Do You Need a Transfer Agent for Your Security Token?

Get a closer look at the role of transfer agents for private companies and how this affects security token offerings and the industry.

A series of traditional stock certificates

Do I need a transfer agent for my STO?

In all likelihood, you do not need a transfer agent for your STO. However, you may want to consider using a transfer agent if you:

1. Don’t want to take responsibility for corporate governance responsibilities such as stock transfer, dividend payment, and proxy-voting
2. Anticipate doing a Reg A+ (tier 2) offering
3. Anticipate a large volume of shareholders with active secondary trading activity
4. Anticipate a frequent amount of coupon or dividend payments to a large volume of participants

Doesn’t blockchain technology make a transfer agent obsolete?

Although a lot of the functionality provided by a transfer agent is redundant functionality provided by most security token issuance platforms, the reality is that there still remains a risk involved in using the technology.

One can still mess up a transaction using security token technology both from a human perspective as well as a technical error. Examples of this are when an authorized user makes an incorrect change in the online interface used to manage the security tokens (and therefore the cap table) or when a smart contract for a dividend payment was programmed incorrectly — both resulting in major investor liability.

As a small-cap issuer that is self-administering only a handful of investors and a limited amount of secondary activity, security token issuance technology providers are typically a major leg up compared to self-administration using paper documents and analog governance processes. However, when a security token issuer starts to receive large volumes of secondary activity, see their shareholder counts rise into the hundreds and thousands, and begin to frequently process distributions or proxy votes, the company may fear that despite the capacity of technology, the concern for liability may be even greater.

For the same reason that public companies use transfer agents, large security token issuers will need to use transfer agents as well. It is largely assumed that traditional transfer agents will start to adopt blockchain technology to provide more cost-effective solutions to their clients in the near future.

Following the news that Securitize has become the first transfer agent approved by the SEC to currently use blockchain to power its services, it now seems that large institutional issuers can take advantage of both the benefits of security token technology AND the benefits of using an SEC-registered transfer agent.

Disclosure: This article is not intended to be interpreted as legal advice. Please consult an attorney if you need are looking for legal opinions on this topic.