Contingency Offerings in Private Placements: A Practical Guide for Sponsors, Issuers and Selling Group Members

The Full Analysis

In Reg D private placement offerings, a minimum offering contingency may sound reassuring. Investors may like hearing that the issuer will not break escrow unless a minimum amount of capital has been raised. Sponsors may think a contingency makes the offering look more disciplined. Legal counsel may add the contingency for window dressing and because they believe that it seems like a protective embellishment.

But a contingency in your private placement offering is not decoration. It is a promise with consequences.

Contingencies are one of the trickier structures in private securities offerings, particularly when a broker-dealer is involved. Once an offering is structured as “all-or-none” or “part-or-none,” the issuer, sponsor, escrow agent and broker-dealer have stepped into a regulatory framework that requires precision, coordination and a very clear understanding of what happens if the contingency is not met by the stated deadline.

That is where many issuers, and broker-dealers, get into trouble.

A Contingency Is a Promise, Not a Preference

In a Reg D private placement, a contingency offering is an offering where investor funds cannot be released to the issuer unless a stated condition, made in the Private Placement Memorandum (“PPM”), is satisfied. Most commonly, that condition is the sale of a minimum amount of securities by a specified date, often defined as a “Minimum Offering Amount” by a “Minimum Offering Termination Date.”

That sounds simple enough. But I assure you - it is not.

Under Exchange Act Rule 10b-9, a contingency offering must provide for the prompt return of investor funds if the stated contingency is not met. FINRA has reminded broker-dealers that they must safeguard investor funds until the contingency is satisfied and that they must ensure that funds are promptly refunded if the contingency is not met. FINRA discusses the matter in-depth in Regulatory Notice 16-08.

The issue is not whether the issuer eventually raises the money. The issue is whether the contingency was met in the manner, amount and timeframe disclosed to investors.

That distinction matters.

In one FINRA Acceptance, Waiver and Consent (“AWC”) involving a fellow managing broker-dealer, the offering required the issuer to raise a Minimum Offering Amount by the Minimum Offering Termination Date. The offering documents allowed for an extension only to a later specified date. When the Minimum Offering Amount was not met by the applicable deadline, the issuer issued supplements extending the offering termination date. The minimum was ultimately met and the offering closed. FINRA still found a willful Rule 10b-9 violation because the proper reconfirmation process was not followed and investor funds were not returned.

That should stop everyone cold.

The offering closed. The money was eventually raised. Investors were not necessarily sitting in a failed deal forever. And FINRA still found a violation.

The Business Reason for the Contingency

Before structuring an offering as contingent, the issuer and sponsor should be able to articulate a very solid business reason for the contingency.

A minimum offering contingency should not be added because it sounds protective, marketable or investor-friendly. It should be tied to the economic reality of the transaction.

Examples include:

The issuer needs to raise the full equity amount before proceeding.
- This is the classic “all-or-none” offering. TOBIN has several clients that approach offerings in this way. These clients are clear-eyed about the structure: if they do not raise the required capital for the entire project, they cannot execute the transaction. So they will return investors’ subscriptions and walk away.
The issuer must raise a portion of the full equity amount in order to proceed with an acquisition or a project.
- These issuer want to establish a “part-or-none” offering. They need to raise a minimum dollar amount to purchase an asset, begin redevelopment or satisfy a financing condition. Once this partial minimum is met, the issuer may have alternatives at its disposal to finance the balance of the project, including sponsor capital, lender financing or later investor subscriptions.
The issuer wants to use the contingency for “momentum testing.”
- This is where the analysis becomes more delicate. Some issuers want a contingency because they would like to see fundraising momentum before accepting investor funds. TOBIN has had clients in this category who, after understanding Rule 10b-9, Rule 15c2-4, escrow and reconfirmation obligations, decided to drop the contingency altogether.

You Cannot Casually Change the Minimum Offering Amount

One of the most dangerous sentences we see in offering documents is a version of this:

“The Manager reserves the right, in its sole discretion, to increase the maximum amount of the Offering and/or reduce or eliminate any minimum offering amount at any time.”

In a non-contingency offering, the issuer may have more flexibility to adjust offering size, subject of course to proper disclosure, securities law compliance and investor fairness.

But in a contingency offering, reducing or eliminating the minimum is not an innocuous business adjustment. The minimum is the condition on which investor funds are being held. It is the threshold investors were told must be satisfied before funds may be released.

FINRA has warned that broker-dealers have violated Rule 10b-9 by failing to return subscriber funds after an issuer changed the contingency by reducing the offering minimum. FINRA has also flagged violations where firms failed to take proper steps when an issuer extended the offering period.

So… no. The issuer should not reserve the right to reduce or eliminate the minimum at any time as if the contingency were a knob on the dashboard.

If the offering has a real minimum, the issuer has to meet it. If the issuer is not able to meet the minimum by the disclosed deadline, it must complete the required reconfirmation process or return investor funds.

A Contingency Offering Needs Guardrails

A contingency offering requires exacting precision.

The offering documents need to clearly identify the Minimum Offering Amount, the Minimum Offering Termination Date (the deadline for satisfying the Minimum Offering Amount) and what happens if the Minimum Offering Amount is not satisfied by that deadline.

We have seen offering documents try to create a distinction between the “first closing date” and the “Minimum Offering Termination Date” in a way that does not make practical sense. TOBIN advises that you do not do that unless counsel can clearly explain what each date does, how the dates interact and what happens to investor funds if the Minimum Offering Amount is not raised by each date.

Of course, the issuer may hold one or more closings after the Minimum Offering Amount has been raised, assuming all other closing conditions are satisfied. But the contingency deadline itself should not be tied to a movable “first closing” concept. In a contingency offering, “first closing date” is the wrong controlling term. The operative deadline is the Minimum Offering Termination Date. That is the date by which the Minimum Offering Amount must be raised, and that is the date that drives the return-of-funds or reconfirmation analysis.

When drafting your PPM demand and produce this kind of precision:

What is the Minimum Offering Amount?
What is the Minimum Offering Termination Date?
What happens if the Minimum Offering Amount is not raised by the Minimum Offering Termination Date?
Are investor funds returned promptly?
Is the issuer attempting to reserve the right to extend the Minimum Offering Termination Date?
- If so, what is the required reconfirmation process?
Does the escrow agreement use the same Minimum Offering Amount and Minimum Offering Termination Date as the PPM?
Who has authority to release funds from escrow?
Who must receive notice before escrow is released, terminated or extended?
Does the Managing BD have visibility into escrow release, termination and extension?

Those questions should be answered before the offering launches, not after investor funds are sitting in escrow. In a contingency offering, the deadline has to be known, disclosed and operationally honored.

Escrow Is Not a Back-Office Detail

A contingency offering also requires disciplined escrow mechanics.

Rule 15c2-4 governs the transmission or maintenance of investor funds in certain best-efforts offerings. In broad terms, a broker-dealer participating in a contingency offering cannot casually accept investor funds and allow them to sit wherever the issuer or sponsor finds convenient. Investor funds must be handled in a way that protects them until the contingency is satisfied.

That means the escrow agreement matters.
The escrow agent matters.
The release conditions matter.
The notice provisions matter.
The broker-dealer’s visibility into the escrow mechanics matters.

A sponsor may think escrow is a back-office function. It is not. If the broker-dealer is supervising a contingency offering, the broker-dealer needs to diligize and understand the escrow structure, the conditions for release, the termination provisions and the process for returning funds if the contingency is not met. And the Managing Broker Dealer must maintain a front seat in the process.

At TOBIN, we have become very direct on this point. When we serve as the Managing Broker-Dealer (“MBD”) in a contingency offering, we expect to be included in the escrow agreement mechanics, either as a required signer, where appropriate, or, at minimum, as a party entitled to notice before funds are released.

That is not ceremonial. It is how a broker-dealer protects investors and protects itself.

The Contingency Date Should Be Realistic, Not Indulgent

Sponsors also need to think carefully about the Minimum Offering Termination Date.

A date that is too short may be commercially unrealistic. A date that is too long may raise market and regulatory questions.

If the minimum must be raised in 30 days, can the issuer actually do that?

If the issuer gives itself a year, will investors, RIAs and selling group members wonder whether their money could sit in escrow for too long while the sponsor tests demand?

A longer date is not automatically impermissible. But it should be supportable. There should be a business reason for the timeline. A six-month deadline may be easier to understand than a one-year deadline if the issuer has a plausible capital raise plan, a defined investor pipeline and a willingness to return funds if the minimum is not met.

The issuer can usually close earlier if the Minimum Offering Amount is met before the Minimum Offering Termination Date and the documents permit an earlier closing. That is often the cleaner answer. Give yourself a realistic deadline, but do not pretend the deadline is irrelevant.

Extensions Require Discipline

The FINRA AWC cited above is particularly instructive because it addressed extensions.

The offering did not meet its minimum by the disclosed deadline. The issuer issued PPM supplements extending the offering termination date. The minimum was eventually met. But FINRA still found that the managing broker-dealer failed to obtain affirmative written consent from each and every investor to continue their investment or return their funds. It was an administrative activity that created huge headaches.

That is the core lesson.

A PPM supplement alone is not enough.

If the contingency deadline needs to be extended, the issuer and broker-dealer must be prepared to send reconfirmation offers before the deadline, disclose the extension and obtain affirmative written confirmation from investors who wish to remain invested BEFORE THE DEADLINE. Investors who do not affirmatively reconfirm must receive their money back.

The issuer, counsel, escrow agent and broker-dealer should understand the extension and reconfirmation process before investor funds are accepted.

And that is where an excellent Managing Broker Dealer sets the issuer right on solid ground.

Are Contingency Offerings Worth It?

Sometimes, yes.

TOBIN has clients that execute contingency offerings thoughtfully, successfully and with real discipline. Their offerings succeed when the contingency reflects the economics of the transaction and the parties administer the structure with precision.

Those clients deserve credit. They demonstrate that contingency offerings are not inherently problematic. They simply require discipline.

But contingency offerings are only worth it when the contingency serves a real economic function and the issuer, sponsor, counsel, escrow agent and MBD are prepared to administer it correctly.

A minimum offering contingency may be appropriate when:

The issuer cannot execute the disclosed business plan below a certain capital level.
The minimum amount is tied to actual capital needs.
The deadline is commercially realistic.
The PPM, subscription documents and escrow agreement are exacting and consistent.
The escrow agent’s release conditions are clear.
The broker-dealer has proper visibility into escrow release and termination.
The issuer understands that the minimum cannot simply be waived, reduced or extended without regulatory consequences.

A minimum offering contingency is probably not worth it when it is added merely because someone thinks investors will like it.

The Bottom Line

Contingency offerings are not impossible. But they are unforgiving.

If the issuer proclaims that investor funds will not be released until a Minimum Offering Amount is raised, everyone involved needs to treat that statement as binding. The Minimum Offering Amount must be clearly stated in the private placement memorandum. The Minimum Offering Termination Date, the deadline, must be excruciatingly clear. The escrow agreement must match the offering documents exactly as it relates to the requirements of the contingency. The broker-dealer must understand the flow of funds and have a front-row seat to that movement. And if the contingency is not met by the disclosed date, investor funds need to be returned immediately unless an impeccably proper reconfirmation process is executed before the Minimum Offering Termination Date.

In private placements, the issuer’s and the sponsor’s credibility comes from the kind of discipline demonstrated in its offering processes and its choice of Managing Broker-Dealer to supervise the securities offering.

A contingency offering can reflect discipline and thoughtful financial strategy. But only if the issuer is prepared to live with the contingency it created.

The Vocabulary Matters

For sponsors, issuers and selling group members, the vocabulary matters. These terms are often used casually, but in a contingency offering, they carry operational and regulatory consequences.

Contingency Offering: An offering where investor funds cannot be released unless a stated condition is met. The condition is usually raising a minimum amount by a stated deadline.
All-or-None Offering: An offering where the issuer must raise the full stated offering amount before funds may be released. If the full amount is not raised by the deadline, investor funds are returned.
Part-or-None Offering: An offering where the issuer must raise a stated minimum amount, but not necessarily the full offering amount, before funds may be released.
Minimum Offering Amount: The amount that must be raised before the issuer can break escrow and accept investor funds.
Minimum Offering Termination Date: The deadline by which the minimum offering amount must be raised. If the minimum is not met by this date, the issuer must return funds or follow the required reconfirmation process if an extension is permitted.
Escrow Agent: The third party that holds investor funds until the contingency is satisfied or funds must be returned.
Breaking Escrow: Releasing investor funds from escrow to the issuer after the stated conditions have been satisfied.
Reconfirmation Offer: A process used when the contingency deadline is extended. Investors must affirmatively confirm in writing that they want to remain invested, or their funds must be returned.
Momentum Testing: A business reason sometimes given for using a contingency: the issuer wants to see whether the offering has enough investor interest before accepting funds. This can be understandable, but it may not justify the regulatory complexity of a contingency offering.
Exchange Act Rule 10b-9: The Exchange Act rule addressing representations in contingency offerings, including the requirement that investor funds be returned if the stated contingency is not met.
Exchange Act Rule 15c2-4: The Exchange Act rule addressing how investor funds must be transmitted or maintained in certain best-efforts and contingency offerings.
FINRA Regulatory Notice 16-08: FINRA guidance reminding broker-dealers of their obligations in contingency offerings, including escrow handling, consistency between offering documents and escrow agreements, return of investor funds if a contingency is not met, problems with reducing offering minimums and proper handling of offering-period extensions.

Source note: This draft references FINRA Regulatory Notice 16-08, Exchange Act Rules 10b-9 and 15c2-4 and FINRA AWC No. 2021070766201. The AWC is cited as an instructive public enforcement example, not as criticism of any particular firm.