So much goes into a single trade in the alternative asset market. Each time a real estate or private equity security changes hands, multiple parties are required to coordinate. This coordination has almost exclusively been manual in the past. This, among other factors, has limited the viability of an efficient secondary market through inefficiencies, errors, and, in some cases, months-long settlement times.
Through the advent of digital securities, those antiquated, manual processes are being streamlined, enabling accurate, secure and timely settlement. One of the key players in this process is the transfer agent. Transfer agents play a critical role in the life cycle of a security transaction, and their adoption of technology will have a major impact on secondary markets of private and public non-listed securities.
What Is a Transfer Agent?
A transfer agent’s main responsibilities include documenting ownership records and servicing assets. In other words, they maintain the list of investors that own the security and perform functions such as proxy mailings and dividend payments.Transfer agents are hired by issuers and sponsors of both private and public securities and are registered with the SEC.
The use of a registered transfer agent may or may not be required, depending on the type of security being offered. For example, with an exempt security like a Regulation D offering, there is no requirement to use a transfer agent. However, many private offering issuers and sponsors choose to use a transfer agent to ensure accurate ownership records. Most, if not all, public securities are required by law to retain a transfer agent, and so are Reg A+ securities. Since Reg A+ became available in 2015, a growing number of companies are going the Reg A+ route, and interest is also growing in digitizing these securities.
Transfer agents hold the “golden copy” of ownership of a security and, as a result, any changes or updates must flow through them. Unlike the public equities markets, where asset transfers happen seamlessly and digitally, the infrastructure to efficiently notify transfer agents about changes in ownership of private securities does not exist. In fact, many transfer agents still require paper instructions to make changes to the record of a private security. This requires mailing or faxing hard copies of documents that require wet signatures and a medallion signature guarantee stamp. Mailing all of this paper results in data input errors and untimely settlement, both creating unnecessary costs.
Improving Efficiency through Transfer Agent Integration
Private markets desperately need a better process if the goal of a secondary market is to be realized. Electronic communication can surely replace paper and snail mail, just as it did in the public markets decades earlier. By connecting to transfer agents digitally using APIs, it's possible to verify asset ownership in real time and send transfer instructions electronically. Consider this real-life example:
Tom claims to have 1,000 REIT shares he wants to sell. In order to prevent Tom from selling shares he actually does not own, the ATS or exchange must confirm that he owns those 1,000 shares. Rather than mailing paper or uploading a statement, an ATS like Openfinance can confirm that ownership in real time via API. Once confirmed, Tom’s shares can be listed for sale.
Next, let’s say Jim wants to buy those shares. As a result, the books and records have to be updated to accurately reflect who actually owns the shares. Once again, instead of printing, signing, stamping and mailing the transfer instructions, this update to the ledger can occur almost instantaneously through electronic connection. This process could potentially take settlement times down from weeks to mere minutes, supporting a truly efficient market.
Openfinance is working with the industry’s foremost transfer agents to establish these electronic connections. The final result will be millions of dollars saved through the elimination of manual and redundant processes, fewer errors and lower cost of capital.
Growing in Real Time
While a transfer agent is a critical player in the private securities market, current transfer agent processes simply don’t offer the speed or efficiency needed in a world that is rapidly digitizing – and demanding faster and more accurate results. Trading platforms like Openfinance can partner with transfer agents to deliver superior service to our mutual issuer and sponsor clients and their investors.