Crowdfunding Risks Raise Concerns

Terry Flanagan

Ensuring the accurate transfer of securities is essential to implementing the crowdfunding provisions of the Jumpstart Our Business Startup Act (JOBS Act), an organization of professional recordkeepers said.

“Accurate shareholder records are essential to preserve the ownership rights of investors and to prevent fraud,” said Charles Rossi, chairman of advisory committee of the Securities Transfer Association, in a comment letter.

The STA supports the SEC’s proposed crowdfunding rules requiring that a funding platform direct investors to transmit funds to a qualified third party to be held in escrow until any target amount has been reached for he offering.

It also supports provisions which require a funding platform to have a reasonable basis for believing that the issuer has established means to keep accurate records of shareholder investments.

“The recordkeeping process involves not only maintenance of a share registry, but also requires knowledge of related laws and the ability to process transfers in a timely fashion,” said Rossi. “The greater the number of shareholders, the more complex the task of managing shareholder records will become.”

Issuers with greater than 100 shareholders will require professional assistance to maintain accurate records,, particularly if the issuer has multiple classes of stock or a history of corporate actions.

The STA said that a funding platform needs to adopt procedures to record registered shareowner positions and balance them to the number of shares outstanding, and to follow shareholder instructions to change an address or efficiently transfer interests as a result of death, divorce, or sale.

While an issuer may have the ability to keep adequate records at the tie of closing, the integrity of issuer controls over recordkeeping may erode with transfers and other shareholder activity over tune due to inexperience and inadequate systems.

“Having a transfer agent appointed for a period of time would provide some assurance that the recordkeeping during this period would meet minimum standards to protect investors, said Rossi.

Joshua Levine, co-founder and CEO of Sharewave, a registered transfer agent that provides pre-IPO issuers with an electronic platform that can be used to maintain accurate shareholder records and communicate directly with shareholders and directors, said in a comment letter: “As
traditional capital raising continues to evolve within the United States, Sharewave recognized the growth in pre-IPO funding and a lack of cost effective services for smaller companies seeking to simplify investor communications. In response to this concern, Sharewave developed a low-cost direct registration transfer agent for these companies.”

Levine said, “We are concerned that an element is missing from Regulation Crowdfunding that is necessary to enable the effective and efficient compliance of securities law requirements by issuers and investors. This problem is particularly acute when issuers rely on paper certificates rather than book-entry recordkeeping.”

Levine encouraged the SEC to amend Regulation Crowdfunding to require the use of services Sharewave in order to ensure the appropriate issuance of securities, reduce the number of paper securities that can be lost, stolen or misplaced, and to prevent any issues that might arise without the requisite recordkeeping.

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