Escrow and custody: who actually holds your shares

The gap between agreeing to a trade and holding shares

Public trades settle through centralized clearing in a single business day, with a depository holding the securities and a clearinghouse guaranteeing both sides. Private trades have none of that. Settlement is bilateral, paper-driven, and gated by the issuer's transfer restrictions. The share purchase agreement sets the terms, but the terms don't execute themselves. Money and shares have to change hands in the right order, and someone has to be responsible for each while the other is in transit.

Who is involved

A typical private secondary involves the buyer, the seller, the issuing company (which usually must approve the transfer and may hold a right of first refusal), the company's transfer agent (which updates the ownership record), and in many cases an escrow agent holding funds until closing conditions are satisfied. If the buyer is participating through a vehicle, add the SPV manager. If the buyer holds through a custodial account, add the custodian. The transfer agent is the one party whose records define who legally owns the shares.

How escrow works

Escrow is an arrangement in which a neutral third party holds funds, assets, or both until specified conditions are met, then releases them according to written instructions. In a private share sale, the buyer typically deposits the purchase price with the escrow agent at signing. The funds sit there while the company's approval process runs: the ROFR window expires or is waived, the board consents, the transfer documents are countersigned. When every condition in the escrow instructions is satisfied, the agent releases funds to the seller. If a condition fails, the agent returns the funds to the buyer.

The buyer is protected from paying for shares that never transfer. The seller is protected from transferring shares to a buyer who can't pay. Neither has to trust the other; they trust the instructions.

The role of the escrow agent

An escrow agent is a fiduciary for the transaction, not for either party. Its job is to hold what it's given, verify that release conditions are met exactly as written, and disburse accordingly. Escrow agents in private securities transactions are typically banks, trust companies, or specialized escrow providers, and their fees are usually set out in the escrow agreement. The escrow agreement itself is a distinct document from the purchase agreement, and investors should read both: the SPA says what the deal is, the escrow agreement says how and when money moves.

How custody works

Custody is the safekeeping of assets on behalf of their owner. A custodian holds the asset, maintains records of the owner's interest in it, processes transactions and corporate actions, and reports to the owner. For public securities, custody is nearly invisible: shares sit in "street name" at a broker, which holds them through a central depository. For private shares, custody can mean several different things, which is why "who holds my shares" is a harder question than it sounds.

What a qualified custodian is

"Qualified custodian" is a defined term under the Investment Advisers Act, specifically Rule 206(4)-2, known as the custody rule. It requires SEC-registered investment advisers who have custody of client assets to keep those assets with a qualified custodian: a bank or FDIC-insured savings association, a registered broker-dealer holding the assets in customer accounts, a registered futures commission merchant (for certain assets), or a foreign financial institution that customarily holds financial assets for customers. The custodian must maintain the assets in a separate account for the client or in accounts that contain only client funds and securities, under the client's name or the adviser's as agent.

Two things follow for private market investors. First, the custody rule governs advisers, not individuals: if you buy shares directly in your own name, no rule requires a custodian at all. Second, the rule has a carve-out for certain privately offered securities held by audited pooled vehicles, where the securities are uncertificated, recorded only on the issuer's books, and transferable only with issuer consent. Between the two, the answer to "who holds my shares" in private markets very often turns out to be "the company's own records," not a bank vault.

Direct ownership

In a direct purchase, once the transfer is approved and recorded, you are the shareholder of record. Your name appears on the cap table, maintained by the company or its transfer agent, and the shares are typically issued in book-entry form, meaning there's a ledger entry rather than a paper certificate. No custodian stands between you and the company. The records that prove ownership are the transfer agent's, and the document that got you there is the countersigned stock transfer or purchase agreement. Keep it.

Ownership through an SPV

When shares are bought through a special purpose vehicle, the SPV is the shareholder of record and you hold a membership or partnership interest in the SPV. The SPV's manager maintains the record of who owns what percentage of the vehicle, and the company sees only the vehicle. This is the most common structure in platform-organized secondaries, for reasons the guides to SPV vs. direct investment and comparing SPV structures explain. What matters for custody purposes: your ownership evidence is the SPV's subscription documents and its ledger, not the company's cap table. If the company were ever to go public, what happens to your SPV interest depends on the SPV's terms.

Custodial arrangements

Some investors hold private shares through a custodial account, most commonly when the buyer is an IRA (which must use a custodian) or an advisory client whose adviser is subject to the custody rule. The custodian is recorded as the holder "for the benefit of" the investor, keeps the underlying documents, and reports positions. Ownership is still yours; the custodian is holding on your behalf under an agreement that says so. The cost is a fee and an extra party in every transaction; the benefit is a regulated institution keeping the records and an account statement that shows the position.

Funding and share confirmation

After signing, the buyer funds escrow. In parallel, the seller's holdings are confirmed against the transfer agent's records: that the seller owns the shares in the quantity being sold, that they're not subject to a lien or an unexpired lockup, and that any required spousal or co-owner consents are in hand. Confirming this before funds move is what prevents the most painful failure mode, a fully funded purchase of shares the seller couldn't deliver.

Escrow release and settlement

The issuer's approval process runs. Once the ROFR window has closed, the company has consented, and the transfer documents are fully executed, the escrow agent confirms that release conditions are met and disburses the purchase price to the seller, less any fees the agreement allocates.

Recording the new owner

The transfer agent updates the cap table. In a direct purchase, the buyer's name replaces the seller's for those shares. In an SPV purchase, the SPV is recorded and its manager updates the vehicle's own ledger. In a custodial purchase, the custodian is recorded FBO the investor. Settlement is complete when the record changes; not before. The guide to tender offer vs. direct sale describes how this sequence differs when the company itself organizes the transaction, and what a tender offer is covers that structure in full.

Who holds the shares and how ownership is recorded

Before funding, know the answer in one sentence: "After closing, [I / the SPV / the custodian] will be the shareholder of record, and my ownership is evidenced by [the transfer agent's ledger / the SPV's subscription agreement / the custodial account statement]." If you can't fill in the blanks from the documents you've been given, ask.

Custodian qualifications

If a custodian is involved, confirm it's a regulated institution, ideally one that meets the qualified custodian definition, and that the custody agreement names you as the beneficial owner. If an SPV is involved, understand who the manager is, what the SPV's records look like, and how you'd get a copy.

Settlement and release conditions

Read the escrow agreement. Know what conditions trigger release, what happens if the issuer declines the transfer, how long escrow can run before either party can walk, and who bears the escrow fee. Every one of those is negotiable before signing and none of them is negotiable after.

Augment's private marketplace is built around the settlement sequence described above rather than around the match alone. Transactions run through a defined workflow: verification of the seller's holdings, issuer approval and ROFR handling, executed transfer documents, funding, and release. Augment coordinates that workflow and works alongside the third parties that hold and record assets, including escrow providers and the issuer's transfer agent, so that each step is visible to both sides while it's happening. Augment itself does not act as a custodian of funds or securities; its role is to organize the process and make it transparent.

For investments made through the pre-IPO investment platform, the SPV is the shareholder of record, and investors receive the vehicle's documentation showing their interest. In either case, investors in pre-IPO companies can see how their ownership is held and recorded before they commit, which is the whole point.

Escrow protects the interval between agreement and closing. Custody defines what you hold once closing is done. Ownership after a private transaction can sit in three places, on the company's cap table in your name, in an SPV's ledger, or at a custodian for your benefit, and each comes with a different piece of paper that proves it. Investors who know which one they're getting, and who read the escrow agreement before wiring, are the ones who don't spend the settlement period wondering. In a secondary market built on bilateral trades and issuer approvals, knowing exactly who holds your shares is the baseline, not the bonus.