Many smaller banks in the United States recently received a bit of surprising news. The banking agencies published their notices of proposed rulemaking relating to the bank capital requirements. The Basel III NPR made clear that only the smallest banks in the United States would be exempt from compliance with the heightened regulatory capital requirements of Basel III. Over time, smaller banks will need to raise capital in order to meet the new requirements that will be phased in over the next few years. Historically, smaller banks have found it difficult and expensive to raise capital. Many smaller banks were not able to raise capital on their own, and turned to issuances of trust preferred securities, which then got pooled with trust preferred securities issued by other small banks, and sold (on a packaged basis) to investors. Trust preferred securities will no longer be eligible for favorable regulatory capital treatment. Smaller banks must offer common stock, or non-cumulative perpetual preferred stock, or REIT preferred stock. Memories are probably too fresh to accept a new pool instrument, even if it were a simpler pooled non-cumulative preferred. A few JOBS Act changes may provide some new alternatives for smaller banks. First, small banks might want to consider issuing securities at the bank level and rely on the exemption from registration offered by Section 3(a)(2). A national bank generally relies on Part 16 of the Office of the Comptroller of the Currency's (the "OCC") regulations in connection with offerings pursuant to Section 3(a)(2). The Part 16 regulations generally require that a national bank offer and sell its securities pursuant to a registration statement filed with the OCC, unless there is an available exemption. An exemption from the registration requirement is available if the national bank offers and sells its securities in transactions that comply with the Regulation D safe harbor or in Rule 144A qualifying transactions. Generally, banks have structured their offerings of securities to comply with the Regulation D safe harbor in order to avoid the OCC registration statement requirement. Once the SEC promulgates rules to permit general solicitation and general advertising in connection with Rule 506 offerings and resales under Rule 144A, banks should have an easier time raising capital. Banks will be able to offer securities at the bank level in 3(a)(2) offerings, using general solicitation, provided that actual investors are verified to be accredited investors. If the institution were to issue securities at the bank holding company level instead (for which the 3(a)(2) exemption is not available), this new flexibility in relation to private offerings is still quite useful.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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