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The Misconceptions of Private Bank M&A

Last week, Kevin Strachan joined me in the podcast studio to discuss the ability of privately held banks to use their securities as consideration to acquire another institution.

Sadly, since the last time we recorded a podcast, the patriarch of our banking practice, Walt Moeling, passed away.  Our previously posted memorial included several links to remember Walt, but of particular relatedness to the podcast, we encourage everyone to listen again to two earlier podcasts with Walt sharing his wisdom.  In December 2016, Walt joined us on the podcast to discuss, among other things, the future of the banking industry and what one regulatory change he would make if given unlimited power. Then, in March 2017, Walt spoke about establishing a sustainable sales culture.

Somehow, I was able to read the notes I had scribbled about Walt, and we then continued to discuss two common (and contradictory) misconceptions on private company merger and acquisition activity. 

The first misconception is that privately held companies can’t issue stock as merger consideration.  The second misconception is that privately held companies can issue stock without restriction as merger consideration.  We regularly hear both of these misconceptions when advising private companies on a potential merger transaction where they are looking to issue (or receive) private company stock.  While neither of these ideas are correct, the truth is messy and usually requires further discussion.

Among the topics covered with Kevin in this episode of The Bank Account are:

  • the additional flexibility of banks without holding companies (and the limitations of that flexibility);
  • SEC registration via merger;
  • Regulation A+ in mergers;
  • the state Fairness Hearing exemption; and
  • using Rule 506 of Regulation D to issue securities to the target shareholders.

For private companies considering an acquisition of another institution, further conversations with investment bankers and lawyers are almost certainly going to be needed, but this episode of The Bank Account can give you a head start in understanding some of the potential options that may be out there.

Please click to subscribe to the feed on iTunes, Android, Email or MyCast. It is also now available in the iTunes and Google Play searchable podcast directories.

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FAST Act Rule Changes for Banks

FAST Act Rule Changes for Banks

April 30, 2019

Authored by: Kevin Strachan

The SEC recently published final rules that allow publicly traded bank holding companies and banks to simplify their public disclosures and provide more meaningful information to investors. Most of the rules become effective on May 2, 2019, which allow many registrants to benefit from them on their Form 10-Q filings for the quarter ended March 31, 2019.

This post is intended to highlight those changes that we expect to be most significant to registrants in the banking industry. BCLP has also produced a more thorough summary of the final rules as applicable to all registrants. The complete, 252-page adopting release is available here.


Most registrants provide three years of MD&A narrative.  The new rule allows such registrants to omit discussion of the earliest of the three years if such discussion was previously filed, so that the 10-K MD&A will address only the year being reported and the previous year.  Smaller reporting companies are only required to provide two years of financials and MD&A (and emerging growth companies are allowed to omit periods prior to their IPO), so these registrants will not see any benefit from this change.

The revisions to the MD&A requirements also eliminate the requirement that issuers provide a year-to-year comparison.  In the related commentary in the adopting release, the SEC characterizes this change as providing registrants flexibility to tailor their presentation.  Hopefully, over time, the SEC’s expressed purpose will encourage creative approaches to this area. 

Exhibits – Material Contracts

Previously, a two year “lookback” applied, such that material contracts entered into in the two years prior to the filing were required to be disclosed on the exhibit index even if the contracts had been fully performed.  A common example is merger agreements—companies are currently required to continue to file merger agreements as exhibits even after closing.  The new rule eliminates this requirement (other than for newly public companies), such that material contracts that have been fully performed are no longer required to be disclosed.

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SEC Increases Smaller Reporting Company Threshold

The Securities and Exchange Commission amended its definition of “smaller reporting company” (an “SRC”) increasing the public float threshold (cap on portion of shares held by public investors) to $250 million, up from the prior $75 million threshold.  Companies with a public float of up to $700 million may also qualify for SRC status under the new rule if their annual revenues are less than $100 million.

Benefits of SRC Status

The less rigorous reporting requirements for SRC’s provide a number of benefits to qualifying companies.  The Independent Community Bankers of America estimates that SRC status—thus exemption from the 404(b) reporting requirements—could cut audit fees for qualifying bank holding companies by as much as 50%.   Included in the lesser filing requirements for SRCs are the following scaled disclosure accommodations:

  • Audited historical financial statement filing requirements are reduced to two years (rather than three for larger reporting companies)
  • Less rigorous disclosure for annual and quarterly reports, proxy statements and registration statements
  • Two years of income statements (rather than three)
  • Two years of changes in stockholders’ equity (rather than three)
  • Reduced compensation disclosures
  • No stock performance graph required
  • Not required to make quantitative and qualitative disclosures about market risk

Methods of Calculation

A company’s public float, the total market value of the company’s outstanding common stock (voting and non-voting) held by non-affiliates or non-insiders, is the amount reflected on the first page of the company’s 10-K as the “aggregate market value of the common stock held by nonaffiliates of the registrant.”   The public float is measured as of June 30th each year.

To calculate “annual revenues” for the $100 million SRC limit, a financial institution must calculate its gross revenues earned from traditional banking activities.

Interest income

+ non-interest income

– gains and losses on securities

= annual revenues

The calculation of annual revenues is from the most recent 12 months for which audited financials are available.  We have no reason to believe based on the issuance of this new rule that the SEC will change the calculation of annual revenues for financial institutions.

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Financial Institutions Stock Liquidity Conference

May 4, 2015 – May 5, 2015
The Ritz-Carlton, Atlanta
181 Peachtree Street Northeast
Atlanta, GA  30303

Sponsor(s):  Hosted by Bryan Cave LLP, OTC Markets Group, Banks Street Partners, and Stock Cross Financial Services

Conference Description
We are pleased to announce the inaugural Financial Institutions Stock Liquidity Conference in Atlanta, Georgia.  The conference will begin with a cocktail reception on Monday evening, May 4th from 6:00 – 9:00 p.m., at the College Football Hall of Fame, where interactive and personalized tours will be offered to conference attendees.  The conference will continue on Tuesday, May 5th from 8:00 a.m. – 4:00 p.m., with a full day of presentations and panel discussions that will explore the universe of liquidity options available to financial institutions and opportunities to access the capital markets.

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Comments on Proposed Rules for Georgia Fairness Hearings

On May 9, 2014, the Georgia Securities Division issued a proposed rule to create a formal process for fairness hearings to be conducted by the Georgia Commissioner of Securities.  The proposed rule would establish procedures for administrative hearings to determine the fairness of certain mergers and other business combinations in which securities are issued.  If the Commissioner determines that the terms of the proposed transaction are fair to the shareholders receiving securities, the issuer would be able to claim an exemption from the registration requirements of the federal Securities Act of 1933 for the securities to be issued.  Specifically, Section 3(a)(10) provides an exemption from the registration requirements of the federal Securities Act for securities issued in a transaction determined to be fair pursuant to a fairness hearing by a governmental authority.  The exemption from registration with the SEC is particularly valuable for companies that are not currently subject to the periodic reporting requirements under the Securities Exchange Act of 1934.

In our view, fairness hearings conducted by the Georgia Commissioner will make it easier for private bank holding companies to use stock to fund the purchase price for acquisitions.  Not only will the hearing process allow companies to avoid filing a Form S-4 registration statement for the acquisition with the SEC, it will also allow the companies to avoid triggering the significant ongoing expense associated with the periodic reporting and disclosure requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act.  We have seen circumstances in which the registration and ongoing reporting requirements have discouraged a company from using stock as a currency for an acquisition.

States such as California and North Carolina have conducted state fairness hearings similar to those described in the proposed rule for some time.  Following the re-write of the Georgia Securities Act in 2008, Georgia has only conducted one fairness hearing, which involved the merger of two financial institutions in late 2013. The proposed rule would provide more clarity and certainty with respect to the fairness hearing process in Georgia.

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SEC Adopts Final Rules to Rule 506 Private Placements

The SEC recently adopted new rules to lift the ban on general solicitations and general advertising for Rule 506 private placements and Rule 144A offerings. In addition, the SEC also adopted rules disqualifying “bad actors” from taking advantage of the Rule 506 private placement safe harbor. These new rules will be effective on September 23, 2013. The SEC has further proposed new rules that, among other things, require an SEC filing at the start of Rule 506 placements involving general solicitation, the inclusion of additional cautionary legends and disclosures in offering materials as well as a temporary (two-year) requirement to file general solicitation materials with the SEC.

Regulation D’s Rule 506 provides a safe harbor exemption from registration under the Securities Act of 1933 for private offerings made to accredited investors and no more than 35 non-accredited investors who meet certain investment sophistication requirements. The SEC estimates that Rule 506 offerings account for more than 90% of all Regulation D safe harbor private offerings and substantially all of the capital raised under Regulation D. Prior to these new rules, an offering would not satisfy the Rule 506 safe harbor exemption if any general solicitation or general advertising occurred. General solicitation and advertising includes advertisements published in magazines and newspapers or broadcast by television or radio or made available through unrestricted websites. Widely disseminating offering materials absent pre-existing relationships with investors may even be deemed a general solicitation.

General Solicitation Ban Removed

As mandated by the JOBS Act (to be completed by July of last year), the SEC is adding new Section 506(c) to permit general solicitation and advertising to offer and sell securities in a Rule 506 offering if (a) all purchasers are accredited investors or the issuer reasonably believes that they are accredited investors, and (b) the issuer takes reasonable steps to verify that all purchasers are accredited investors.

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SEC Advisory Committee Recommends Relaxing Restrictions on Solicitation and Advertising in Private Offerings

On January 6, 2012, the Advisory Committee on Small and Emerging Companies established by the Securities and Exchange Commission (“SEC”) recommended that the SEC take immediate action to permit general solicitation and general advertising in private offerings of securities under Rule 506 of Regulation D where securities are sold only to accredited investors. Relaxing the current restrictions on general solicitation and advertising would facilitate the ability of companies to raise capital from accredited investors, who are generally viewed as able to fend for themselves. For example, relaxing these restrictions would make it easier for companies to publicize their financing plans and seek funding from investors without any pre-existing relationship.

Rule 506 of Regulation D provides a widely-used safe harbor from the registration requirements of the Securities Act of 1933 for qualifying private offerings. Under current Rule 506, neither the issuer nor any person acting on the issuer’s behalf may offer or sell securities by any form of “general solicitation or general advertising,” and securities sold pursuant to Rule 506 may only be sold to “accredited investors” or persons who, either alone or with a representative, have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of a prospective investment.

The Advisory Committee is of the view that the restrictions on general solicitation and advertising prevent many privately held small businesses and smaller public companies from gaining sufficient access to capital sources and thereby materially limit their ability to raise capital through private offerings. The Advisory Committee noted that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings where the securities are sold solely to accredited investors. Because the concepts of general solicitation and advertising are vague, the prohibition increases compliance and diligence costs for issuers of securities who seek to avoid potential activities that might be deemed to constitute general solicitation or advertising and thereby destroy the availability of the Rule 506 safe harbor.

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Conference Committee Approves Sarbanes-Oxley 404(b) Exemption

On June 16, 2010, the conference committee reconciling the House and Senate versions of the federal financial reform bill agreed to include in the final reform legislation the House provision that provides an exemption on compliance with Sarbanes-Oxley Act (SOX) Section 404(b) for companies with less than $75 million in market capitalization.

Under the provisions of SOX 404, publicly reporting companies and their independent auditors are each required to report on the effectiveness of internal control over financial reporting.  Section 404(a) requires all public companies to assess the effectiveness of their internal control over financial reporting, while Section 404(b) requires independent auditors to report on management’s assessment.  On October 2, 2009, the Securities and Exchange Commission (SEC) granted its latest deferral for compliance with SOX 404(b), providing non-accelerated filers, those companies with a public float below $75 million, with a reprieve from the auditor attestation until annual reports for fiscal years ending on or after June 15, 2010 are filed.  At the time of that deferral, the SEC was adamant that it would not be granting any further extensions for compliance with SOX 404(b).

The inclusion of the exemption in the final reform legislation would permanently exempt the auditor attestation requirement and significantly reduce the anticipated compliance burdens of smaller reporting companies.  Disclosure of management attestations on internal control over financial reporting would continue to be required for smaller reporting companies.

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SEC Extends Deadline for Sarbanes-Oxley 404(b) Compliance

On October 2, 2009, the Securities and Exchange Commission (SEC) announced a nine-month deferral on Sarbanes-Oxley Act (SOX) Section 404(b) compliance for the smallest publicly reporting companies. Under the provisions of SOX 404, public companies and their independent auditors are each required to report on the effectiveness of company internal controls.  All publicly reporting companies are currently required to disclose a report on management’s assessment of internal controls; however, only reporting companies with a public float of $75 million or above are required to disclose an attestation report provided by an independent auditor.  The extension granted by the SEC will provide non-accelerated filers, those companies with a public float below $75 million, with a reprieve from independent auditor attestations until annual reports for fiscal years ending on or after June 15, 2010 are filed.  Although the SEC has not published the final rule providing for the extension, based on prior extensions, we believe the extended deadline only applies to independent auditor attestations.  Consequently, disclosure of management attestations on internal control continues to be required.

Prior to the October 2 announcement, the deadline for the independent auditor disclosure in annual reports for the smallest publicly reporting companies was fiscal years ending on or after December 15, 2009.  The previous extension, granted in January 2008, was put in place to allow the SEC’s Office of Economic Analysis to complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance.  This study was published recently, less than three months before the December 15 deadline, and, as a result, the SEC determined that additional time was appropriate and reasonable so the smallest publicly reporting companies and their auditors could better plan for the required attestation.

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