How do you know your money is safe while pooled?
That is always a difficult part of any transaction. First of all, go with what and whom you know. Commercial banks of reasonable size with adequate liquidity and capital are always better bets. They are the reliable source of the interest income during the cash on deposit phase of the potential investment. Also, you want the financial institution or the consolidator or holder of the funds to have a lot of experience with these types of transactions.
The tenor or the nature of the deposit that is held is also extremely important. For example, just having money in the hands of the promoters of an investment fund or pool and relying upon them to hold the money for you in their deposit account where they control the funds is not as desirable as having money in the hands of a trusted third party, such as a qualified escrow holder. You have to have certain conditions attached to the money: how it is collected, held, invested and disbursed. The best scenario of all is when the escrow holder is also the depository bank.
What roles do funds aggregators play?
Aggregators are really the people who are consolidating all the investment funds in one place. They could be the promoters, developers, general partners or leading members of an LLC that see the opportunity. The aggregators’ mission is to recruit or solicit investments from other people, usually through a private placement or similar offering document. So, on one hand, you have the aggregators and, on the other, you have the bank involved as a depository. The bank is the one that really consolidates all the funds that are being pooled into one place. It’s worth mentioning that it’s not necessary that these pools are single-purpose; they can also be multipurpose to take advantage of several opportunities as they arise over time out of one fund.
When the money is held by a third party, the funds will be deposited with a bank acting as the depository for the investment promoter, ideally, under the terms of an escrow agreement that protects the individual investors. So, if they do not go forward into the investment, the funds are returned to the investors, with interest and without any hassles or delay.
Remember, each deal and each opportunity is different, so custom drafting of controlling documents that say how the funds will be received, held, invested and disbursed needs to be addressed. Make sure the documentation of the financial institution that is going to hold the funds and that of the promoters and the lawyers negotiating the terms are compatible. The deposit has to be in sync with what the offering memorandum says will happen, and that’s where a good depository consolidator/escrow holder is so important. You don’t have to go back too many months to read about how nonbank investment intermediaries acting as funds holders proved disastrous for the investors.
Syd Saperstein is a senior vice president and the division manager of Special Corporate Financial Services with Comerica Bank. Reach him at (415) 477-3246 or [email protected].