Private Placement Escrow Services
Federal securities law (the Exchange Act) is specific regarding the necessary treatment of an escrow account maintained in an “all or none” or “part or none” offering.
Rules 10b-9 and 15c2-4 of the Securities Exchange Act of 1934 apply to “all or none” or “part or none” offerings and the associated escrow account.
Rule 10b-9 generally requires that “all or none” or “part or none” offerings (as opposed to “best efforts” offerings) monies paid invested in the securities must be returned to the investors if the specified dollar amount or number of securities are not sold within a specified time. As such, “all or none” or “part or none” offerings require the enumerated specification as to the number of securities and the length of time of the selling period. The offering must adhere to both terms.
Also, Rule 15c2-4 requires that the investors' monies received to be held “in escrow” within a separate segregated bank account by an Escrow Agent. Investor money shall be held for the investors’ sole benefit until the “all or none” or “part or none” terms have been fulfilled. If the terms of the offering are satisfied, the money is transmitted to the issuer. If not satisfied, the funds are to be returned to subscribers.
Specific escrow procedures are required to be followed for “all or none” or “part or none” transactions are enumerated as follows:
The escrow trust agreement is created before an “all or none” or “part or none” offering begins. The brokerage firm and the trustee executes the document. The brokerage firm is required to keep on file all escrow agreements in compliance with Rule 15c2-4.
The Trustee establishes the escrow account trust. The escrow trust is governed by the escrow trust agreement. The dual representatives are required to sign the escrow trust account before any checks can be issued from the escrow account.
Incoming monies are deposited immediately into the escrow account, along with the purchaser’s name, address, social security number and number of the subscribed shares/units.
Once the “all or none” or “part or none” terms of the agreement are achieved, or upon the expiration of the specified time period, the escrow trustee verifies that the terms of the escrow agreement have been signed by the designated date and that the funds are to be released from escrow.
The issuer then transmits written confirmation stating that a determination has been made that the conditions of the escrow have been satisfied and requests a release of the funds.
Upon receipt of the written confirmation described above, the funds are transmitted to the appropriate entity or persons.
Documentation is retained in a segregated file for audit or regulatory review.