The Transfer Agent Role in the Crowdfunding Era

For any fund sponsor, especially one who lacks skill or competence in investor relations, the type of recordkeeping and shareholder contact that a transfer agent performs can be extremely time consuming. Whether the investor base consists of a large number of small investors or a few demanding institutional investors, the participation of a transfer agent professionalizes investor-facing tasks without causing management any distraction.

Due to the limited time available to startup fund managers, outsourcing the time-consuming transfer agent duties of assembling and managing shareholder information, making payments, producing reports and executing investor communications allows them to focus on more critical investment, sales and growth initiatives.

A transfer agent takes on additional importance 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. As a result, companies with a large number of shareholders may be required to file SEC filings on a frequent basis, which can be expensive and time-intensive. However, in some cases, with the help of a transfer agent, this isn’t necessary.

Section 12(g) of the Act is subject to conditional exclusions or exceptions under two pieces of equity crowdfunding legislation. If the following criteria are met, companies can exclude shareholders who own shares offered under Regulation A (Reg A+):

• They don’t have a float (the number of shares available for trading) of more than $75 million (or, if there isn’t a float, a revenue of more than $50 million).
• They engage an SEC registered transfer agent to file annual reports with audited financials, semi-annual reports with unaudited financials, and event reports that document major changes to shareholders’ rights or the company itself, as required by Regulation A+.

Companies that use Regulation Crowdfunding (Reg CF) to raise up to $1.07 million can also exclude investors who own shares sold through Reg CF if they:

• Do not have a net worth exceeding $25 million.
• Every year, submit all required Reg CF forms, including a financial report.

These two pieces of law make it possible to have thousands of investors on your cap table without having to be a publicly traded company, as long as you follow the standards outlined above, which include hiring a transfer agent.

Companies that use a transfer agent are protected not just from the operational hazards of errors in shareholder records, reporting and dividend distribution, but they can also focus their time and resources on growth rather than transfer agent responsibilities and administrative challenges. By integrating transfer agent systems with crowdfunding platforms and enabling the digital onboarding of new contributions, as well as systematizing ongoing transfer agent service assistance for investors, transfer agent providers help funds expand and scale without the growing pains one would otherwise expect.

Funds seeking capital through equity crowdfunding can hire a transfer agent to avoid the hassles and costs of public filing requirements while soliciting capital from thousands of investors. Funds can avoid the main disadvantage of raising funds through crowdfunding by raising capital under Reg A+ and Reg CF by following the requirements of each and hiring an SEC registered transfer agent.