Why is it so hard to find a bank that will act as escrow agent for direct-to-the-crowd offerings? There are two primary reasons for this, technology and risk.

Technology: banks, law firms, title companies and others have long enjoyed a nice revenue stream from acting as escrow agent on million dollar securities offerings with a small handful of investors. A typical 506-D offering might be for $5+ million and have 8 investors wiring funds. A $150 million NASDAQ IPO may just have a single funding via DTC. Easy. So these escrow agents have usually done this business using Excel spreadsheets.

Manual Systems – Now they face a situation where a typical 506-D offering may have 99 investors (in the case of SPV’s) or more. Much more. A Title III/4(a)(6) offering might have 1,000 investors. And a Reg A or S-1 might have 10,000 investors.  And they might fund via different payment mechanisms, including wires, checks, ACH, and (soon) debit cards. There is absolutely no way that an escrow agent can manage all this with Excel spreadsheets and have any hope of staying in compliance and keeping the accounts reconciled. Not only with keeping track of investor information, but also all associated documents, status of funds receipt, handling refunds, processing intra-offering disbursements to the issuer, and other activities.

Issuer Communications – with highly manual systems it’s impossible for escrow agents to keep issuers and their brokers, funding portals and other parties informed of the status of all the aspects of the offering which relate to escrow.

Refunds – if an offering isn’t successful, then the investors need to be refunded. This could mean 99, 1,000 or even 10,000+ refunds that have to be processed. Cost and resource prohibitive to do manually, to state the obvious.

Investor Communications – on top of everything else, how does escrow ensure all the investors are being communicated with? That they know their funds have been received? That they are aware an offering was canceled and a refund was issued? 

► Escrow agents just don’t have the software to handle this new era of online capital formation.

Risk: first is that mistakes are unavoidable in manual systems. Obviously if they can’t keep track of things internally, as the chances of human-error in an Excel spreadsheet are huge, then the escrow agent will be held accountable. You can count on all sorts of errors occurring in a manual-intensive recordkeeping system which drive up both internal costs and potential liability.

Second is ACH. Offerings that are funded directly by the crowd will invariably use ACH. And as ACH has a 60 day recall window by investors then there is a very real risk to banks in letting an issuer use this mechanism to fund an escrow account. Once an offering has met its minimum and funds start being disbursed to the issuer, then later have the escrow account gets hit with ACH recalls then where does that money come from? The bank (translation = the bank is out the money, which may not be recoverable if the issuer already spent the cash from the offering). Think of this like a situation where someone writes you a check, you take it to a bank and the bank cashes it, then when the bank puts it through the clearing system the coresponding-bank rejects it for NSF or whatever other reason…you’ve got the money, but the bank gets hit with the chargeback. This is why banks put holds on check deposits, and is why we’ve worked with our bank partners to craft an ACH hold policy that mitigates their (very real) ACH risk.

Solutions: Just as in the 90’s, at the dawn of the internet, customers wanted to access their bank information online but banks were not equipped to offer that feature. Software vendors came in and provided banks with the tools they needed. Likewise today FundAmerica services and software is designed to provide banks, law firms, title companies and other escrow departments with the tools they need to handle tech-driven, crowd-sourced offerings. We are still in the very early stages of development for tech-driven capital markets, and this has been a major frustration for the early participants, but it is being worked through and we are now seeing more and more banks raising their hands to participate in and profit from this evolving industry.