JOBS Act Is Boon to Small Banks, But SEC Can Do More

By Neal Wise

These can be nervous times for small, privately held banks. It’s acquire or be acquired. You need greater scale to keep up with regulatory costs. And a whole variety of factors limit growth.

Thankfully, the Securities and Exchange Commission gave community banks and other small companies a rare bit of good news last year. The SEC expanded Regulation A, a provision of the 1933 Securities Act that provides certain exemptions from SEC registration and other flexibility for private stock issuers.

A common issue encountered by non-public community banks exploring mergers and acquisitions or looking to raise additional capital is the limited number of exemptions from federal securities law that a bank must satisfy in order to offer its stock. Traditionally, a bank that did not want to go through the hassle of an IPO could not offer stock to more than 35 “unaccredited” investors. (This is defined as anyone with less than $1 million in net worth, exclusive of residence, or $200,000 in annual income.)

Further, these traditional exemptions mean the securities will be restricted and cannot be transferred by the shareholder for up to a year, adding a layer of illiquidity to this type of capital. All of this can greatly limit the field of target banks in an M&A deal or dim the prospects that a stock offering will be successful.

The SEC’s Regulation A allows a limited amount of privately issued securities to be unrestricted. But before last year’s reform, such securities were essentially capped at $5 million. Under the expansion commonly known as Regulation A+, banks and bank holding companies can issue up to $20 million in unrestricted securities to an unlimited number of individuals across the country in what is known as a Tier 1 offering.

The new flexibility, which was mandated by the Jumpstart Our Business Startups Act (JOBS) Act in 2012, was in part designed to allow startups to appeal to a wider scope of investors. But the new rules can also benefit community banks looking to strengthen their capital base. Regulation A+ also allows Tier 2 offerings of up to $50 million, yet those come with more reporting and compliance obligations.

Is Regulation A+ perfect? Not by any stretch of the imagination. The $20 million and $50 million caps should be higher, and implementation of the JOBS Act encountered bureaucratic resistance that resulted in a watered-down rule that fails to live up to its potential.

But the added flexibility still offers numerous advantages.

For example, for small banks with between $100 million and $200 million in assets looking to grow into a more sophisticated operation, Regulation A+ can be a promising opportunity to cast a wider net for potential investors. Even for larger organizations that may be looking to cross the $1 billion asset mark via an acquisition, a Regulation A+ offering can be combined with a cash component to create an attractive offer for a smaller target bank — especially one with a diverse shareholder base.

In a perfect world, the SEC would have gone further with Regulation A+. Community banking organizations may find that the $20 million limit on Tier 1 offerings limits the exemption’s usefulness. And while a Tier 2 offering of up to $50 million is available, it comes with more reporting and compliance obligations.

The SEC should consider raising the cap on Tier 1 offerings under Regulation A+ to fulfill Congress’ intention under the JOBS Act that smaller organizations truly have greater access to capital.


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