In early March the House of Representatives passed a package of bills called the Jumpstart Our Business Startups (JOBS Act) aimed in part at making it easier for small businesses to go public, attract investors, and hire workers by reducing Securities and Exchange Commission (SEC) registration requirements. Last week the Senate finally approved the Bill, H.R. 3606, inserting a single amendment which required further House approval. That approval came on Tuesday, March 27, 2012 sending the Bill, which was backed by the Administration, to the White House for signature. President Obama is expected to sign it promptly.
While the JOBS Act contains a number of elements, the “Capital Expansion Act” component (CEA) is of particular interest to Community Banks. The CEA both:
(i) Raises the number of shareholders permitted to a Community Bank before it is required to publicly register with the SEC from 500 shareholders to 2,000. This number is further widened by excluding from the calculation those shareholders whose only securities were received under employee compensation plans; and
(ii) Equally importantly, for Community Banks already registered with the SEC, the JOBS Act now allows deregistration for companies with up to 1,200 shareholders (an increase from the current 300 shareholder deregistration level).
These reforms allow Community Banks to raise substantial additional capital, by adding additional shareholders, without incurring costly registration requirements. The change will also permit many Community Banks already registered with the SEC to deregister, substantially reducing their overall regulatory cost and compliance burdens. [Note: In the past, deregistration frequently required reverse stock splits and similar costly legal maneuvers to get below the 300 shareholder level.]
Many Community Banks faced with the need to raise additional capital have feared running afoul of the 500-shareholder rule when seeking additional investors. Others run afoul of the requirement quite unintentionally, when existing shareholders sell shares or transfer shares at death. Generally, companies were required to publicly register with the SEC whenever they crossed above the 500 shareholder threshold. These restrictive rules have remained in place for over 40 years, imposing the same reporting burdens and costs on locally-owned Community Banks as on other, much larger, publicly-traded companies.
In addition to the Capital Expansion Act, the JOBS Act bundled together the following bills:
Private Company Flexibility and Growth Act: allows other companies to increase their number of shareholders from 500 to 2,000.
Entrepreneur Access to Capital Act: relieves SEC restrictions that prevent “crowdfunding.”
Small Company Capital Formation Act: increases the ceiling for offerings that are exempt from public registration requirements from $5 million to $50 million.
Access to Capital for Job Creators Act: allows use of advertisements to solicit investors.
Reopening American Capital Markets to Emerging Growth Companies Act: aims to reduce the overall cost of going public.
We will continue to monitor the JOBS Act, and especially the Community Bank CEA shareholder provisions, for effective dates and implementation guidelines. In the meantime, we will be pleased to answer whatever questions you may have.