Virtually all private securities offerings sold as unregistered exempt securities (units), are marketed on a “best efforts” basis. In a “best efforts” offering, the broker-dealer acts as the agent of the issuer (generally, the limited partnership or limited liability company) in attempting to sell the units directly from the issuer to the investors. The broker-dealer is paid commissions from the issuer for sales made. Best efforts offerings frequently are made on an “all or none” or “part or none” (minimum-maximum) basis. In an “all or none” offering, all of the units must be sold during the specified offering period or the subscriptions must be promptly returned to the investors. In a “part or none” offering, the designated minimum amount must be sold within the specified time or subscriptions returned to investors.

The October 2016 column1 discussed SEC Rule 15c2-4 which establishes procedures for best efforts offering. The rule makes it a “fraudulent, deceptive or manipulative act or practice” for purposes of Section 15(c)(2) of the Securities Exchange Act of 1934 (1934 Act) for any broker-dealer participating in a best efforts, contingency offering to accept any part of the sale price for the securities unless the broker-dealer either (i) promptly puts the funds in escrow and appoints as escrow agent a bank that has agreed in writing to make the appropriate transfer to the issuer or the investors upon the occurrence of the relevant contingency or (ii) promptly deposits the funds in a segregated bank account, with respect to which the broker-dealer acts as trustee or agent, and, upon the occurrence of the relevant contingency, promptly makes the appropriate transfer itself.

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