We took the money, and signed the subscription agreement, so when are the shares issued?

This is a question we often get from companies as they are trying to organize their cap table, or provide information to a transfer agent. Many companies seem to be of the belief that shares are not actually issued until a certificate is prepared, or that the shares are recorded on the company’s internal ledger, or the transfer agent’s ledger. However, this is not correct.

Taking a step back, investors commit to acquire a company’s shares by signing a subscription agreement (which may also be called a purchase agreement). The subscription agreement has certain representations from the company and the investor, and may have some other clauses like for dispute resolution. But the fundamental purpose of the agreement is to establish the procedure for how shares are to be issued. Usually, those steps are:

1. Investor signs the subscription agreement;
2. Investor pays for the shares;
3. Company counter-signs the subscription agreement;
4. Company issues the shares.

Typically, those are the only conditions to share being issued. Once funds have been received, and the company counter-signs the subscription agreement, all the conditions for the agreement have been met, and the shares are issued to the investors. It doesn’t matter that as of the date the issuer counter-signs no share certificate has been created, or that the shares are not yet recorded on the ledger. Those are formalities. The legal obligation for issuing the shares is complete as of the date the company countersigned the subscription agreement, and that is the date that the shares are issued.

In certain circumstances, there may be additional conditions for closing (such as regulatory approvals, or certain filings being made), but for a typical investment “sign, cash, sign, and done” is the extent of what is required.

The good news here is that the date of the subscription agreement is the date that time starts to run on things like the one-year period during which transfers are restricted under Regulation CF. Even if it takes the issuer and its transfer agent months to actually record the sale!