Using Escrow in a Private Placement Memorandum

A private placement memorandum (PPM) or offering memorandum (OM) is the document used in a private offering of securities to a small number of uniquely qualified investors. Also known as an offering circular (OC), a PPM is typically used by a company to raise capital and avoid using debt or a traditional public offering. A PPM can be advantageous to an issuing business in that there is no registration required by the Securities and Exchange Commission as there is for a public offering.

What Comprises a Private Placement Memorandum?

A private placement memorandum will contain information required by potential investors to make an informed decision as to whether to buy into the offering. Included will be key information such as:

  • Securities for sale
  • Potential return for the investor
  • Businesses management team
  • Forecasted financial information

The PPM will also provide offering terms, information on proposed activities and use of investor proceeds, and plans for collecting and distributing investor funds. Such plans will include milestones for terminating the offering and distributing funds back to investors and triggers for distributing funds to the business for the purpose of the offering.

A private placement memorandum will contain financial information such as per unit offering prices and the minimum and maximum project offering numbers. A PPM can look very much like a business plan and include information about the business entity associated with the offering and even organizational documents associated with that entity.

To mitigate investor risk, an issuing business can offer security by incorporating the use of an escrow in a private placement memorandum.

Escrow in a Private Placement Memorandum

When incorporating escrow, funds are held by a third-party until all involved parties have fulfilled their obligations and the offering's milestones have been reached. The escrow agent, operating as that independent third party, is bound by contract to monitor milestones and act upon specific actions attached to them. Such milestones and associated actions are agreed upon openly by the escrow agent, the issuer of the PPM, and the investors.

Investors in the offering invest funds directly with the escrow agent, ensuring that:

  • If the offering’s goals are not met, they receive their funds back.
  • If the offering’s goals are met, the business entity can be assured that funds reside safely with the escrow agent’s bank and are ready for immediate transfer for the offering’s proposed activities.

Escrow agents serve as a repository of initial investment records for the involved parties. An escrow agent will keep organized files of:

  • Deposits received from the investors
  • Interest earned on the deposits
  • The signed escrow agreement and any amendments
  • Subscription Agreements – the investment contract between the investor and issuing business

As a neutral party without claim or stake in the success of the project, an escrow agent promotes timely communication, transparency, and protection of investment funds.


Given the risks that investors face, a PPM-issuing business may attract depositors by including escrow language within a private placement memorandum. Similarly, it behooves an investor to inquire about the use of an escrow agent in such an offering, helping ensure that their funds are safely held in reserve until agreed upon PPM milestones are reached.