On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act ("JOBS Act") into law. The JOBS Act makes several important changes to federal securities laws, and the following discussion is intended to summarize three changes that have garnered a lot of attention in the banking industry. We intend to address the other changes in a future bulletin. A copy of the JOBS Act may be found here (http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf).
Currently, Section 12(g)(1) of the Securities and Exchange Act of 1934, as amended ("Exchange Act"), requires any issuer of securities to become a "public company" by registering with the Securities and Exchange Commission ("SEC") if it has both (i) at least $1 million in assets as of the end of its most recently completed fiscal year and (ii) a class of equity security held of record by 500 or more persons. Pursuant to its exemptive authority, however, the SEC has, by regulation, exempted any issuer that has less than $10 million in assets. Once registered, an issuer is subject to all of the periodic and other reporting requirements of the Exchange Act (e.g., Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, etc.), as well as various requirements relating to corporate governance. Pursuant to Section 12(g)(4) and Exchange Act Rule 12g-4, a registered issuer may terminate its registration only if the number of record holders of its registered equity security drops below 300 persons. Although there are various methods of "going private", such as through a reverse stock split, a tender offer, or a merger, these transactions are the subject of extensive regulation and are burdensome and expensive to issuers.
The JOBS Act made two important changes to Section 12 of the Exchange Act that were intended to reduce the regulatory burden on small banks and bank holding companies. First, Section 12(g)(1) was amended to increase the number of security holders that triggers initial registration by banks and bank holding companies to 2,000 persons. Second, Section 12(g)(4) was amended to permit a registered bank or bank holding company to terminate its Section 12(g) registration once the number of record holders of its registered class of equity security drops below 1,200 persons.
For purposes of the registration requirement, securities are deemed to be "held of record" by each person who is identified as the owner of such securities on the records of security holders maintained by or on behalf of the issuer, subject to certain exceptions. Importantly, where a broker or other fiduciary holds securities in its name on behalf of multiple security holders (i.e., in "street name"), all of those securities are deemed to be held by a single holder of record. The JOBS Act made an important change to the definition of "held of record", which will further reduce the number of issuers who are required to register (and remain registered) pursuant to Section 12(g) of the Exchange Act. Specifically, Section 12(g)(5) now excludes securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act of 1933, as amended ("Securities Act"). For example, a person who holds securities issued pursuant to a stock option or other equity compensation plan that is exempt from registration by Securities Act Rule 701 will not be deemed to be a "holder of record".
Although the amendments to Section 12 of the Exchange Act were effective when President Obama signed the JOBS Act into law, the JOBS Act expressly requires the SEC to adopt regulations to implement those amendments so that banks and bank holding companies can take advantage of them. The SEC has up to one year to adopt implementing regulations, although we understand that rule-making efforts are well under way. Until those regulations are finalized, however, registered banks and bank holding companies with less than 1,200 stockholders are in a holding pattern.
The idea of eliminating SEC reporting obligations and the costs and burdens that accompany those reports is exciting, but institutions should keep in mind that deregistration can have significant consequences. Before making a decision to deregister, an institution's board of directors should carefully consider the advantages and disadvantages of doing so. Among other things, the board should consider how stockholders will perceive the deregistration, the impact that deregistration will have on the ability of stockholders to freely sell their shares of stock, the impact that deregistration will have on the institution's ability to raise capital and use its securities as currency in a merger or an acquisition, and the impact deregistration will have on stock-based compensatory awards. In addition, bank holding companies who have an effective registration statement on file with the SEC under the Securities Act have periodic reporting obligations that are independent from the requirements of Section 12, so these companies should consult with counsel before deciding to deregister.
If you have any questions about the JOBS Act, or if we can assist you in taking advantage of its changes, please feel free to contact the Gordon Feinblatt attorney with whom you regularly work or Andy Bulgin at email@example.com or 410-576-4280.