FAST Act Extends Popular JOBS Act Registration Threshold to S&Ls

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JOBS-Act-2-1-16.pngOn December 4, President Obama signed the Fixing America’s Surface Transportation Act, or the FAST Act, which included several amendments to federal securities laws. Among the changes, the law amended Section 12(g) of the Securities Exchange Act of 1934 so that savings and loan (S&L) holding companies will be treated in the same manner to banks and bank holding companies for the purposes of registration or suspension of their Exchange Act reporting obligations. Not too long ago, the Jumpstart Our Business Startups (JOBS) Act raised the threshold under which a bank or bank holding company may terminate its Securities and Exchange Commission (SEC) registration and reporting requirements to 1,200 shareholders of record from 300.

One thrift, Alpena, Michigan-based First Federal of Northern Michigan Bancorp, which has $338 million in assets, has already taken advantage of the new ruling and voluntarily deregistered and de-listed its stock from the NASDAQ stock market on December 18. The company’s stock now trades on the OTCQX market, the top tier of the over-the-counter markets operated by OTC Markets Group Inc.

In its press release about the rule change, the bank said that “the continuing increased costs and administrative burdens of public company status, including our reporting obligations with the SEC, outweigh the benefits of public reporting.”

The bank said it will continue to file quarterly interim financial statements and provide its shareholders with an annual report with audited financials, among other items, all of which are requirements on the OTCQX market.

The JOBS Act Deregistration and De-Listing Wave
Twenty banks and bank holding companies have deregistered and de-listed from a national stock exchange since the passage of the JOBS Act. Approximately half have moved to the OTCQX market.

Most banks have cited the high costs and regulatory compliance of being an SEC reporting company as the reason for their decision, as well as the ability to focus more of management’s time and resources on growing the business.

In a letter to shareholders following its de-listing, First Federal of Northern Michigan Bancorp said that deregistering and de-listing it shares would allow its management team to “spend more of its time focused on the core operations of the bank, including strategic planning and market expansion, thereby helping to create shareholder value.”

Wheeling, VA-based First West Virginia Bancorp, Inc., with $347 million in assets, said in an October 26 press release that deregistering and de-listing its securities from the New York Stock Exchange’s NYSE MKT market would allow its senior management “to devote more time and resources to focus on customers and profitable growth of the [c]ompany as opposed to the considerable time and effort necessary to manage compliance with SEC reporting requirements.”  The company’s stock now trades on the OTCQX market under its same symbol, FWVB.

Attorney’s fees, printing costs and exchange listing fees aren’t the only expenses banks stand to save from by de-listing from an exchange. Directors and officers (D&O) liability insurance is also higher for SEC-registered companies than for non-SEC reporting companies and can provide a significant cost savings to smaller banks.

Trading on the OTC Market Versus on a National Stock Exchange
The unique structure of the OTC market, which is based on a network of broker-dealers rather than a centralized matching engine, can also help reduce volatility in the trading of small bank stocks and provide better visibility into trading activity.

“For a very thinly traded bank on NASDAQ, a trader may not want to commit capital to inventory 20,000 shares of stock when those shares may represent six weeks’ worth of volume, and computers are changing the bid and ask every few minutes. Maybe that capital is better committed someplace else. Don’t get me wrong, NASDAQ is a fantastic place to be but maybe not for some of the more illiquid banks,” says Tom Dooley, senior vice president of Institutional Sales at Boenning & Scattergood.

On OTCQX, banks are required to appoint a FINRA-member broker-dealer who can provide guidance on the trading of their stock, as well as help facilitate relationships with institutional investors, investment bankers and other key market participants. OTCQX bank advisors can also help their clients handle changes in their shareholder base and correct imbalances between the number of buyers and sellers of their stock.

Small S&L companies that are interested in taking advantage of the new law should examine the various costs and benefits to their business and their shareholders. There is much to be gained from deregistering and de-listing your securities if you do it the right way.

Four Steps to Going Public on the OTCQX Marketplace

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5-27-15-OTC.pngOn February 23, FirstAtlantic Financial Holdings, Inc., the holding company for FirstAtlantic Bank in Jacksonville, Florida, became the first bank to become publicly traded on OTCQX, the top marketplace for established, investor-friendly U.S. and international companies in the U.S. unlisted market.

Since then, three more private banks have effectively “gone public” on OTCQX, providing liquidity to existing shareholders while leveraging the OTCQX platform to increase their visibility in the public markets: First Priority Financial Corp. of Malvern, Pennsylvania, Paragon Commercial Corp. of Raleigh, North Carolina, and PBB Bancorp of Los Angeles.

As private banks seek the benefits of public trading, more are turning to the OTCQX marketplace which offers most of the benefits of a U.S. stock exchange listing without the high cost and additional disclosure obligations.

In this article, I’ll discuss the step-by-step process for getting traded on OTCQX and what banks can do to help maximize their trading in the public markets.

First, get your financial statements in order. One of the major positive features of OTCQX for Banks is that it allows banks to use their existing regulatory reporting standards to qualify. Securities and Exchange Commission (SEC) reporting banks must simply be current in their reporting to the SEC while banks with SEC registered securities that report to a bank regulator can make the past two years of reports available to investors through OTC Markets Group’s OTC Disclosure & News Service.

Non-SEC reporting banks must provide the past two years of annual audited consolidated financial statements in accordance with U.S. GAAP, interim financial statements and any press releases or other material news announcements they have made.

To continue trading on OTCQX, banks are required to remain compliant and current in their financial and regulatory reporting to their bank regulator or the SEC and to make timely disclosures about material news events such as dividend announcements, mergers, acquisitions, tender offers, stock splits and management changes.

Next, distribute shares to investors. Nowadays, banks can go public on the OTCQX marketplace one of two ways: either via a traditional SEC registered offering, also known as an Initial Public Offering (IPO), or what is called a “Slow PO,” in which previously restricted shares are made available for public trading after SEC registration or a certain seasoning period.

With the passage of Regulation A+ by the SEC on March 25, private banks will soon be able to raise up to $50 million in an SEC exempt offering in any 12-month period. Those securities will be free trading on day one. Certain restrictions will apply.

Banks should keep in mind that OTCQX requires companies have a minimum of 50 beneficial shareholders, each owning at least 100 shares of the company’s stock.

Third, make your shares tradable. To qualify for trading on OTCQX, banks must appoint a “corporate broker,” a Financial Industry Regulatory Authority (FINRA) member broker-dealer approved by OTC Markets Group, to serve as their market maker and advisor. The corporate broker or another market maker will file what is called a Form 211 with FINRA to allow the bank’s securities to be publicly quoted on OTCQX.

The Form 211 will include information about the bank and its securities, as well as current financial statements, the name of the bank’s SEC registered transfer agent and a CUSIP number from Standard & Poor’s, www.cusip.com. Upon approval of the Form 211, FINRA will assign the bank a trading symbol.

The bank will also want to apply for “DTC eligibility” through a Depository Trust & Clearing Corporation (DTCC) participant that will allow its shares to be electronically transferred between brokerage accounts and, hence, more easily tradable.

At the same time, the bank should submit an application to trade on OTCQX and make sure their financial statements are posted and publicly available for investors on OTC Markets Group’s website.

And lastly, begin trading! The entire process from appointing a corporate broker and submitting an OTCQX application to receiving an approval and trading symbol from FINRA typically takes two to four months.

Once the process is complete and FINRA approval has been obtained, a market maker—often the bank’s corporate broker—will enter a quotation on its securities on OTCQX. For the first 30 days, the market maker that filed the Form 211 has an exclusive market in the bank’s securities. After that time, the stock is “piggyback qualified,” meaning other market makers can enter proprietary quotes for the bank’s securities.

But the process doesn’t end there! Once a bank is publicly traded, it should remain current in its disclosure requirements on OTCQX.

Banks may also wish to create a separate investor relations section on their website or a separate portal for investors with information about their shares, the latest press releases, financial filings and an investor contact. Always remember to include your stock symbol and OTCQX marketplace designation so investors know where your securities are traded.