What is a custodial account?
A custodial account is an account that can be used to hold your investments (in legal speak, your securities). Unlike when you make investments on Republic without a custodial account, a custodial account allows you to name a beneficiary and accept payments such as dividend distributions or cash payouts. Custodial accounts are not managed or held by Republic; instead, they are managed by third-party custodians that work with the issuers raising on the platform.
A custodial account is like a box you can passively hold your investments in safely and securely with a third party, making sure no one can claim your investment without your consent.
Why do I need to use a custodial account?
In short: because it's better for you and the company you've invested in.
Traditionally, when making investments on Republic, and other Reg CF platforms, investors purchase their securities directly. In other words, just like you can buy a toaster on Amazon and hold it in your hands, securities purchased directly are held by you, the investor, not a broker or other intermediary like most publicly traded securities (like AAPL).
Some companies have moved toward an issuance model where investors may only purchase the securities if a third-party can hold the security for them. Companies do this to ensure that all securities they sell during their campaign are in the same place. This means if a liquidity event occurs or other actions with respect to the securities are necessary, the company can look to one financial institution to service the securities, rather than each individual (which can get very difficult if there are thousands of investors!). If a company is requiring custodial accounts to participate in their campaign on Republic, is the only way to participate.
How do I create a custodial account?
If your investment commitment requires that you create a custodial account (not all offerings will), you will be guided through the process of doing so in your portfolio.
What are the benefits of using custodial accounts for the investor and the company?
For investors, it means their security interest will be held by a financial institution, meaning it can’t be lost like an email or a piece of paper. Having an account means you can designate transfer on death rights and better integrate your holdings into your estate planning. For companies, it can drastically increase efficiency by reducing their cap table management costs and by keeping their cap tables clean, helping them raise future rounds. When exits occur, providing their holders cash or securities is easiest to do all in one place.