On April 5, 2012, the Jumpstart Our Business Startups Act (“JOBS Act”) was signed into law in an attempt to reduce regulatory burdens on small businesses. The Act relaxes limits regarding the number of shareholders a company may have before it must register its securities with the Securities & Exchange Commission. For privately-held companies approaching the shareholder limit, the additional reporting requirements related to SEC registration can be particularly burdensome, without the benefits of access to capital markets and stock liquidity that being publicly traded offer. As a result, privately-held companies were compelled to undertake transactions such as reverse stock splits or share reclassifications to avoid triggering registration.
Since the JOBS Act became law, deregistration activity has been rising. According to a May 29, 2012 article on SNL Financial, approximately 60 banks had made the necessary filings to deregister their securities with additional filings expected. Most of these banks were relatively small, generally having total assets below $1 billion.
The JOBS Act increases the threshold for the number of shareholders that would require SEC registration from 500 to 2,000. Additionally, companies may terminate their existing registration by reducing the number of shareholders to fewer than 1,200 shareholders, relative to the former requirement of 300 shareholders. These rules offer opportunities for small, privately-held businesses, particularly for community banks which often have a relatively large base of local shareholders and demand for their stock within the local community.
The opportunity can present itself to community banks through two general scenarios:
For members of bank management contemplating taking action, several financial considerations unique to each scenario are discussed below. A number of legal considerations would arise as well, which are beyond the scope of this discussion.
While the opportunity to eliminate the drawbacks associated with SEC registration is compelling, bank management should carefully consider all options and the associated consequences. Oftentimes, this will require a firm understanding of the bank’s financial strength, growth prospects, and stock price, under both the contemplated transaction and the status quo. Mercer Capital has wide ranging experience in assisting management with stock valuation for capital raises and redemptions, as well as performing pro forma analyses under varying scenarios. If you think we can be of assistance regarding these matters, we would welcome your inquiry.
Reprinted from Mercer Capital’s Bank Watch, June 2012