Payment and Contractual Settlement for Private Placement Securities

Settlement and payment for a private placement follow the deal's own paperwork, not a market utility's fixed timetable.

How Does a Private Placement Settle?

• A private placement does not settle through a clearing corporation's regular-way cycle the way an exchange-traded secondary-market trade does. There is no third party comparing, netting, and settling the trade on a fixed timetable.
• Instead, the offering documents, the subscription agreement and the private placement memorandum, set the terms for payment and for closing.

Exam Tip: Gotchas

• Do not apply a standard exchange-traded settlement cycle to a private placement. The offering documents, not a clearing-corporation cycle, control when and how the trade completes.

Where Must the Investor's Funds Go?

• The payment-handling rule governs how a broker, dealer, or municipal securities dealer must handle the sale price it accepts in any distribution of securities other than a firm-commitment underwriting. Whether the distribution is contingent decides which branch of the rule applies, not whether the rule applies at all.
• If the distribution is not contingent, the money received must be promptly transmitted to the persons entitled to it, normally the issuer in a private placement.
• If the distribution is contingent, an all-or-none structure or any other basis where payment waits on some further event, the money must instead be held until the contingency occurs. Neither holding method outranks the other.
• The two methods are a separate bank account with the broker-dealer as agent or trustee, or a bank that has agreed in writing to hold the money in escrow. Either way it is held for the persons who have the beneficial interests in it until the contingency occurs, and then promptly transmitted or returned to the persons entitled to it.
• The two routes differ only in who carries that last duty. Under the escrow route the bank's written agreement binds the bank to transmit or return the funds directly to those persons. Under the separate-account route the broker-dealer carries the same duty itself.
• This lesson gives the rule's scope and its two branches, including that a firm-commitment underwriting sits outside the whole rule. The mechanics-of-distribution unit's lesson on all-or-none representations and payment handling adds what an all-or-none promise must deliver to be honest.

What Is the Closing?

• The closing is the point at which the subscription has been accepted and the funds are transmitted or released under the offering documents' terms, completing the transaction.

What Should You Check on Exam Day?

• Expect a private placement to settle on the offering documents' terms, not a clearing corporation's regular-way cycle.
• Confirm whether the distribution is contingent before choosing which branch of the payment-handling rule applies.
• Match a contingent structure to its holding method: a separate bank account as agent or trustee, or a written bank escrow agreement.
• Carry the holding duty through to its end. Both methods finish the same way, with the money promptly transmitted or returned once the contingency occurs.
• Treat the closing as the point subscription acceptance and fund transfer both occur under the offering documents.