When Should You Use a Transfer Agent?

Investment funds at various phases have different requirements and various challenges when it comes to investor record keeping, communications, payments, compliance duties and transfer agent tasks.


When Should You Use a Transfer Agent?

Investment funds at various phases have different challenges and requirements when it comes to investor record keeping, communications, payments, compliance duties and transfer agent tasks. At any point in the the lifecycle of your fund, it is a good idea to hire a transfer agent. Management must take the transfer agent function seriously in order to maximize efficiency and avoid back-office issues. When looking for a transfer agent, there are a few important factors to bear in mind.

Transfer Agent Services for Startup Funds

At the earliest stage, startups and pre-seed venture capital firms frequently use founders’ stock or have raised some startup financing from close friends or family and are hesitant to use a transfer agent. To keep track of who owns what, internal spreadsheets or self-administration applications are employed and investor contacts are frequently handled directly by the CEO or founder. This is a natural way to begin when a fund is still small but this approach does not last very long. Even if the entrepreneur only knows a few investors, serving them professionally is key and being subject to rapid expansion, either in assets or investor count, without the assistance of a transfer agent is a recipe for future operational problems.

Seed-stage companies are more likely to use a transfer agent since they have raised money from angel investors, venture capitalists or, increasingly, equity crowdfunding platforms. Because these investors may not know the CEO/founder directly, there is a higher demand for the accuracy, accountability and transparency that a transfer agent can provide in investor record-services. Seed stage businesses often undertake these responsibilities in-house with the assistance of a law firm or a CFO. But, as the company grows, internal focus is diverted to growth management. Investor administration, fund accounting, and transfer agent functions may fall by the wayside. The lack of a skilled transfer agent often results in incomplete records, poor investor service and/or non-compliant reporting, payments or tax documents. To avoid these issues, forward-thinking fund managers are beginning to understand hiring a transfer agent as a necessary part of their operations.

The Growth Stage and the Growing Need for a Transfer Agent

The need for a specialized, professional third-party transfer agent becomes inescapable for businesses at the growth stage. Traditionally, Series A or later funding rounds have been raised for growth enterprises by venture capital firms, private equity firms and other certified investors such as family offices. A fully professionalized operation is expected at this point and a transfer agent is required. A corporation must keep accurate books and records on its investors in practically any scenario at this point, whether through a legal firm, an accounting firm or a transfer agent, and must comply to strict corporate governance, transparency and investor communications standards. Attempts to manage these activities without the assistance of a transfer agent typically fail or become unreasonably expensive in terms of time, money and the risk of regulatory infractions. In the case of a typical IPO or a Regulation A+ offering, recordkeeping by an SEC-registered transfer agent is legally required.

What to Think About When Selecting a Transfer Agent

These are the three most crucial factors to consider in evaluating a transfer agent.

  • Institutional-Grade Services – As your firm grows, the sophistication of its investor relations processes and record-keeping becomes increasingly important, eventually demanding a high quality transfer agent. The history, experience and technical know-how of the firm are important. Institutional investors, for example, expect a high level of transparency, responsiveness and adherence to the commitments and investment restrictions of the institution. Having a skilled transfer agent in place is not only reassuring but required by many institutions as part of their due diligence process for candidate funds.
  • Efficiency and Data Security – A good transfer agent will have an advanced transfer agent system, disaster recovery services, dedicated information security, compliance processes and internal audit teams. The transfer agent’s full range of back-office solutions allows the client to concentrate on investments while ensuring that their data is secure and their investors are well served. A fund that has used a transfer agent from the beginning will have established the necessary investor relations and governance infrastructures to avoid communications, regulatory and compliance issues throughout its life cycle. But beginning with an in-house team and later converting operations to a transfer agent provider can be a costly and time-consuming process.
  • Savings and Scale – The cost of hiring, training and retaining a competent in-house team for transfer agent responsibilities is significantly higher than the cost of partnering with a transfer agent provider. The transfer agent is a professional group with the protocols, procedures and experience necessary to minimize operational dangers that others are not aware of. A transfer agent’s economies of scale, task-based pricing and backup employees ensure that clients never face operational overstaffing, understaffing or key man risk. Investors are treated to a well-oiled investor communications team which reflects favorably on the client’s professionalism. The transfer agent, above all, allows the management team to concentrate on capital raising and investments. Professional third-party transfer agent services are a cost-effective and efficient way to divide labor.

The Right Transfer Agent Is a Valuable Partner

For all of these reasons, the time to hire a transfer agent is right now. Investor relations, regulatory compliance, payment processing, tax document generation, audit support and data security (the air a transfer agent breathes) are all far too crucial to overlook as well as far too complex and risky to handle alone. A transfer agent is a powerful investment back-office professionalism.

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