Series 22: Anti-Fraud Rules For Best-Efforts Commitments

Anti-Fraud Rules for Best-Efforts Commitments

Two Securities Exchange Act rules govern the conduct of a best-efforts commitment underwriting. SEC Rule 15c2-4 requires that payments for securities in an “all-or-none” or “mini-max” offering be deposited into a separate segregated escrow account of an independent bank until the conditions of the offering are satisfied. The bank is called the escrow agent. This rule was put into place to ensure that purchasers will get their money back if the offering is cancelled.

An escrow account is an account where funds are held by a third party (the escrow agent), but the funds do not belong to this party. The funds in an escrow account cannot be commingled with the third party’s funds. Under Rule 15c2-4, the escrow agents may only invest in safe investments, such as bank accounts, bank money-market accounts, short-term CDs issued by the bank, or short-term securities issued by