On April 5, President Obama signed into law the JOBS Act, designed to increase access to private capital. The act eases restrictions on the sale of securities, increases the number of shareholders a company must have before becoming subject to the SEC’s reporting and disclosure rules, and provides “emerging growth companies” with exemptions from certain financial disclosure and governance requirements for up to five years.
Many of the law’s provisions went into effect immediately; the SEC must still write rules in some areas.
Although the JOBS Act has an effect on all entrepreneurs and small business owners who need funding for their businesses to grow, it includes changes that specifically have an effect on community banks.
Under the act, banks can have up to 2,000 shareholders before registering with the SEC. The previous benchmark was 500 shareholders and $10 million in assets, which created a significant compliance burden for many community banks. Also under the act, a bank can deregister if its number of shareholders slips below 1,200; the previous cutoff was 300 shareholders.
The changes in registration requirements give community banks much more flexibility in how they operate. Registration as a publicly traded bank comes with the time and expense associated with preparing and filing quarterly disclosures with the SEC and complying with the reporting, testing, and certification requirements of the Exchange Act of 1934, the Sarbanes-Oxley Act, and other regulations. Many banks can now raise capital in a way that doesn’t require expensive registration with the SEC in order to seek new investors.
As a result of the JOBS Act, a significant number of banks whose shares are thinly traded have announced their intentions to suspend their reporting obligations under the Exchange Act, and many more are likely to do the same. According to American Banker, data provided by the OTC Markets indicates that 46 percent of banks currently trading on NASDAQ have fewer than 1,200 shareholders and would be eligible to deregister. Idaho Independent Bank publicly announced its voluntary intention to deregister in June.
Advantages of suspending reporting obligations for banks include reduced accounting, compliance and legal costs, including less time spent by the board of directors and management on these functions; greater flexibility in determining what information will be publicly disclosed; and the elimination of CEO and CFO certifications.
Potential disadvantages of suspending reporting include reduced access to the bank’s shares, which may result in reduced share liquidity and/or a decrease in the trading price of its shares; future capital may be more difficult to raise once the deregistration process is completed; and many current shareholders have become accustomed to the additional disclosures provided to them and don’t want to see the bank eliminate the reporting process. However, concerns about the transparency of bank financial information to investors if a bank deregisters may be overblown. These banks will still have to file quarterly call reports with the FDIC.
Overall, the JOBS Act provides increased flexibility for all community banks. Each bank must evaluate its current and future capital needs and carefully weigh the advantages and disadvantages of deregistering under the Securities Act of 1934 before making any decisions.
Scott Klitsch, CPA is a manager with CliftonLarsonAllen LLP in Boise. He can be reached at firstname.lastname@example.org or (208) 387-6440.