WHO CONTROLS DTC ELIGIBILITY?
What does it take to get DTC eligibile and what does DTC eligibility mean? The Depository Trust Company or DTC was established in 1973, as a result of the “Back Office Crisis” or “Paper Crunch” caused by the over 400% increase in daily volume of the New York Stock Exchangefrom 1960 to 1968. During 1969 the inability for some brokerage firms to settle transactions created enormous backups in deliveries, so that underperformed obligations could range from 70% to over 200% of a firm’s total assets. As
the market turned downward in 1970 over 100 brokerage firms went bankrupt or were acquired by stronger competitors due to their inability to maintain sufficient working capital. Basically, brokers could not process the paperwork connected with the settlement of the growing number of exchange transactions. Several memorable changes came out of this era. Most notably are the Securities ACT of 1975 and the SIPC, (Securities Investor Protection Corporation). The most important changes may be the least remembered: the formation of the DTC, the concept of net settlement and the ability for electronic settlement of trades.
For some companies listed on the Over the Counter Bulletin Board or the Pinksheets the process of gaining DTC Eligibility can be difficult if not impossible, especially for a company that went public on its own, without an underwriter or DTC Member Clearing Firm. In these situations, management usually relies on the corporate attorney, accountants or transfer agent for advice and help. Perhaps the management team has a relationship with a local brokerage firm, but that is not sufficient. The answer lies in having a relationship, specifically with a DTC Member Clearing firm.. Becoming DTC eligible allows for trades conducted in the company’s stock to be settled continuously and electronically.
Potential investors in small cap companies often require that the shares of common stock of the Issuer be available for electronic transfer via the DWAC system (Deposit/Withdrawal at Custodian). In order for an OTCBB Issuer’s shares of common stock to be available for DWAC (electronic issuance or electronic transfer), the Issuer must be DTC eligible. In fact, some PIPE investors may inquire about an Issuer’s DTC eligibility status even before they inquire about future revenue projections.
The insistence by shareholders and potential investors on the need for electronic transfer has become even more apparent since a recent announcement by a leading clearing firm with regard to securities that trade under $.10 per share. Due to inherent volatility in low priced securities and the concern of illiquidity in such securities coupled with the fact that regulations are more focused on the deposits of physical certificates of Pink Sheets or OTC Bulletin Board companies have prompted some clearing firms to no longer accepts deposits of equity securities priced below $0.10.
HELP – I HAVE A DTC CHILL!
DTCC has experienced an increase in the number of customer queries regarding transaction restrictions, generally referred to as “chills” that DTC places on a relatively small number of eligible securities. A chill is a special restriction that can be placed on a given security by the Depository Trust Company. Chill restrictions are intended to limit the potential for problems within the financial marketplace, and can be placed on a security for various reasons. An issuer will often need to engage an attorney or work with various consultants who have significant experience in working with DTC. At times, the solution for having a chill removed may be providing certain documentation and requested items to DTC while at other times the solution may lie in obtaining legal opinions regarding the eligibility of certain shares of common stock.. In conclusion, as a private company with hopes of going public, or as a public company looking to trade on the OTCBB, DTC eligibility will be a critical part of your existence and add value to your company. If you are a company that has just completed the going public process and have obtained a symbol from FINRA, then it is likely that time for you to consider the next steps towards obtaining DTC eligibility.
Lisa Loew is VP of Business Development for Vstock Transfer, a NY based stock transfer firm that offers Issuers online capabilities, cost savings and has assisted numerous public companies (www.dtceligiblity.com). Vstock Transfer (www.vstocktransfer.com) was founded and is managed by securities attorneys who, for the last decade, have also provided SEC EDGAR filing services, XBRL services, financial print and general corporate guidance to public companies and to private companies looking to go public.
For more information please email firstname.lastname@example.org or call 212 828-8436. To call Lisa Loew directly, call 917-742-7939.
© 2012 by VStock Transfer LLC, all rights reserved. Reprinted here with permission from Lisa Loew.