Unlock U.S. Market Potential: A Guide to DTC Eligibility for Canadian Issuers

Collaborated by:

Lisa Cripps – Marrelli Trust Company Limited
Michael Shannon – McMillan LLP
Peter Georgas – Peterson McVicar LLP
Kara Kennedy – Cleartrust LLC

Introduction

The Depository Trust Company (DTC) eligibility is mandatory for issuers seeking to have their securities listed for trading on a national securities exchange in the United States. In addition, although DTC eligibility is not mandatory for equity securities to be admitted to trade through an inter-dealer quotation system such as the various tiers of the OTC Markets, most U.S. broker- dealers do not want to deal with equity securities that do not settle electronically through DTC. Accordingly, an issuer that wishes to facilitate a robust trading market for its common stock on the OTCQB or OTCQX, will customarily seek DTC eligibility for such securities. This guide outlines the process, key participants, and steps involved.

What is DTC Eligibility?

“Full-service” DTC eligibility allows securities of an issuer to be deposited through DTC and to be transferred between brokerage accounts electronically. Obtaining full-service DTC eligibility typically takes 2-3 weeks, although it may be obtained faster depending on the issuer’s circumstances.

Key Participants

• Issuer
• Legal counsel
• Transfer agents (Marrelli Trust and ClearTrust LLC)
• Market makers
• DTC participant (most large U.S. broker-dealers, banks, and clearing firms)
• Brokers
• Shareholders

Step-by-Step Process

Step 1: Initiation by Issuer

The issuer initiates the DTC eligibility process, working closely with its legal counsel to ensure compliance with SEC and DTC requirements and preparing/gathering the necessary documentation for the eligibility submission. For “older issue” DTC eligibility, the issuer will need to work with a friendly shareholder who is not an “affiliate” of the issuer, and who holds shares that are not subject to any statutory resale restrictions (i.e., are free and clear of any restrictive legends).

Generally, an “affiliate” will include a director or officer of the issuer, as well as persons who beneficially owns 10% or more of the voting shares of the issuer (including shares that can be acquired through the exercise of stock options, warrants or other rights within 60 days); for these purposes, an “affiliate” will also include the spouse of such persons, as well as a family member who shares the same household of any of the foregoing persons.

Note that the shares which are presented with the DTC eligibility application must be registered in the name of the non-affiliated shareholder. In other words, shares which are registered in “street” form will not be acceptable for presentation with the DTC eligibility application; if the subject shares are initially held in a brokerage account they will first have to be withdrawn before the application is submitted and the share certificate must remain as an outstanding share certificate until DTC eligibility is granted.

Step 2: Market Maker’s Role

The market maker, acting on behalf of the issuer, provides a DTC participant with whom it works closely with the eligibility application along with necessary documentation to be submitted to DTC. In addition, the market maker helps guide the issuer through challenges and advocating for the eligibility of the securities.

Step 3: Coordination with Legal Counsel and Transfer Agents

• Legal Counsel: Prepares essential documentation, including legal opinions, and ensures regulatory compliance.

• Transfer Agents (Marrelli Trust and ClearTrust LLC): Marrelli Trust, as a Canadian transfer agent, maintains shareholder records and facilitates cross-border share transfers. ClearTrust LLC serves as the U.S. co-agent, acting as a liaison with DTC, providing OFAC (Office of Foreign Assets Control) monitoring required for DTC eligibility and handles FAST (Fast Automated Securities Transfer) and DWAC (Deposit/Withdrawal at Custodian) eligibility, which is discussed in more detail in Step 8 below.

Step 4: DTC Eligibility Process

Staff at DTC will review the application and they will communicate any questions that they may have exclusively to the DTC participant that filed the DTC eligibility application. When DTC is satisfied with the eligibility application, DTC will reach out to the legal counsel identified in the application for a legal opinion covering the shares to be deposited into DTC’s nominee, Cede & Co. After the legal opinion is submitted to DTC, the approval for eligibility typically follows shortly thereafter. Once eligibility is confirmed, an issuer must have the share certificate deposited into Cede & Co within 30 days to avoid potential “Chills” or reapplication for DTC eligibility.

Step 5: Shareholder’s Role in Depositing Shares

The shareholder will instruct their broker to have the shares deposited in the name of DTC’s nominee, Cede & Co. If the broker is not already in possession of the share certificate representing the subject shares, the shareholder will have to send the share certificate to the broker at this time.

Step 6: Broker’s Role

The shareholder’s broker will, upon receipt of the share certificate from the shareholder (if necessary), arrange for the subject shares to be deposited into Cede & Co. As discussed above, this will need to be completed within 30 days of DTC eligibility being approved.

Step 7: Conversion to Electronic Settlements of Trades

Once the share certificate is deposited, DTC will hold the certificate in Cede & Co’s name in its vault and electronically credit the shares to the appropriate brokerage firm. At this point, DTC will be settling trades made between brokerage accounts electronically.

Step 8: Setup Electronic Deposits and Withdrawals (Optional)

After at least one share certificate is deposited with DTC, the issuer may request that the transfer agent apply for FAST, DWAC, and DRS eligibility, which allows shares to be deposited or withdrawn electronically.

In order for the issue to be made FAST and DWAC eligible, ClearTrust LLC will have to submit an application to DTC for FAST and DWAC eligibility. When DTC approves the application, it will cause the share certificate(s) it previously received to be moved to book-entry-only (electronic) shares.

If DRS eligibility is sought by the issuer, ClearTrust LLC can apply for it as soon as the shares held by Cede & Co are moved to book-entry-only, whereupon DTC will automatically approve it.

Shareholders may then request that their unrestricted shares be deposited into their brokerage accounts by paper certificate or electronically, as well as withdraw shares electronically. The shares of most OTC issuers are not qualified for book-entry-only.

Additional Steps and Considerations

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Upcoming Webinar

Unlock U.S. Market Potential: Webinar on DTC Eligibility for Canadian Issuers

Date: September 12, 2024|Time: 4:00 PM EST|Location: Online (Zoom)|Cut off Date: September 10, 2024

Join us for an exclusive webinar hosted by Marrelli Trust Company Limited and ClearTrust, LLC, where we will guide Canadian issuers through the critical steps to achieving DTC eligibility. Gain insights into navigating U.S. markets, enhancing your trading potential, and ensuring compliance with key regulations.

Featured Speakers:

• Lisa Cripps, Marrelli Trust Company Limited
• Kara Kennedy, ClearTrust LLC
• Michael Shannon, Partner, McMillan LLP
• Peter Georgas, Solicitor, Peterson McVicar LLP

What You’ll Learn:

Understanding DTC eligibility and its importance

• Step-by-step guidance on the application process
• Roles of key participants, including issuers, market makers, and transfer agents
• Best practices for successful DTC submission and approval

How to Join:

To attend, please sign up via the landing page. Once we receive your registration, you will be provided with the Zoom link for the webinar.

Secure your spot today and unlock new opportunities in the U.S. market!

Register Here: https://marrellitrust.ca/webinar-event/

For more information, contact Lisa Cripps at Marrelli Trust Company Limited.

Need More Information? Contact Us