The U.S. House of Representatives, by a vote of 380 to 41, has passed the Jumpstart Our Business Startups Act, or JOBS Act [link to House Bill], in the form previously approved by the Senate last week [link to Senate Amendment]. The bill now goes to President Obama, who is expected to sign it into law. The JOBS Act could significantly impact community banks, among other businesses, regarding the categories summarized below.
The JOBS Act increases the threshold for SEC registration from 500 shareholders of record to 2,000 shareholders of record for banks and bank holding companies. The increase allows some banks to raise capital by selling stock to new investors without having to register under Section 12(g) of the Securities Exchange Act of 1934.
The Exchange Act currently provides that even if a company has never made a public offering of stock, it must register its stock with the SEC if it has more than $10 million in assets and 500 shareholders of record. Once registered, the company must comply with the SEC’s costly periodic reporting requirements. Even the smallest banking organizations typically have more than $10 million in assets so the important requirement to avoid registration is to remain below 500 shareholders of record. As banks seek new investors, remaining below the threshold becomes difficult.
The JOBS Act also increases the threshold for SEC deregistration from 300 shareholders of record to 1,200 shareholders of record for banks and bank holding companies. As a result, community banks that are below 1,200 shareholders of record should consider deregistration or “going dark” in order to avoid the costs of continued SEC registration.
The JOBS Act creates a new securities registration exemption known as “crowdfunding” that banks (among other issuers) can rely on to sell up to $1 million worth of securities to non-accredited investors as long as no individual investor invests more than (a) $2,000 or 5% of the investor’s annual income in any 12-month period for investors with annual income or net worth less than $100,000; and (b) 10% of the investor’s annual income or net worth up to $100,000 in any 12-month period for investors with annual income or net worth in excess of $100,000. And, these “crowdfunders” do not count toward the 500 shareholders of record threshold that triggers Exchange Act registration under Section 12(g).
The securities may only be issued through a registered broker-dealer or “funding portal” over the internet that complies with additional requirements. The issuer has certain disclosure requirements during the offering process and following the offering.
Crowdfunding is not specific to community banks, but it could provide community banks a way to raise up to $1 million from the community they serve without being limited to accredited investors.
Emerging Growth Companies
The main focus of the JOBS Act creates a category of companies called “Emerging Growth Companies,” which will have decreased public company disclosure obligations similar to that of a smaller reporting company. The new category of registrant could include banks and bank holding companies. To be an Emerging Growth Company, a bank must be newly public with total gross annual revenues of less than $1 billion.
An Emerging Growth Company is not subject to a say-on-pay vote by its shareholders and is not required to pay its independent auditors to attest to the company’s internal controls and procedures (a requirement of Sarbanes-Oxley). An Emerging Growth Company is also afforded greater flexibility with respect to an IPO, including exemption from the restriction on analyst research prior to and immediately after IPOs, even if the analyst works for a bank that is underwriting the offering, and exemption from restrictions on communications to institutional investors ahead of public stock offering filings.
$50 Million Regulation A Offering
Finally, the JOBS Act permits securities offerings of up to $50 million in any 12-month period under a new exemption to be established by the SEC under Regulation A (the small public offering exemption). Currently, the existing exemption under Regulation A is capped at $5 million and is not available to reporting companies under the Exchange Act. The details of the exemption must be provided by the SEC, but presumably, consistent with Regulation A, public sales would be permitted and offering materials and audited financial statements would need to be filed with the SEC.