The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted on April 5, 2012, established, among other things, new shareholder headcount thresholds relating to SEC registration. For banks and bank holding companies (“BHCs”), registration and reporting under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is required for any class of securities held by more than 2,000 shareholders of record as of the end of a given fiscal year, and deregistration is permitted for any class of securities held by fewer than 1,200 shareholders of record under the timing rules described below. The reports in question include annual (10-K), quarterly (10-Q) and periodic (8-K) reports; proxy statements; Forms 3, 4 and 5; Schedule 13D and 13G reports; and other reports required under the Exchange Act.
The JOBS Act allows a bank or BHC to terminate its registration under Section 12(g) of the Exchange Act effective 90 days after filing a Form 15 certifying that it has fewer than 1,200 shareholders of record. For a bank/BHC that currently has fewer than 1,200 shareholders of record, termination can be effected without a stock buyback, share reclassification or other “going-private” transaction. Instead, a board resolution, Form 8-K, press release and, if desired, a letter to shareholders would be all that would be required. This is frequently referred to as “going dark” or “turning off the lights.” The new thresholds also apply to going-private transactions, however, and banks and BHCs that did not previously have the resources to cash out a significant number of shareholders or that had more shareholders of record than could be accommodated reasonably in multiple classes of stock via a share reclassification transaction may wish to revisit the idea of going private in the wake of the JOBS Act.
A bank or BHC that terminates its Section 12(g) registration and reporting obligations will remain eligible to avoid re-registration and reporting so long as it has fewer than 2,000 shareholders of record (or 1,200 if it has ever previously filed a registration statement for an offering of securities under the Securities Act of 1933, as amended (the “Securities Act”)), at the end of a given fiscal year. Examples of Securities Act registration statements include Forms S-1 (public offering), S-3 (short-form public offering), S-8 (employee benefit plans) and S-4 (business combinations). The different threshold for companies that have previously filed a registration statement arises from Section 15(d) of the Exchange Act, which requires such companies to file periodic reports under the Exchange Act for the remainder of the fiscal year in which a Securities Act registration statement was declared effective.
The decision to deregister involves balancing the advantages and disadvantages of “going dark” to the bank/BHC and its shareholders, and each bank or BHC will need consider the issues in light of its particular facts and circumstances. In general, relevant considerations include:
Reduced Reporting Burden. Although a bank would continue to file Call Reports and a BHC would continue to file FR Y-6 and other reports with applicable regulatory authorities, they would no longer be required to file applicable Exchange Act reports with the SEC (or, in the case of a bank without a holding company, the FDIC or OCC). Preparing and filing these reports requires significant time, attention and training for personnel in finance, administration, human resources, legal and other departments. Eliminating these reports would allow these executives and employees to focus on other areas of the bank’s operations to further the strategic direction set by its board of directors.
Reduced Disclosure Obligations and Public Scrutiny. As a result of “going dark,” a bank or BHC would be subject to the relatively minimal disclosure obligations contained in its bylaws and applicable state and federal statutes and regulations governing financial institutions. These requirements generally contain minimum notice requirements and may also require periodic reports to shareholders or other disclosures. (See, e.g., 12 CFR Part 7.200 et seq for national bank corporate governance requirements and 12 CFR Part 18 for requirements applicable to a bank’s annual reports to shareholders.)
Less public scrutiny and disclosure will make it easier to maintain confidentiality regarding competitive business information, potential transactions, executive compensation, and other sensitive issues. It is important to note, however, that the anti-fraud and insider trading provisions of state and federal securities laws will continue to apply regardless of registration.
Ability to List on OTCBB. Although registration under Section 12(b) of the Exchange Act is required in order to list a security on The Nasdaq Stock Market (“Nasdaq”) or The New York Stock Exchange (the “NYSE”), bank and BHC securities can trade on the Nasdaq Over-the-Counter Bulletin Board (the “OTCBB”) so long as the issuer files copies of the reports it files with its primary federal regulator and any other notices or forms required under OTCBB rules (e.g., notices of dividends and other corporate actions) with the Financial Industry Regulatory Authority (“FINRA”). As a result, bank and BHC shareholders will not necessarily experience the reduction in liquidity that often accompanies deregistration by an exchange-listed issuer that would not qualify for continued listing on the OTCBB.
Cost Savings. The benefits of terminating reporting obligations normally include lower accounting, legal, insurance and compliance costs related to Exchange Act and Sarbanes-Oxley requirements and public disclosure obligations. For a bank with over $1 billion in assets, Section 112 of FDICIA would require that it continue to conduct a management assessment of the effectiveness of internal controls over financial reporting and obtain independent auditor attestations regarding management’s assessment. Nevertheless, other costs (e.g., training for SEC-compliant reporting, legal fees from outside SEC counsel, and D&O insurance premiums for public companies) would likely be reduced.
Reduced Personal Liability for Certifying Officers. The principal executive officer and principal financial officer of an Exchange Act-registered company are required to certify to the completeness and material accuracy of the company’s Exchange Act reports and face significant personal liability if their certifications are untrue. This risk might deter otherwise qualified personnel from serving in these positions, and deregistration would eliminate this potential issue.
Transfer Agent Qualification. Reporting on Form TA-1 and TA-2 is required only if a company serves as a transfer agent for “qualifying securities” (those registered under the Exchange Act). As a result, if a company serves only as its own transfer agent, then it could withdraw its transfer agent registration and continue to serve without filing these reports.
Public/Shareholder Perception. An announcement that a bank/BHC is voluntarily reducing the amount of information that is publicly available about its operations could be perceived as an indication that it has “something to hide” or values its insiders more highly than public investors. This perception can be managed, however, by: (i) making public information about the bank/BHC available under Exchange Act Rule 15c2-11(a)(5) (as described further under “Disadvantages–Unavailability of Rule 144″ below), (ii) emphasizing the bank/BHC’s status as a regulated entity that will continue to file public reports, issue press releases and communicate with investors, and (iii) if applicable, stating that the stock will continue to trade as it has in the past without interruption.
No Immediate Cessation of Reporting. As is noted above, until the SEC adopts a rule that permits immediate suspension or termination of reporting, an issuer that files a Form 15 reporting that it has fewer than 1,200 shareholders of record will need to continue to file Exchange Act reports for 90 days after filing the Form 15. Additionally, if the issuer has filed a Securities Act registration statement during the fiscal year in which the Form 15 is filed, it will be required to continue to file 10-K, 10-Q and 8-K reports with respect to that fiscal year. For purposes of this analysis, the SEC views automatic updates (via the annual Form 10-K) to Form S-8, S-3 and S-4 registration statements filed in prior years as fresh declarations of effectiveness, so continued reporting for the fiscal year in which the Form 10-K was filed will be required in this case unless the issuer can obtain SEC no-action relief. The SEC has indicated that it will consider granting such relief if there have been no sales under the updated registration statement during the fiscal year in question and the registration statement is withdrawn. See SEC Staff Legal Bulletin No. 18 (CF), March 15, 2010.
Unavailability of Rule 144. Rule 144 is a “safe harbor” exemption from liability (as an underwriter) for resales of an issuer’s securities under the Securities Act. One of its requirements is that there be “adequate public information” available about the issuer of the securities. Filing Exchange Act reports allows an issuer to meet this requirement, and if it ceases to file these reports, Rule 144 will not be an available “safe harbor” unless the issuer publishes the information specified in Exchange Act Rule 15c2-11(a)(5). This information includes, among other things, a description of the issuer and its business, a list of its directors and executive officers, balance sheets and income and retained earnings statements for the current year and such part of the previous two years as it has been in existence, and the number of outstanding securities as of the end of the most recent fiscal year. The information would be filed with FINRA and publicly available via the OTCBB or “Pink Sheets.” Note, however, that Rule 144 is merely a “safe harbor,” and that resales of bank and BHC stock can comply with the Securities Act in other ways.
Potential Litigation Claims. Although claims can always be made against insiders for trading on the basis of material nonpublic information, investors might be more likely to bring claims against directors and officers for insider trading or against an issuer for repurchasing or otherwise engaging in market transactions in its stock based on material non-public information if it no longer files Exchange Act reports. This risk can be mitigated by making public information available under Rule 15c2-11(a)(5); instituting a system of public disclosure of material events through press releases, the bank’s website and reports to shareholders; and continuing to follow applicable insider trading policy and stock repurchase program requirements.
Broker Kick-Out. Because SEC rules allow brokerage firms holding shares in “street name” on behalf of multiple individual beneficial owners to be counted as a single record holder, it is possible that if a broker decides it no longer wants to hold shares in “street name” or if beneficial owners decide they no longer want to hold their shares in their brokerage accounts, then those shares would be distributed to the beneficial owners and increase the number of record holders as a result. If a bank/BHC were to have 2,000 shareholders of record (or 1,200 if it has ever filed a registration statement under the Securities Act) at the end of a given fiscal year, then it would be required to begin filing Exchange Act reports again. In our experience, broker kick-out has not represented a significant risk, especially if there will be continued liquidity in the stock, but like other transactions resulting in increased shareholder headcount, distributions out of “street name” should be monitored during the course of the year. If necessary, re-registration risk could be addressed by means of a reverse stock split, stock repurchase, tender offer or other mechanism for reducing the number of record holders prior to the year-end measurement date.
Effort Required to Resume Reporting. If a bank/BHC is required to register again under the Exchange Act, either because it exceeds the applicable shareholder headcount threshold at the end of a given year; files a registration statement under the Securities Act for a public offering, acquisition or employee benefit plan; or wants to list its stock on Nasdaq or the NYSE, then its SEC compliance infrastructure will need to be resurrected and any intervening changes in SEC rules and reporting requirements will need to be assessed.
If a bank/BHC exceeds the shareholder headcount threshold at the end of a fiscal year or wants to list its stock on an exchange and does not file a Securities Act registration statement, it will need to file a Form 10 within 120 days after the end of that fiscal year. The Form 10 disclosure requirements are very similar to those of a 10-K, including disclosures relating to directors and officers, executive compensation, stock ownership, and related party transactions. For a reporting company, such disclosures are often incorporated by reference from the annual meeting proxy statement, but would need to be included in the Form 10 to re-register.
If a bank/BHC files a Securities Act registration statement, it would not be required to file a Form 10, but would instead file a Form 8-A (a short-form registration) to register its stock under the Exchange Act and recommence filing Form 10-K, 10-Q and 8-K reports following the effectiveness of the 8-A and the Securities Act registration statement. It would not be eligible to incorporate information from previously filed documents or use a short-form registration statement on Form S-3 for the first year after its return to filing. For banks and other regulated entities with established financial and regulatory reporting infrastructures, the effort required to resume reporting is not likely to be as significant as it would be for a company with fewer resources or a lack of management or operational continuity, but it would require management time, additional legal and accounting costs, and regulatory review.
The JOBS Act provides significant opportunities for “going dark” or “going private” transactions for banks and BHCs. The SEC’s rules regarding these transactions are complex, however, and banks/BHCs should consult with securities counsel to ensure that they understand the application of these rules, as well as the advantages and disadvantages of deregistration, to their particular circumstances.