What is Subscribed Stock?

Subscribed Stock

Subscribed stock refers to shares of stock that investors have committed to purchase, but have not yet been issued or fully paid for. When a company decides to issue new shares to raise capital, it may offer these shares to investors. Once investors express their intention to buy and enter into an agreement to purchase these shares, the stock is considered “subscribed.”

The company, in turn, agrees to issue the stock at a future date, typically once the subscriber (the investor) makes the full payment for the shares as agreed. Until the full payment is received and the stock is actually issued, the amount to be paid is recorded as a liability on the company’s balance sheet, typically under “subscriptions receivable” or a similar account.

Here are some key points to note about subscribed stock:

• Commitment: Subscribed stock represents a formal commitment from investors to buy shares at an agreed-upon price.
• Financial Statements: On the balance sheet, the company will typically have an account titled “Common Stock Subscribed” (or similar) in the equity section, reflecting the value of the shares that have been committed but not yet paid for. There would also be a “Subscriptions Receivable” account, which is a contra-equity account, representing the amount still owed by the subscribers.
• Payment: Depending on the agreement between the company and the subscriber, the payment for the shares might be made in installments over a specified period.
• Failure to Pay: If a subscriber does not fulfill their commitment to pay for the shares, the company might have legal grounds to either enforce the payment or to keep any partial payments as compensation, depending on the terms of the subscription agreement.
• Issuance : Once payment is received in full, the “Subscriptions Receivable” account is reduced, and the stock is moved from “Common Stock Subscribed” to “Common Stock Issued.

Subscribed stock is a method for companies, especially those in their early stages, to secure commitment from investors and have a clearer understanding of the capital they can expect to receive.

Example of Subscribed Stock

Let’s illustrate the concept of subscribed stock with a hypothetical scenario:

Scenario: “GreenTech Innovations Inc.”

Background: GreenTech Innovations Inc. is an emerging clean energy company that designs cutting-edge solar panels. Given the increasing demand for sustainable energy, they plan to expand their production capabilities. To do this, they need additional capital. GreenTech decides to issue new shares to raise $10 million.

Subscription Offer: GreenTech offers 1 million new shares at $10 per share to a group of institutional investors. These investors express their intent to buy, entering into a subscription agreement to purchase the shares.

Subscribed Stock on Balance Sheet : Once the agreement is signed, GreenTech’s balance sheet reflects this new commitment:

• Equity Section:
  • Common Stock Subscribed: $10 million (This represents the total value of the shares that investors have agreed to buy but have not yet been issued.)
• Liability Section:
  • Subscriptions Receivable: $10 million (This represents the amount GreenTech expects to receive from the investors.)

Payment and Stock Issuance: The institutional investors agree to pay in two installments over six months. After three months, they pay the first installment of $5 million.

The balance sheet is then adjusted:

• Assets Section:
  • Cash increases by $5 million (from the payment received).
• Liability Section:
  • Subscriptions Receivable decreases by $5 million (now $5 million remaining).

After six months, the investors pay the final installment of $5 million. GreenTech then issues the shares to the investors:

• Assets Section:
  • Cash increases by another $5 million.
• Equity Section:
  • Common Stock Subscribed account is reduced by $10 million.
  • Common Stock Issued increases by $10 million.
• Liability Section:
  • Subscriptions Receivable is reduced to $0, as full payment is received.

This example provides a step-by-step depiction of how subscribed stock works in practice. From the company’s perspective, the subscription gives them assurance of incoming capital, while from the investor’s perspective, it’s a commitment to provide funds in exchange for equity at a set price.