Interview with a Transfer Agent: The Most Important Securities Figure You Overlook
The Transfer Agent has come into sharp focus recently. Today we'll review what they do and why they matter.
By Vertalo Team
About three years ago Vertalo made one of its best hires to date when we invited Allan Chiulli, a veteran securities industry operator, to join our team. He holds over a dozen U.S. patents (all within the securities industry), has launched four different companies in securities (two RIA’s and two broker-dealers), and has been a tremendous member of our team with his knowledge, experience, work ethic, and passion.
As Chiulli got to know Vertalo’s business and model during the interview process, one thing stood out to him that he thought to himself, and told me about after the fact:
“What are you guys doing as a transfer agent?”
He was so surprised that Vertalo would focus on being a transfer agent and data manager rather than some of the more bold or investor-facing roles like tokenization, brokerage, product creation (e.g. creating a blockchain), or alternative trading systems. After clearly seeing the mission of Vertalo, to connect and enable the digital asset ecosystem, the vision, purpose, and approach of Vertalo was perfectly clear, but it took some digging for him to arrive there.
Chiulli detailed to us that once he saw how private markets could be radically disrupted by the right party acting as the data manager in the middle of the issuance and trading processes, Vertalo’s desire to build an API-first data management platform, that included issuance, tokenization, transfer agency, and support for secondary trading, became downright obvious.
As best we recall, his words were, “The transfer agent could be the ones to stitch this whole industry together. And it’s gonna be incredible.”
This post is an attempt to highlight transfer agents; to define what they do and why they matter. As a rarely considered party to securities transactions - and in the market we are currently in - the importance, necessity, and value of accurate record keeping and asset ownership data has never been more clear.
Additionally, we’re going to try a new format by interviewing Naomi Miner, from Vertalo’s compliance and client success teams, to bring a fresh perspective to this content and change things up a bit.
Miner brings with her several securities licenses from her time with Bank of America Merrill Lynch, spent time working overseas in finance, and is a standing member of the Securities Transfer Association. We work closely with her, as well as our general counsel, on all things compliance and product.
A brief description of transfer agency
From Investopedia, we get the following answer regarding what Transfer Agents actually do:
A transfer agent is a trust company, bank, or similar institution assigned by a corporation for the purposes of maintaining an investor's financial records and tracking each investor's account balance. The transfer agent records transactions, cancels and issues certificates, processes investor mailings, and handles a host of other investor problems, including reissuing lost or stolen certificates.
Transfer agents work closely with registrars to ensure investors receive their due interest and dividend payments in a timely manner. Transfer agents likewise oversee the mailing of monthly investment statements to mutual fund shareholders.
Last year, in the piece entitled “Defining Digital Securities: A How-To Guide” we reviewed the differences between classifications of shares, including digital dematerialized shares, digitally enhanced shares, or fully native digital asset securities.
While many of the large traditional transfer agents still do the work of printing and mailing paper certificates, nearly all securities that are created today are done so in digital dematerialized format, also known as “book entry” form.
No matter what form the securities they manage take, all transfer agents typically do the following:
Recording and maintenance of shareholder ledgers on behalf of issuers
Issue new shares to shareholders
Transferring securities to new shareholders
Cancel or otherwise unwind old or erroneous issuances
Assist issuers with the communication to shareholders, both beneficial and street name shareholders
Assist issuers with issuing dividend, interest, principal, or other payment distributions to investors as necessary*
One of the big problems with the securities market when the Great Depression settled in was the lack of clear record keeping, leaving investors to seek reparation through legal means. By having a third party, that is not the broker, stock exchange, custodian, or issuer themselves, who can accurately keep records, the SEC attempts to divide the interest of the parties involved, thereby decentralizing risk away from a singular party. In the wake of FTX’s collapse and subsequent trial proceedings, the crypto industry could take a page from the existing legacy infrastructure on this point.
*Not all transfer agents are licensed as money transmitter businesses, so not all of them support the dividend process directly. In Vertalo’s case, we partner with registered custodians like North Capital to support dividend distribution. We provide the issuer’s custodian with a snapshot of the cap table as of the date of issuance of the dividend or interest payments, who can then distribute accordingly.
If you’re interested in digging into the history of transfer agents, Jerry Hsiang's Substack,
includes an excellent review of the history and background of transfer agents.The Interview
As we mentioned, in an attempt to change up the format, we’ve asked Naomi Miner, of Vertalo’s Compliance and Client Success teams, to help us in describing what transfer agents do and how Vertalo operates within existing regulatory frameworks.
Through this question & answer style, we’ll come to a greater understanding of the importance and necessity of transfer agency within capital markets. We will play the interviewer, while Miner plays the subject of the interview answering my questions. We’ve abbreviated our names to VT & NM respectively.
VT: So Naomi, let’s start broad. Tell me about why transfer agents really matter?
NM: Transfer Agents matter because they are the sole record of truth when it comes to securities on who owns what and how much of it. This simple matter has ramifications that spread throughout the entire industry and life-cycle of an investment opportunity from primary issuance to secondary trading, to collateralization, and touches not only issuers but exchanges, ATSs, Broker-Dealers, and more. Transfer Agents maintain the accurate ownership of a company, protect investors’ shares, validate and execute transfers, and facilitate shareholder votes so that founders and employees can focus on actually running the company!
VT: We like to tell people transfer agents are the most important securities player they know nothing about…
NM: Exactly. Whereas other actors will perform other duties, the core function of a transfer agent has remained relatively simple and unchanged: clear and accurate record keeping for securities & shareholder information.
Side note: When our founders came together to form Vertalo the original idea had more to do with human capital management and using blockchain to verify work history and professional identity, based on a unique fundraising experience spurred by a bad combination of poor record keeping and overly ambitious employees.
Our general counsel Gautam Gujral, a former SEC regulator himself, noted that the ICO’s happening in 2017 were mostly unregistered securities offerings. Rather than follow in this non-compliant, although appealing, approach (ICO’s were getting funded left, right, and center at the time) Vertalo chose instead to run one of the worlds first Reg D 506(c) compliant security token offerings in March of 2018.
(We believe the first ever compliant security token offering titles belong to SpiceVC & Blockchain Capital’s BCAP token in fall of 2017, but feel free to contradict us if you know of others that were performed before then.)
As part of the venture pitch when fundraising we demonstrated this graphic:
On one side you had many token issuance platforms (Securitize, Polymath, Tokensoft, etc.) that could create and codify smart contracts and build compliant security tokens. On the other hand you had the alternative trading systems, like tZERO or Figure that promised liquidity and trading. However, there was nothing substantive standing between these entities to help properly stage, manage, and maintain the data.
We’ve written previously about how the actual tokenization is the simple part, it’s the staging & preparation, as well as the treatment afterwards, that truly matters when it comes to tokenized offerings. Since these are securities, there is a host of regulatory requirements that issuers must satisfy in order to properly offer these instruments to investors, and it’s precisely the problem of data management that birthed the idea for Vertalo as a data management company and transfer agent:
While we’ve added token issuance through the Vertalo Securities Protocol, the core mission of connecting and enabling the digital asset securities ecosystem has remained unchanged throughout my entire tenure at Vertalo. Kinda neat to look back at where one has started from with the benefit, and wisdom, of hindsight.
VT: In your opinion, why was accurate record keeping ignored for so long in digital asset securities? It seems like everyone was excited about secondary trading via ATS’s or defi or collateralized lending, but not so much on the issuance and data management side. Why is that?
NM: If we’re being honest, ownership records aren’t nearly as sexy as a blockchain-capable ATS or crypto custodian. They tend to fade into the background as the pipes that lay the groundwork for more exciting opportunities to purpose assets, like realizing gains or collateralizing illiquid holdings. We’ve all gotten so used to book-entry (non-paper certificated) securities ownership that the method of recording such ownership became overlooked by many issuers and financial institutions. Are investors’ shares recorded in an API-enabled secure decentralized database, or in a file cabinet in the basement of the World Trade Center? (Yes, there is a true story there…) You may not know or care until it becomes a big problem when your investors are asking you about liquidity, collateralization, or purely how to make transfers easier.
VT: During your time at a RIA/Broker-Dealer, did you have experiences with transfer agents or transfer agent processes?
NM: As a registered investment advisor, a large part of my job was moving funds and securities between accounts for my retail investor clients. This involved rolling over outside accounts held in investors’ street name ownership, and depositing physical stock certificates into brokerage custody sometimes! These situations required me to interact with Transfer Agents by applying Medallion Signature Guarantees to their applicable forms, mailing them in, and then waiting… and waiting. These antiquated processes and the amount of physical paperwork processing they require can be very frustrating to both investors and their fiduciary parties (financial advisor, attorney, etc.) alike, and inspired me to join a company pioneering digitization of securities ownership like Vertalo. You know what they say – happy shareholders, happy life!
VT: “Happy shareholders, happy life!” is a great slogan! What about personally, before Vertalo did you ever have any experiences with a transfer agent as an investor yourself?
NM: Like many retail investors, not at all! If the reader’s investment portfolio consists of publicly traded securities purchased on a public national exchange through a brokerage firm, then they likely haven’t either. In public markets, Broker-Dealers facilitate the purchase, sale, conversion, voting, etc. of shares on behalf of the end retail investor, so the investor need not interact with Transfer Agents, Exchanges, or Issuers directly. In private markets we see much fewer of these transactions done through Broker-Dealers. Retail investors will more commonly invest in primary offerings directly with the issuer, and therefore will encounter and interact with these other institutions as a part of their investment journey.
VT: In your opinion, what are the most important regulatory considerations for transfer agents?
NM: At the end of the day, federal regulation and internal compliance policies are focused on a very clear and important primary goal: investor protection. Protecting the investor from fraud and deceit was, and continues to be, the motivating factor behind the Securities Act of 1933 (signed after the stock market crash of 1929) and the establishment of the SEC. An SEC-registered Transfer Agent is uniquely positioned to protect investors and issuers alike by maintaining an accurate record of ownership to ensure that securities are never lost or stolen. This protects investors from theft or loss of their assets, and protects issuers from regulatory scrutiny in the maintenance and accuracy of their records.
The key regulation governing transfer agents is Rule 240.17ad of the Securities Exchange Act of 1934, the key section (in my opinion) being Section 12, which mandates that securities are held in safekeeping in a manner reasonably free from risk of theft, loss or destruction. Transfer Agents fulfill this obligation by having clear and consistent compliance programs when it comes to transfers of ownership to validate transfer requests.
VT: As far as the transfer process goes, what does this look like at Vertalo? Let’s say an issuer wants to perform a transfer? Is it a uniform process, or are there variations in how it works?
NM: We have different transfer processes depending on the nature of the transfer itself, since not all transactions are created equally. For example, with a secondary trade matched and executed on an ATS, this change in ownership is reflected in an automated fashion with our API. However, if a change in ownership is required due to the death of a shareholder, there are additional pieces of information we collect and verify, like the death certificate, in order to protect investors and issuers against fraud.
VT: And what about sandtraps? Things to be aware of for transfer agents or those seeking to digitize their equity stack? What advice do you have for that audience?
NM: What I think is important to keep in mind is that issuers who do not employ an SEC-registered Transfer Agent are in fact acting as their own Transfer Agent. While this does not mandate the same reporting and registration requirements that a registered Transfer Agent must follow, it does not absolve the issuer of the safeguarding of funds and securities laws. Choosing to employ a registered Transfer Agent for your record keeping responsibilities is a risk appetite decision that is still important to the issuer’s fraud prevention policies, even if the employment of it is not required by law.
VT: How is Vertalo doing things differently? What are the more sharp contrasts issuers could expect between a Vertalo and legacy players like ComputerShare or Broadridge?
NM: The most notable difference is the technology-first mindset Vertalo brings to its approach to Transfer Agent Services. Our API-first, fully digital de-certificated approach allows for API integration to any other partners issuers may choose to work with, from Broker-Dealers to Fund Admins to ATSs. This greatly decreases the operational burden that traditional TAs who are still paper- and fax- based may require. This benefits everyone, not just the issuer themselves, but also investors, who experience a more seamless process than what they are traditionally used to.
VT: You’ve stated before that the private placement offering in the US is often misunderstood. What are the misunderstandings, and can you clear the air?
NM: Confusion can arise from imprecision of speech, which we see quite often in the finance industry with colloquial jargon. The terms “private” and “unregistered” (and “public” and “registered”) are often used interchangeably when speaking about securities, but there is actually an important distinction between them. Unregistered securities are sold legally under an exemption from registration provided by the SEC, the most common of which include Section 4(a)(2) with the Regulation D Safe Harbor, Regulation A+, and Regulation CF. The term “Private Capital Markets” generally refers to unregistered securities, whether they were sold and issued privately or publicly, and “Public Capital Markets” refers to registered securities sold publicly on a National Exchange (“going public,” or “IPO”). Unregistered securities can be offered through a primary sale privately under a Reg D Private Placement, or publicly under a Reg A+ exemption. Whether unregistered securities are sold privately or publicly dictates the reporting requirements of the issuer, whether the shares are restricted under Rule 144, if the issuer must employ an SEC-registered Transfer Agent, and much more.
VT: Love that. When you encounter this imprecision of speech, how do you handle it?
NM: I think it’s very important to be precise and diligent when it comes to vocabulary in discussions with issuers and partners alike to avoid any miscommunication or misunderstanding between parties. If we are all speaking the same language, we can be streamlined in our discussions and work together, and accomplish shared goals quickly and successfully.
VT: Previously we wrote about some of the differences between public markets and private markets. What have been your impressions about how public market transfer agents differ from private market transfer agents?
NM: I think the biggest difference between public and private markets comes down to expectation management on the part of the issuer towards investors, particularly when it comes to the operational side of owning unregistered investment opportunities. Most private market accredited investors are accustomed to dealing directly with the issuer on matters of securities management, transfers, or other communication. But, with the USA JOBS Act allowing for unregistered securities to be offered publicly, and new amendments to Regulation ATS opening up liquidity opportunities for historically illiquid investments, the line between what’s “private” and “public” (read: “inaccessible to everyday investors” and “easily accessible to everyday investors”) has blurred. This is one of the reasons Vertalo has sought to solve for the unregistered securities market first and foremost; there is so much room for innovation to transform these investment opportunities to behave more like the well-oiled machine of the public registered markets, opening access to all.
VT: And is there anything that one could learn from the other?
NM: Certainly related, but one of the biggest benefits with public companies is their consistency. In GAAP standards, in reporting and compliance, in investor communications, public market standards are well defined, leaving little room for interpretation as to what information should be relayed, and when. On the other hand, private markets are so much more nimble precisely because of the lack of regulation, which some consider to be stifling and restrictive, that public markets tend to lag behind by years before innovations catch up to the private side. So more standardization and cohesion can be adopted by private markets, but more innovation and willingness to push the envelope could be adopted by public markets.
VT: Fantastic. Vertalo is blockchain enabled. How does this affect your transfer agency registration?
NM: The short answer is that it doesn’t need to - depending on how a Transfer Agent approaches tokenization. Vertalo maintains an internal secure database that functions as the official control book and security holder ledger. Then, we are able to deploy what is essentially a “courtesy copy” of the shares in the form of tokens on a blockchain of the issuer’s choice. The blockchain is not currently recognized by regulators as an official method of recording ledger transactions when it comes to securities, so in Vertalo’s case the blockchain is a copy, like the receipt that comes with your cash withdrawal at the ATM. The cash is legal tender with value; the receipt is not but assists with record-keeping when you balance your checkbook.
*to be clear, Miner is speaking here of the differences between digital dematerialized shares, digitally enhanced shares, and fully chain native digital asset securities. In her answer, Miner references digitally enhanced dematerialized shares. See below to learn more about how to properly identify and define the various classifications of digital security types.
VT: Obviously a lot has been written about blockchain and capital markets. In your opinion, what’s real, what’s smoke, and what are you unsure is real or smoke?
NM: This is such a great question and I’m happy to editorialize a bit. Blockchain can bring many benefits to capital markets in the form of transparency and immutability of data stored in a decentralized manner. This is real, but it’s where the buck stops and the smoke starts in terms of benefits. Utilizing blockchain technology to create security tokens will not make an offering of securities more attractive to investors if the underlying asset is not attractive. The misguided idea that blockchain is a secret sauce that will sell your offering for you begins to smell like the fraud-riddled ICO craze of recent years. What is real is savvy innovators with good ideas positioning themselves favorably in anticipation of blockchain technology becoming integrated in, and accepted by, capital markets and regulators alike as the space matures. (Is this last part real or smoke? Yet to be determined…)
VT: To conclude, what are you most excited about with what you’re building right now? And what are you most concerned with in the industry?
NM: How could I ever choose! The most exciting projects to me right now are liquidity programs. We are expanding our API to allow for more integration with Alternative Trading Systems with many different business models, including Lit Market trading, Dark Pools, Company Employee Liquidity Programs, and more. This allows issuer clients a suite of options for the specific liquidity needs of their shareholders and employees, from $50mm to $1bn market caps.
What concerns me is the conflation of cryptocurrency/sh*tcoin scams with legitimate, compliant tokenized security offerings by those who aren’t as familiar with the capital markets space, which I touched on in your question about smoke and mirrors. Blockchain is an incredible technological asset that gets used by sinners and saints alike, just like the World Wide Web. But, as regulators continue to crack down on the former, I am confident the difference will become more widely recognized, and the benefits blockchain technology can bring to the regulated securities space will shine.
In conclusion…
The evolution of the digital transfer agent is a history that’s very much being written in real time. As we consider the lessons from other market participants, and previous financial events, we have the ability to learn from the past and implement proper procedures and techniques. Issuers should take care when selecting their transfer agent, since it has broad reaching impacts across the life cycle of private issuers and their securities.
Till next time.
Interested in connecting over the digital asset ecosystem, capital markets, or blockchain-based securities? Reach out to us on LinkedIn or Twitter!
Disclaimer: We are not attorneys, broker-dealers, investment advisors, or wealth advisors. Nothing presented herein is nor should it be considered as legal, professional, business, investment, or any other kind of advice. The information presented here is done so for educational, informational, and entertainment purposes only. Always consult a licensed professional before taking professional, investment, or legal action.
Another brilliant article Collin!