All-or-None Representations and Payment Handling

Both rules share the same exemption. A firm commitment offering, where there is no sales contingency to misrepresent and no pending payment to hold, is carved out of both.

What Must Be True for an All-or-None or Mini-Max Representation to Be Honest?

This is the same representation pattern behind the mini-max method taught earlier in this unit: a mini-max offering makes exactly this kind of conditional refund promise, and it has to be honored the same way an all-or-none offering does.

Representing an offering as all-or-none, or on any other basis where consideration will be refunded if all or some of the securities are not sold, is a manipulative or deceptive device unless that representation is actually honored:

• All of the securities, or the stated part, sell at the specified price within the specified time.
• The seller receives the total amount due by a specified date.

If those conditions are not met, the consideration must be promptly refunded.

Exam Tip: Gotchas

• Neither rule states a fixed number of days for "specified time" or "specified date." The offering documents set the actual deadline; the rule only requires that whatever deadline is promised is actually met, and that a refund is prompt when it is not.

Where Must Investor Money Sit While a Contingency Is Still Pending?

A broker, dealer, or municipal securities dealer participating in a distribution other than a firm commitment may accept part of the sale price only if the money is promptly transmitted to the persons entitled to it. When payment depends on a contingency, an all-or-none or mini-max structure, the money must instead be:

• promptly deposited in a separate bank account, with the broker-dealer acting as agent or trustee for the beneficial owners, until the contingency is resolved and the funds are promptly transmitted or returned, or
• promptly transmitted to a bank that has agreed in writing to hold the funds in escrow and to transmit or return them directly to the persons entitled once the contingency is resolved.

Exam Tip: Gotchas

• Neither holding method is preferred over the other. A separate bank account with the broker-dealer as agent or trustee and a written escrow arrangement with a bank both satisfy the rule; the broker-dealer simply cannot hold contingent funds directly in its own account.

Why Is a Firm Commitment Offering Exempt From Both Rules?

A firm commitment offering is exempt from the all-or-none representation rule, subject only to customary closing conditions such as a market-out, because there is no sales contingency to misrepresent.

A firm commitment underwriting is also exempt from the entire payment-handling rule, not just its separate-account and escrow requirement. The exemption sits in the rule's opening words, so the prompt-transmission requirement never reaches a firm commitment offering either.

Exam Tip: Gotchas

• These two rules are not the same rule tested twice. One polices what the firm says an all-or-none or mini-max offering means and whether that promise is kept. The other polices where investor money physically sits, a separate bank account or an escrow agent, while the contingency is still pending. An exam item can test either half of this pair.
• A firm commitment offering is exempt from all of the payment-handling rule, not only its separate-account and escrow requirement. The prompt-transmission requirement does not reach a firm commitment either.
• One failed contingency can break both rules. An all-or-none statement the firm does not honor breaks the representation rule. If the contingency also fails and the firm keeps the money, instead of having it promptly returned to the persons entitled, the payment-handling rule is broken too. A proper escrow while the offering is pending does not excuse what happens when the contingency fails.

What Should You Check on Exam Day?

• Distinguish the all-or-none representation rule (what the firm may promise) from the payment-handling rule (where the money sits); they pair together on the exam.
• Confirm an all-or-none or mini-max promise is honored only if the stated amount sells in time and payment is received by the stated date.
• Match a contingency structure to its required money handling: a separate bank account as agent or trustee, or a written escrow agreement.
• Remember a firm commitment offering is fully exempt from the payment-handling rule, not just its separate-account and escrow piece.