DTC eligibility: what DTC eligible means for an issuer

In securities markets DTC eligibility has nothing to do with Canada's Disability Tax Credit. DTC is The Depository Trust Company, the US central securities depository, and a DTC eligible security is one it will hold and settle in book-entry form, so shares can move electronically between brokers instead of by paper certificate.

Key takeaways

• The issuer cannot apply for itself. Only a DTC Participant can request eligibility, and the Participant makes representations about the issue when it does. An issuer with no participant relationship has no route in.
• The transfer agent has to be on file. An agent bound by DTC's Operational Arrangements, and in the FAST programme if positions are to move by DWAC rather than by certificate.
• Eligible is not the same as depositable. Book-entry service is for securities held in fungible bulk. A legended, restricted certificate is not depositable in that form, which is why legend removal comes first.
• A chill blocks new deposits; a lock blocks everything. Under DTC Rule 33, approved by the SEC in December 2016, a restriction follows a FINRA or Commission trading suspension, a court order, or a need to avert imminent harm.
• A DTC Rule 33 restriction has a defined challenge process. DTC notifies the issuer within three business days, the issuer has 20 days to respond, and a review officer decides within 10 business days.

What eligibility actually buys

Almost all US-listed and US-quoted equity settles in book-entry form. Shares sit at the depository registered in the name of its nominee, brokers hold positions on their own books, and a trade settles as a debit and a credit rather than a movement of paper. Eligibility is admission to that system for one issue, identified by CUSIP.

An ineligible security is not illegal and not necessarily untradable. It is expensive to move: certificates, medallion guarantees, transfer agent turnaround, and a receiving broker willing to handle any of it. Most are not, which is why an ineligible issue behaves as though it is illiquid.

How an issue becomes eligible

1. Find a Participant to sponsor it

   An underwriter, broker-dealer or bank that is a DTC Participant submits the request through DTC's underwriting service. Nothing happens otherwise.

2. Appoint an agent bound by the Operational Arrangements

   The transfer agent must have the required agent letter on file with DTC, and should be a FAST participant if electronic movement matters.

3. Complete the eligibility questionnaire

   For securities already issued and outstanding, the Participant files the older-issue questionnaire with the certificate and an agent attestation, and warrants the information given.

4. Keep the issue clean afterwards

   Eligibility is not permanent. It survives on the accuracy of what was represented and on the issue not attracting a restriction later.

Deposit chills and global locks

The depository can restrict an issue. DTC Rule 33, approved by the SEC in December 2016 after the Commission held that issuers were entitled to fair procedures, sets out when it will and what the issuer can do about it.

A global lock follows automatically where FINRA or the Commission suspends trading, or where a court orders it. The discretionary ground is narrower than the old practice: DTC may impose a restriction where it identifies a need for immediate action to avert imminent harm to itself or its Participants. Release follows the lifting of the halt or suspension, the court's direction, or a determination that release no longer poses that threat.

Why this belongs in financing diligence

Every structure on this site that contemplates resale — a PIPE transaction, a convertible note, an equity facility — assumes the investor can deliver stock into the market. A clean Rule 144 analysis and an effective registration statement are worth nothing if the issue is chilled. So the questions asked before terms are agreed are simple: is the security eligible, is there a restriction now, has there been one, and is the transfer agent set up for electronic movement. The related work sits on free trading shares and Rule 144 and former shell companies, because a restriction and a shell history usually travel together.

Related reading

• Rule 144 in full
• Resale registration (S-1)
• Convertible notes
• Who we fund

Primary sources

• The Depository Trust Company — Operational Arrangements
• The Depository Trust Company — Underwriting Service Guide
• SEC order approving DTC Rule 33 on deposit chills and global locks
• Canada Revenue Agency — Disability tax credit, the other DTC

DTC eligibility: frequently asked questions

Is DTC eligibility the same as the Disability Tax Credit?

No, and the two are searched for under the same three letters. In Canada the DTC is the Disability Tax Credit, a non-refundable tax credit administered by the Canada Revenue Agency and applied for on Form T2201. In securities markets DTC is The Depository Trust Company, the United States central securities depository. This page is about the second.

What does DTC eligible mean?

It means The Depository Trust Company has accepted the issue for its depository and book-entry services, so the security can be held in the name of DTC's nominee and moved electronically between brokers. Without eligibility the shares can still exist and still trade, but every movement is a paper certificate process, which is slow and which many brokers will not undertake.

How does a company make its shares DTC eligible?

The issuer cannot apply on its own behalf. A DTC Participant, normally an underwriter, broker-dealer or bank, submits the eligibility request through DTC's underwriting service and makes representations about the issue, including its registration or exemption status. The issuer must also have a transfer agent that has signed the Operational Arrangements agent letter.

What is a deposit chill and how is it different from a global lock?

A deposit chill stops DTC accepting further deposits of a security while existing book-entry positions continue to settle. A global lock stops all book-entry services for the issue, so positions already at DTC cannot move either. A global lock is the more serious of the two and effectively removes the security from ordinary electronic settlement.

Why does DTC eligibility matter to a financing?

Because every structure that depends on resale depends on delivery. An investor who cannot deposit shares electronically cannot sell them on a normal settlement cycle, no matter how clean the securities-law position is. Eligibility and the absence of any restriction on the issue belong in diligence, before terms are agreed rather than after closing.