Tag Archives: DTC eligible securities lawyer

DTC Eligibility

What is DTC?

DTC describes itself as the world’s largest securities depository.  DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law.
DTC is also a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code.  Finally, DTC is  a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934.

What does DTC Do?

DTC Provides Asset Servicing for Securities

DTC states that it holds and provides asset servicing for over 3. 6 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC.

DTC Facilitates Post Settlement of Securities

DTC also facilitates the post-settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates.

What are DTC Participants?

Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).

What is DTCC?

DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies.
DTCC is owned by the users of its regulated subsidiaries.

Who Has Access to the DTC System?

Access to the DTC system is also available to others such as both U.S. and non – U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirec t Participants”). DTC has a Standard & Poor’s rating of AA +.
The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission.
More information about DTC can be found at www.dtcc.com.

DTC Eligibility

The process of obtaining DTC eligibility is usually a mystery to OTC Market’s Pink Sheet Issuers.

However, for securities lawyers who regularly represent over-the-counter public companies in DTC eligibility legal matters, the reality is that the process is straightforward when an OTC Markets securities lawyer can document the company’s history.

We Can Help Document Reasons for DTC and DWAC Eligibility

As securities lawyers working with OTC Bulletin Board or OTC Markets Pink Sheets, we know the criteria for DTC eligibility and DWAC eligibility.  With an OTC securities lawyer’s help, OTCMarkets public companies can document how they meets DTC’s requirements for eligibility.

OTC Securities Lawyers Can Confirm A DTC Chill

Sometimes OTC Issuers do not receive a letter from DTC, but still believe there is a chill on their stock.   When Pink Sheet or OTC public company learns from a market maker or broker that their securities might have a DTC chill, there are some steps the Issuer can take to confirm their DTC eligibility status:

1. An experienced OTC Markets securities attorney like Matt Stout contact DTC with the correct CUSIP to ask if there is a chill.  Many times, even when a market maker believes a Pink Sheet issuer to “have a DTC chill” they are working off of outdated information, even though DTC provides regular lists of securities which are DTC chilled.

2.  If there is a confirmed DTC chill, and it is not related to some specific bad actor, like an officer, director or promoter, who is currently connected to the company the next step is for the Issuer’s OTC Markets securities lawyer to contact DTC to start a dialogue.

We Help Public Companies Document Their History for DTC Eligibility

OTC public companies seeking more information or guidance in the DTC eligibility process, or a DTC legal opinion, can contact Matt Stout, OTCMarkets securities attorney, at (410) 429-7076 or mstout@otclawyers.com

What are Bid and Ask Prices?

Companies with the goal to go public on the OTC Markets are ultimately looking for their stock to trade.  In the over-the-counter markets,  the most basic terms to understand are the “bid” and “ask.”

What is the Bid?

The “bid” is the highest price a Market Maker will pay to purchase a specific number of shares of stock.  For instance, on a penny stock, a Market Maker may quote a bid of $0.05 and a size of 10,000, meaning that you can sell up to 10,000 shares to the Market Maker at five cents a share.

What is the Ask?

The “ask” is the lowest price at which a Market Maker will sell a specific number of shares of stock.  The ask price is also known as the “offer” price.  The ask price is almost always higher than the bid price.  For example, on the same penny stock, the Market Maker may quote an ask of $0.06 and a size of 20,000, meaning that you can buy up to 20,000 shares from the Market Maker at six cents a share.

What is the Spread?

The spread is the difference between the bid and the ask price.  In the example above, the spread is $0.01.  Market makers make money on the difference between the bid price and the ask price.

In thinly traded markets where volume in a microcap stock is very low, the spread is higher.  When trading volume increases, more shares are bought and sold so a Market Maker will decrease the spread to encourage more volume.  Eventually, multiple Market Makers compete for business by constantly adjusting their bid and ask prices to facilitate trading.

DTC Eligibility and DTC FAST

As many shareholders in OTC Markets microcap public companies know, DTC eligibility is the process by which share certificates can be deposited at brokerage firms and publicly traded.   DTC FAST is what allows those same shares to be sent via “DWAC”–traded via electronic “book-entry” which does not require a paper stock certificate.

Difference Between Basic DTC Eligibility and DTC FAST

Basic DTC Eligibility (Paper Only)

Once a security is DTC eligible, DTC will accept physical stock certificates for deposit from brokers which are DTC participants. Those certs must then be deposited into a brokerage account in order to be cleared and sold.

Sometimes, the process of clearing and depositing a physical stock certificate can take weeks.  It can be frustrating for all parties.  After the stock is deposited with Cede & Co., (DTC’s nominee), those shares can be sold through the brokerage firm.

DTC FAST Eligibility (Electronic Book-Entry/DWAC)

If an Issuer is DTC FAST eligible, DTC will accept electronic “book-entry” deposits without requiring a physical stock certificate through its Deposit and Withdraw at Custodian (DWAC”) service. Brokers which are DTC participants can request that these DTC FAST eligible shares be sent via DWAC, directly from the transfer agent to the brokerage account.

With DTC FAST, this same stock may be deposited into the shareholder’s brokerage account within a day or two, rather than waiting weeks for the paper certificate to clear.

How Do I Become DTC Eligible?

Issuer’s seeking Basic DTC eligibility must be sponsored by a market maker (brokerage firm) that is a DTC participant.  This can be the same market maker which filed the Issuer’s 15c211, but it could also be another brokerage firm.

While all of the major brokerages which are household names are DTC participants, only a select few work with OTC Markets microcap companies.

How Do I Become DTC FAST Eligible?

Issuers which are already DTC eligible can seek to become DTC FAST qualified or “DWAC’able” by asking the Transfer Agent to submit a request to DTC.   The Depository Trust Company (DTC) reviews these DTC FAST requests on an individual basis before granting approval.   Sometimes these requests to become DWAC eligible are denied, based on one of several factors.

Issuers with questions about becoming DTC eligible or requesting DWAC or DTC FAST eligibility can contact securities lawyer Matheau J. W. Stout at (410) 429-7076 or via mstout@otclawyers.com.



What is the Role of a Market Maker Under Rule 15c2-11?

Market Makers File Form 211 With FINRA

If a private company is using Rule 15c2-11 to become public, the company first needs a relationship with a sponsoring Market Maker that can file the Form 211 application with FINRA.   An experienced securities attorney works with several Market Makers and can recommend one willing to offer sponsorship.

Just as the SEC can provide comments on an Issuer’s S-1 Registration Statement, FINRA may also have comments to the company’s Form 211 application.  When FINRA does have comments, the company’s securities lawyer and Market Maker must respond to them in a timely fashion.

Market Makers Obtain the Company’s Trading Symbol and Quote the Bid and Ask Price

After the question and answer process, if FINRA believes the company’s disclosures meet the requirements of Rule 15c2-11, FINRA assigns the company a “ticker” or trading symbol which will allow the sponsoring Market Maker to provide a bid and ask quote for the company’s stock.

Other Market Makers Can Piggyback to Quote the Company’s Stock After 30 Days

When the ticker symbol and initial quotations are in place, these will be found on  OTCMarkets.com.   After the company’s sponsoring Market Maker has published quotations for the company’s stock for 30 days, other market makers can “piggy back” in order to also publish quotations for the security without doing their own due diligence or submitting another Form 211.

Can Market Makers Charge Fees for 15c2-11?

Market Makers sponsoring companies by filing the Form 211 are technically not allowed to charge or accept a fee for work specific to 15c2-11.  As a practical matter, Issuers do pay fees for other services that are needed in connection with the Form 211, in the sense that Market Makers can refer the due diligence package to a securities lawyer of their choice, and Market Makers often also provide DTC eligibility consulting by working alongside a securities lawyer like Matt Stout in the process of helping companies become DTC eligible.

Matheau J. W. Stout works with Issuers seeking assistance in the 15c2-11 process and can help companies find Market Maker sponsorship for Form 211.  Companies with questions about the costs and timeline of going public by 15c2-11, or about the DTC eligibility process can reach Matt Stout at (410) 429-7076 or mstout@otclawyers.com.

What Does Caveat Emptor or Skull & Crossbones Mean on OTC Markets?

caveat-emptor The Caveat Emptor or “Buyer Beware” warning on OTC Markets means that there is  a public interest concern involving the Issuer, its Management or Securities.

Although the skull and crossbones implies that there is something possibly toxic about the stock, and looks scary, it really functions to alert the Issuer to provide documentation requested by a regulatory authority like the SEC in order to clear up what might just be a misunderstanding.

Caveat Emptor is Inevitable When Issuers Ignore SEC Inquires

In many cases, the existing Management or prospective Buyers of Caveat Emptor pubic vehicles will discover that the source of the skull and crossbones is a matter easily explained when a securities lawyer takes the time to follow the process.

Another way of looking at a Caveat Emptor is that the skull and crossbones is the inevitable result when an Issuer ignores an SEC inquiry, even if there is nothing whatsoever wrong.

Issuers Should Respect the Process and Hire Counsel to Respond

The difference between having a skull and crossbones for a few days or forever comes down to whether an Issuer respects the process enough to respond properly.  Hoping it will go away doesn’t work.  Management hiding their heads in the sand won’t remove it.

It is not the goal of the SEC, OTC Markets or any other organization to blacklist companies for life; those with good management and transparent numbers, that take the time and demonstrate good faith by cooperating fully are often rewarded quickly.  There is nothing to lose by responding and Shareholders have a lot to gain if the stock can start trading again.

Even if there was a legitimate public interest concern which caused the Caveat Emptor warning, once the Issuer takes affirmative steps to address past problems, it can distance itself from bad actors or past mistakes.   This process is all about disclosure, and more transparency is always better for both Management and Shareholders.

Pink Current Issuers who suddenly find themselves saddled with the Caveat Emptor badge should pick up the telephone and hire experienced securities counsel, who can coordinate the process of providing the regulatory authority with the information they need.

When is the Caveat Emptor Warning Removed By OTC Markets?

OTC Markets quoted companies may have the Caveat Emptor warning removed by providing their investors with detailed disclosures following the Alternative Reporting Standard.  This is accomplished by using either the OTC Markets Disclosure & News Service or, if the Issuer is an OTCQB, by becoming current again in their SEC filings.  Even after filings are brought current, OTC Markets may continue to mark an Issuer as Caveat Emptor if it believes there might still be a public interest concern.  For this reason, Issuers should specifically address any public interest concerns in their disclosures rather than trying to pretend it didn’t happen.

Experienced Securities Counsel for Caveat Emptor Vehicles

OTC Markets Issuers facing a Caveat Emptor situation should contact experienced securities legal counsel to discuss what is required to remove the skull and crossbones.  There are many reasons why the Caveat Emptor warning can be added to an Issuer’s trading symbol and the proper actions in response depend on why the Issuer was flagged.

Caveat Emptor May Create An Opportunity for Buyers of Public Vehicles

When existing Management of a Caveat Emptor vehicle gives up in frustration or chooses not to respond properly to an SEC inquiry, this can create an opportunity for a group with the money and patience to deal properly with any lingering public interest concerns.  Due diligence is essential in evaluating the difficulty of removing the Caveat Emptor warning, and this should be factored in when looking at a skull and crossbones vehicle that is for sale.

Management or Shareholders of OTC Markets skull and crossbones public vehicles can contact securities attorney Matt Stout at (410) 429-7076 for further information.

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.

What is Cede & Co in Relation to DTC?

When Issuers of OTC securities are reviewing their Shareholder lists, the free trading securities held by Shareholders that have already “cleared” and are in “the system” are shown as owned by Cede & Co.  Because of this, Issuers often wonder what Cede & Co is and how it is related to DTC.

Cede & Co is DTC’s Partnership Nominee

Once a certificate has cleared and deposited deposited by Direct Participants with DTC, all subsequent transfers of those securities are registered in the name of DTC’s partnership nominee, Cede & Co.

Cede & Co Does Not Affect Beneficial Ownership

The deposit of Securities with DTC and their registration in the name of Cede & Co. does not change beneficial ownership.   However, DTC has no knowledge of the beneficial owners of the securities once they are in Cede & Co’s name.

Instead, DTC’s records reflect only the identity of the broker-dealer, bank, trust company, or clearing firm to whose accounts the securities are credited.

While DTC does not track beneficial ownership, it is still the responsibility of the Direct and Indirect DTC Participants to maintain an account of their holdings on behalf of customers.

What is the DTC?

DTC eligibility is a concern of both OTC Issuers and their Shareholders since it determines whether or not an Issuer’s securities can be electronically traded through “book-entry” rather than through the movement of actual paper stock certificates.

If an Issuer’s securities are not DTC eligible, it is difficult to find a market for its shares.  Securities lawyers who practice OTC securities law are often asked questions about DTC eligibility and perhaps the most often is “What is the DTC?”

DTC is the World’s Largest Securities Depository

The Depository Trust Company (“DTC”)  is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).  DTC describes itself as “the world’s largest securities depository” and is structured as a limited-purpose trust company and classified as a “banking organization” under the New York Banking Law.

DTC is also a member of the Federal Reserve System, and a  “clearing corporation” under the New York Uniform Commercial Code, and a “clearing agency” registered under the Securities Exchange Act of 1934.

DTC Works With Broker-Dealer Participants Not Directly With Issuers

DTC holds securities of DTC eligible Issuers, provides asset servicing and also facilitates the post-trade settlement among Direct Participants of sales in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts.

DTC does not work directly with OTC public companies, but rather works through its participating broker-dealers, who sponsor the OTC Issuer’s for DTC eligibility.  These broker-dealers are known as DTC Participants.  Among this list of DTC Participants includes every major broker-dealer, and some smaller or lesser known broker-dealers which specialize in OTC Bulletin Board and OTC Markets securities, both in the US and abroad.

DTC Eliminates the Need to Deliver Physical Certificates

DTC’s book-entry transfers of securities essentially eliminates the need for physical movement of stock certificates for OTC Issuers that are DTC eligible.  Instead, DTC Participants essentially book the transactions electronically between one another and no transfer of physical certificates is necessary.   In addition to brokers and dealers, Direct Participants include both U.S. and non-U.S. securities banks, trust companies, clearing corporations, and certain other organizations.

Indirect Participants Also Have Access to DTC

DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries.

In addition to access by DTC Direct Participants, access to the DTC system is also available to others such as smaller U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”).

For this reason, even though Shareholders of OTC Bulletin Board and OTC Markets Pink Sheet stock might have a brokerage account at a little known firm specializing in over-the-counter stocks, these smaller firms clear shares through larger DTC Direct Participants.

The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission.  More information about DTC can be found at www.dtcc.com.

What are DTC Opinions of Counsel?

DTC Requests Legal Opinions from Outside Counsel

DTC evaluates securities for DTC eligibility on an individual, case-by-case basis.  After DTC has reviewed the information provided by the Issuer’s sponsoring broker-dealer/market maker (“DTC Particpant”), DTC decides whether or not a legal opinion from the Issuer’s outside counsel will be required to substantiate the legal basis for DTC eligibility.

Reasons DTC Can Request a Legal Opinion

DTC Opinions of Counsel are typically requested to confirm:
  1. that the registration requirements for the Issuer’s securities under the Securities Act of 1933 (“Securities Act”)  have been met; or
  2. that the securities are exempt from SEC registration under the Securities Act, under a recognized exemption that will not restrict the transfer and ownership of the Issuer’s securities; or
  3. that the Issuer’s securities are eligible for deposit for the appropriate DTC program under SEC Rule 144A or Reg S.

DTC Opinions are Required for all Securities With New CUSIP

DTC Opinions are also required for certain corporate actions or share reorganizations that result in the issuance of securities under a new CUSIP which will be held at DTC.

DTC can also request a legal opinion from outside counsel for any reason at its discretion in order to protect DTC and its DTC Participants from perceived risk .

DTC Eligibility Securities Lawyer

Matheau J. W. Stout, securities lawyer, drafts DTC Opinions of Counsel and DTC Eligibility Opinions for OTC Bulletin Board (OTCBB) and OTC Markets OTCQX, OTCQB and OTC Pink Sheets and can be reached at (410) 429-7076 with questions about the DTC Eligibility process.