Public vs. Private, Round 2

November 24, 2008

Authored by: Robert Klingler

As we’ve previously noted here, here and here, we’re not big fans of the Treasury’s definition of what constitutes a publicly traded company under the TARP Capital program.  The Treasury’s definition provides two tests, one of which is a subset of the other, and doesn’t specify whether both tests or either test must be met.

Non-Exchange-Listed Companies = Private

While speaking to an official with the Federal Reserve Bank of Atlanta today, we were told that: (i) both tests have to be met; (ii) the Over-the-Counter Bulletin Board and Pinksheets were NOT considered “national exchanges,” and therefore companies listed on such would be considered private; and (iii) they believe that all applications filed by companies which have asserted public status with an Over-the-Counter Bulletin Board or Pinksheets listing have been sent back to be reconsidered as private companies.

Similarly, the Treasury’s Second Tranche Report to Congress states that all commitments so far have been to financial institutions whose stock is traded on a national securities exchange, and that the terms of the program for non-publicly held financial institutions “whose stock is not traded on national securities exchanges” were released on November 17 and these institutions have until December 8 to apply.

Non-Exchange-Listed Companies = Public

However, the Treasury has completed a TARP Capital infusion on the publicly traded terms to an Over-the-Counter Bulletin Board company.  We are also aware of at least two other Over-the-Counter Bulletin Board companies that have received preliminary approval to participate in the TARP Capital program, including one with a scheduled closing date on December 5th.

Next Steps?

Companies that are public but not listed on national securities exchange should likely review the terms for private companies and confirm whether they are ambivalent (or perhaps prefer) the private term sheet.  If a company has a strong preference for participating under the public or private term sheet, they may want to provide their federal banking regulator with that information.

Can a Company Choose Whether it is Public or Not?

We have no idea how flexible (if at all) the Treasury will ultimately be.  Presumably, the Treasury is indifferent as to which program a company participates under, as the terms are designed to be economically equivalent.

If an arguably public company prefers the private terms over the public terms, they may want to explicitly amend their applications to make that clear.  If an arguably private comany prefers the public terms, they similarly should amend their applications to make that clear.  On the other hand, if an applicant is willing to participate in either program, they may be best positioned not to amend their application at this time and instead wait for preliminary approval from the Treasury.  At that point, they may be able to “negotiate” which terms they will participate under with a case manager who has been assigned to process their applications.

A Possible Reconciliation?

The Treasury might simply be taking the position that an Over-the-Counter Bulletin Board or Pinksheets listing is insufficient by itself to be considered a publicly traded company.  This would be a rational position to take as neither the Over-the-Counter Bulletin Board nor the Pinksheets require that listed banks, bank holding companies or insurance companies file periodic reports with the SEC.  This reconciliation would make the true test for whether an institution is publicly-traded to be whether they file periodic reports with the SEC (or comparable securities reports with their federal banking regulator if there is no holding company).