DTC Eligibility

DTC eligibility allows public companies to deposit their securities through the DTC. It is the largest securities depository in the world and holds over thirty-five trillion dollars worth of securities on deposit.  The company accepts securities deposits only from its members, primarily clearing firms. Most brokers clear stock in-house or hire a clearing firm to deposit securities on their behalf. All securities transactions are electronic with book-entry adjustments. Non-eligible issuers cannot transfer their shares between brokerage accounts electronically, which makes trading shares more difficult.  Larger exchanges such as the NYSE and AMEX require DTC eligibility. Smaller entities such as the OTC Bulletin Board (OTCBB) and other networks run by the over-the-counter markets do not.  Only DTC participants can request that the DTC make securities eligible. Most large U.S. broker-dealers and banks are DTC participants.

DTC Eligibility Process

For OTC securities, once an issuer has been approved for trading by FINRA, they must apply to DTC for their initial eligibility to trade securities.  If DTC approves the application, they will hold all of the issuer’s free-trading, or street name, shares on deposit. These shares become the company’s “float.”  As with a Form 211 submission to FINRA, an issuer cannot make a direct application to the DTC for eligibility. The issuer must first have a relationship with a broker-dealer or other financial institution (called a market-maker) that is a participant and will sponsor the eligibility process. They carry the initial position in inventory on behalf of their firm. Lastly, the issuer must also have a transfer agent that has completed and has on file with DTC a DTC Operational Arrangements Agent Letter (available on the DTC’s website).  For NASDAQ and NYSE issuers, the companies must also subscribe to DTC’s FAST (Fast Automated Securities Transfer) and DRS (Direct Registration System) program. Transfer agents that are considered limited participants in DTC’s FAST and DRS systems can submit the FAST and DRS applications. A list of DTC Participants is available on DTC’s website.

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Possible Document Requirements for Issuers

Whether at the point of initial offering or when the terms of an already eligible security are amended, the DTC’s underwriting department may require the issuer to execute and deliver related documentation including but not limited to the following:

  • an offering document
  • a completed eligibility questionnaire signed by a DTC participant
  • For book-entry-only (BEO) securities, in addition to the two documents above, an issuer must provide a DTC Letter of Representation. The Letter of Representation may be a blanket letter, which is issuer specific and covers all securities by that issuer, or used for only one-time issuances.
  • Book-Entry-Only (“BEO”) securities are securities for which no physical certificates are made available and all securities are maintained by DTC in a “Cede & Co” account.  Transactions are made through the FAST program. Most OTC issuer securities are not BEO.
  • The DTC may request a rider, usually only required for REG S or non-U.S. issuers.

See also our DTC Forms page for more information.

Streamline

Streamline the process of becoming a DTC eligible issuer, ensuring you meet the requirements and fill out all required forms

Apply for DTC Eligibility

We can submit all three DTC applications for you: DTC eligibility, FAST, and DRS.

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Assess the benefits and drawbacks of DTC eligibility and determine if it’s the right option for your company

More Eligibility Requirements

DTC reserves the right to deny a company the use of their depository without providing reasoning.  Therefore, to successfully become DTC eligible, the review process should include a clean presentation of facts and documents that meet the DTC’s requirements. Eligibility requirements include that the securities must be:

  1. Issued in a transaction registered with the U.S. Securities and Exchange Commission (SEC) pursuant to the Securities Act of 1933
  2. Issued in a transaction exempt from registration per the Securities Act of 1933, that at the time of the request for DTC eligibility no longer involves transfer or ownership restrictions
  3. Eligible for resale pursuant to Rule 144A or Regulation S under the Securities Act of 1933, and compliant to the DTC’s requirements

Maximizing Your Chances to Become DTC Eligible

Below are some tips on how to maximize your chances to gain DTC eligibility. It is not necessary, but strongly recommended, to meet these criteria

  1. The company has a strong reputation with the SEC, with no history of late filings.
  2. It should have a minimal history of name changes and/or reverse splits in the last five years prior to the eligibility application.
  3. The company should have no persons associated directly or indirectly (stock promoters, lawyers, accountants) that have ever been under investigation by the SEC.
  4. If the DTC requests a legal opinion, it should be written by a reputable licensed securities attorney. In most cases, the DTC does not trust the opinions of in-house counsel. Further, the DTC requires that the securities lawyer writing the opinion not be a shareholder of the issuer; they reserve the right to approve this legal counsel.
  5. The issuer should have no record of being involved in a spam campaign, pump and dump scheme, or any history of fraudulent activity since its inception.
  6. Affiliates of the issuer should have no record of unregistered re-sales at any brokerage firm.

DTC FAST & DWAC Eligibility

Shareholders can now hold their shares at transfer agencies in electronic book-entry form rather than in physical certificate form. DWAC allows the transfer of shares from a transfer agent to a broker without having to first go through the DTC, which is efficient and provides many benefits to shareholders and issuers. These include:

  • Elimination of lost certificates fees
  • Reduction of broker processing times and elimination of resulting processing fees
  • Issuers do not have to pay for printing stock certificates
  • No courier shipment fees
  • More funding opportunities from institutional investors, lenders, and investment bankers

Contact us to learn more about becoming a DWAC eligible issuer.

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