On March 27th, the House of Representatives passed the Jumpstart Our Business Startups Act (the JOBS Act). The Senate approved the same legislation the prior week and and the bill was signed by President Obama yesterday.
In part, the JOBS Act changes the Securities and Exchange Commission (SEC) registration requirements under the Securities Exchange Act of 1934 (the Exchange Act) in two respects for banks and bank holding companies.
First, the JOBS Act increases the threshold for Exchange Act registration with the SEC from 500 shareholders of record to 2,000 shareholders of record. This amends the current rule which requires registration for companies with more than $10 million in assets and 500 shareholders of record. Up to this time, many small banks with assets over $10 million have avoided SEC registration by keeping the number of shareholders below 500. The new threshold will now allow smaller banks to raise capital by selling stock to new shareholders without having to register with the SEC.
Second, the JOBS Act increases the threshold for deregistering securities with the SEC for banks and bank holding companies from 300 shareholders of record to 1,200 shareholders of record. Consequently, more publicly-held banks may explore deregistration in order to avoid the costs and aggravation of continued SEC registration.
Exchange Act regulations subject a company to the SEC’s public disclosure and reporting requirements, including periodic financial reporting (Forms 10-Q and 10-K), detailed governance and compensation disclosures (proxy statements) and share ownership reporting (Forms 3, 4 and 5). (It is not clear that Congress intended for the legislation to exclude thrifts and thrift holding companies and it is possible that the SEC may include thrifts and thrift holding companies when it issues regulations on the new registration thresholds.)
In deciding whether to explore deregistration, companies should consider some of its advantages and disadvantages:
Deregistration can provide a publicly held company with certain advantages, including:
Expense Reduction—Companies that deregister will save expenses in several areas, including costs associated with SEC filings, shareholder communications, professional fees, and, potentially, lower premiums for directors and officers liability insurance.
Increased Dividends—Companies that eliminate expenses associated with SEC registration may be able pass the savings to shareholders in the form of increased dividends.
Eliminate Personal Financial Disclosures—Deregistered companies would no longer be required to report transactions in the company’s stock and would also not be required to disclose detailed compensation information in the annual proxy statement of the company.
Reduce Pressure from Dissident Shareholders—Deregistered companies may be able to reduce certain pressures from dissident shareholders because those companies would no longer be required to comply with certain periodic reporting and disclosure obligations. However, dissident shareholders would also not be required to publicly disclose their stock holdings.
Focus on Long-Term Goals—By eliminating certain reporting and disclosure obligations (quarterly reports, for example), deregistered companies may find it easier to focus on long-term business strategies rather than satisfying short-term shareholder expectations.
When weighing the advantages of deregistering, companies should also keep in mind certain disadvantages, including:
Reduced Access to Public Equity Markets—Publicly traded companies generally have greater access to equity markets and, therefore, can often raise capital more quickly than private companies.
Reduced Market for Stock—Deregistered companies are ineligible to list their stock on the NASDAQ OMX or other stock exchange. Consequently, shareholders of deregistered companies, including officers and directors, may not be able to sell stock as quickly as they could with an actively traded security. However, many registered companies have small markets for their stock which already limits the ability of individuals to timely buy and sell. Further, some institutional shareholders may have policies that prevent them from holding securities of deregistered companies.
Reduced Ability to Use Stock in Acquisitions—Deregistered companies may find it more difficult to use stock in structuring acquisitions because issuing stock as acquisition consideration may not qualify for a private placement exemption and, thus, require SEC registration. However, deregistering should not affect the ability of the company to be acquired.
Loss of Public Company Status—Many companies believe that being a public company enhances the business reputation of the company.