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Understanding Funding and Financing through the CVCA – Part 3: The Subscription Agreement, Where the Deal Gets Done

Welcome back to our series covering the Canadian Venture Capital & Private Equity Association (CVCA) model documents. In our first two posts, we summarized the various documents in play in a CVCA financing before diving further into the CVCA Term Sheet, which acts as a non-binding roadmap for the transaction that the parties settle on as an initial step.

This week, we explore the core transactional document where the deal gets done: the CVCA Share Purchase Agreement (SPA) (also referred to as the Subscription Agreement). The SPA can be thought of as serving three main purposes:

  1. Implementing the financing transaction;
  2. Setting out the facts on which the parties are relying in undertaking the transaction; and
  3. Centralizing the parties’ obligations to enter other transaction documents.

Implementing the Transaction

A key element in a financing transaction is – obviously – the financing! The SPA deals with the investors’ purchase of shares (or other securities) of the company and the company’s issuance of those shares, including the amount to be invested by each participating investor, the number of shares each investor is to receive, and the applicable price per share. Generally speaking, the dollars and cents of it all has already been negotiated in the term sheet. The sections of the SPA that serve to implement the transaction also deal with closing logistics (such as timing, location, and payment methods) and may allow the company to sell up to a fixed number of additional shares in a subsequent closing within a specified period.

If the company has issued convertible securities (ex. SAFEs or convertible notes) that will convert in connection with the CVCA financing, the SPA typically also handles that conversion.

Setting Out the Facts

A substantial portion of the SPA is dedicated to the representations and warranties of each party, which effectively set out the factual context in which the parties are agreeing to undertake the transaction. While the investors do provide some representations and warranties (mostly relating to the investors authority to undertake the transaction and securities laws compliance), the majority are given by the company to provide the investors with comfort in making an investment in a private company where minimal company disclosures are legally required.

The company’s representations and warranties cover various aspects of the company and its business, including the company’s capitalization, intellectual property, commercial agreements, financial state, employees, and tax compliance. These representations and warranties are qualified by a disclosure schedule that the company prepares and attaches to the SPA. The schedule identifies exemptions from certain representations and warranties, and provides details for others. Both the representations and warranties and the disclosure schedule interact with the investors’ due diligence process so that the investors either have direct visibility on key facts (as a result of diligence) or coverage on facts they don’t have visibility on (through representations and warranties). Investors may also require an opinion from the company’s legal counsel in connection with the financing.

Centralizing Obligations to Enter Other Transaction Documents

Finally, the SPA acts as a central hub for ensuring other transaction documents are executed as part of the financing. As previewed in our first post in this series, these other documents include the Investors Rights Agreement, Right of First Refusal and Co-Sale Agreement, Voting Agreement, Articles of Amendment, and other documents or agreements that may be required among the parties.

This centralized coordination happens through conditions to the parties’ obligations at closing that require the necessary related documents are in place before closing and exhibits that show the forms agreed to by the parties for those documents.

Contextualizing the SPA

Supported by the CVCA Articles of Amendment, which serve to create the shares to be issued by the company in the financing, the SPA is the core CVCA document that implements the financing transaction, ensures the parties are aligned on key facts, and coordinates the execution of other relevant documents. Those other relevant documents are critical to the financing, and important for founders to understand, but relate to the governance of the company following the financing and not to the mechanics of the financing itself. Stay tuned for more on those in our next posts in this series. If you have any questions on the SPA, please don’t hesitate to contact us at MT❯Ventures. We are happy to help!

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