Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Commissioner Luis A. Aguilar recently gave a speech in which he stated the JOBS Act will require increased scrutiny of transfer agents because of the gatekeeping function that transfer agents perform.  In his speech, Commissioner Aguilar noted:

•           Regulation A, general solicitation under Regulation D and the crowdfunding exemption will increase the amount of securities issued and potentially impact trading in shares of unregistered issuers. Any trading market that develops for these unregistered securities will almost certainly be less transparent and less liquid than the market for listed securities.  Thus, the role of transfer agents in monitoring the issuance of new shares and removing restrictions on restricted securities and control blocks may be critical in deterring and detecting fraud.

•           These new rules—enhanced Regulation A, general solicitation under Regulation D, and crowdfunding—are being proposed at the same time that other rules enable companies to remain “private” (or at least unregistered) for longer periods, even as they rely on increasing numbers of outside investors for their capital needs.  In particular, the JOBS Act raised the shareholder thresholds for when companies are required to register under the Exchange Act.  These changes, in the aggregate, will significantly impact companies and transfer agents, who in some cases may have to keep track not only of the record holders of a company’s securities, but also whether such securities were issued in a crowdfunding transaction or in a transaction exempt from the Securities Act pursuant to an employee compensation plan, and whether the record holder is an accredited investor.  All of these changes add confusion and complication to the important task of determining whether a company is required to register with the SEC.  And, although the burden of getting it right remains with the issuer, any adverse effects will fall on investors—who may be denied the information and liquidity advantages provided by Exchange Act registration.

•           The SEC needs to take a hard look at whether the current regulatory framework governing transfer agents appropriately addresses the risks associated with the anticipated increased trading in unlisted securities.


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