There are 3 ways to run your fundraise…

  1. Have all investor funds sent into escrow
  2. Have investor funds immediately sent to the issuer
  3. Have investors “pledge” their commitment and then send funds at closing

Pledges” are a pretty awful way to go for a number of reasons. Namely: you risk a high failure rate of funding associated with a pledge system, and you may not receive enough funds to reach the offering minimum and thus have to void the entire deal. Plus, in not knowing who truly is committed to participate you waste time and money confirming accreditation, clearing AML and processing legal paperwork on investors who in reality will never send funds.

Immediate” funding is generally a terrible idea as well. When you sell securities to an investor it forms a contractual promise. In the event you don’t raise enough to fulfill your business plan you may expose yourself to litigation (tort attorney fodder). You also have to start filing Form D’s and incur other closing-related expenses, even though the offering has really only just begun. And if you sell securities to someone who then fails accreditation or AML then you expose yourself to other problems since it’s too late, you already sold them the securities and they may rightfully refuse your offer/desire to refund them. Not to mention the risk of federal as well as state regulators taking exception to what they perceive as a failure to protect investors and comply with their rules.

**Is it really worth the potential problems and hassle just to save $280?**

The reasons for using escrow include…

  • To comply with SEC Rule 15c2-4;
  • To give you time to sort out any issues or errors with an investor’s subscription agreement;
  • To ensure that when people commit they really do send funds (and gives you time to work with them to deliver funds if needed);
  • To give you time before securities are sold to…
    – verify investor accreditation
    – run AML (US Treasury, Homeland Security and IRS checks for money-laundering, terrorist, and tax fraud) on all investors and to clear any fails
    – get your funding in place before the expense of filing Form D’s
    – weed out (refund) any problematic or unwanted investors (since you can rescind anyone’s participation so long as securities are not yet sold)
  • To avoid potential state & federal regulatory concerns;
  • To comply with securities best practices;
  • To add a level of protection and comfort to investors as their money is professionally accounted for prior to the sale of securities to ensure the company meets its minimum funding obligation.

Think of it not just as compliance, but as a kind of cheap insurance that allows you get the money in from investors while also giving you the time you need to button things up as you prepare to close.

It’s not expensive. FundAmerica Securities escrow fees are, all-in, $280 for escrow (not based upon amount raised), $2 per investor AML, and nominal incoming funds fees for checks, wires, and ACH (no charges for investor refunds, if any).

We also provide payment processing as a post-escrow service option in the event you want to send investor interest payments or other distributions in the future.


Scott Purcell
FundAmerica Technologies

Legal Disclaimer:
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. You should contact your attorney or tax professionals to obtain advice with respect to any particular issue or problem.