By: Tim Cook, manager of corporate trust national sales, UMB Bank
If you are preparing to start raising capital for a new private placement offering, you have a lot on your plate, from establishing the business strategy and marketing plan, to structuring the investment vehicle and infrastructure. With the intricacies of regulation, requirements and setup that a new offering can have, it’s smart to ensure you have a solid understanding of the how, where and why of funds movement.
Specifically, one of the critical backbones of a private placement offering is the escrow agent. An escrow agent is a neutral, third-party that safely holds investor funds for your offering.
In some instances, an escrow account is a requirement for your offering. In other situations, it’s good practice and helps reassure investors that funds are protected and can be returned in the event the offering is unsuccessful. For new issuers or sponsors without an established reputation this can be a significant benefit for investors, and an effective selling point.
As a guidepost for engaging an escrow agent, below is an overview that covers when you should bring in an escrow agent to your capital raise plan and top considerations for selecting an escrow agent.
When to engage your escrow agent
When raising capital for your securities offering, the sooner you establish your escrow account, the better. Establishing an escrow account with a financial institution is often a requirement in a fund offering sold through private placements, and this step can be a bottleneck in the process if not considered in advance.
Proactively selecting your escrow agent as you create the investor presentation gives you a comprehensive and prepared pitch to offer your potential investors. This concurrent timing allows for maximum flexibility and efficiency when you are ready to launch.
Once your offering is built and you are ready to start accepting investments, the process can move quickly. With that in mind, you don’t want to miss an investor opportunity because you need time to establish the escrow account. And, an escrow account can provide your investors with the risk management and fund security they are looking for.
Top considerations for selecting an escrow agent
Whether you are independently selecting your escrow agent or working with a team of advisors for a referral, there are some vital capabilities to consider. Overall, an escrow agent will help protect assets during your capital raise and can provide investors with assurances that funds can be returned in the event certain conditions of the offering are not met.
Beyond the foundational benefits of an escrow account, look for the following characteristics in an agent:
Speed and efficiency
Above all, your escrow agent should be fast and accurate with the setup of the escrow account, including negotiating the escrow agreement, reviewing account opening documentation, and releasing funds once the escrow is ready to deploy.
Due to the nature of escrow accounts—and the quick action sometimes required—nimble escrow account administration is important. Elements of speed can include standardized onboarding forms, responsive teams and dedicated communication processes to shepherd the account opening process through legal review and implementation.
Your escrow agreement is a roadmap of specifics about your capital raise and investor offering. As such, it requires meticulous execution to help ensure a compliant escrow account. Look for an agent with a credible history of successful escrow administration and an understanding of the types of capital raises that require an escrow account.
Expertise and scope
Your capital raise is unique, and likely has unique challenges, nuances or requirements. To help address these unique complexities, find an escrow agent with subscription escrow expertise with specific experience in private placement compliance, industry specifics, deal terms and regulations.
In addition, an escrow agent with a comprehensive scope of services can positively impact your experience by reducing your administrative workload and providing a single point of contact as your escrow is onboarded and administered. In-house legal counsel and responsive customer service are also important considerations when assessing your escrow agent’s capabilities.
It may be ideal to find an escrow agent with a broad array of services and a deep experience in your market or fund type to deliver a simpler experience for you.
Beyond account set up and expertise, your escrow agent will provide administrative services throughout the lifecycle of your capital raise. While your escrow timeline may vary, you should still aim for an escrow agent who can provide optimized administration with features like real-time reporting, same-day disbursements and flexibility to respond to changes and evolutions in your program. For instance, you may need your documentation amended as your offering evolves, so avoid an escrow agent that sets-it-and-forgets-it.
Establishing an escrow account
Establishing an escrow for your offering is the first step to a successful capital raise program. Typically, creating the account can take one to two weeks, but, in some instances, an account can be established in a few days.
For such an integral part of your transaction, it’s important to understand when to engage an escrow agent and the considerations for selecting an agent. Due to the complexity and high stakes of private placement transactions, a detailed, accurate and compliant escrow management partner is of paramount importance to the success of your fund launch.
UMB is a nationally recognized and ranked provider of bond trustee and agency services to the corporate and municipal marketplaces. Our services reach beyond traditional offerings to service aviation, reinsurance and funeral trusts, and our agency business provides efficient escrow solutions. Our tenured and specialized teams understand the complexities of how you do business so we can provide tailored solutions that meet your needs.
UMB is a sponsor of The DI Wire, and the article was published as part of their standard directory sponsorship package.