What is DTC Eligibility?

DTC, or Depository Trust Company, founded in 1973, is the largest depository globally with over thirty-five trillion dollars worth of securities on deposit. It operates a securities settlement system and provides services, including depository and book-entry services. Other services also include dividend and interest payments, tender and rights offers, and corporate reorganizations events like a name change, reverse splits, mergers, bankruptcy, etc.

DTC Eligible securities are freely tradable securities of a public company that become eligible to be deposited into the DTC. Any company planning to go public or host a liquidity event for their investors must procure DTC eligibility, without which shares cannot trade easily. Once securities are DTC eligible, brokers can process and clear transactions, allowing issuers to save on clearing and broker fees, enhance their liquidity, and improve their market visibility.

DTC Eligibility facilitates:

  • Stock certificate deposits into individual brokerages,
  • Reduction in broker processing fees,
  • Elimination of printing excessive physical stock certificates by using electronic processing between brokers and DTC,
  • Reduction in costs that are associated with courier shipments,
  • Increased funding opportunities from lenders, investment bankers, as well as investors, and
  • Easy transfer of ownership of securities between brokers.

Lead managers, underwriters, placement agents, market players, and clearing firms directly or indirectly partnered with DTC can use their services. Since a company cannot directly apply for DTC Eligibility, they will need a transfer agent to apply on their behalf. The agent helps simplify the complicated and confusing process of obtaining DTC Eligibility, ensuring your securities are registered promptly.

Under the Eligibility program, DTC Participants can submit new and secondary security offerings eligibility requests. Since issuers do not need to complete the offering or have a ticker symbol before requesting DTC Eligibility, they can apply during the offering process, saving time. OTC Bulletin Board and the Pink Sheet markets do not require DTC eligibility; only significant exchanges such as NYSE and NASDAQ do. The DTC participant must submit corporate or municipal debt or retail certificate of deposit on behalf of the Issuer. Additional requirements include securities offering data and offering documentation under the Securities Act of 1933 or issued in an offering exempted from registration or is resold according to Rule 144A, or Regulation S. Examples include a prospectus, official statement, the offering memorandum.

DTC has the right to deny its services without providing a reason. Therefore it is crucial to present only facts according to the standards laid out by DTC. DTC owns the authority to restrict an issuer’s securities, referred to as “chill,” until the Issuer or its transfer agent clarifies the underlying problem. DTC permits eligibility requests for an older offering, and Colonial Stock Transfer can help you with this and much more.

What is the Typical Process for DTC Eligibility?

Trading securities is only one part of the process for successful stock trading. The Depository Trust Commission (DTC) Eligibility is another important step in order to ensure that a particular security can be traded. DTC Eligibility is a designation that allows DTC to process securities transactions, such as stocks and bonds, so that they can be bought and sold without a physical stock certificate changing hands. To become DTC eligible, the security must meet certain criteria outlined by the DTC.

  1. The first requirement for DTC eligibility is that a company must send in an application sponsored by a DTC participant. Any company issuing stocks through NASDAQ and NYSE, for instance, must be approved by the DTC for eligibility. This includes companies that are publicly traded, as well as private companies that are looking to become publicly traded.
  2. The second requirement is that the company must have freely tradable securities, meaning they’ve been registered with the Securities and Exchange Commission (SEC). This is important for ensuring that all buyers of the stock are fully informed about their potential risks and rewards.
  3. The third requirement is that a company must have at least one shareholder that’s ready to transfer those stocks into the DTC System. For instance, if a company has been approved for DTC eligibility, but there are no buyers ready to buy the stocks yet, then the securities cannot be processed through the DTC system.
  4. Finally, an issuer of stock might need to submit a letter to finalize the process.

What Types of Documents Do You Need To Apply for DTC Eligibility?

As you go through the process of applying for DTC eligibility, there are different documents that the underwriting department may request. The exact documents requested will depend on the nature of your application. Some of the documents that they may request include:

  • An offering document
  • A completed eligibility questionnaire that has been signed by the participant
  • A DTC Letter of representation, which may be a blanket letter or a letter used only for one-time issuances
  • A rider, which is typically required only for Reg S and non-US issuing companies

Because the DTC eligibility application process can take a while, it is important to have all of these documents ready ahead of time. You may not know exactly what documents the DTC underwriting department is going to ask for, but if you have these documents ready ahead of time, you may be able to expedite the application process. If you work with a reliable transfer agent service, you can streamline the application process and ensure all documents are ready to go.

How Long Does the DTC Application Process Take?

Generally, the process will take a few weeks. It depends on how complicated the application is, how much documentation they need to review, and whether your documents are filled out accurately. If you want to expedite the process, you should work with a transfer agent service that can review your documents ahead of time to make sure they have been filled out appropriately.

What Are the Most Common Reasons Why DTC Applications Are Rejected?

There are several reasons why DTC eligibility applications are rejected. Some of the most common reasons include:

  • The application has a long history of late filings.
  • There have been a lot of name changes in the past, which can make it hard for the DTC underwriting department to ensure transparency.
  • There is an extensive history of reverse splits during the last five years, which could indicate that the company has liquidity issues.
  • The company has a history of being associated with lawyers, stock promoters, and accountants who have been under investigation or sanctioned by the SEC.
  • The company behind the application, or certain members of the leadership team, have been involved in pump-and-dump schemes in the past.
  • Affiliates tied to the application have a history of being involved in unregistered re-sales at outside brokerage firms.

It is important to note that the DTC underwriting department has accepted applications with these types of issues in the past; however, if your company has a history of these issues, it could hinder the approval process.

Ultimately, each application is reviewed on a case-by-case basis. If you believe your application will have these issues, you should work with a professional service that can help you identify ways to mitigate these problems and place your application in the best position possible to be successful. That is another reason why you should work with a professional transfer agent service.

Making the Process Easier

Working with a stock transfer agent can help make the process of becoming DTC eligible much easier. Transfer agents are responsible for managing a company’s stock records, which includes issuing and transferring securities, as well as tracking who owns what. Colonial Stock Transfer is a stock transfer agent and can help manage the paperwork involved with becoming DTC eligible, such as filing applications with the SEC and coordinating with the DTC.

Becoming DTC eligible is a big step in attracting more investors and working toward becoming listed on the NASDAQ or NYSE, and working with a transfer agent can help make the process quicker, easier, and more efficient. By taking these necessary steps to become DTC eligible, companies will be able to open up their trading opportunities to a much larger pool of potential investors.

Apply for DTC Eligibility

To obtain DTC eligibility, Colonial Stock Transfer can help submit your DTC eligibility applications for standard eligibility or DTC FAST/DWAC eligibility.  We have the experience and expertise to help companies become DTC eligible. We are dedicated to helping our clients navigate through all of the necessary steps in order to make their stocks eligible for trading on popular stock exchanges. Please contact us for more information or to get started.

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