Great question! This relates to CfPA's policy platform. Here is our position on the topic.

When a Reg CF Issuer Goes Public

Investors that have invested in an issuer via Reg CF have difficulty getting their securities into a brokerage account when the issuer conducts an IPO. This sometimes results in the Reg CF investors being unable to sell when the shares are at their highest price. We request industry guidance to prevent this unfair treatment of Reg CF investors.

Background

Investors who have purchased shares through Reg CF offering often face significant challenges when an issuer goes public, particularly in transferring their shares to brokerage accounts to exit their positions. This can cause delays that hinder investors' ability to manage their investments effectively, whether they choose to sell immediately or hold their shares. A lack of education and guidance from platforms exacerbates this issue, leaving many investors unaware of the necessary steps to take post-IPO. Inconsistent communication from issuers, who sometimes mix important updates with marketing emails, leads to missed, time-sensitive actions on behalf of the investors. Moreover, high fees imposed by transfer agents, sometimes ranging from $25-$75 for DWAC/DRS transfers, disproportionately impact small investors, whose investments might only be $100-$200. The process is further complicated by delays in transferring shares, often taking several weeks, which can significantly disadvantage retail investors.

Requested Change

In an ideal scenario, the process for transferring Reg CF shares to brokerage accounts would be streamlined and investor-friendly. Platforms would provide clear guidelines and robust support to ensure investors understand and complete the necessary steps promptly. Issuers would use dedicated communication channels to deliver critical updates, ensuring investors are well-informed and able to act quickly. Fees for transferring shares would be reduced or eliminated to protect small investors' returns, making the process cost-effective. Transfer processes would be expedited, allowing investors the flexibility to sell or hold their shares as they see fit, without undue delays. Furthermore, issuers should be required to choose transfer agents capable of selling shares directly via brokers, with right-sized fees for retail-sized trades, ensuring the system works efficiently for smaller Reg CF investors.

To achieve these improvements, we propose regulatory changes through SEC rulemaking and FINRA guidelines. The SEC should implement rules mandating clear communication and lower fees for Reg CF share transfers, requiring issuers and transfer agents to expedite the transfer process and provide timely updates. Additionally, FINRA should establish guidelines encouraging brokers to support Reg CF share transfers and offer necessary investor support. By developing industry standards for communication and process transparency, these regulatory changes would protect small investors' interests and contribute to a healthier, more efficient Reg CF ecosystem, ultimately promoting greater investor confidence and participation.

Statutory Authority

This change could be accomplished under existing statutory authority.

@Andrew Stephenson @Scott McIntyre