Monday, August 13, 2012 12:43:12 PM
The majority of securities with a DTC Chill are microcap's. And, it's important to note that companies subjected to a Chill may have never violated the law. There only "crime" is that they are trade in a market that has historically been rampant with fraud.
Here's a great summary of why microcaps have a high probability of a Chill (directly from Chairman Schapiro):
“Microcaps and the OTC market present increased risks to investors that the SEC has a deep interest in monitoring. Indeed, the microcap market has been prone to fraud and manipulation, most often in the form of pump-and-dump schemes. These continuing incidents of fraud are detrimental to the market and investors, and are a serious concern which is, of course, why the SEC created the microcap fraud working group, to try to focus our efforts on combating microcap fraud and strengthening this marketplace.
The volume of activity in the microcap market, however, makes it difficult for the SEC to monitor trading as closely as investors and other market participants deserve. And so, the market participants who are tasked with clearing and settling trading activity on the over-the-counter market play a very important role in protecting the integrity of the microcap marketplace, and they face unique compliance-related challenges in processing microcap transactions.”
A Chill may also be placed on a security due to questionable practices by the company or by their investors. For example, if an investor in your security is seen as a market manipulator (whether or not it's been proved), the DTC may very well place a Chill on your security.
It is a big deal for the company because a Chill significantly reduces the volume of trading activity in the marketplace.
It's also rather difficult to remove a chill as the DTC now requires a sponsoring participating broker-dealer to recommend they remove the Chill. You'll really need some good contacts to make this happen in an efficient manner. However, there are companies that can lobby to have your DTC eligibility reinstated.
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