The federal securities law (the Exchange Act) is very specific with respect to the required treatment of an escrow account maintained in an "all or none" or "part or none" offering.

The rules applicable to "all or none" or "part or none" offerings relating to the maintenance of an escrow account for a given offering are Rules 10b-9 and 15c2-4 of the Securities Exchange Act of 1934. Rule 10b-9 requires, in general, that in an "all or none" or "part or none" offering (as opposed to a "best efforts" offering) monies paid for the purchase of securities must be returned to the investors if the specified number/dollar amount of securities is not sold within a specified time. In other words, the "all or none" or "part or none" offering requires specification of the number of securities and the time of the selling period. Both terms must be adhered to.

Rule 15c2-4 requires, in general, that the monies received from investors be deposited into a separate segregated bank account (Independent Bank as Escrow Agent) and held for the investors' benefit until the "all or none" or "part or none" terms have been complied with. If the terms of the offering are met, the money is to be transmitted to the issuer. If not, the monies are to be returned to subscribers.

The specific procedures to be followed in the handling of escrow accounts for "all or none" or "part or none" transactions are as follows:

1.When an "all or none" or "part or none" offering is commenced, an escrow agreement shall be created. This document should be executed by the brokerage firm and the bank. The brokerage firm is required to keep a copy of all escrow agreements on file to demonstrate compliance with Rule 15c2-4.

2.An escrow account should be opened by the bank. The escrow account is governed by the escrow agreement. The account typically requires signatures of representatives of both the brokerage firm and the Issuer before any checks can be issued from the account.

3.Incoming monies should be deposited immediately into the escrow account, along with the purchaser's name, address, social security number and number of shares/units.

4.Upon the completion of the "all or none" or "part or none" terms of the agreement or upon the expiration of the specified time period, the escrow agent verifies that the terms of the escrow agreement have been or have not been met by the designated date and that the funds should be released from escrow.

5.The issuer then transmits written confirmation stating that a determination has been made that the conditions of the escrow have or have not been complied with and request a release of the funds.

6.Upon receipt of the written confirmation described above, the funds are transmitted to the proper entity or persons.

7.The documentation created by these procedures is then retained in a segregated file for audit or regulatory review.

8.In a "best efforts" offering, the brokerage firm is contractually bound to use its "best efforts" to place the securities with suitable investors. The brokerage firm will follow the procedures as outlined above regarding placement of subscriber's funds in an independent bank escrow account.

Hopefully, this introduction has provided you with an overview of the legal requirements of a private placement, and the importance of every step of the process. For information on the practical side of the process, try other sites listed in our Financial Resources page.