- What is "escrow"?
Escrow protects money when one party to a deal has some conditions it must meet before it is entitled to receive the money. The party that pays the money gives the money
to a neutral third party. The neutral third party holds the money in an escrow account. The third party doesn’t release the money until the conditions are met.
- Why is escrow required in securities offerings?
Escrow protects the investor. The issuer can’t access the money until certain conditions are met. All investor funds are collected in one place. Escrow protects the issuer.
The issuer will not get the money until the escrow agent has verified that the funds have cleared.
- What is an escrow agreement?
An escrow agreement is a contract that describes how an escrow account will work.
Each business using the services should enter into an escrow agreement.
- Who has to have an escrow account and agreement?
Every issuer raising funds using the funding portal. The issuer’s escrow agreement has to direct investor funds to an escrow account.
The funds raised from the investors have to be deposited in the escrow account.
- Are there any requirements for escrow accounts?
Yes. An issuer raising capital using funding portal must direct investor funds to an escrow account that:
Does the funding portal have special requirements for escrow agreements too?
- Is FDIC insured
- Is a segregated account for each securities offering
- Is maintained by an escrow agent.
Yes. Escrow agreements have to include all the contract terms and useful information like:
Any of the following can serve as an escrow agent:
- The name of the escrow agent,
- The bank or depository institution where the account will be held
- When and how the issuer can access the money
- When and how investors can get their money back
When can an escrow agent release the funds in the escrow account?
- A bank or depository institution,
- A registered securities broker-dealer, and
- A lawyer
An escrow agent will release money in the escrow account to the investor when:
- An escrow agent will release money in the escrow account to the issuer when the funds raised are at least 20% of the goal for the securities offering.
- The minimum amount set by the issuer isn’t met by the deadline or
- The investor asks for the money back before the issuer raises at least 20% of its goal for the securities offering.