ootb-white-solo

A transfer agent serves an important function, but many small startups don’t understand what a transfer agent is, and so ironically they also aren’t aware that they don’t have to go out and hire one. This may lead to confusion and hiring a registered transfer agent unnecessarily.

Transfer Agents 101

The main responsibility of the transfer agent is to keep track of the stockholders of the company. This includes things like: maintaining the official record of ownership, issuing stock certificates, cancelling stock certificates, exchanging or converting securities, and managing distributions to stockholders.

Who Needs What? Public vs Private Companies

For publicly-traded companies that are listed on an exchange, do proxy voting, and pay dividends, there are a lot of complexities and so they are required to have a registered transfer agent. But not all transfer agents need to be registered and start-ups don’t commonly use registered transfer agents (more on this later).  

The SEC has framed the requirement to use a registered transfer agent based on whether the agent is performing “any transfer agent function with respect to any qualifying security.” A "qualifying security" is any security registered under Section 12 of the Securities Exchange Act of 1934. The SEC explains what securities must be registered under Section 12 of the Securities Exchange Act of 1934: A company that has “more than $10 million of total assets” and “its securities are ‘held of record’ by either 2,000 persons, or 500 persons who are not accredited investors.” Most startups do not meet this threshold and therefore do not need a registered transfer agent.

The SEC also requires a registered transfer agent for companies that are engaged in certain crowdfunding activities, or a Tier 2 equity offering under Regulation A. If all this sounds too technical and you just want to know whether your company needs to use a registered transfer agent, your lawyer is the best source for such confirmation.  

For private companies, all the basic functions of a transfer agent are needed—maintaining the official record of ownership, issuing stock certificates, cancelling stock certificates, exchanging or converting securities, and managing distributions to stockholders—but it's not required that they be performed by a registered transfer agent. What is more important is that if the company is going to be acting as its own transfer agent, that it select tools to help it that are robust in their functionality and focus on information security and privacy. It is also important that the tools be accessed by the company’s lawyer so that they can monitor and make sure activities are being handled appropriately.  

Why Have you Never Heard About Transfer Agents?

Most early stage companies are unfamiliar with the concept of a transfer agent because for many small startups the company itself (or the company’s lawyer) is acting as a transfer agent and keeping track of stock issuances and transfers. Neither the company, nor the company’s lawyer if it is acting as the transfer agent, have registered with the SEC as a transfer agent because the company isn’t required to use one. 

For the most part, private companies can and do manage their equity themselves (often with a lawyer helping as needed). Do you want to be one of them?

Subscribe to our blog:

The content and opinions expressed in these posts do not necessarily reflect the views of Shoobx. The content and opinions of Guest Contributors in no way reflect those of Shoobx, nor do they constitute an endorsement of our Guest or of any companies with which they may be affiliated. Blog posts are not legal advice and must not be construed as such. Readers are encouraged to seek professional counsel to address questions specific to their situation.