What Causes a DTC Chill? Going Public Lawyers

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 and issuers must satisfy the criteria set by DTCC to be settled through DTC. All public companies- SEC reporters and non-reporters alike- are subject to these rules. Once they qualify, they must continue to meet DTC standards in order to maintain eligibility.

Meeting these criteria- once relatively simple- has become increasingly complicated in recent years. It can be an unexpected legal and compliance cost for many issuers, and a challenge for SEC attorneys not familiar with DTC procedures.

When microcap issuers encounter problems with securities on deposit at DTC, DTC may limit or terminate its services. 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 chill may be imposed for a few days or an extended period of time depending on the nature of the problem and whether the issuer or transfer agent is able to rectify it.  A “DTC freeze” is the 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 underlying problem 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 for clearing by any registered clearing agency.

DTC places chills and freezes on securities for various reasons; these may include legal, regulatory or operational problems with a security or issues with trading or clearing transactions in the security. DTC chills and freezes occur when there is a suspicion or indication that the issuer or persons associated with the issuer have violated the securities laws. DTC may act 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 featuring the issuance or exchange of large quantities of unregistered “free trading” securities.  Additionally, DTC Chills often follow offerings made purportedly under Rule 504 of Regulation D which illegally result in the issuance of “free trading” securities.

DTC may also chill a chill on a security because the issuer no longer has a transfer agent to facilitate the transfer of the security or the transfer agent is not complying with DTC rules regarding transfers.

DTC does not always disclose the reason for a chill or freeze, or announce how long it will be in effect.  DTC chills and freezes are publicly posted at http://www.dtcc.com/legal/imp_notices.

Often issuers lose DTC eligibility upon notifying the Financial Industry Regulatory Authority (“FINRA”) of corporate actions such as name changes or stock splits which results in a review of stock issuances and other activities.

Factors that may cause the loss of DTC eligibility include:

i. having multiple name changes and reverse splits;

ii. improperly issuing free trading shares that have not been registered with the SEC in reliance upon Rule 504, 144 or upon conversion of debt;

iii. engaging in a reverse merger with a company that has been involved in a state receivership or custodianship action or other action which resulting in a state court order to obtain control of a public shell company;

iv. engaging in a reverse merger with a public shell company which resulted in the issuance or transfer of unregistered free trading shares;

v. being involved in improper investor relations activities including spam campaigns, pump and dump schemes, or other fraudulent activities; and

iv. being subject to an SEC investigation or associating with stock promoters, brokers, lawyers or accountants that have been subject to investigations by the SEC, FINRA or the Department of Justice.

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 info@securitieslawyer101.com 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 and compliance 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
www.SecuritiesLawyer101.com