How to Transfer Crowdfunding Securities to Another Person: 7 Essential Steps

In the realm of crowdfunding securities, there are key guidelines and rules that investors should be aware of when it comes to transferring these assets. Understanding these complexities will help keep your investments secure and risk-free.

In this article, we’ll outline the essentials of transferring crowdfunding securities to another person, including a 7-step guide and other important considerations to keep in mind.

7 Essential steps for transferring crowdfunding securities

1. Understand the one-year holding requirement

Before initiating any transfer, recognize that securities acquired through crowdfunding are subject to a one-year holding period before they can be resold, with a few exceptions. This is to make sure investors are committed to the long-term success of the company and to prevent quick-flip investments that could destabilize the fledgling business. Take this time to thoroughly research the company’s progress and potential, as understanding its trajectory can be invaluable when the time comes to transfer or sell your shares.

2. Identify an eligible recipient

When you’re ready to transfer your securities, you have to find a recipient who is legally able to receive them. The SEC allows transfers to the issuer, accredited investors, or as part of an SEC-registered offering. Here’s a lesser-known tip: if you’re looking to transfer to an individual who isn’t an accredited investor, consider if they qualify under the “knowledgeable employees” exception, which includes certain employees of the issuer of the securities.

3. Notify your broker or platform

Communication with your broker or crowdfunding platform is essential. They will guide you through their specific process and provide paperwork necessary for the transfer. A useful tip is to ask for any less-known clauses that may facilitate your transfer, such as transfer-on-death provisions that might simplify the process in certain situations.

4. Prepare and deliver documents

Acquire a stock or bond power form for each security and prepare it carefully. A common oversight is not including detailed instructions or forgetting to send these in separate envelopes if there are multiple securities. Each set of documents should include precise instructions for the transfer, ensuring no confusion that could delay the process.

5. Obtain a medallion signature guarantee

Your signature on any transfer document needs to be verified with a medallion signature guarantee, which is different from a notary stamp. You can usually get this from a bank or broker where you have an account. It’s worth noting that some financial institutions may not provide this service if you do not hold an account with them, so plan ahead.

6. Understand and comply with state laws

While the SEC provides federal guidance, state regulations can also impact the transfer of securities. Ask a legal professional if any state securities laws apply to your situation since no state has approved the offer to sell securities. A tip often overlooked is to check if any state offers exemptions similar to federal ones that might be beneficial in your case.

7. Consider the method of transfer

Finally, decide on the method of transfer. Will it be a cash transfer where you sell the securities and move the proceeds, or an in-kind transfer where the securities are moved directly? While cash transfers are straightforward, in-kind transfers maintain your investment position but may involve more complex steps. One actionable tip here is to assess market conditions – if they’re volatile, an in-kind transfer might protect you from short-term market dips during the sale process.

What does the SEC say about transferring securities?

The SEC stipulates that securities obtained through crowdfunding are generally not transferable for a one-year holding period post-purchase, except under specific conditions such as transfers to the issuer, accredited investors, or within a registered offering, and any transfer must adhere to federal securities laws as well as state regulations.

Certain exemptions may apply that enable the resale or gifting of securities within this holding period, but these should be navigated with careful consideration and often require the advice of a financial or legal professional to allow for full compliance with the intricate rules governing such transactions.

When are crowdfunding securities eligible for transfer?

According to the SEC’s regulations, crowdfunding securities are only transferable after a one-year holding period, but there are some exceptions where transfers may take place earlier, such as to the securities’ issuer, accredited investors, or in a registered offering with the Commission, as well as under specific exemptions like Section 4(a)(1) of the Securities Act, provided they don’t involve an issuer, underwriter, or dealer.

Even within these exceptions, due diligence is required to make sure all transfers comply with the relevant federal and state securities regulations.

Understanding the one-year restriction rule for crowdfunding securities

The SEC’s one-year restriction rule for crowdfunding securities aims to protect investors and the market from speculative trading by prohibiting the resale of securities acquired through crowdfunding platforms for a year following the date of purchase.

This rule encourages a focus on long-term growth and commitment to the success of the issuing company while also providing exceptions that allow transfers under certain conditions, thus balancing investor protection with flexibility for legitimate transfer needs.

Possible ways to transfer crowdfunding securities

  • Transfer to the issuer: You can return the securities back to the company that issued them, which is a straightforward process and often involves coordination directly with the company to make sure the transfer complies with their internal policies.
  • Transfer to an accredited investor: According to the SEC’s definition, accredited investors have the financial sophistication to manage the risks associated with securities not registered with the Commission. Transferring to such individuals may require additional verification of their accredited status.
  • Registered offering inclusion: If the securities are included in an offering that has been registered with the SEC, they can be transferred as part of this offering, which allows them to be sold to the general public under a formal prospectus.
  • Gift to a relative or trust: Securities can be gifted to a family member or put into a trust. This process typically requires notifying your broker and ensuring proper transfer documentation is submitted with all necessary endorsements and guarantees.
  • Transfer upon death: Securities can be designed to transfer upon the holder’s death. This usually requires setting up a transfer-on-death (TOD) registration with your brokerage that allows for a smoother transition of assets.
  • Company buyback programs: Some companies may offer buyback programs where they repurchase shares from investors. These programs must be carefully structured to avoid violating SEC regulations.
  • Secondary market transfers after one year: Following the one-year holding period, securities can be sold on secondary markets, provided these markets are compliant with SEC rules and regulations regarding such transactions.

Transferring securities to the issuer: How and why

Transferring securities back to the issuer may be executed for various reasons, such as in the case of a company buyback or if the investor chooses to divest their holding for personal reasons.

To initiate this process, the investor must engage in direct communication with the issuer to understand the specific steps required as per the company’s transfer policies, which may include completing transfer forms, providing valid identification, and ensuring all legal requirements are met. In order to ensure compliance with SEC rules and facilitate a smooth transaction process, this transfer method typically follows the issuer’s compliance framework.

What does it mean to transfer to an accredited investor?

Transferring securities to an accredited investor means to reassign ownership of the securities to an individual or entity that meets the SEC’s criteria for financial sophistication, such as having a net worth exceeding $1 million, excluding the value of their primary residence, or having an income above a certain threshold for the last two years.

The rationale behind this is that accredited investors are deemed capable of bearing the economic risks of investing in unregistered securities, and thus the transaction is exempt from some of the regulations that apply to sales to the general public. This process typically involves verifying the accredited status of the buyer and ensuring all transfer documentation is properly executed and in compliance with applicable securities laws.

Making sense of the offering registered with the commission

An offering registered with the Commission refers to the process where an issuer files a registration statement with the SEC, disclosing financial statements, material risks, and other significant information about the company and the securities being offered, as mandated by federal securities laws.

This registration enables the issuer to publicly offer and sell securities to the general market, and for investors holding crowdfunding securities, it provides a pathway for these securities to be transferred or sold as part of this public offering, subject to the terms and conditions outlined in the registration statement.

Making a gift of securities: Necessary preparations

Making a gift of securities requires careful preparation to ensure a smooth transfer; you must notify your financial institution of your intent, deliver a stock or bond power for each security, which acts as a legal document authorizing the transfer, and make sure your signature on the document is validated with a medallion signature guarantee to prevent fraud.

Provide a copy of the instructions you’ve sent along with the certificate to the recipient or broker handling the transfer to clarify the intended action, and be aware of any potential tax implications for both the giver and receiver, as gifting securities can have different tax consequences than selling them outright.

Regulations regarding CF and A+ shares transfers

  • CF share restrictions: Shares acquired under Regulation Crowdfunding (CF) are subject to a one-year lock-up period where they cannot typically be resold, with exceptions for transfers to the issuer, accredited investors, a family member, or in connection with death or divorce. This restriction is meant to balance the interests of investors and the market by limiting early speculative trading.
  • A+ share flexibility: Regulation A+ shares offer more flexibility because they are available for public trading after the offering. However, issuers may impose their own restrictions on transfers, and it’s crucial for shareholders to review the terms of the offering statement. These terms might include lock-up agreements, which could restrict transfers for a certain time after the offering.
  • Secondary market limitations: Even after the restriction period, CF and A+ shares may only be sold on secondary markets that are registered with the SEC or are exempt from registration. The availability of such markets can affect the liquidity and transferability of these shares.
  • State securities laws: Both CF and A+ shares are subject to federal regulations, as well as possible state “blue sky” laws, which can impose additional requirements or restrictions on the transfer of shares. It is crucial for shareholders to take these into account when planning a transfer.

To get around problems and understand the legal implications of transferring securities, you need to do your research. This includes fully understanding the SEC rules and any state laws that apply, carefully putting together transfer documents like stock or bond powers with medallion signature guarantees, and maybe even looking for exemptions for early transfer under certain circumstances.

You have to communicate effectively with all parties involved, including brokers, financial institutions, and legal advisors, to make sure all requirements are met and that the transfer is executed in a manner that is compliant with both federal and state securities laws, thereby mitigating legal risks and avoiding potential penalties or delays.

Author: Alice