When to Hire a Transfer Agent

At any stage, it is a good time to engage a transfer agent to maximize efficiency and minimize ongoing back-office headaches.


When to Hire a Transfer Agent

When it comes to investor record keeping, communications, payments and compliance obligations, in other words transfer agent tasks, investment funds at various stages have distinct obstacles and requirements. At any stage, it is a good time to engage a transfer agent. To maximize efficiency and minimize future headaches, it is critical for management to take the transfer agent role seriously. There are some crucial things to keep in mind when looking for a transfer agent.

Transfer Agent Services for Start Ups

Startups and pre-seed venture capital firms are often using founders’ equity or have raised some startup financing from close friends or family at this early stage and are reluctant to use a transfer agent. Internal spreadsheets or self-administration software are used to keep track of who owns what, and investor contacts are frequently handled directly by the CEO or founder. This type of approach does not work for long without a transfer agent. The entrepreneur may only know a small number of investors but to be unprepared for rapid growth without the capabilities of a transfer agent is a recipe for operational headaches down the road.

Companies in the seed stage have generally raised financing from angel investors, venture capitalists or, increasingly, equity crowdfunding platforms and are more inclined to consider a transfer agent. Because these investors may not know the CEO/founder personally, there is a greater demand for the openness, accountability and accuracy in investor record-keeping that a transfer agent can provide. These tasks are sometimes handled in-house by seed stage enterprises but with the support of a law firm or a CFO. Investor administration, accounting and transfer agent capability may fall by the wayside as the company grows and internal attention is drawn to growth management. Incomplete records or non-compliant transfers and other processes tend to emerge as a result of the lack of a professional transfer agent. To circumvent these problems, forward-thinking companies are beginning to consider hiring a transfer agent as an essential element of their business.

Transfer Agents at Growth Stage and Beyond

For companies in the early stages of growth the necessity for a dedicated, professional transfer agent becomes obvious. Venture capital firms, private equity firms and other certified investors such as family offices have traditionally raised Series A or later funding rounds for growth enterprises. At this point a thoroughly professionalized operation is expected and a transfer agent is essential. In almost any scenario at this point, a corporation must retain correct books and records about its investors, whether through a legal firm, an accounting firm or a transfer agent and must adhere to strict corporate governance, transparency and investor communications standards. Attempts to manage these tasks without a transfer agent frequently fail or become prohibitively expensive in terms of time, money and potential regulatory violations. Recordkeeping by an SEC-registered transfer agent is required in the case of a traditional IPO procedure or a Regulation A+ offering.

What to Consider when Choosing a Transfer Agent

The three most important considerations with regard to a transfer agent relationship are these.

  • Look Ahead – The sophistication of your company’s investor-relations operations and record-keeping must increase as it grows and ultimately involve a transfer agent. Institutional investors demand a high level of corporate governance, which may include, but is not limited to, running the company as a separate entity capable of balancing the interests of its stakeholders with those of its founders. A professional transfer agent in place is reassuring in this regard.
  • Starting Out Right – It’s best to start working with an experienced transfer agent as early as possible. It avoids an expensive and time-consuming catch-up and conversion process later. However an in-house back-office team keeps its investor records a conversion of investor and historical data to a transfer agent system is an intricate and expensive process. Embarking on a conversion of data to a transfer agent system when an IPO is on the horizon may cause a company to miss its deadline. Also, a company with a transfer agent provider from the start will have developed the appropriate investor relations and governance infrastructures to avoid communications, regulatory, and compliance concerns as the firm grows. Investors are pleased while the company has saved a lot of time. Better yet, a reputable transfer agent will provide disaster recovery services as well as dedicated information security, compliance, and internal audit teams. The transfer agent allows the client to focus on investment while knowing that investor records are safe and accurate.
  • Consider the Costs – A transfer agent relationship is a smart business decision. Almost certainly, the cost of retaining a transfer agent provider will be far below the cost of hiring, training and retaining an adequate in-house team for these tasks. The transfer agent is a professional team with the systems, procedures and experience to avoid operational risks others are unaware of. The economies of scale, task-based pricing and back-up personnel a transfer agent is able to leverage mean clients never suffer issues of operational overstaffing, understaffing or key man risk. Investors experience a well-oiled investor communications team that reflects well on the professionalism of the client. Most of all, the transfer agent frees the management team to focus on capital raising and investments. Professional third-party transfer agent services represent an efficient and cost-effective division of labor.

For all these reasons, the answer to ‘when to hire a transfer agent’ is now. Investor relations, regulatory compliance, payment processing, tax document production, audit support, data security (the air a transfer agent breathes) are too important to neglect and too complex and fraught with risk to take on oneself. For back-office professionalism, a transfer agent is too good and investment to ignore.

Institutional Investors - Their Heavy Demands on Transfer Agents

The largest investors, pension funds, endowments and family offices, regard high-quality outsourced transfer agent services as part of their due diligence process for candidate funds. Many financial institutions think that fund sponsors who operate in-house transfer agent teams take an unacceptable operational risk.

Many institutional investors are members of the Institutional Limited Partners Association (ILPA), a trade association for the industry. ILPA recommends its members seek financial reporting from their portfolio investment funds that follows the ILPA Reporting Template because they want maximum transparency for their stakeholders. The transfer agent partner must be able to create a complete reporting package that breaks down portfolio performance, compensation rates, costs, depreciation, and every other line item and metric of the fund in granular detail. This transfer agent reporting challenge must also include detailed reporting on the fund’s adherence to any and all portfolio investment limits and restrictions imposed on the institution.

Even for those transfer agents who can generate the ILPA template, it is a time-consuming and resource-intensive operation. The ILPA Template is far above the capability of most transfer agent firms. If a fund wishes to attract institutional investors, it will need an institutional-class transfer agent who is familiar with the ILPA template and can rapidly prepare it. When it comes to fund raising, having a transfer agent provider with the reporting ability to qualify a fund for institutional money is a major bonus.

The return on investment that management has been able to generate is what attracts investors to a fund. Fund management has the right to expect a return on transfer agent services, a return that goes beyond the mere fulfillment of transfer agent responsibilities and has meaningful financial benefits.

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