The usefulness of an escrow account in a capital increase

In a cash capital increase, the subscribers pay in funds even before the transaction is definitively completed. These sums cannot be used immediately by the company: they are blocked, while the formalities are carried out. The escrow account is the tool that secures this interim period, for the benefit of the investors as much as of the company.

The cash capital increase, step by step

A capital increase by contributions in cash follows a regulated sequence:

• Decision in principle (extraordinary general meeting or competent body) and setting of the terms of the issue;
• Subscription of the new shares by the investors;
• Payment of the corresponding funds, deposited and blocked in a dedicated account;
• Recording of the completion of the capital increase (minutes) and updating of the articles of association;
• Formalities with the commercial court registry and obtaining of the updated Kbis;
• Release of the funds to the company.

Why the funds must be blocked

As long as the capital increase is not definitively completed, the funds paid in by the subscribers must not be used. This blocking protects both sides: the investor has the certainty that their payment will only be released once the transaction has been duly recorded; the company, for its part, has proof that the funds have indeed been gathered. If the transaction does not go through, the sums are refunded to the subscribers.

The role of the escrow account

The escrow account isolates the subscribed funds in an account dedicated to the transaction, separate from the company's treasury. The trusted third party who holds it undertakes to release the sums only under conditions determined in advance:

• Receipt and safekeeping of the subscribers' payments in a dedicated account;
• Blocking of the funds until the completion of the capital increase is recorded;
• Release to the company on presentation of the agreed supporting documents (minutes recording the completion, updated articles of association, Kbis);
• Refund to the subscribers if the transaction is not carried through to completion.

When an escrow agent brings additional security

Recourse to an escrow agent comes into its own in the most sensitive transactions: a financing round bringing together several investors, a capital increase subject to conditions precedent (the simultaneous entry of a fund, obtaining an authorisation, a coordinated closing), or a tight timetable. The escrow agent then applies a bespoke agreement, which locks down the order of payments and releases and neutralises counterparty risk between the parties.

Escrow and statutory deposit of the funds

A distinction must be drawn between the contractual escrow, which rests on the agreement of the parties, and the statutory deposit of the funds made with an authorised depositary (a notaire or a credit institution), which gives rise to the certificate required for the formalities with the commercial court registry. The escrow entrusted to a lawyer takes place before or in addition to these formalities, to secure the funds and organise their release according to the conditions negotiated between investors and company.

The guarantees of an escrow entrusted to a lawyer

Entrusting this escrow to a lawyer provides a protective framework: the funds pass through a dedicated CARPA account, ring-fenced and controlled; the lawyer is bound by professional secrecy and strict professional ethics; and the identification due diligence (KYC/KYB) and source-of-funds checks are incorporated from the opening of the matter, in accordance with AML/CFT obligations.

Preparing a capital increase or a financing round? Fidens sets up the escrow of the subscribed funds on a CARPA account and organises their release on completion of the transaction.