DTC Eligibility Q&A

Creating Liquidity with Electronic Trading

The Depository Trust and Clearing Corporation (“DTCC”),
through its subsidiaries, provides clearing, settlement and
information services for securities. DTCC’s subsidiary, the
Depository Trust Company (“DTC”), was created to improve
efficiencies and reduce risk in the clearance and settlement of
securities transactions. Not all securities are eligible to be
settled through DTC. DTC eligibility has often become an
unexpected burden for companies in going public transactions.

Issuers must satisfy the criteria set by DTCC to be settled

through DTC. All companies must satisfy this criteria in order
to be DTC eligible, including both Securities and Exchange
Commission (“SEC”) reporting and non-reporting issuers. This
presentation discusses the most common questions we receive
about DTC eligibility has become a growing concern in going
public transactions.
 What Is The Depository Trust
Company (“DTC”)?
DTC is the only stock depository in the United States.

Why Is DTC So Important To Public

Companies?
When DTC provides services as the depository for a company’s shares, the
shares can be traded electronically. Without DTC-eligibility, it is almost
impossible for an issuer to establish an active market in its shares.
 How Do Public Companies Obtain
DTC Eligibility?
Issuers must satisfy specific criteria to receive initial DTC eligibility and
remain DTC eligible. Even after those securities become eligible, DTC
may limit or terminate its services.

How Does DTC Limit Its Services?

DTC limits its service by placing a chill (“DTC Chill”) on a security and
terminates its services by placing a lock (“Global Lock”) on the security.
Is There A Conspiracy Between The DTC
And The SEC To Eliminate All Small Cap
Public Companies By DTC Placing
Global Locks And Chills On Their
Securities?
When DTC eligibility is limited or terminated, issuers and their securities
attorneys often scream foul play, asserting various conspiracy theories, each
more ludicrous than the last. We have all read about issuers who
self-righteously proclaim that their loss of eligibility was due to conniving
short sellers, nefarious clearing firms and the purported “agenda” of the
SEC to eliminate small broker-dealers and microcap issuers.

The reality is that microcap issuers lose DTC’s services for three legitimate
reasons: failures to cover, illegal issuances of free trading securities and
fraudulent investor relations activity.
 If I Obtain A Legal Opinion, Will I Get
DTC Eligibility Back For My Company?

Not if the opinion is legally flawed. Many officers and directors of

microcap companies are facing the harsh reality that reliance upon a
legal opinion will not enable them to get a Chill or Global lock removed.
DTC reserves the right to refuse to rely upon the opinion of any issuer’s
securities attorney. In the last few years, the SEC has brought multiple
enforcement actions against attorneys in connection with tradability
opinions rendered for microcap issuers. Often, these actions are
preceded by a loss of eligibility.
 What Is DTCC’s Office Of Corporate
And Regulatory Compliance And What
Do They Do?

DTCC’s Office of Corporate and Regulatory Compliance monitors

unusually large deposits of microcap securities that are deposited into
DTC when there is a suspicion or indication that the issuer or persons
associated with the issuer have violated the securities laws. With
Microcap stocks, this behavior typically involves the deposit of large
blocks of illegally unrestricted securities rendered in connection with
convertible notes, reverse merger transactions or Rule 504 offerings.
 Does FINRA Have Anything To Do
With All The DTC Chills?

A review is also prompted when issuers provide notice to the Financial

Industry Regulatory Authority (“FINRA”) pursuant to Rule 6490 of
certain corporate actions. While FINRA examines the corporate action
prompting the notice under Rule 6490, DTC reviews matters related to
the issuer’s shares, including the tradability of the securities it holds on
deposit in the name of CEDE & Co. DTC staff may discover (previously
undetected) illegal free trading share issuances or other fraudulent
activity that will persuade them to limit or suspend its services. In these
instances, DTC may make referrals to appropriate regulators, including
the SEC’s Division of Enforcement.
 How Will A DTC Chill Or Global Lock
Impact Trading Of My Company’s
Stock?
A Chill restricts DTC’s services, including limiting a participant’s ability to
deposit or withdraw chilled securities. A Chill may last a few days or for an
extended period of time, depending upon the problems that caused the Chill
and the issuer’s willingness to address them. A “Global Lock” is a
termination of all of all services to an issuer. Like a Chill, a Global Lock
may last a few days or for an extended period of time, depending on the
reason for the action. If the fundamental issue cannot be corrected, then the
security will be removed from its depository, and transactions in the
security subject to the Global Lock will no longer be eligible for clearing at
any registered clearing agency. When this happens, clearance and
settlement of open market trades are significantly delayed because trades
can only occur upon physical delivery of stock certificates between the buyer
and seller’s brokerage firms. In such circumstances, it could take weeks for
trades to clear and settle.
 Will DTC Tell Me Why My Stock Is
Chilled?
DTC does not always disclose the reason for a Chill or Global Lock, nor
does it suggest how long it will be in effect.

Where Can I Find A List Of Chilled

Stocks?
DTC Chills and Global Locks are publicly announced on the DTCC website.
Who Can Help Me Remove A DTC Chill?
Generally, two people are needed to help an issuer remove a Chill: a
securities attorney acceptable to DTC, who can render a tradability opinion
concerning the issuer’s unrestricted shares, and a DTC Market participant,
who can ask that DTC provide its services with respect to the security.
Anyone else claiming he can secure eligibility or remove a Chill is not
qualified to do so.

Will DTC Ever Remove A Chill Or

Global Lock?
Yes, DTC Chills and Global Locks have been removed from multiple public
companies. In some circumstances, DTC obtains additional information from
the issuer and an opinion from its securities attorney regarding the activity
in question.
 What Are The Fairness Procedures
That Apply To DTC?

On September 24, 2009, the SEC determined that DTC must provide
issuers with fairness procedures, adding further that the suspension of its
services to an issuer is subject to SEC review upon request. Unfortunately,
the SEC has not precisely defined adequate fairness procedures. Even with
a fairness hearing, there can be no assurance that DTC will resume its
services for an issuer’s securities; it continues to have a broad discretion
with respect to its services.
 What Should I Do If I Want To Get
DTC Eligibility Or Have A DTC Chill
Removed?
Because the DTC may refer securities violations that it discovers to the
SEC’s Division of Enforcement, issuers should consult with a securities
attorney at all stages of the DTC process, particularly when information
must be provided by the issuer. The selection of a securities attorney to
address problems (and potential problems) should not be considered a
routine legal matter. Issuers expecting to obtain and maintain eligibility
need to recognize that their securities could become subject to a DTC
Chill if they go public in a reverse merger or use the services of securities
professionals - including unregistered brokers, investor relations firms,
transfer agents, and, even securities lawyers - who have been the subject
of SEC investigations and enforcement actions.
For further information about this securities law Q & A, please
contact Brenda Hamilton, Securities Attorney at 200 E. Palmetto
Park Rd., Suite 103, Boca Raton Florida, (561) 416-8956, or
info@securitieslawyer101.com. This securities law blog post is
provided as a general informational service to clients and friends
of Hamilton & Associates Law Group, P.A. and should not be
construed as, and does not constitute legal advice on any specific
matter, nor does this message create an attorney-client
relationship. Please note that the prior results discussed herein do
not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers

Brenda Hamilton, Going Public Attorney
200 E. Palmetto Park Rd., Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com
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