All-or-none Offering

A private placement is being sold on an "all-or-none" basis, meaning the entire offering must be sold before any closing occurs. Where must investor subscription funds be held while the offering is still being sold?

1. A.Directly into the issuer's general operating account as soon as each subscription is receivedWrong. Releasing funds to the issuer before the all-or-none contingency is met defeats the purpose of the contingency.
2. B.In an escrow account, or similar arrangement, segregated from the firm's own funds, until the contingency is satisfied or the offering is terminatedCorrect. Segregated escrow protects subscriber funds until the condition they relied on has actually been met.
3. C.Into the representative's firm commission account, to be reconciled at closingWrong. Commingling subscriber funds with a representative's commission account is improper handling of customer funds.
4. D.Nowhere in particular, since all-or-none offerings do not require any special handling of subscriber funds before closingWrong. This understates the requirement; contingent offerings specifically require segregated handling of subscriber funds before closing.

Why: Investor funds must be held in an escrow account or similar arrangement, segregated from the firm's own funds, until the all-or-none contingency is satisfied or the offering is terminated. Segregation is what protects subscribers' funds from being used before the condition they relied on — full subscription of the offering — has actually been met.

A program is offered on an all-or-none basis and the stated number of units is not sold by the end of the offering period. What happens to the money investors have paid?

1. A.The issuer keeps the proceeds and reduces the size of the programWrong. That describes a straight best efforts offering rather than an all-or-none contingency.
2. B.It is returned to the investors, because the contingency failedCorrect. No units are sold unless all are sold, so the escrow pays the money back.
3. C.It stays in escrow until a replacement offering is registeredWrong. The escrow ends when the contingency fails; funds are not carried into another offering.
4. D.It is released to the issuer less the underwriting compensationWrong. No part of the escrowed money reaches the issuer when the contingency fails.

Why: In an all-or-none offering no units are sold unless all of them are sold, so failure of the contingency means the transaction never happens. Investor funds are held in escrow for exactly this reason and go back to the investors when the contingency fails. The escrow exists so that the money is never available to the issuer while the outcome is unresolved. Had this been a mini-max offering, funds would have been released once the stated minimum was reached and only the unsold balance would have lapsed.

An offering is structured as "all-or-none." What happens if the underwriters are unable to sell 100% of the offered securities by the offering deadline?

1. A.The offering closes on whatever portion was actually soldWrong. That describes a minimum-maximum offering, not all-or-none.
2. B.The entire offering is canceled and all funds are returned to subscribersCorrect. All-or-none requires selling the entire offering or canceling it entirely, with funds returned.
3. C.The underwriters are required to purchase the unsold balance themselvesWrong. That describes a firm commitment feature, not all-or-none, which is typically executed on a best-efforts basis.
4. D.The issuer must extend the offering period indefinitely until it is fully soldWrong. All-or-none offerings have a stated deadline; they do not extend indefinitely.

Why: In an all-or-none offering, the entire transaction is canceled and all funds are returned to subscribers if the full amount is not sold by the deadline — there is no partial closing.

A broker-dealer is distributing securities on an all-or-none basis and receives subscription cheques from investors before the minimum has been reached. How must it handle that money?

1. A.It may hold the cheques uncashed in its own files until the contingency resolves.Wrong. The rule requires a separate bank account or a bank escrow, not internal safekeeping.
2. B.It must transmit the money to the issuer immediately, which is what prompt transmission means.Wrong. Transmission to the issuer before the contingency occurs is precisely what the rule prevents.
3. C.Into a separate bank account held as agent or trustee for the investors, or to a bank escrow under a written agreement.Correct. Those are the two routes the rule permits for contingency offerings.
4. D.Into the firm own account, provided it records each investor interest on its books.Wrong. Bookkeeping inside the firm is not the segregation the rule requires.

Why: Rule 15c2-4 makes it a fraudulent, deceptive or manipulative practice for a firm participating in a distribution other than a firm commitment underwriting to accept part of the sale price unless the money is handled in the prescribed way. Where the distribution is on an all-or-none basis, or on any other basis contemplating that payment will not be made until a further event or contingency occurs, the firm must either promptly deposit the money in a separate bank account as agent or trustee for the persons beneficially interested, or promptly transmit it to a bank that has agreed in writing to hold the funds in escrow. In either case the funds are then promptly transmitted or returned once the contingency resolves. Holding the cheques in the firm own operating account is exactly what the rule forbids.