The Use of Online Subscription Agreements in Private Markets

In the private markets, a subscription agreement defines the terms of an investor's investment into a fund. In particular, it sets out certain categories of information that a sponsor will need to collect from investors in order to ensure the investor can invest in the fund without any adverse legal, tax, regulatory or other consequences to the fund, as well as the smooth operation of the fund. For example, a subscription agreement includes, amongst other things, an investor's bank account details, contact details, regulatory status and certain assurances as to the investor's sophistication and ability to invest in the fund.

Subscription agreements require each investor to complete complex and detailed questionnaires which are similar to a gamebook, such that the investor will complete (or not be required to complete) certain sections based on its responses to prior sections. This process is time consuming and usually involves several rounds of email correspondence with the sponsor or its lawyers before the subscription agreement is finalised and signed by the investor. The sponsor then needs to extract the information from the subscription agreement, transform it and load it to the sponsor's CRM, accounting and compliance systems.

Online subscription processes aim to remove the inefficiencies associated with investor on-boarding. On a typical online subscription process, the sponsor would engage a third-party online subscription service provider who would take the traditional form of subscription agreement and map it into a smart workflow. This means that investors do not need to review questions which are irrelevant to them and, in theory, the investor should not be able to complete the subscription agreement without providing all relevant information. The investor would then electronically sign the mapped subscription agreement (or download the completed agreement in PDF and sign in wet-ink) just like any other contract. As a result, the sponsor has real time access to each investor's data in an easy to manipulate form. It eliminates the need to extract, transfer and load the data manually.

The main advantage of an online subscription process is the seamless collation of investor information. Prior to the online subscription process, smaller managers and US sponsors, both of whom typically work less with fund administrators compared to larger European sponsors, needed to complete this process manually. By collating the investors' data online, the risk of human error is reduced. The operational burden on the sponsors' operations team is also reduced significantly, allowing sponsors to redeploy limited resources to workstreams which are less process driven.

Certain types of investors (in particular, high-net worth individuals ("HNWIs") and angel investors) expect sponsors with whom they invest to innovate and reduce inefficiencies. Any process which improves the user experience or UX, and so makes investment easier, is appealing. It allows sponsors to spend more time on building relationships with investors and less time dealing with administrative on-boarding queries. It also allows investors to invest more quickly which, in turn, improves the certainty of capital of the fund.

Finally, where a sponsor runs multiple products across various vintages, an investor's information can be recycled from one fund to the next removing the need for an investor to re-populate the same information for each product it has with a particular sponsor. When an investor logs into the online subscription portal, its information should be pre-populated based on its previous subscription. This information can be re-used for each investment an investor makes with the same sponsor, provided the investor confirms that the information is still true, correct and complete.

A subscription agreement is not a pro-forma document. Its contents will be driven by a number of factors, including the location of the fund and the sponsor, the types of investments that the fund will make, the investor base location and investor sophistication. Each sponsor will have its own form of subscription agreement and there is no industry standard (notwithstanding ILPA's published model which attempts to standardise subscription agreements across the private markets).

Secondly, trying to provide for all relevant factors means that mapping the subscription agreement to an online workflow is not straightforward. The mapping exercise is also undertaken by non-legal professionals who typically wouldn't be familiar with the implications if the conditional logic of the workflow does not exactly mirror the traditional subscription agreement. Therefore, any workflow needs to be extensively tested to ensure that every possible combination of potential answers has been properly mapped otherwise there is a risk that investors will need to re-sign their subscription agreements and/or sponsors won't have all the information that they need.

Additionally, traditional institutional investors do not typically have the processes and tools designed to complete an online subscription process. Their processes and internal governance frameworks are not yet aligned with the evolving technology. Sponsors usually have to run a separate manual process via email or the data room for these types of investors which, to an extent, defeats the efficiencies that would otherwise be gained from the online subscription process.

While the online subscription process can create efficiencies where a sponsor is targeting a certain investor base (for example, HNWIs, angels and family offices), the related technology hasn't sufficiently evolved to allow for easy mapping to an online format. It is our experience that, while an online subscription platform, can introduce efficiencies in some instances, the promised benefits to sponsors don't tend to fully materialise in every instance.

The key for sponsors to maximise the efficiencies of the online subscription process is to select a service provider who has experience and can tailor their platform to suit the sponsors existing fund documents. The online subscription service provider must also be in a position to adapt to the sponsor's target investor base and work well with the sponsor's other service providers, such as, legal counsel and fund administrators.