Cry Me A River – DTC Chills & Global Locks – Going Public Attorneys
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 by allowing securities transactions to be conducted electronically. Without DTC eligibility, it is almost impossible for a company to establish an active trading market for its shares. To have DTC eligibility, a company must satisfy the criteria set by DTCC to be settled through DTC. In addition, a company must satisfy the criteria established by DTC to remain DTC eligible. If they fail to do so, DTC will limit its services and issue a DTC Chill or terminate its services and issue a global lock.
A “DTC chill” restricts DTC’s services, including limiting a DTC participant’s ability to make a deposit or withdrawal of a Chilled security. A DTC Chill may be for a few days or an extended period of time depending upon the reasons for the Chill and whether the issuer rectifies the cause of the chill. A “DTC freeze” or “Global Lock” is a termination of all of DTC’s services to an issuer. Like a chill, a freeze may last a few days or an extended period of time depending on the reason for the freeze. If the cause for the freeze cannot be corrected, then the security will be removed from DTC and transactions in the security subject to the freeze will no longer be eligible to be cleared at any registered clearing agency.
DTC places chills and freezes on securities for various reasons including legal, regulatory or operational problems with a security or trading or clearing transactions in the security. DTC may chill or freeze a security when it suspects that some or all of an issuer’s “free trading” securities were issued or transferred in violation of state or federal securities laws. For example, DTC Chills often follow reverse mergers involving public shell companies where there are large issuances of unregistered “free trading” securities being issued or exchanged. DTC Chills and Global locks frequently follow the issuance of unregistered securities offerings which result in the issuance of “free trading” securities. A DTC Chill or Global Lock may also be imposed if there is an indication of manipulative activity in an issuers securities such as spam email campaigns.
Since FINRA Rule 6490 become effective, some issuers have lost DTC eligibility upon notifying FINRA of corporate actions such as name changes or stock splits. This is because DTC may undertake a review and identify improperly issued and/or illegally free trading shares or other violations of the securities laws.
The key maintaining DTC eligibility is simple. The company should:
- Engage a reputable transfer agent to avoid operational problems with its securities;
- Comply with the SEC registration requirements and avoid issuing unregistered securities to dilution funders in reliance upon Rule 504 and Section 3(a)(10); and
- Avoid activity designed to manipulate the trading of its securities such as spam email campaigns.
The solution to a DTC Chill or Global Lock can vary depending upon the particular facts causing the chill. Often it is necessary to trace the issuance and tradability of all shares in the issuer’s public float and explain how the shares became free trading securities. In order to do this, it is critical that the issuer engage a competent securities attorney to review prior issuances and related legal opinions. While DTC Chills and Global Locks are almost always devastating to a public company, often DTC’s services can be restored.
Hamilton & Associates has successfully assisted numerous issuers in obtaining initial eligibility as well as restoring eligibility after a DTC Chill or Global Lock.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group 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, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855