I’m crowdfunding. Do I really need a transfer agent?

We keep hearing this question. To be honest, it’s not clear why a crowdfunding issuer would want to have to deal with the recordkeeping for what could be thousands of investors (and even if the issuer uses a Reg CF SPV, that itself is an issuer whose many shareholders have to be wrangled).

But are you absolutely required to have one?

Let’s look first at Rule 301 of Regulation CF. This (titled “Measures to reduce risk of fraud”) requires that the intermediary in a Reg CF offering have a reasonable basis to believe that the issuer “has established means to keep accurate records of the holders of securities” and says that the intermediary has satisfied the requirement if the issuer has engaged a transfer agent. There are only three subsections in Rule 301: this one, the requirement that the intermediary have a reasonable basis to believe the issuer has complied with the disclosure rules, and the requirement that the intermediary bounce an issuer if it believes there is fraud or a “bad actor” involved. So you can see that the SEC sees the role of a transfer agent as being pretty significant. However, it’s not compulsory to meet this requirement.

Now let’s look at the conditional exemptions from registration under the Securities Exchange Act of 1934. Section 12(g) of the Exchange Act says you need to register your securities with the SEC and comply with the Exchange Act ongoing reporting requirements if:

  • You have more than $10 million in assets; AND
  • A class of equity securities held of record by 2,000 persons, or 500 non-accredited persons.

Exchange Act registration and reporting is a big thing. While there are some allowances for smaller companies, it still requires a higher standard of audit, quarterly reporting, filings by insiders, proxy statements, and all the things that huge companies do. So you don’t want to have to do it before you are ready.

And yet, crowdfunding involves raising funds from a crowd of investors, and hopefully any crowdfunding company will eventually have more than 500 non-accredited shareholders. This is why the SEC included “conditional exemptions” from Exchange Act reporting.

Issuers need not count the holders of securities originally issued in Reg A offerings (even if subsequently transferred) as “holders of record” if:

    • The company has made all the periodic filings required of a Reg A company (Forms 1-K, 1-SA and 1-U);
    • It has engaged a registered transfer agent; AND
    • It does not have a public float (equity securities held by non-affiliates multiplied by trading price) of $75m, or if no public trading, had revenues of less than $50m in the most recent year.

Issuers need not count the holders of securities issued in Reg CF offerings (even if subsequently transferred) as “holders of record” if:

  • The company is current in its annual filing (Form C-AR) requirements;
  • It has engaged a registered transfer agent; AND
  • It has total assets of less than $25m at the end of the most recent fiscal year.

It’s important that the issuer’s transfer agent keep accurate records of which exemption securities were issued under, even when they are transferred.

Some issuers say, “Well, we used an SPV, so that’s just one holder, right?” True, from March 15, 2021, Reg CF has allowed the use of “crowdfunding vehicles”, a particular kind of SPV with specific requirements for control, fees, and rights of the SPV in order to put all of the investors in a Reg CF offering into one holder of record. However, not all holders can hold through the SPV (entities have to hold directly, for example) and the SPV still comes with administrative requirements, which may make use of a transfer agent still practical.

Crowdfunding SPVs are not permitted in Reg A offerings.

So when do you need a transfer agent? Let’s turn that question around and look at when you DON’T need a TA. That could include issuers that know they will never trigger the underlying requirements of Section 12(g). For example, the issuer could be issuing fractionalized interests in an asset that will never reach a $10 million value (or will be sold and the issuer liquidated if it does). Or the issuer could have issued securities to a limited number of holders across all classes, and taken advantage of the crowdfunding SPV structure in a Reg CF offering, and have no plans to issue securities in the future in any volume.

Everyone else should consider using a transfer agent.

Join CrowdCheck

More Blogs