What Is a Securities Purchase Agreement?

A Securities Purchase Agreement (SPA) is a legally binding contract for securities sale and purchase. It ensures clarity and enforceability in financial transactions. It formalizes ownership transfer of equity or debt instruments, providing a framework for dealings.

Understanding Securities Purchase Agreements

SPAs are used when companies issue new shares directly to investors (e.g., private placements for startups raising capital from venture capitalists or angel investors). Also, they govern secondary sales by existing shareholders. They provide a structured approach to transactions with financial commitments and due diligence.

The agreement defines securities transferred, including common stock, preferred stock, warrants, or convertible notes. Terms vary depending on the securities and transaction structure. An SPA acts as a roadmap, protecting parties by delineating rights, obligations, and transfer conditions.

Key Provisions of a Securities Purchase Agreement

The purchase price and payment terms specify the price and method. Price may be fixed, determined by formula, or include contingent payments like earn-outs. Payment methods include cash, other securities, or a combination.

Representations and warranties are statements of fact made to induce agreement. Seller representations cover capitalization, financial statement accuracy, undisclosed liabilities, and legal compliance. Buyers represent their authority to enter the agreement and, in private placements, their status as a sophisticated investor. These clauses aid due diligence and risk allocation, forming the basis for claims.

Covenants are promises to perform or refrain from actions. Pre-closing covenants dictate business operations between signing and closing (e.g., maintaining ordinary course operations or obtaining third-party consents). Post-closing covenants impose ongoing obligations post-closing, including non-compete clauses, confidentiality agreements, or legal assurances. They ensure appropriate business function and persistent obligations.

Conditions precedent are events or actions that must occur or be waived before transaction completion. These include obtaining regulatory approvals, confirming representation accuracy at closing, or legal document delivery. Failure to satisfy conditions allows termination without penalty. They provide protection, ensuring transaction proceeds only when prerequisites are met.

Indemnification clauses allocate risk by obligating one party to compensate the other for losses from breaches. Provisions often include liability limitations like “baskets” (thresholds before claims) and “caps” (maximum liability). They also specify “survival periods,” defining how long representations and warranties remain enforceable post-closing. This provides a remedy for the non-breaching party, ensuring recourse for unforeseen issues post-closing.

Termination provisions outline circumstances for ending the agreement before closing. This can occur due to a material breach, failure of conditions precedent by a specified date, or mutual agreement. An “outside date” is often set, allowing termination if closing has not occurred. They provide an exit strategy if obstacles arise, preventing indefinite legal limbo.

Governing law and dispute resolution clauses establish the agreement’s legal framework and how disagreements are handled. Specifying the governing jurisdiction provides certainty and predictability in legal interpretation. Parties agree on dispute resolution methods, including binding arbitration, mediation, or litigation. This ensures a predetermined process for conflicts, avoiding lengthy legal battles.

Parties Involved in a Securities Purchase Agreement

The seller can be the company (e.g., issuing new shares in a primary issuance). Alternatively, an existing shareholder selling to a new investor in a secondary sale. Objectives include maximizing sale price, minimizing future liabilities, and ensuring a smooth closing. Seller aims to divest ownership under favorable terms.

The buyer can be an individual, institutional, venture capital, private equity firm, or strategic acquirer. Objectives involve acquiring securities at a fair price, ensuring accuracy of seller’s information, and securing rights. Buyers conduct due diligence to validate the investment and mitigate risks.

Legal counsel plays a role for buyer and seller throughout the SPA process. Attorneys draft, review, and negotiate agreement terms, ensuring client interests are protected. They provide expertise on securities laws, corporate governance, and contractual nuances, advising on provision implications. Their involvement aids in navigating complexities and mitigating legal risks.

The Securities Purchase Agreement Process

The SPA process begins with negotiation of fundamental transaction terms. This phase often originates from a non-binding term sheet or letter of intent, outlining key economic and legal points before agreement drafting. These discussions lay the groundwork for the SPA, setting expectations.

Following negotiations, the buyer undertakes due diligence. This involves investigating the seller’s financial, legal, operational, and intellectual property to verify representations and assess risks. Findings from this phase directly influence specific terms and protective clauses, such as representations and warranties, included in the SPA. This information ensures the investment aligns with risk tolerance and strategic goals.

After due diligence, SPA drafting and review commence, involving legal work. Legal counsel prepare the document, undergoing multiple rounds of revisions and negotiations. This iterative process ensures agreed-upon terms are accurately reflected and the agreement addresses contingencies. The SPA requires attention to legal language and commercial implications.

Once terms are finalized, the execution phase occurs, with relevant parties formally signing the SPA. This transforms the agreement into a legally binding contract, obligating buyer and seller to proceed under agreed conditions. The signing signifies a milestone, committing parties to the terms.

Closing finalizes the transaction, typically involving simultaneous exchange of funds for securities. At this stage, all conditions precedent in the SPA must be satisfied or waived, ensuring prerequisites for ownership transfer are met. Legal ownership of securities officially transfers from seller to buyer.

Following closing, post-closing obligations may remain. These include filing notices with regulatory bodies, updating corporate records for new ownership, or ongoing compliance with covenants like non-compete agreements. These obligations ensure the transaction is fully integrated and legal and operational requirements are met.