Copyright (c) 2013 Hamilton and Associates Securities Law – brenda Hamilton
One of the most important considerations in going public transactions involves the ability of an issuer’s securities to trade electronically. The Depository Trust Corporation (DTC) is the only custodian of securities and is the only securities settlement provider in the United States. If an issuer’s securities are DTC eligible, it will hold an inventory of free-trading street name shares on deposit. These free-trading shares are also known as the “public float.”Issuers must satisfy DTCC’s criteria for their securities to be settled through DTC. Without DTC, for trades to be executed and settled, brokers must deliver physical stock certificates among buyers and sellers which can takes weeks.
After the purchase of a security occurs, the second portion of the trade transaction occurs. This portion is referred to as clearing. While brokers maintain individual books recording the entire amount of buy and sell orders transacted by their clients, DTC handles clearing of these transactions. Clearing trades involves the matching of the buy and sell orders in a security. Once the transactions are executed, details are sent to DTC, where they are recorded and matched for accuracy. After all the trades are matched for buys and sells, DTC notifies all member firms of their associated obligations, and arranges the transfer of related funds and securities. Thus, individual brokers are not dealing with one another astern every trade. Instead DTC serves as an intermediary that facilitates the convert about stocks and cash.
Typically, the DTC clearing policy takes three days to complete. When a security is not DTC eligible clearing occurs only upon physical elocution of the stock certificate representing the security from the seller to the buyer. Clearing without DTC eligibility through physical delivery is not a rapid process – it may take weeks to complete. Without DTC eligibility it is impossible for an issuer to establish liquidity in its securities.The DTC Eligibility ProcessOnly participants can request that DTC make a gage eligible.
The issuer of the securities appealing eligibility must locate an underwriter or other financial institution-sometimes a market maker- that is a DTC Participant and that is willing to sponsor the eligibility process.
General Document Requirements of DTC for Issuers
Whether at the point regarding initial offering or when the terms of an once desirable security are amended in a corporate action, underwriting may require the issuer to execute and cart joint documentation to DTC.
DTC Letters of Representations and Riders Requirements for Book-entry-only Securities Book-entry-only (“BEO”) securities are securities for which i) physical certificates are not available to investors and ii) DTC, through its nominee, Cede & Co., will hold the entire balance of the offering, either at DTC or through a FAST agent in DTC’s FAST program. Issuers from these securities must submit to DTC a Epistolography of Representations among the issuer, its Agent and DTC, to DTC prior to an issue being made eligible. An issuer may submit to DTC a Sheet Issuer Letter of Representations, which is issuer specific and proportional to all DTC eligible issuances of or by the selfsame issuer, or an Issuer Letter of Representations, which is specific to a one-time-only issuance.
Additional Requirements of DTC for Certain Securities Additional riders to the LOR are required for eligibility of multipotent securities. Some common examples where another riders are required include Rule 144A and Edict S securities, securities denominated or that have payments in non-U.S. currencies and securities of a U.K. issuer. All relevant CUSIP (or CINS) numbers must be listed on each applicable rider. The appendix forms may be obtained from DTC’s website.
Legal Opinions in DTC Matters Like described above, DTC evaluates issues for eligibility on a case-by-case basis and may claim the participant seeking to make a security DTC-eligible to provide an opinion from the issuer’s securities attorney regarding the security. Such opinions are typically requested to confirm either: (i) that the SEC registration requirements for that police have been met, or (ii) that the security was exempt from SEC registration by the Securities Act from 1933 under an acceptable exemption and that the security is not subject to transfer restrictions and is freely transferable. Opinions from the issuer’s securities attorney might also be requested in other circumstances, such quasi if an issuer changes its name or its form of organization in a corporate action and in exchange offers.
DTC and Unregistered Securities Opinions about counsel with respect to making unregistered securities eligible may be required in connection with the following transactions (among others):i. securities (either newly issued, those in the secondary market oppositely those issued in articulate with corporate actions) that are issued pursuant to an satisfactory exemption from SEC registration under the Securities Act; andii. the exchange of securities text to transfer restrictions represented by certificates bearing a restrictive legend for certificates not motif to assign restrictions with no restrictive legend (e.g., in reliance on the Securities Act Rule 144(b)(1)).
Foreign Issuers ampersand DTC Eligibility A inconsistent issuer may be required to prepare special representations or provide additional legal opinions to protect DTC and its participants from unmistakable risks associated with the laws under which the issuer is organized and/or the laws governing the securities. A foreign legal sophomoric will refer to relevant laws of the foreign dominion in which the foreign issuer is organized.
Maturity Revisions of Eligible Securities & DTC Eligibility DTC cannot effect changes on its records to the conditions and conditions of an outstanding security without the lawful instruction and proper authorization from the issuer of the respective security. When the maturity of an question is amended, the issuer must provide DTC with an indemnity letter, which instructs DTC to attain relevant changes to the terms ampersand conditions of the affected security, at the chance such changes are duly authorized.
DTC Requirements for Rule 144A et cetera Regulation S Securities To lift restrictions qualified to securities which DTC has initially accepted as competent pursuant to Rule 144A and/or Regulation S on the grounds that the original restricted and/or distribution compliance period imposed under such exemptions has elapsed, the issuer of the securities must provide an instruction letter to DTC. The instruction letter confirms to DTC that the segregated period and/or distribution compliance period has elapsed furthermore supports the exchange of the formerly restricted securities represented near a restricted CUSIP number for new unrestricted securities of the same issue represented by an unrestricted CUSIP number.DTC retains the right to deny any issuer the ability to use their depository for any reason at their discretion without notice or explanation to the issuer. For this reason, before an issuer applies for eligibility, it mold provide information to DTC concerning the original issue date of its free trading shares, the holders and transferees as well as the categorical consideration provided for any free trading shares.
Fast Tracking the DTC Process Factors that will quicken the DTC passage are:
♦ being an SEC reporting issuer and not missing or being recent with any reports;
♦ having very limited name changes else converse splits;
♦ the issuer not using service providers that are unscrupulous stock promoters or, lawyers or accountants that have been under SEC investigation or the subject of SEC actions that may have resulted in injunctions, penny stock bars, cease and desist orders, fines connective disgorgement or criminal convictions involving securities fraud;
♦ neither going public through a reverse merger with a public shell company;
♦ having no record of being involved in a spam campaign, pump and dump scheme, or other fraudulent activities that would raise Anti Money Laundering or Office of Foreign Equity Control issues; and
♦ having no preserve of unregistered securities sales, especially by affiliates. The solution for issuers seeking DTC eligibility is for the issuer to file a registration statement under the Securities Act of 1933. Issuers without potential underwriters can register securities in a focus public offering.
Issuers expecting to obtain and maintain DTC eligibility need to recognize that it is more quagmire supposing they go public in a reverse merger transaction with a civil pod company because of the perceived fraud associated with defeat coalescent companies. Additionally, they should avoid using the services of securities professionals who have been the subject of SEC investigations and enforcement actions. The key for corporations concerned about DTC eligibility is SEC registration.