Tuesday, September 18, 2012

Stock Transfer Association Shares JOBS Act Concerns with the SEC

In a letter to the SEC, the Stock Transfer Association said that the JOBS Act, which significantly expands the number of investors that may hold shares in any company before it must become registered under Section 12, could significantly increases the possibility that the persons responsible for maintaining records of each individual’s investment or assuring that their funds are properly safeguarded will not be subject to regulatory oversight.   In addition, the STA is concerned that these persons, whether issuers or other intermediaries, will also not have the necessary experience, recordkeeping systems or controls to perform the 
function appropriately.

The STA questions, for example, whether many small issuers seeking to rely on an exemption under the JOBS Act will have the internal resources and sophistication to properly execute even the routine functions that registered transfer agents provide. Among other things, this would include procedures to record and balance registered shareowner positions; follow shareholder instructions (and retain records of the instructions) to change an address or transfer their interests as a result of death, divorce, or sale; escheat unclaimed assets under state laws; or address lost or stolen certificates.  Issuers, or their transfer agents, whether or not registered, also must comply with UCC requirements, state and Federal privacy laws, as well as IRS regulations relating to, among other things, transferee and cost basis reporting.  

Moreover, in STA.s view, it is equally unlikely that the many small investors that potentially would participate in offerings conducted in reliance on the JOBS Act would have the
sophistication to inquire about these operational safeguards.  Thus, even apart from any deliberate fraud, STA foresees the very likely possibility of innumerable investor complaints attributable to inaccurate recordkeeping or the failure to follow instructions in a timely manner. 
       
As an investor protection safeguard, the STA urged the SEC to condition an issuer’s ability to raise funds pursuant to the exemptions afforded by the JOBS Act on the use of a registered transfer agent to maintain records of share ownership and transfers.  This would afford investors the protection of rules that the SEC has developed over many years to protect their interests.  In addition,  reasoned STA, the SEC and Federal and state banking regulators would more easily be able to conduct routine
inspections and examinations of issuer records held at the transfer agent.   Equally as important, they would have a jurisdictional basis to address investor complaints and to conduct cause examinations in instances in which they may suspect fraud or negligent recordkeeping.





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