Subscription Escrow

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.

A branch collects a customer's subscription funds and forwards them directly to the offering's escrow agent the same day, intending to complete the supervisory approval paperwork sometime afterward, once the branch has a chance to catch up on its backlog. Is completing supervisory approval after the funds have already been transmitted an appropriate sequence?

1. A.Yes -- as long as the supervisory approval paperwork is eventually completed at some point, the order relative to when funds are transmitted does not matter.Wrong. The sequence matters; completing approval only after funds have already moved defeats the gate function approval is meant to serve.
2. B.No -- supervisory approval is meant to function as a gate the transaction passes through before proceeding, and transmitting funds to the escrow agent before approval is completed reverses that sequence, letting the transaction move forward without an actual, completed independent review first.Correct. Approval is meant to occur before the transaction proceeds, and transmitting funds first reverses that intended sequence.
3. C.Yes -- but only because escrow agents are themselves required to independently verify supervisory approval before accepting any funds, making the branch's own sequence immaterial.Wrong. There is no described independent verification duty on the escrow agent's part that would make the branch's own sequencing immaterial.
4. D.No -- but only because escrow agents are prohibited by rule from accepting private-placement subscription funds under any circumstances.Wrong. Escrow agents are not prohibited from accepting private-placement subscription funds; the issue is the sequence of the firm's own supervisory approval relative to when the funds are sent.

Why: Supervisory approval is meant to function as a gate the transaction passes through before it proceeds; transmitting the customer's funds to the escrow agent before supervisory approval has been completed reverses that sequence, allowing the transaction to move forward on the strength of the branch's own momentum rather than on an actual, completed independent review.

A private placement's offering documents state a maximum offering amount but no minimum -- the issuer will accept and close on any amount raised, up to the stated cap. Does Rule 15c2-4 treat this offering as contingent, requiring escrow of investor funds, or non-contingent, requiring prompt transmission?

1. A.As contingent, because any stated dollar limit -- whether a minimum or a maximum -- triggers Rule 15c2-4's escrow requirement in the same way.Wrong. A maximum alone does not create the same all-or-nothing threshold a minimum does.
2. B.As contingent, because the offering could theoretically fail to reach even a single dollar of subscriptions, which itself functions as an implicit minimum requiring escrow.Wrong. A theoretical possibility of low subscriptions does not create a disclosed minimum contingency.
3. C.As exempt from Rule 15c2-4 entirely, because a maximum-only offering with no minimum falls outside the rule's scope regardless of how investor funds are handled.Wrong. Rule 15c2-4 still applies; it calls for prompt transmission rather than escrow, not exemption from the rule.
4. D.As non-contingent, requiring prompt transmission, since a maximum cap alone does not create the minimum-type contingency the escrow requirement responds to.Correct. Absent a stated minimum, the offering is treated as non-contingent for Rule 15c2-4 purposes.

Why: As non-contingent, requiring prompt transmission. Rule 15c2-4's escrow requirement is triggered by a contingency such as a stated minimum that must be reached before any closing can occur. A stated maximum alone, with no minimum, does not create that kind of all-or-nothing threshold, so funds should be promptly transmitted to the issuer as received, up to the stated cap, rather than held in escrow.