MICROCAP TRANSFER AGENTS: Friend or Foe? [Guest Post]

Guest Post By: Mark R. Basile, Esq.


MICROCAP TRANSFER AGENTS: Friend or Foe? [Guest Post]

I was prompted to write this article based on some disturbing information I had found out about a fairly well known and active transfer agent representing and working for microcap issuers. I have dealt with several transfer agents over the years, some good and some not so good – but lately, I am seeing a trend by some of the agencies actually working against their microcap clients in a variety of ways.

Again, a lot of this goes back to the root of all microcap evil, toxic lending, irrevocable transfer agent letters and your transfer agency agreements. Recently, I spoke with a CEO who wanted to terminate his company’s transfer agent because the transfer agent refused to follow his instructions as well as the T/A providing confidential information to third parties without consent of the client, and in all likelihood, breaching the non-disclosure clauses in their own transfer agency contracts.

Toxic lenders love calling transfer agents in order to know what the outstanding shares are at any given time. So do very active day traders on IHUB. Unfortunately, transfer agents are NOT ALLOWED to share that information. This violates the T/A’s responsibility to not disclose non-public information. The only right answer the T/A should be providing when asked is, ask the company. Evidently, some T/A’s are in bed with your note-holders, and why not. They get up to $500 for each conversion a lender submits, and guess who pays that, you the microcap.

It seems that certain transfer agents, while under contract with the microcap client, apparently choose to work instead for a variety of toxic funders that their clients have loans with. The last time I checked, the transfer agent works for the company and is bound to not share any non-public information with any third party, and that goes double if the company is incorporated in the State of Nevada where the laws of disclosing non-public information to any third party is very strict. It appears that microcaps lenders have a direct line to employees at transfer agencies and can ask them just about anything regarding your company’s stock and those “agents” will provide it, even though they are not allowed to do so. Even if a microcap fires a T/A, the only information a T/A can give to a lender is to direct the inquiry to the company. That’s non-public information and unless a Q, or a K is filed, they should not, and legally cannot, provide that information, but some do it all the time.

I just heard a story of one CEO who had an issue with an irrevocable T/A letter reserving X number of shares, but the lender never funded, and the microcap tried terminating the reserve letter with the T/A based on failure of consideration – in other words, its void as a matter of law. The T/A refused to help its client and told the client that it had to provide proof from the lender that it was allowed to terminate the irrevocable letter or else get a court order. Obviously the funder refused and did not fund the company and now the company’s reserve stock sits in limbo. This is one of the problems in executing an irrevocable T/A letter BEFORE you receive money, but this is usually a requirement before money is released. Funny thing though, every single T/A agreement I have seen requires the client indemnify the T/A. So what harm does the T/A cause to the client? It necessitates the client to now go to court, at great expense, to declare the transaction invalid for failure of consideration, blah, blah, blah, taking several weeks (or months) to complete and get an order. Meanwhile, your friendly neighborhood T/A is holding tens of millions of shares in reserve based on a void irrevocable T/A letter, preventing you from meeting other reserve share obligations under other notes the microcap has taken, and in some situations creating a cavalcade of technical defaults under all of the microcaps lenders notes. Thanks T/A.

But the fun doesn’t stop here, no….why should it?. The T/A’s now feel the power to control YOUR destiny, just like the toxic lenders think they control your company. So now the CEO terminates the T/A. Some T/A’s have terminations clauses that provide for termination fees. Others, like the one this CEO is dealing with, have a clause that says there are no termination fees. (A sales tactic used to get your business, like they would ever give up anything without any money). However, this particular T/A agreement (and this T/A’s standard policy) is a multi-year agreement, and if you terminate them, they start yelling you owe the monthly fee for the balance of the whole term – guess what, THAT’S a termination fee, even though it doesn’t state it is. So now, the T/A extorts money from you for services that they will never provide and the best part of it is that this T/A will not release your records unless the full remaining term is paid up front. This one will likely end up in court.

So first things first, if you have a T/A agreement that does not provide for terminations fees specifically, better renegotiate one now, before it too late unless they just don’t really charge any fee’s for termination. Put in a clause that upon termination and after the 10 Day DTC wait requirements, the T/A must unconditionally transfer your shareholder files to whatever T/A you designate or face $1000 a day penalty for not doing so. Also put in a clause that says if they fail to follow your instructions, your indemnification clause is automatically voided, and that you are entitled to $10,000.00 in damages. If you must issue an irrevocable T/A letter in connection with a toxic loan, make sure you demand a provision that authorizes your attorney to hold that T/A letter in escrow and to only release it upon your company actually receiving the funds.

I have experienced similar issues with several different T/A’s. Remember, they need YOUR business to make money, and every client counts. Some T/A’s prop themselves up and tell you how great their services are, or they provide unique services but basically, the services are almost all the same in one form or another. The better T/A’s will work with you instead of placing you in an inflexible structure so when you need them, they aren’t there.


About Mark R. Basile, Esq.

Mark R. Basile, Esq. is a nationally known corporate restructuring and workout attorney and is a member of The Basile Law Firm, P.C.. The Firm represents numerous OTC and Pink Sheet companies in both litigation and corporate restructurings www.thebasilelawfirm.com. Mr. Basile is also managing director at www.otcworkouts.com



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