According to SEC Form D data, $1.7 trillion was invested into private offerings under Regulation D in 2017. Nearly all of those investments were processed manually, with paper documents mailed or faxed between parties. While this is how things have been done for decades, new technologies are enabling sponsors, investors, and their representatives to streamline the investment process, fixing many of the problems posed by manual methods, such as high error rates and security risks.
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Automating manual processes in alternative investments enables companies to address security concerns, increase transparency, and decrease time-consuming errors. Straight Through Processing technology, which originated in the 1970s for trading public securities through computer networks, is a concept designed to let financial companies automate transaction processing through the use of online workflows.
In the case of an alternative investment offering, Straight Through Processing enables issuers and advisors to collect investor information, verify their identity, deliver signature-ready subscription documents, and transfer funds. Even back-office compliance, typically a highly manual process, can be partially automated. A good automation solution will include an information collection workflow, electronic signature technology with bank-grade security, secure cloud storage with file-sharing capabilities, and API and integration features to connect with your existing tools and services.
Creating subscription documents involves handling a lot of sensitive information, from social security numbers, to bank account and routing numbers, and more. Using mail, fax, and even standard email to send these documents back and forth subjects all parties involved to risks of information loss or exposure. The loss, destruction, or disclosure of such sensitive information, even if by accident, can lead to serious consequences, including regulatory penalties, fines, and litigation from investors.
Straight Through Processing solutions transfer information between parties via secure workflows and encrypted document sharing. Including cloud storage can also reduce or eliminate the need for expensive and potentially vulnerable physical storage solutions.
Information Collection Workflow – Rather than investors visually scanning documents for the applicable blanks to fill out, opt for a user-friendly workflow that collects information and automatically populates subscription documents with the necessary data.
Electronic Signatures – Once investor information is mapped to the subscription documents, electronic signature technology allows the document to be automatically sent to the investor’s inbox where it can be reviewed and signed without ever needing to be printed.
Secure Cloud Storage – Standard email is not secure enough for the exchange of financial information. Cloud-based file sharing software allows users to securely and compliantly store and share sensitive documents. Advisors and potential investors can be invited to access files through a secure folder with restricted access.
API and Integration – Technology solutions must be able to integrate with your existing tools, external services, and vendors. Look for an open architecture platform that can connect with fund administrators, transfer agents, custodians, or other service providers.
Some securities industry participants and their advisors are hesitant about the legality of electronically-facilitated transactions. However, The North American Securities Administrators Association (NASAA) has set forth a statement of policy specifically addressing its suggested requirements to administer securities sales online. The NASAA policy incorporates and supplements federal and uniform acts regarding electronic signatures. While the NASAA policy is not itself binding, states are adopting these standards into their respective securities regulations. Regulators are accepting that automation is coming and that electronic transactions are allowed if the technology and processes meet basic legal requirements.
The leading electronic signature provider, DocuSign, has bank-grade security features, is certified to work with financial services, and is trusted by some of the largest institutions in the industry. Most subscription automation solutions will have DocuSign or a similar service integrated into their technology offering.