The Treasury’s sixth round of TARP Capital infusions included five more public companies companies that are traded on the Over-The-Counter Bulletin Board. Three institutions received TARP Capital under the public company term sheet, while the other two institutions received TARP Capital under the non-public company term sheet.
As a result, it appears clear that the Treasury is willing to allow public reporting companies that are traded over the OTCBB participate in the TARP Capital program under either the public company terms or the non-public company terms. We still haven’t seen any public reporting companies that are traded over the Pink Sheets receive TARP Capital funds, but one would presume that they will receive the same deference shown to OTCBB companies.
The Treasury has provided us with more detailed calculations for the Warrant Preferred Shares to be issued by private companies participating in the TARP Capital program. (As a reminder, the “warrants” for private companies are essentially warrants only in name, as the Treasury intends to exercise them immediately, causing additional shares of preferred stock, the Warrant Preferred Shares, to be outstanding immediately following the capital infusion.)
In order to calculate the number of Warrant Preferred Shares that are subject to the warrant (before net settlement), the following calculations need to be made:
- (Aggregate Purchase Price x 5%)/$1,000 = Number of Warrant Preferred Shares (following net settlement of the warrant).
- (Number of Warrant Preferred Shares x $0.01)/$1,000 = Net Settlement Amount
- Number of Warrant Preferred Shares + Net Settlement Amount = Number of Shares subject to Warrant.
These calculations result in the Treasury receiving the full 5% of their TARP Capital investment as Warrant Preferred Shares, and avoids any reduction as a result of the net exercise (and further emphasizes that the warrants are only warrants in name.)
On December 11, 2008, the Treasury published the investment agreements for privately held companies that are approved to receive TARP Capital infusions.
The Treasury has used the same basic structure as adopted for publicly traded companies: a uniform securities purchase agreement, form of warrant and certificate of designations for preferred stock, along with a personalized letter agreement providing the details for each particular investment.
The Treasury’s fourth round of completed TARP Capital infusions added four more public companies that are traded on the Over-The-Counter Bulletin Board (OTCBB): Blue Valley Ban Corp., Coastal Banking Company, Inc., Manhattan Bancorp, and Oak Valley Bancorp. As a result, it seems clear that the Treasury is willing to allow public reporting companies that are traded over the OTCBB participate in the TARP Capital program under the public company terms.
As we’ve previously noted, the definition provided by the Treasury of a publicly traded company is “a company (1) whose securities are traded on a national securities exchange and (2) required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator.” While the Treasury has not defined what constitutes a national securities exchange, the OTCBB is generally not considered a “national securities exchange.” The SEC does not consider the OTCBB to be a national securities exchange. Neither does the OTCBB itself, which states that it is “not an issuer listing service, market or exchange.”
As we’ve previously noted here, here and here, we’re not big fans of the Treasury’s definition of what constitutes a publicly traded company under the TARP Capital program. The Treasury’s definition provides two tests, one of which is a subset of the other, and doesn’t specify whether both tests or either test must be met.
Non-Exchange-Listed Companies = Private
While speaking to an official with the Federal Reserve Bank of Atlanta today, we were told that: (i) both tests have to be met; (ii) the Over-the-Counter Bulletin Board and Pinksheets were NOT considered “national exchanges,” and therefore companies listed on such would be considered private; and (iii) they believe that all applications filed by companies which have asserted public status with an Over-the-Counter Bulletin Board or Pinksheets listing have been sent back to be reconsidered as private companies.
In light of the new term sheet for non-public institutions, we have been asked by several clients whether they need to amend their application if they have already submitted applications to their federal regulators.
At this time, unless the regulator specifically asks that you file an amendment, we do NOT believe an amendment should be necessary. The Treasury has not updated its application form (available online directly from the Treasury in PDF format, or from Powell Goldstein in Word format) and the application does not contain any information that would differ because the company is applying under the new non-public company term sheet.
We are aware of one instance in which the regulators specifically requested an amendment, but in that case the applicant also desired to increase the amount of TARP Capital they were applying for, which would seem to independently necessitate an amendment.
Update 11/20/2008 – An FDIC representative confirmed to one of our privately-held clients that they did NOT need to file a new application or amend their application, but that they should confirm to the regulators that they have reviewed the new Term Sheet.
Update #2 11/20/2008 – A Federal Reserve Bank of Atlanta representative stated that they expect that private banks WILL NEED to make some kind of amendment, but they don’t know what form that amendment will take. They expect to receive guidance later this week from D.C., and will inform applicants accordingly.
Update #3 11/21/2008 - The representative of the Federal Reserve Bank of Atlanta has informed us that the staff at the Board of Governors has advised that there is NO need to amend the application to reflect the recent terms announced for private companies. The documents the Treasury will require participants to sign in order to participate will incorporate all of the changes, terms, conditions, etc.
Our TARP Capital Spreadsheet for Private Banks provides a basic analysis of the terms of TARP Capital under the newly announced term sheet for non-public institutions. By adjusting the Risk Weighted Assets and percentage of Risk Weighted Assets that an institution is requesting in TARP Capital (minimum 1% and maximum is 3%), an institution can review the estimated annual interest costs of the Preferred stock and the Warrant Preferred stock, as well as the ultimate redemption cost.
1st Financial Services Corporation’s inclusion on the Treasury’s Transaction Report, as an OTCBB company, appears to show that the Treasury is NOT requiring that companies be traded on a national securities exchange in order to participate in the TARP Capital program for publicly traded companies. The inclusion would also suggest that any company that is required to file periodic reports under the federal securities law: (a) is considered a “publicly traded” company, (b) had a deadline to apply of November 14, 2008, and (c) is not eligible to participate in the newly announced TARP Capital program for private companies.
We will provide additional analysis over the next several days, but here are some highlights:
- The new Term Sheet applies to all non-public qualifying financial institutions, excluding S Corporations and mutual organizations. The Treasury has NOT clarified its prior statement regarding the definition of “publicly traded” companies to clarify whether such companies must be traded on a national securities exchange or whether being obligated to file periodic reports is sufficient to constitute a publicly traded company.
- Investment structures for S Corporations and mutual organizations are still “under consideration,” and the announced deadline does not apply to S Corporations or mutual organizations.
- The deadline for applications for private C Corporations is Monday, December 8, 2008.
We spoke with an official with the Federal Reserve Bank of Atlanta official yesterday who informed us that:
- Non-exchange-listed public companies are being considered “private companies” or as “not publicly traded” by the Treasury Department; and
- While the federal banking regulators will continue to review applications by private companies at this time, they have been instructed not to forward such applications to the Treasury Department until further guidance is published by the Treasury Department.