Issuer Tips on Presenting Securities for DTC Eligibility

Once an OTCBB, OTCQB or Pink Sheet’s securities are DTC eligible, it is important to focus on a few key requirements that can help DTC promptly process the Issuer’s securities and make sure these transactions are accurately reflected within the records at DTC.

CUSIP Number Assignment

The first key requirement to ensure that DTC eligible securities are processed correctly is for the Issuer’s securities lawyer to obtain a new CUSIP number from Standard & Poor’s CUSIP Service Bureau for each new issuance.

New CUSIP Required for Every Corporate Action Event

A new CUSIP number must be obtained for every “corporate action event” that either generates a new class of shares, or which causes a material change to an existing class of shares.

New CUSIP is Required Before a Reverse Split Becomes Effective

The classic example of a corporate action event requiring a new CUSIP is a reverse stock split., which cannot be declared effective by FINRA until a new CUSIP has been assigned.   This new CUSIP number is then printed on each new stock certificate, and helps shareholders, transfer agents and DTC keep track of the new issuance.

DTC Chills Are Tracked Under a Specific CUSIP

The CUSIP number becomes very important when questions of a DTC chill arise, since the way DTC checks for a chill is by CUSIP number.

When an Issuer’s securities lawyer calls or emails DTC to inquire about a DTC chill that a market maker believes was placed on an Issuer’s stock, the first question DTC will ask is “what is the CUSIP?”  With the proper CUSIP number, it is possible to get an answer on the status of DTC eligibility or a DTC chill quickly.

Certificate Format

The certificate format for DTC registered securities is a matter best handled by the Issuer’s Transfer Agent.  Issuers are encouraged not to be too creative with their certificate design, since DTC requires that the certificates comply with American National Standards Institute (“ANSI”) standards.

Proper Placement of Stamps and Labels on Certificates

Compliance with the ANSI ensures the processing is not delayed due to improper placement of stamps, bar code labels or other processing marks and materials.  By requiring that these processing stamps and labels stay within the “standard assignment area” Issuers can help DTC streamline processing time, which helps shareholders.

Avoid Having to Revalidate or Guarantee Certificates

When stamps, labels and bar codes are placed outside of the standard assignment area, the face of the certificate could be considered “mutilated” and require a revalidation or guarantee of the certificate by the Issuer or the Transfer Agent, which can take considerable time.

As a securities attorney with expertise representing OTC Bulletin Board (OTCBB), OTCQB and OTC Pink Sheet Issuers, Matt Stout can recommend Transfer Agents that also specialize in the over-the-counter market.

Restrictive Legends

Most stock certificates for DTC eligible OTC Issuers initially bear a restrictive legend noting that the securities are subject to SEC Rule 144.

When these stock certificates are accepted for deposit by DTC they are sent back to the Issuer’s Transfer Agent for re- registration into the name of Cede & Co., as nominee for DTC.  At that time, the restrictive legend is removed from the certificate and the DTC legend must  appear on the certificate that is then registered in the name of Cede & Co.

Once the certificate is in the name of DTC’s Nominee, Cede & Co., when these securities are transferred by book- entry in the DTC system, DTC Participants (broker-dealers) and the beneficial owners of the stock will not be aware of any restrictive legend.

Each stock certificate registered in the name of Cede & Co. will bear the following DTC Legend:

Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation (“DTC”), to Issuer or its agent for registration of transfer, exchange, or payment, and any certificate issued is registered in the name of Cede & Co. or in such other name as is requested by an authorized representative of DTC (and any payment is made to Cede & Co. or to such other entity as is requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest herein.

OTC Bulletin Board and OTC Markets Issuers with questions on the DTC eligibility process, or on the the process of clearing restricted stock for OTC shareholders can contact Matt Stout, securities lawyer for further information at (410) 429-7076.