What is "Publicly Traded?"

November 17, 2008

Authored by: Robert Klingler

1st Financial Services Corporation’s inclusion on the Treasury’s Transaction Report, as an OTCBB company, appears to show that the Treasury is NOT requiring that companies be traded on a national securities exchange in order to participate in the TARP Capital program for publicly traded companies.  The inclusion would also suggest that any company that is required to file periodic reports under the federal securities law: (a) is considered a “publicly traded” company, (b) had a deadline to apply of November 14, 2008, and (c) is not eligible to participate in the newly announced TARP Capital program for private companies.

The Treasury’s new term sheet for private companies, repeats the prior definition from the FAQ:

For the purposes of this term sheet “publicly traded” means a company (1) whose securities are traded on a national securities exchange and (2) required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator.  A company may be required to do so by virtue of having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which applies to all companies that are traded on an exchange or that have $10 million in assets and 500 shareholders of record or Section 15(d) of the Exchange Act which requires companies that have filed a registration statement under the Securities Act of 1933, as amended, and have 300 or more securityholders of record of the registered class to file reports required under Section 13 of the Exchange Act, e.g., periodic reports.

As we previously noted, the Treasury’s definition of “publicly traded” does not clarify whether a “public” institution must satisfy both conditions or either condition.  We previously asked whether a company that does not have securities traded on a national securities exchange but is required to file periodic reports is a “public” institution under the Treasury’s interpretation.  The inclusion of 1st Financial Services Corporation appears to answer that question in the affirmative.

The plain language of Treasury’s definition suggests that both conditions must be met, as the definition uses “and” to describe the two tests.  However, the second prong (as noted in the second sentence of the answer) will always be true if the first prong is satisfied.  As a result, if both prongs must be satisfied, then only the first prong matters, but if either prong is sufficient to constitute a “public” company, then only the second prong matters.