A regional food processing plant needed to expand production in order to compete in the global market.  A troubled bank facing seizure by federal regulators needed to raise millions in capital or face dire consequences.  A computer systems management firm needed a quick and inexpensive way to obtain the funds to pay its operating costs during a cash crunch.  In each case, these organizations turned to private placement stock offerings involving a subscription escrow. 

Throughout the recent financial crisis, banks have maintained tight lending standards. Because of this, companies are increasingly turning to private placement stock offerings as a cost-effective, alternative source of financing. 

The Securities Act of 1933 requires companies to register securities offerings with the Securities Exchange Commission (SEC).  This can be a time-consuming, costly process.  A private placement is an offering that the SEC exempts from registration under SEC Regulation D because it is limited to a certain number of more sophisticated investors with high net worth.  

Although Regulation D allows issuers to avoid a tremendous amount of red tape, federal statutes and regulations do impose some requirements for companies that issue private placement stock offerings. Rules 501-506 set out the manner in which companies may provide exempt stock offerings. The larger the dollar value of the securities sold within a consecutive 12-month period, the more restrictions the SEC places upon the offering. 

These requirements can include disclosure to investors, restrictions on the types of and number investors who may participate, restricted methods of solicitation, and mandating the use of an independent subscription escrow agent. 

Restrictions on Private Placement Stock Offerings 

Many Regulation D offerings are restricted to “accredited investors”.  Rule 501(a) defines an accredited investor as a director, partner, or executive officer of the issuing company, another business entity, or an individual with a high net worth or income.  In a private placement, companies also generally cannot solicit investors through cold calling, advertising, or general seminars. 

Very often, stock issuers will appoint a broker or placement agent with an existing network of investors to raise capital.  In most cases, the issuing company must provide an offering memorandum to the investors disclosing the nature and character of, and risk factors related to, the offering.

In some cases, companies make private placement offerings on a “best efforts” basis, meaning that there is no definite termination period and the offering can continue indefinitely. 

However, companies often make offers on an “all or none” or “part or none” basis, which requires that a certain number of securities must be sold by a definite closing date.  This structure provides comfort to investors that, if the offering is not successful, they can have their investment returned to them.   

Rule 15c2-4 of the Securities Exchange Act of 1934 requires that, with any “all or none” or “part or none” offering, an independent escrow agent must hold any funds received from investors in a segregated escrow account until the “all or none” or “part or none” terms have been met.  In such cases, the escrow agent collects all of the payments from investors subscribing to the offering and frequently reports to the issuer and placement agent as to the total amount of subscriptions received.   

Once the escrow agent reports that the minimum amount has been received, the issuer and placement agent will provide direction to release the funds to the issuer.  If the terms of the offering have not been met, the escrow agent must return the funds to the investors.  Appointing an experienced, responsive escrow agent is a key decision issuers must make to assure their investors’ payments will be collected and released in an efficient and accurate manner.

Need Help?

CSC Trust Company of Delaware provides subscription escrow agent services to meet federal statutory and regulatory requirements for private placement stock offerings. As an independent Delaware state chartered trust company and wholly owned subsidiary of Corporation Service Company, CSC Trust also provides a full suite of trust and agency services.  For more information, please email us at csctrust@cscinfo.com or call us at 877.827.8992.