Ten Things Community Bankers Need to Know About the Jobs ActRobert M. Fleetwood and Sarah M. Bernstein
On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the JOBS Act). The JOBS Act contains important changes to U.S. securities laws that may have a significant impact on banks and bank holding companies in the areas summarized below.
1. REGISTRATION AND DEREGISTRATION THRESHOLDS EASED
The JOBS Act increases the statutory threshold for registration for banks and bank holding companies with the Securities and Exchange Commission (SEC) from 500 to 2,000 shareholders of record. Moreover, banks and bank holding companies may suspend their SEC registration and reporting requirements so long as they have fewer than 1,200 shareholders of record, as compared to 300 shareholders under the former statute. The definition of "held of record" will not include securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the Securities Act). Shareholders obtained through the crowdfunding exemption (described below) will be further excluded from the count of shareholders of record.
2. RAISING CAPITAL
The new provisions of the JOBS Act may allow certain banks and bank holding companies to raise additional capital and increase their shareholder base without triggering SEC registration and reporting. Please note that federal and state securities laws concerning exemptions from registration must still be closely adhered to when selling or offering securities.
3. WHAT IS 'GOING DARK'?
The eased thresholds enable a significant number of public bank holding companies with fewer than 1,200 shareholders of record to deregister and suspend reporting obligations with the SEC, also known as "going dark." This can be accomplished after action by the board of directors and the filing of a form with the SEC.
4. 'GOING PRIVATE' MADE EASIER
For those bank holding companies above the 1,200 record shareholder threshold, several "going private" options may be available to reduce their number of shareholders to below the threshold, including engaging in stock repurchases, a reverse stock split, a subsidiary merger or a re-classification of the company's stock. These transactions are generally more involved than "going dark."
5. MECHANICS OF DEREGISTERING
A bank holding company can deregister under the new 1,200 record shareholder threshold by filing a Form 15 with the SEC. Because Form 15 has not yet been amended to add a disclosure indicating that the company is deregistering pursuant to the new threshold, the company should include an explanatory note indicating that it is relying on Section 12(g)(4) of the Exchange Act to terminate its duty to file reports with the SEC. Before filing a Form 15, a bank holding company with stock listed on a national exchange must first voluntarily delist from the exchange by filing a Form 25 with the SEC.
Under Section 12(g)(4) of the Exchange Act, deregistration is not effective until 90 days after the Form 15 is filed. During this 90-day period, the company must continue to file periodic reports (e.g., 10-Ks, 10-Qs and 8-Ks), proxy statements and beneficial ownership reports. Rule 12g-4 immediately suspends a company's duty to file periodic reports when it files a Form 15 but is currently applicable only to companies falling under the 300 record stockholder threshold. Therefore, until this rule is amended by the SEC to reflect the new 1,200 record shareholder threshold, a bank holding company deregistering with in excess of 300 record holders must continue to file periodic reports, in addition to proxy statements and beneficial ownership reports, for the full 90-day period.
A bank holding company that has an effective registration statement on file with the SEC under which securities have been offered and sold in 2012 may continue to have some reporting obligations until 2013. A company that has an effective registration statement on file with the SEC that is updated in 2012, but under which no sales have been made, may be eligible to seek no-action relief to suspend its reporting obligations.
6. EMERGING GROWTH COMPANIES
A significant portion of the JOBS Act concerns the creation of a new class of registered companies referred to as Emerging Growth Companies (EGCs). An EGC is defined broadly to include any company that has an initial sale of registered equity securities (an IPO) after Dec. 8, 2011, and has total gross annual revenues of less than $1 billion. This category is not limited by business operations, so banks and bank holding companies can qualify as an EGC.
An EGC will have decreased disclosure obligations similar to that of current smaller reporting companies (generally, registered companies with a market capitalization
less than $75 million).
In addition to scaled disclosures, an EGC will be exempt from holding shareholder "Say-on-Pay" votes, will not be required to have independent auditors' attestations regarding internal controls pursuant to the Sarbanes-Oxley Act of 2002, and will be afforded greater flexibility during the IPO process.
7. WHAT IS CROWDFUNDING?
Crowdfunding allows companies to raise capital, often over the Internet, from numerous investors that each contribute relatively small amounts of money. The JOBS Act creates a new Section 4(6) exemption under the Securities Act to permit crowdfunding. Generally, non-reporting issuers will be able to sell, without registration or reliance on another exemption, up to $1 million of securities to an unlimited number of investors, whether or not an investor is "accredited," in any 12-month period. For individuals, an "accredited investor" is generally an individual who has either a net worth of $1 million or an annual income of at least $200,000. The crowdfunding exemption limits an investor to investing no more than five to 10 percent of his or her net worth in the issuance and requires the use of registered brokerdealers
or online "funding portals."
The crowdfunding exemption may provide companies, including bank holding companies, an opportunity to raise capital with relatively minimal cost from a wider range of people, including members of their communities.
8. ELIMINATION OF BAN AGAINST GENERAL SOLICITATION
The JOBS Act directs the SEC to eliminate the prohibitions against "general solicitation and general advertising" contained in Rule 502(c) of Regulation D in connection with Rule 506 private offerings in which all purchasers are accredited investors. Depending on the forthcoming SEC rules, companies may be able to advertise through print and televised or social media and solicit through open websites, as long as the ultimate investors are accredited investors.
9. INCREASED REGULATION A EXEMPTION
The JOBS Act creates an additional exemption under Section 3(b) of the Securities Act to permit aggregate offerings of equity, debt or convertible securities of up to $50 million in any 12-month period (an increase from the current $5 million requirement under the existing statute and Regulation A). Based on the statutory language and history of Regulation A, it would appear that compliance with the exemption will likely require the filing of offering materials with the SEC, but investors will generally be permitted to make public sales of the securities without resale restrictions.
10. STAY TUNED
Several of the provisions of the JOBS Act are immediately effective, but many of the provisions require the SEC to issue or amend implementing rules or regulations within 90 days to a year after the date of enactment of the JOBS Act. Moreover, the Act requires the SEC to conduct several studies before taking additional actions. On April 11, 2012, the SEC announced it was accepting public comment on provisions of the JOBS Act that require the SEC to undertake rulemaking. Also in April and May 2012, the SEC's Division of Corporation Finance issued frequently asked questions clarifying the operation of certain of the JOBS Act provisions. The full impact of the JOBS Act may not be known for over a year.
This article was published in the June 2012 issue of Illinois Banker. See the original article here.