I’m attorney Laura Anthony founding partner
of Legal & Compliance, a full service corporate,
securities, and business transactions law
firm.
Today is the first part in a multipart LawCast
discussing DTC eligibility, chills, and global
locks for OTC market companies.
DTC stands for Depository Trust Company.
DTC is a central securities depository in
the U.S., which was originally created as
a central holding and clearing system to handle
the flow of trading securities and the problems
with moving physical certificates among trading
parties.
DTC is regulated by the SEC, the Federal Reserve
System, and the New York Department of Financial
Services.
Today, and as noted by the SEC, DTC provides
clearance, settlement, custodial, underwriting,
registration, dividend, and proxy services
for a substantial portion of all equities,
corporate and municipal debt, exchange traded
funds, and money market instruments available
for trading in the United States.
DTC eligibility is a prerequisite for OTC
company shareholders to deposit securities
with their brokers and have such securities
traded in the open marketplace.
Obtaining and maintaining eligibility is of
utmost importance for the smooth trading of
a company’s stock in the secondary market.
If the DTC doesn’t process and settle trading
in your securities, it just doesn’t happen.
First, like a Form 211 submittal to FINRA,
an issuer cannot make direct application to
DTC for eligibility.
An application must be submitted and sponsored
by a DTC Participant.
Many market makers and transfer agents that
I work with offer the service and, of course,
I assist clients in completing the process.
Once eligible, DTC reviews such securities
for continued eligibility every time a company
completes a corporate action that include
obtaining a new CUSIP number, such as a name
change or reverse split.
The DTC application itself is not long or
complicated and the application process is
not difficult as long as the company meets
the eligibility requirements.
However, DTC has the ability to request additional
information and responses to comments.
All securities deposited in DTC are fungible
and freely tradable.
Accordingly, to be eligible, the company must
have freely tradable securities in the hands
of its shareholders.
Those securities must have either been issued
under an effective registration statement
or issued in a private transaction and no
longer be restricted, i.e., they must be eligible
for use of Rule 144.
Also, to be eligible for DTC, a company must
have at least one shareholder that holds freely
tradable securities, that is ready and planning
on depositing such securities into the DTC
system.
Moreover, a company must use a DTC participating
transfer agent.
Once a DTC application is submitted, DTC will
notify the applicant whether a legal opinion
letter is necessary.
Legal opinion letters must be provided by
an experienced securities practitioner, properly
licensed in the subject or jurisdiction and
in good standing with their bar association.
Legal opinions confirm the free tradability
of securities to be deposited into the DTC
system including either through the registration
of such securities or availability of the
use of Rule 144.
Generally, such opinions are required.
In the next LawCast in this series, I will
begin the discussion of DTC chills and locks
on a company’s stock.
I’m securities attorney Laura Anthony, founding
partner of Legal and Compliance.
Should you have any questions about today’s
topic, please visit SecuritiesLawBlog.com
and LawCast.com, or contact me directly.
Inquiries of a technical nature are always
encouraged.
