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.
While any relief still has a long (and uncertain) path before it would be effective, on October 26, 2011, the House Financial Services Committee approved four bills (with bipartisan support) that would remove regulatory federal securities law obstacles to capital formation.
H.R. 1965 would, for banks and bank holding companies, raise the SEC registration threshold to 2,000 shareholders and the deregistration threshold to 1,200 shareholders.
H.R. 2167, the “Private Company Flexibility and Growth Act,” would raise the SEC registration threshold for all companies to 1,000 shareholders and would exclude accredited investors and certain employees from the definition of “held of record” for registration purposes.
H.R. 2940, the “Access to Capital for Job Creators Act,” would permit general solicitation and general advertising for private offerings conducted under Rule 506, so long as all purchasers were accredited investors.
On June 13, 2011, the Federal Reserve published an interim final rule nominally offering some relief from the capital effects of the Tier 2 treatment for SBLF funds for Sub S and Mutual bank holding companies.
As recognized by the Federal Reserve, “the SBLF Subordinated Securities, like the CPP Subordinated Securities, are issued to Treasury as part of a nationwide program to provide capital to eligible banking organizations that are in generally sound financial condition in order to increase the capital available for lending to small businesses, thereby mitigating the ongoing effects of the financial crisis on small business and promoting financial stability.” The Federal Reserve also acknowledged that “the SBLF Subordinated Securities are in terms and substance substantially equivalent to the CPP Subordinated Securities.” (more…)
A year ago today, the Dodd-Frank Act was signed into law. Today the Consumer Financial Protection Bureau “stands up,” the Office of Thrift Supervision has 90 days to live, and the Comptroller General’s study on the independence of presidentially appointed inspectors general of certain federal entities was due to Congress (don’t worry if you missed that last one). For many provisions of the Act, the legislation requires that implementing rules were to be finalized by today. As few of the hundreds of required rules have actually been proposed yet alone finalized, there is an argument that those aspects of the law requiring rules by today are not yet effective. Provisions of the law that are certainly effective today:
- Preemption standard for national banks and federal thrifts is altered
- Codification of the requirement that a bank holding company act as a “source of strength” for any subsidiary that is a depository institution
- Federal Reserve is authorized to issue orders and regulations relating to the capital requirements of holding companies
- Heightened capital requirements for interstate acquisitions
- New restrictions on insider asset sales and lending
- Truth in Lending Act exemption threshold for certain credit transactions and consumer leases is increased from $25,000 to $50,000 (i.e., TILA coverage is increased)
- Repeal of Regulation Q and the underlying statute (permitting payment of interest on demand deposit accounts)
- Increase in next-day availability requirement for deposit items not themselves subject to next-day availability under the Expedited Funds Availability Act from first $100 to first $200
- Required credit score disclosure under the Fair Credit Reporting Act where adverse action is based in whole or part on a consumer report
We will continue to follow rulemaking and enforcement of the Act and provide updates linked to our dedicated Dodd-Frank page. Regulators (and Barney Frank) are celebrating the law’s milestone today by testifying before the U.S. Senate on how the Act has improved supervision. Stay tuned.
On May 11, 2011, Georgia Governor Nathan Deal signed House Bill 30 into law, ushering in a new era for non-competition agreements (non-competes), non-disclosure agreements (NDAs), and non-solicitation covenants under Georgia law. Historically, Georgia courts have not been friendly to such agreements and have made enforceability unclear. The new statute clarifies and strengthens the ability of parties to restrict conduct during and after employment or a deal. Perhaps most importantly, the law expressly authorizes courts to cure or “blue pencil” such agreements signed on or after May 11, 2011. Under the previous regime, one faulty provision generally invalidated an entire restrictive covenant in Georgia. In addition, the new law makes clear that NDAs need not specify a time limit on a requirement to maintain information as confidential so long as the information otherwise remains confidential.
In Georgia, new consideration is not required to execute new non-competes, so employers are in a good position to strengthen their competitive protections under the revised statute, but action is required as only new agreements will enjoy the benefits of the new law. The new law also governs restrictive covenants between distributors and manufacturers, lessors and lessees, partnerships and partners, franchisors and franchisees, sellers and purchasers of a business or a commercial enterprise, and two or more employers.
In-Term Covenants Generally
The bill codifies many aspects of the law in this area that had developed in the Georgia courts. This includes the presumption that any restriction within an agreement that operates during the term of the underlying employment or business relationship is not unreasonable because it lacks any specific limitation on the scope of activity, duration, or geographic area as long as it promotes or protects the purpose of the agreement or deters any potential conflict of interest.
In its press release issued on May 4, 2011, Bryan Cave client Brand Group Holdings, Inc. (the “Company”) announced the successful completion of its recapitalization. The total amount raised in the initial phase of this effort was $125 million, and the three largest investors in the recapitalization, affiliates of The Carlyle Group, The Stephens Group, and the Cousins’ family, invested approximately $96 million, with various other investors investing approximately $29 million. The investors have agreements in place with the Company to invest an additional $75 million in capital at a later date.
A unique feature of this transaction is a valuation adjustment that utilizes a stock escrow arrangement. Some of the purchased shares will revert from the new investors to the legacy shareholders if the existing loan portfolio performs better than the investors have projected.
As a result of the recapitalization, the Company is among the best capitalized financial institutions, among those with over $1 billion in assets, in Georgia. The Company’s Total Risk-Based Capital Ratio stands at over 24%. The Company anticipates that its wholly owned subsidiary bank, The Brand Banking Company, will use proceeds from the recapitalization to enhance its current offerings and expand into new banking services.
If there is a partial Federal government shutdown due to a failure to reach a budget agreement, what effect would this have on the four main Federal banking agencies? The short answer: None.
None of the Federal Reserve System, the FDIC, the OCC, or the OTS receives appropriations from Congress. Instead, each of these Federal agencies is funded through various other sources, as described below. Thus, none of the services or responsibilities of these Federal agencies will be affected if a budget agreement is not reached.
However, many other Federal agencies may be significantly affected by a Federal government shutdown, including, notably for financial institutions, the SEC. We would recommend that institutions with on-going matters with the SEC reach out to their contact persons at the SEC to discuss their situations.
The conference report of the Dodd-Frank Wall Street Reform and Consumer Protection Act creates a new regulatory framework for the supervision of financial holding companies and their non-bank subsidiaries, and provides new standards for interstate bank mergers, interstate bank acquisitions by bank holding companies, de novo branching for national and state banks, and charter selection and conversion (see Title VI).
Increasing Supervision of Holding Companies and Their Subsidiaries
Sections 604 and 605 of the conference report broaden the supervisory powers afforded to the Federal Reserve Board to supervise the activities of holding companies and their non-bank subsidiaries. The conference report permits the Federal Reserve to review other supervisory materials – “reports and supervisory information” – provided to regulators by the holding company or any of its subsidiaries to get a better sense of the risk profile of non-depository subsidiaries of the holding company. In addition, the Federal Reserve is permitted to commence examinations of the holding company and its subsidiaries, with a particular focus on prudential concerns such as the safety and soundness of the institution, the overall stability of the U.S. financial system, as well as a review of the compliance of the holding company and its subsidiaries with relevant provisions of federal law.
The conference report attempts to reduce the burden of additional regulatory examinations on financial institutions and regulators, with the Federal Reserve instructed to rely on reports from prior examinations by other federal or state regulators in order to get a preliminary picture of the condition of the holding company and its subsidiary. The conference report further requires the Federal Reserve to coordinate its activities with the functional regulator of a subsidiary; for example, should the conference report be enacted, the Federal Reserve is required to consult with the OCC for its review of a national bank and to consult with the Securities Exchange Commission for its review of a securities or brokerage subsidiary.
After the dust settled on the work of the financial reform bill’s conference committee, Section 171 — the capital treatment provisions added by Senator Susan Collins (R-Maine) — grandfathers securities previously issued by small and mid-size bank and thrift holding companies and otherwise phases in the heightened standards. In addition, the Federal Reserve’s small bank holding company policy statement (applicable to holding companies with less than $500 million in consolidated assets) is preserved. Accordingly, the Dodd Frank Act will not impact small bank holding companies so long as they remain under $500 million in consolidated assets. Other provisions of the Act regulate systemic risk and direct the Fed to establish counter-cyclical capital requirements and to force holding companies to act as a “source of strength” for subsidiary banks.
The amended Section 171 avoids placing significant and untimely capital needs on community banks. Although we do not expect further debate on this or any other provision of the Dodd Frank Act, the reconciled bill still needs to pass both houses of Congress and be signed by the President in order to become law.
The conference report does not modify the basic policy change proposed by Senator Collins — to subject holding companies to capital requirements at least as stringent as those applicable to banks. As we have discussed, this shift would exclude trust preferred securities and TARP CPP Preferred Stock from holding company tier 1 capital totals. The impact of this change cannot be understated since banks are already struggling to retire trust preferred obligations and to generally raise capital. However, the conference committee has significantly softened the impact via grandfather provisions, blanket exemptions and transition periods.
7th Circuit Reverses Tax Court in Vainisi –
Subchapter S and Q Sub Banks Following Notice 97-5 with Respect to Expenses Relating to Tax Exempt Income
Should Consider Filing Refund Claims
On March 17, 2010, the U.S. Court of Appeals, Seventh Circuit, reversed the U.S. Tax Court’s decision in Vainisi v. Commissioner, 132 T.C. No. 1 (2009), which held that a sub-S corporation that is a bank (or in this case a bank holding company that owned a bank that had made a qualified S subsidiary or “Q-sub” election) is required, under the provisions of Section 291 of the Internal Revenue Code of 1986, as amended, (the “Code”), to increase the amount of its taxable income by 20-percent of the amount of the bank’s interest expense that is considered attributable to certain qualified tax exempt-obligations that are owned by the sub-S bank, despite the plain language of Code Section 1363(b)(4), which provides that “section 291 shall apply if the S corporation (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years.” The bank in the Vainisi case had been a Q-sub for longer than 3 years.