True! It can give any potential OTC investor pause to rethink what they are about to jump into. For those that want to play down here---There are better platforms available. In Canada, where I am from, there is no DTCC to "protect" ourselves from ourselves. Many traders feel the DTCC is a good idea gone bad. They are a self regulated entity that has recently changed some of their procedures to allow a chill to be disputed and eventually removed. Many chills were imposed without notice to the company and there was no recourse to dispute the imposed chill. Here is an interesting article:
DTC Chills on Issuer Securities: Has the SEC Taken a Step to Halt the Small Cap Ice Age?
The U.S. “small cap” public markets are comprised primarily of very small public companies with limited operating and revenue histories, low stock prices, volatile trading in their stock and very low market capitalization values. These companies are traditionally known as “penny stock” issuers that trade on the OTCBB and Pink Sheets. Many of these companies do not qualify for listing on national exchanges such as NASDAQ, and probably never will. Nonetheless, they are operating companies with investors and shareholders that must comply with SEC regulations. In recent years, these companies have suffered from limited capital raising opportunities, heightened SEC scrutiny, and the fallout from investigations of fraud in the reverse merger industry. Basically, the small cap market (and small cap companies) have really taken a hit. To make matters worse, it looks as if there is an ice age coming to the small cap market one “chill” at a time.
The Depository Trust Company (DTC) is a clearinghouse for securities exchanges. The DTC system provides brokers with the ability to electronically settle stock trades. In essence, it is one of the largest (if not the largest) electronic clearance conduits for trading and settling securities in the U.S. public markets. In recent years—and now with greater frequency than ever—the DTC is issuing “chills” on small cap stock. A “DTC chill” is the DTC’s decision to make an individual company’s securities ineligible for electronic clearance. This means that brokers attempting to clear securities in that company’s stock must do so the old fashioned way: by hand. Brokers cannot sustain the time, costs, or inefficiencies of providing manual clearance service, so many brokers decline to trade “chilled” securities. As a result, fewer and fewer brokers are willing to trade chilled stock, and sooner or later, the stock just won’t trade. Basically, once a company’s stock is chilled, it becomes almost impossible for it to trade, which means it is also very difficult for the company to raise capital, issue stock strategically, or preserve or enhance the market value of its stock.
The reach of the DTC’s power to influence the capital markets is staggering: the SEC noted that in 2010 alone, the DTC processed 295,000,000 book-entry transfers of securities worth $273.8 trillion. Only a small fraction of that value resides in the small cap market, but in proportion to other segments of the U.S. capital markets, the small cap market has been very hard hit by the DTC chill decisions. Given the lack of warning and the amorphous path to having a chill removed (assuming the DTC voluntarily agrees to do so), these DTC chills (in large numbers and if unchecked) could cause the small cap markets to freeze over.
DTC chills are very frustrating to small cap issuers: because the DTC provides a service to broker-dealers and “participants” in the DTC system and not to the companies themselves, the DTC is not obligated to inform issuers of the decision to chill stock! As a result, the company is often the last to know. More importantly, it is very difficult (if not sometimes impossible) to find out from the DTC why stock was chilled in the first place. Having the chill removed is a “case by case” battle and lacks a legal structure or process for companies to follow. The DTC has taken the position that it owes no particular duty to issuers to explain or review a chill decision despite the fact that a chill can be a death knell to the company.
Of course, like any market, there are some bad apples in the small cap population—some would say a disproportionately large number of such apples (that should be permanently frozen). And some would say that the SEC, FINRA, and the DTC are working in a pointed effort to eliminate those bad apples (and take everyone else with them). Some issuer stock is, of course, properly chilled by the DTC (without notice) — for fraud, lack of reliable SEC reporting, etc.
In light of this growing problem, the SEC has (finally) taken a step towards melting the impending small cap ice age. On March 15, 2012, the SEC issued an administrative opinion (In the Matter of the Application of International Power Group, Ltd. Admin. Proc. File No. 3-13687) stating that an issuer is entitled to some form of due process proceedings by the DTC before a chill is placed on a company’s securities. The SEC did not say what the standards should be to institute or lift a chill, but that issuers are entitled to “fair procedures” by the DTC. In addition, the opinion provides that an issuer that loses the fight with the DTC could appeal that loss through an SEC administrative proceeding. The DTC can continue to chill stocks without prior notice in “emergency situations” but must still provide an opportunity to have the chill reviewed.
While this SEC opinion doesn’t herald a revitalization of the small cap markets (or for that matter, the return of the Woolly Mammoth), it does create an acknowledgment that the DTC should use the chill power more judiciously and be prepared to defend its decisions within a legal framework. Of course, there are still many unknowns: When will the DTC create the required procedures? What steps, if any, will the SEC take to monitor or enforce DTC procedures? And, will the DTC take further legal action that would nullify the SEC’s decision? So, it remains to be seen if the small cap ice age as been averted or just delayed; however, for small cap companies making every effort to legitimately run their business and comply with securities regulations, this SEC opinion offers some hope that the DTC won’t be able to leave their stock out in the cold.
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