Due to the limited time available to startup owners, outsourcing the time-consuming fund administration tasks of compiling shareholder information and appropriately sending payments, reports, and other communications allows them to focus on essential investment, sales and growth objectives.
A fund administration firm also provides an additional purpose in the context of equity crowdfunding. Funds with more than 2,000 accredited investors or 500 non-accredited investors must register under the Exchange Act and become publicly reporting companies, according to Section 12(g) of the Act. This means that corporations with a large number of shareholders may be required to file SEC filings on a frequent basis, which can be costly and time-consuming. A fund administration partner is in a position to monitor a fund’s compliance with these regulations and advise on how to proceed as thresholds approach.
The two equity crowdfunding laws, on the other hand, establish conditional exemptions or exceptions to Section 12 of the Act (g). Companies can exclude investors who hold shares sold under Regulation A+ as long as the company:
- Doesn’t have a float (the number of shares available for trading) of more than $75 million (or more than $50 million in revenue if there isn’t afloat).
- Filings required by Regulation A+, include annual reports with audited financials, semi-annual reports with unaudited financials, and event reports that document important changes to shareholders’ rights or the firm itself.
- Makes use of a registered transfer agent, often a division of a fund administration firm.
Companies that raise up to $1.07 million through Rule Crowdfunding can also exclude investors who hold shares sold under Regulation Crowdfunding as long as the company:
- Has a net worth of less than $25 million
- Makes all required Regulation Crowdfunding filings, including an annual financial report.
These two pieces of legislation make it possible to have thousands of investors on your cap table without having to be a publicly-traded company, as long as the company fits the requirements outlined above, including engaging a transfer agent. Transfer agent services integrated with the full back-office capability of a fund administration provider add operational efficiency to regulatory compliance.
Using a fund administration partner not only protects startups from the costly risks associated with errors in shareholder records, reporting, and dividend distribution, but it also helps them to focus their time and resources on optimizing growth rather than dealing with fund administration headaches. Fund administration systems also facilitate scale by integrating with crowdfunding platforms and streamlining the onboarding of new investments and thereafter systematizing ongoing fund administration support to investors.
Funds that want to raise money through equity crowdfunding can hire a fund administration/transfer agent provider to avoid the responsibilities and costs of filing public reports while having thousands of investors on their cap table under Regulation A+ and Regulation Crowdfunding, as long as they meet the requirements of each regulation listed above. Meeting these requirements is greatly simplified by fund administration support.