Tag Archives: DTC legal opinion

What is a Reverse Stock Split?

A reverse stock split is a FINRA corporate action which, once approved, reduces the number of shares and causes a temporary proportionate increase in the per share price.

In theory, a reverse stock split is supposed to have no effect on the value of a shareholder’s stock in the Company.  However, following a reverse stock split, many Issuers do not maintain their post-reverse share price, since eventually the market will determine where it lands.

A reverse stock split would follow these steps:

  1. Shareholders vote to reverse split the stock in order to increase share price in the hopes of attracting institutional investors who might otherwise shy away from the Company based on its sub penny stock price.  SEC filers will use the Form 14 at this stage.
  2. Board of Directors approves a reverse stock split and authorizes management to file the appropriate documents with the State and FINRA.
  3. CEO files a Certificate of Change/Amendment (in Nevada, for instance) which details the amount of the reverse split and the proposed effective date, which is usually at least ten days hence.
  4. Issuer counsel files for a new CUSIP.
  5. Issuer counsel files for a new Corporate Action with FINRA and provides all of the supporting shareholder and Board documentation to show approval.
  6. Company announces the proposed reverse split in a news release, 8-K, etc.
  7. FINRA reviews and approves the reverse stock split if all of the necessary corporate formalities have been followed.
  8. DTC requires a legal opinion from outside securities counsel on the new, post-reverse-split shares.

OTC Markets companies considering a reverse stock split, name change, forward split or other FINRA corporate action can contact securities lawyer Matt 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 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.