DTC Eligibility and the OTC Issuer (Part 3)

This is the third in a series of articles I am writing regarding DTC (Depository Trust Company) eligibility for OTC (Over the Counter) Issuers. OTC Issuers include all companies whose securities trade on the over the counter market, including the OTCBB, OTCQB and Pink Sheets.  All technical information in this article comes from the DTC website.

DTC Eligibility

As detailed in my first two articles in this series, in order to become and remain DTC eligible, and Issuer must have a transfer agent that has completed and has on file with DTC a DTC Operational Arrangements Agent Letter.  In addition, all Issuers must meet the requirements set forth in the DTC Operational Arrangements (OA).  This article begins to discuss the OA necessary for an Issue to become and remain eligible for DTC service.  Moreover, the OA rules relate to and regard all Issuers.  This article will only discuss those rules and requirements for OTC Issuers.

The DTC OA states:

“Generally, the issues that may be eligible for DTC’s book-entry delivery and depository services are those that: (1) have been registered with the United States Securities and Exchange Commission (‘SEC”) pursuant to the Securities Act of 1933, as amended (“Securities Act”); (ii) are exempt from registration pursuant to a Securities Act exemption that does not involve transfer or ownership restrictions; or (iii) are eligible for resale pursuant to Rule 144A or Regulation S (and otherwise meet DTC’s eligibility criteria).”

Applying to DTC

To be eligible, all Issuers, through their applying Participant, must submit the following minimal documentation: (i) an offering document; and (ii) a completed eligibility questionnaire signed by a Participant.

For Book-Entry-Only (“BEO”) securities, in addition to the 2 documents above, an Issuer must provide a DTC Letter of Representation among the Issuer, its transfer agent and DTC.  The Letter of Representation may be a blanket letter, which is Issuer specific and covers all securities by that Issuer or an Issuer Letter of Representation which is used for one time only issuances. Book-Entry-Only (“BEO”) securities are securities for which no physical certs are made available and all securities are maintained by DTC in a Cede & Co, account.  Transactions are made through the FAST program.  Most OTC Issuer securities are not BEO.

DTC Legal Opinion Letters

DTC may request a legal opinion.  Generally such opinion is to confirm either (i) that the SEC registration requirements have been met, or (2) that the security was exempt from SEC registration when issued and is not freely tradeable.  However, DTC can request opinions on other matters, such as when an Issuer changes its name or goes through a reorganization such as a reverse merger.  Foreign Issuers are generally required to provide legal opinion letters.

Although many practitioners believe that DTC rules and eligibility requirements have changed in the past year, in actuality the current rules have been in effect since October 2009.  It is my belief that the examiners response to applications, including the review and comment of applications, has become stricter and more particular in the past year.   That is, the rules haven’t changed, but the application and enforcement of such rules certainly has.

Satisfying DTC Requirements

In particular, Issuer’s are now being required to produce the offering document.  For Issuer’s attempting to make existing securities DTC eligible, it may be difficult, if not impossible, to obtain a copy of an initial offering document.  For example, if an Issuer went public via 504 prior to the 1999 rule changes and subsequently became reporting via a Form 10 (which is not an offering document), the original offering document may have been destroyed, if one ever existed.  In this case, the Issuer will have to work with DTC to provide information satisfactory to their counsel that the securities are indeed free trading and therefore DTC eligible.

Accordingly, it is very important for an Issuer to hire professionals that are familiar with the rules, and who will assist in making sure applications are thorough and complete.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.


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