This is the second in a series of articles 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 blog comes from the DTC website.

DTC Requirements for Eligibility

As discussed in my first article on this topic, Issuers, a sponsoring DTC Participant Member must make application to become DTC eligible.  The DTC Operational Arrangements criteria (available on the DTC website) set forth in-depth requirements for eligibility, which will be discussed in a separate articles in this series on DTC eligibility.  In addition to the Operational Arrangements, in order to be DTC eligible, an Issuer’s securities must:

(i)            be issued in a transaction registered with the SEC under the Securities Act of 1933, as amended (“Securities Act”);

(ii)        be issued in a transaction exempt from registration under the Securities Act and that at the time of seeking DTC eligibility, are no longer restricted; or

(iii)       be eligible for resale pursuant to Rule 144A or Regulation S under the Securities Act.

Commonly Requested Issuer Documentation

At the time of application, or during the review of the application, the DTC may request documentation from the Issuer.  The following is a list of the most commonly requested documents.  Further discussion of these documents will be in future blogs in this series.

Although DTC may request additional documents (such as Indemnity letters for tax consequences of a REIT or bond maturity or instruction letters on a Reg A offering), such documents are rarely relevant to an OTC Issuer and accordingly, will not be further discussed.

Letters of Representation and Riders

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.  For BEO securities, 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 only time only issuances.  DTC may request a rider as well.  Generally, riders are required for extra-ordinary situations, such as Regulation S or non U.S. Issuers.

Legal Opinions

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 undergoes reorganization such as a reverse merger.

Foreign Issuers are almost always required to provide legal opinion letters.

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.

This is the first 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 PinkSheets.

DTC eligibility has become a major concern for OTC Issuers in the past year.  Obtaining and maintaining eligibility is of utmost importance for the smooth trading of an Issuer’s float in the secondary market.  Moreover, DTC eligibility is a prerequisite for OTC Issuers’ shareholders to deposit securities with their brokers and have such securities be placed in street name.  Most Issuers and many legal practitioners do not know or understand the eligibility requirements or procedures.

The DTC Application Process

First and foremost, like a Form 211 submittal to FINRA, an Issuer cannot make direct application to DTC for eligibility.  An application must be submitted and sponsored by a DTC Participant.  A current list of DTC Participants can be found on the DTC website.  So to start, an Issuer needs to establish a relationship with one of these participants.  A Participant can submit an application for a new offering or for a security that has already been issued and is already trading on the OTC market.  Note that already traded securities will be reviewed for eligibility following a reorganization, such as a reverse merger.

Prior to submittal of the application, the Issuer must have a transfer agent and that transfer agent must have a completed DTC Operational Arrangements Agent Letter on file with DTC and must be participating in DTC’s Fast Automated Securities Transfer (“FAST”) program.  Accordingly, and obviously, this is one of the first questions an Issuer should ask when choosing a transfer agent.

Transfer Agent Attestation Form

In instances where the Issuer’s securities are already issued and outstanding (not a new offering), the Participant will need to submit a copy of the physical certificate and a Transfer Agent Attestation Form.  Please note that the documents referred to in this blog are available on the DTC website and must be submitted in exactly the form provided.  Most of the forms are simple PDF applications that can be uploaded or printed directly from the website.

Note that virtually all DTC eligibility requests, whether for new or already existing securities, require a copy of the offering documentation to be provided to DTC for review.  Accordingly, and obviously, when conducting due diligence on a public shell prior to a reverse merger, acquisition, or other such reorganization transaction, it is important to ensure that such documentation is available or that the shell is already DTC eligible.

DTC Participants Must Answer Comments

A DTC eligibility application will be reviewed for completeness and subject to comments.  It is the responsibility of the Participant sponsoring the application to address the comments and provide all information requested.  An Issuer should work closely with the Participant to make sure all information is accurate, complete and up to date.

Once DTC has identified the legal basis for eligibility of the security, it will notify the Participant whether a legal opinion letter is necessary.   Legal opinion letters must be provided by an experienced securities attorney, properly licensed in the subject jurisdiction and in good standing with their bar association.  Letters will not be accepted from in house counsel and the opining attorney may not have a beneficial ownership interest in the security covered by the letter and may not be an officer, director or employee of the Issuer.

In the next blog I will begin to discuss specific DTC eligibility requirements.

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.