The business rule-of-thumb, “underpromise, overdeliver,” was completely inverted this month when former BuzzFeed (NASDAQ: BZFD) employees who owned stock could not cash out.
Specifically, former BuzzFeed employees, whose stock options had already vested and were no longer locked up, were unable to transfer their equity into cash after BuzzFeed’s initial public offering (IPO).
A misalignment between the number of shares issued and the number of shares available caused a supply-demand imbalance, creating chaos for former employees and investors alike. This unacceptable outcome was further exacerbated by BZFD’s rapidly declining share value. What had started out as a promising payday resulted in loss, disappointment, and confusion.
The problem lies squarely with legacy transfer agents, and this is not the first time that they have led to massive value destruction. Other companies using legacy stock transfer agents such as Continental, Computershare, and American Stock Transfer have experienced similar problems. BuzzFeed is simply the most recent example of how stock transfer inefficiency results in unexpected losses.
The fundamental mismatch between stocks issued and stocks available is technological at its core. The overreliance on antiquated technology like paper records makes modernizing difficult, and is emblematic of a larger issue for financial services. The extreme consolidation of legacy stock transfer agents and the lack of awareness for alternatives has left the industry with little reason to change.
From mergers and acquisitions to special purpose acquisition companies (SPACs) and IPOs, these problems have three things in common – a lack of agency, technological fragmentation, and a fresh opportunity to remodel the industry with digital-first issuance. How do we get there?
Stock transfer agents are critical, yet rarely discussed, stewards of our financial infrastructure, coordinating the securities lifecycle from issuance to settlement and reconciliation.
Transfer agents are responsible for a lot – from keeping track of shareholders and their holdings to cancelling and reissuing securities, clawbacks, and trade orders. For shareholders, this means that transfer agents manage distributions and governance, death and divorce situations, and, above all, compliance.
Traditionally, transfer agents supporting private companies navigate compliance first to ensure that the rest of their business needs line up properly. Operating within the fence of the law means using technologies that perform well within that environment. Until recently, options have been limited.
Modernizing Transfer Agents
There are new ways to improve capital efficiency when issuing, trading, and settling securities in a compliant manner. Blockchain technology, which automates record-keeping and transaction processing, is bringing this century-old yet critical service into the modern age, so stock transfer disasters like the BuzzFeed situation do not happen again.
Securitize laid the groundwork for digital asset securitization in 2018 with the launch of DS Protocol, a digital ownership architecture for complete lifecycle management of digital securities. This extensible protocol enables complex trading scenarios to run on efficient blockchains like Algorand, Avalanche, and Tezos, reducing firms’ operational expenses and delivering accountability. If it’s not coded, it can’t happen. In the case of BuzzFeed, failing to accurately keep records simply would not have been possible.
Securitize provides private companies and firms with a compliant Digital Transfer Agent to easily issue private equity without cumbersome paper records. Starting with a digital transfer agent first streamlines securities management from end-to-end so what happens on the backend functions in lock-step with what investors see on the frontend.
These technological improvements mean that costs tied to processing trades can be reduced, and margin savings can be passed on to investors. As we’ve seen, manually processing paper records is prone to human error, miscommunication, and backlog. Digital asset securitization, on the other hand, automates complex contractual procedures using smart contracts on the backend to improve capital efficiency.
Securitize passes this capital efficiency onto investors, charging low fees (0.50%) for actively managed digital asset securities like the Securitize S&P Cryptocurrency Tokenized Fund.*
Digital Transfer Agent Adoption
While digital transfer agency is the way of the future, many digital transfer agents, like Securitize, also offer book-entry record keeping options for shareholders not yet ready or comfortable with making the leap to blockchain-only infrastructure. Securitize AQUA, a permissioned blockchain alternative similar to Quorum, provides companies and firms a familiar bookkeeping backend with all the benefits of using a digital-first transfer agent: instant settlement, reduced costs, and programmatically enforceable regulatory restrictions.
At the end of the day, firms want optionality. Precisely because of situations like BuzzFeed, where shareholders wound up in the lurch, it’s important that companies leave the direction of technological innovation up to their shareholders.
This idea isn’t new. Shareholders regularly vote on governance decisions. Providing them with the option to vote on the measures that matter most to their bottom lines just makes sense.
The moment that all shareholders wait for, especially equity-holding employees, is the day that their private equity goes public. Wouldn’t it be great if they had a say in how that process works?
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