Part I: Modern Transfer Agent services for security tokens
As the security token market develops, the need for registered Transfer Agents such as TokenSoft’s affiliate, DTAC, has grown as a key component in automating finance while remaining compliant with securities regulations. From SEC-registered offerings to exempt private offerings under Regulation D, today most issuers are using a Transfer Agent when tokenizing their securities. But, what does a Transfer Agent do and how can Transfer Agents use blockchain technology for security tokens?
Over the next series of articles, we will explain what Transfer Agents do and how TokenSoft’s technology is modernizing the securities infrastructure and automating finance.
In Part I, we’ll focus on setting the stage. What is a Transfer Agent and how are they helpful for security tokens issuers?
According to Section 3(a)(25) of the 1934 Act, the term “Transfer Agent” means:
In short, Transfer Agents manage the issuance, transfer, and exchange of securities. Think: Cap table management: Who are my investors? How much of my company do they own? And, what class of securities do they own?
Simple, the SEC wants to ensure that investors are protected from mistakes in issuance and ownership of securities sold to the public. They do not want to rely on the varying processes of issuers excel spreadsheets or other potentially risky systems for cap table management*.
Additionally, as the SEC’s website states,
“Because Transfer Agents stand between issuing companies and security holders, efficient Transfer Agent operations are critical to the successful completion of secondary trades.”
Meaning: Transfer Agents are a very important market participant to exchanges, alternative trading systems (ATS), broker-dealers, and others providing services to investors. They all need to know any update the cap table is accurate to ensure no one loses money.
*As an aside, issuers are allowed to register to act as their own Transfer Agent, but they would still be subject to the auditing and reporting requirements necessary to protect investors.
Transfer agents roles include:
While these roles sound pretty basic, the duties become more complicated when you dive into each bullet point.
For example: What should you do if an investor loses their stock certificate? How do you prove they are the true owners still and ensure the issuance of a new stock certificate will not create a conflict? Or, what if an investor passes away, how do you transfer ownership? Similarly, issuers want to know when they distribute dividends, they paid the right person.
These are the complexities found in Transfer Agent services that we’ll address as we dive deeper into the implications of issuing securities on an “immutable” blockchain.
Great question. Simply put, it’s still all about investor protection. What if an investor loses the private keys to their security token wallet? Or, what if an investor passes away? How does a security token issuer recover the tokens and get them to their rightful owner?
It’s also about compliance. How do securities issuers ensure their tokens are not purchased by an investor that does not meet the qualifications of the issuer’s securities, such as accredited investor requirements?
While registered offerings like our customer Arca’s tokenized U.S. Treasury Fund (pending SEC registration approval) are required to use a Transfer Agent, traditionally unregistered securities offerings like “Reg D” exempt offerings are not required to use Transfer Agents.In the context of security tokens, broker-dealers and alternative trading systems are pushing issuers with exempt offerings to use Transfer Agents to ensure the same investor protection issues noted above are properly addressed. We view this as wise self-regulation in the industry.
Programmatic money like Bitcoin and Ethereum are currently leading to a number of innovations in finance. Similarly, making securities programmatic via tokenization will enable similar innovations in secondary market securitization, trading and settlement speed (eventually), and the unlocking of previously inaccessible pools of capital necessary to modernize and democratize our financial infrastructure for a world that lives on the Internet.
In Part II of the series on Modern Transfer Agent Services for Security Tokens, we will dive deep into what exactly a Transfer Agent can do for security tokens issuers such as managing investor whitelists on blockchains and automating dividend distributions.
Interested in learning more about how your company can utilize blockchain technology for securities or DTAC’s Transfer Agent services? Reach out to us at tokensoft.io.
TokenSoft is a leading platform for enterprises, funds and financial institutions seeking to launch blockchain-enabled securities. TokenSoft enables issuers to go direct-to-market with their securities or financial products, in over 50 markets.
For more information, please contact email@example.com.
DTAC is a TokenSoft wholly-owned subsidiary and SEC-registered Transfer Agent. DTAC provides modern investor management services to security tokens issuers.