VIEWPOINT
Perspectives from Banking and Boardroom Experts
JOBS Act
The Benefits and Drawbacks of Going Private
The JOBS Act was about the only piece of
bipartisan legislation to pass through Congress
recently, according to Bruce Bennett, co-head of
Covington & Burling LLP’s securities practice. It
is supposed to facilitate job and capital formation
by reducing disclosure rules for publicly traded
companies with less than $1 billion in revenue,
a new category deemed “emerging growth”
companies. It also has a series of provisions to make
it easier for banks and thrifts to stay privately
held, enabling them to save costs. Bank Director
magazine talked recently to Bennett about the
impact of the JOBS Act on banks and thrifts.
What does the JOBS Act say about banks?
Previously, any company with more than 500
shareholders and $10 million in assets had to go
public. Now, banks with fewer than 2,000 shareholders
can stay private. The other trigger that was changed
was the maximum number of shareholders you needed
to deregister. Under the JOBS Act, banks no longer
need to fall below 300 shareholders to deregister; the
threshold is now 1,200 shareholders.
Other provisions apply to all “emerging growth”
companies. The Act basically rewrites the rules for
IPOs. It removes some fairly significant provisions.
It reduces the duration of audited financial statements
you need to go public from three years to two years.
It allows for “test the waters” communications, so you
can go out and talk to investors about whether they
would want to make an investment in this company
before you file your SEC (Securities and Exchange
Commission) report. It reduces some of the public
reporting requirements once the company goes public
and the company gets the benefit of that for five
years, unless it crosses the $1 billion annual revenue
threshold sooner.
What impact do you think it will have on banks?
If a small bank is publicly traded, there is a cost to
that. I’ve seen the cost estimate at $100,000 or more.
If the bank doesn’t have to prepare SEC registration
and reporting documents, it will probably save money.
The investors who remain in the company will expect
audited financial statements and most of the companies
that have said they will deregister say they will
continue to post those on their web sites.
If a bank is spending $100,000 to $125,000 per year
to file SEC reports, and has 10 employees who could
otherwise use their time more productively, then there
is a benefit to that.
Are there drawbacks to deregistering?
The downside is this: What if in a few years the capital markets have changed and the bank wants to raise
money in the public markets? If they have to do an
IPO, that is more expensive than just staying public.
It’s not good for companies to toddle in and out of
public status. Investors would worry: Is this an investment I want to hold? It might make it harder to do
the IPO. There also are some protections for a public
company. If anyone wants to acquire more than five
percent of a company’s stock, that person has to file
with the SEC and the company knows who their large
shareholders are. As a private company, you could
have a large shareholder not aligned with your view as
to how to manage the company and you don’t find out
about it until that shareholder gets far more than five
percent.
What size or type of bank do you think will be most
interested in deregistering securities?
Small banks. We’re seeing an increase in stock-forstock deals in mergers and acquisitions. If you’re a
privately held bank, that sort of transaction is harder
to do. If a bank is thinking of growing by acquisition,
it would probably want to stay public. For a bank with
assets in excess of $1 billion or $2 billion, I don’t see
that category being interested in deregistering. I could
also see regulators saying no, “If you do that, your
access to capital is hurt from a safety and soundness
perspective.”
Could deregistering hurt stock values?
If the standard metrics are strong, valuation will follow
accordingly. If a bank has a compromised loan book
and a lot of comprised real estate on the books, I don’t
think being public would affect that. The way it would
impact them is access to capital markets.
The JOBS Act has been billed as a way to create
jobs. Will it?
I don’t think so from the banking perspective. The
job creation could come from making IPOs easier to
do. With that, you make it easier for small companies
to grow or to do an IPO and they get better access to
capital.
Bruce C. Bennett
Bruce C. Bennett is co-head
of Covington & Burling LLP’s
securities practice. His
practice focuses on domestic
and international capital
markets transactions, including
equity, equity-linked and
fixed income (high yield and
investment grade) offerings.
In addition to his transactional
practice, he advises clients
on regulatory and corporate
governance matters, and
regularly represents clients
on interpretive issues before
the Securities and Exchange
Commission and the
Commodity Futures Trading
Commission.
As seen in the 3rd Quarter 2012 issue of Bank Director