Is an E-Signed Subscription Agreement Valid?
Generally, yes. The federal ESIGN Act says a contract "may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation," and state electronic transaction laws say much the same. A syndication subscription agreement is not on ESIGN's list of exceptions. What decides whether an e-signature holds up in a dispute is proof: who signed, that they meant to sign, and a record that matches what they signed.
This post covers the rules, the narrow exceptions and what a good e-signature record contains. It is general information for sponsors, not legal advice.
What does the ESIGN Act say?
The ESIGN Act became law in 2000. Its core rule, in section 7001(a), has two parts for any transaction in or affecting interstate commerce:
- A signature, contract or other record may not be denied legal effect, validity or enforceability solely because it is in electronic form.
- A contract may not be denied legal effect, validity or enforceability solely because an electronic signature or electronic record was used to form it.
An electronic signature is defined broadly in 15 U.S.C. 7006 as an electronic sound, symbol or process attached to or logically associated with a record and "executed or adopted by a person with the intent to sign the record." A typed name, a drawn signature or a click on "Sign" can all qualify, as long as the person meant to sign.
The rule does not make a bad contract good. A signature that is electronic can still be challenged on the usual grounds, such as fraud or a signer who was not who they claimed to be. ESIGN only removes "it was electronic" as a reason to reject it.
How does state law (UETA) fit in?
Most states have their own electronic transaction statute, usually based on UETA, the model law approved for the states by the Uniform Law Commission in 1999. 15 U.S.C. 7002 lets a state's enactment of UETA govern in place of parts of ESIGN, as long as the state does not carve out exceptions that conflict with ESIGN. In practice, federal and state law point the same way for a subscription agreement: an electronic signature counts.
Your subscription agreement and operating agreement usually say which state's law governs. Ask counsel if that state has any special rule for the documents you use.
What are the exceptions?
ESIGN's exceptions are in 15 U.S.C. 7003. Section 7001 does not apply to records governed by:
| Excepted area | Example |
|---|---|
| Wills, codicils and testamentary trusts | An investor's will leaving their units to a child |
| Adoption, divorce and other family law | A divorce decree dividing an interest |
| Most of the Uniform Commercial Code (except sections 1-107 and 1-206 and Articles 2 and 2A) | Some secured lending documents |
| Court orders, notices and official court documents | Filings in a lawsuit |
| Certain notices: utility shutoffs; default, foreclosure or eviction on a primary residence; cancellation of health or life insurance; product recalls | A foreclosure notice on a home |
| Documents that travel with hazardous materials | Shipping papers |
A subscription to buy units in an apartment LLC is none of these. Some related documents can be different. For example, a document that a county recorder must accept, such as a deed, follows the recorder's own rules, which is a separate question from whether the subscription is valid.
Can an investor be required to sign electronically?
No. Section 7001(b)(2) says ESIGN does not require any person to agree to use or accept electronic records or signatures. A sponsor can offer e-signing as the normal path, and most investors prefer it, but keep a way to sign on paper if someone asks.
There is also a consumer consent rule in section 7001(c). When a statute or regulation requires that information be given to a consumer in writing, an electronic record satisfies it only if the consumer affirmatively consented after receiving certain disclosures, including the right to paper copies and how to withdraw consent. Whether a given investor disclosure is information the law requires in writing to a "consumer" depends on the rule behind it. Many signing processes collect consent to do business electronically from every signer anyway, which settles the point. Ask counsel how this applies to your documents.
What about notarized documents?
Section 7001(g) says that if a law requires a signature or record to be notarized, acknowledged, verified or made under oath, the requirement is met if the electronic signature of the person authorized to perform that act, together with the other required information, is attached to or logically associated with the record. In other words, electronic notarization works where the notary's state allows it. Subscription agreements rarely need a notary, but some lender or title documents for the property do.
What should a good e-signature record contain?
ESIGN's record rules are in sections 7001(d) and (e). Where a law requires a record to be kept, an electronic record meets it if it accurately reflects the information and stays accessible to the people entitled to it, in a form that can be accurately reproduced. A record that cannot be retained and reproduced by everyone entitled to it can be denied effect.
In practice, sponsors should be able to show this for each signer:
| What to keep | Why it helps |
|---|---|
| How the signer's identity was confirmed (email link, text code, account sign-in, ID check) | Shows who signed |
| Consent to sign and receive records electronically | Settles the consent question |
| The exact document version signed, with a fingerprint (hash) of the file | Shows nothing changed after signing |
| The time of each step, with the signer's IP address or device | Builds the sequence of events |
| A completion certificate or audit log | Collects the above in one place |
| A copy sent to every party | Meets the accessibility rule and avoids disputes |
Keep the record for as long as the deal lasts and beyond. Investors refer back to their subscription when they read the offering documents or sell their interest.
A made-up example
This example is made up. An investor e-signs a subscription agreement for $75,000 on March 3. Two years later, after the deal underperforms, they claim they never agreed to a provision on page 14.
The sponsor's signing record shows the investor signed in with a code sent to their phone, consented to electronic records, opened all 22 pages, and signed version 3 of the document at 8:41 p.m. The file's fingerprint today matches the fingerprint at signing, and a copy went to the investor's email the same night. That record does not decide every dispute, but it answers the questions of who signed, what they signed and when, which is what ESIGN leaves to proof.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from their friends and followers under Rule 506(b) or 506(c). DoorRaise prepares the standard offering documents, including the subscription agreement, forms the LLC, files Form D and state notices, and verifies accredited investors for 506(c) deals. Escrow is at Enterprise Bank & Trust, an FDIC-insured bank, investors fund by wire only and distributions are quarterly by default. Fees are $1,500 at setup (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year, with no percentage of the raise and no part of the promote. DoorRaise is not a law firm, broker-dealer, investment adviser, funding portal or bank.
Raise your apartment deal from the people who already follow you.
DoorRaise is built for apartment buildings with 5 or more units: one link for the deal, escrow until closing and a standard fee card.
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FAQ
Is a typed name enough to sign?
It can be. ESIGN's definition covers any symbol or process adopted with the intent to sign. What makes it strong is the surrounding proof of identity and intent.
Does the SEC require wet signatures on subscription agreements?
Rule 506 does not require any particular signature form for a subscription agreement. Form D itself is filed electronically on EDGAR. See how investors commit and wire for the steps around signing.
Can a spouse sign electronically too?
Generally yes, if a spouse's consent is part of the documents. Family law is an ESIGN exception, but a spousal consent in an investment document is usually not a family law record. Ask counsel in community property states.
What if an investor wants to sign on paper?
Let them. ESIGN does not force anyone to sign electronically. Scan the signed paper into the same record as everyone else's.
Next step: read what a subscription agreement includes to see what the investor is actually signing.
Sources
- 15 U.S.C. 7001, general rule of validity
- 15 U.S.C. 7002, exemption to preemption (state UETA)
- 15 U.S.C. 7003, specific exceptions
- 15 U.S.C. 7006, definitions
This article is general information, not legal, tax or investment advice. Talk to a securities attorney about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.