Critical Questions MicroCap Issuers Should Ask Regarding Irrevocable Transfer Agent Instruction Letters


Critical Questions MicroCap Issuers Should Ask Regarding Irrevocable Transfer Agent Instruction Letters

In a recent post on LinkedIn, Kara Kennedy (Executive Director at ClearTrust, LLC) shared a post about “Irrevocable Transfer Agent Instruction Letters: Critical Questions Issuers Should Ask First“.


In her post, Kennedy says “Perhaps no type of transaction results in more heartburn to a microcap CFO than the ubiquitous Convertible Note and its accompanying irrevocable transfer agent instruction letter.


Kennedy discusses how when microcap CEOs have limited funding options they often turn to convertible notes to satisfy immediate cash flow need and survive to fight another day. Unfortunately, once those notes are “aged” under Rule 144, the debt can often be converted into common stock at a steep discount and immediately sold in the marketplace. This usually causes the stock price of a thinly traded microcap public company to plummet.


Many convertible note investors will not fund a microcap public company without the company’s transfer agent’s consent to a irrevocable instruction letter.


Kennedy shares some questions to consider if you are considering funding via a convertible note with a requisite irrevocable instruction letter:

  • Can you pay off the note in cash? If so, what is the penalty for prepayment?
  • Does the note contain any backend agreements or obligation to issue additional securities other than the promissory note?
  • Is the calculation of the conversion ratio clear, objective, and easily understandable?
  • Do you have the right to dispute a conversion request?
  • Who is responsible for the issuance and transfer fees, you or the noteholder?
  • Does the agreement restrict your ability to change transfer agents without the noteholder’s consent?
  • Does the agreement restrict your ability to enter funding agreements with other parties?
  • Does the share reserve auto-renew, or does it decrease with each conversion request?
  • What steps must be taken to cancel or reduce a share reserve?
  • Is there a limitation on the number of conversion requests that can be presented in a given period or the number of shares that can be requested for each conversion?
  • Can the note be sold to another party?
  • Do other issuers offer positive reviews concerning working with this noteholder?
  • Are there outstanding lawsuits, judgments, or active investigations against this Noteholder or any other entities under common management or control?


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