We have received inquiry from clients regarding the method and procedure to deposit their physical share certificates. Numerous OTC Market listed companies and their shareholders approach us and share their experience dealing with broker-dealers, most of them are unable to deposit their stock.
Based on our experience, if a broker-dealers reject the physical share certificate deposit, it is often due to one or all three major factors:
- The company is not current reporting i.e., not being fully transparent
- The shareholder failed to provide information and documentation that tracks the physical share certificate back to their original issuance by the company
- The physical share certificate is not free traded a.k.a restricted share or legended
To elaborate further below:
1. The Company Is Not Current Reporting
OTC Markets organized listed companies into three tiers, namely OTCPINK, OTCQB, and OTCQX, based on the quality of disclosure they provide. All companies subject to periodic disclosure or reporting requirements for broker-dealers and clearing firms to price and assess the risk before deposit the physical share certificate.
Failure to file periodic disclosure may result in “Caveat Emptor” or “STOP” designations that display a public interest concern (promotion, regulatory investigation, suspension, etc.). Due to the regulations by FINRA and SEC, broker-dealers are reluctant to deposit a company’s physical share certificate with “Caveat Emptor” or “STOP” status.
The company must clear the status by maintaining a current reporting status to have their physical share certificate deposit-able.
2. The Shareholder Fails To Provide Information & Documentation
Broker-dealers and clearing firms are responsible for performing KYC (Know Your Customer) and Anti-Money Laundering (AML) compliance checks before they can help to deposit the physical share certificate.
This is to trace “how” the company’s shares were obtained and know “who” the investor is looking to complete the transaction to combat illegal distributions of securities.
Surprisingly, many clients that came to us are unable to provide the information and documents required.
3. The physical share certificate is not free traded
In most cases, the physical share certificate is not free traded. This means that the shares acquired from the listed company or an affiliate of the listed company in an unregistered transaction such as private placement or private share purchase.
Unregistered shares will have a restrictive legend stating that the shares cannot be resold without an effective registration statement or qualifying for an exemption from registration (Rule 144).
If a holder meets the requirements of Rule 144, they can work with the listed company’s transfer agent to remove the restrictive legend.
However, some investors acquired the shares from the companies in significant amounts in the private market at significantly discounted prices. Broker-dealers or clearing firm hardly accept these transactions unless with a solid reason.
Should you face difficulties and problems to deposit your physical share certificate, feel free to contact us !
