Many community banks under pressure to raise capital are considering selling new shares of stock to investors; however, doing so may cause some banks to be required to register under Section 12(g) of the Securities Exchange Act of 1934. The Act provides that even if a company has never made a public offering of stock, it must register its stock with the SEC if has more than $10 million in assets and 500 shareholders of record. Once registered, the company must comply with the SEC’s costly periodic reporting requirements.

Even the smallest of banking organizations typically have more than $10 million in assets so the important requirement to avoid registration is to remain below 500 shareholders of record. As banks seek new investors, remaining below the threshold becomes difficult.

The American Bankers Association has long argued that the 500 shareholders threshold should be raised to somewhere between 1,500 and 3,000.  The ABA argues that when the 500 shareholders threshold was set in 1964, the number of investors in the marketplace and the market presence of 500 shareholders were 3-6 times smaller than they are now. Thus, the 500 shareholders threshold should be increased 3-6 times. The ABA laments that many community banks have had to redeem stock at the expense of capital to reduce the number of their shareholders of record to below 300, the requirement to deregister under the Exchange Act.

The SEC has considered updating the 500 shareholders threshold at various times since 1996 but has not yet done so. Community banks eager to raise capital without burdensome SEC reporting costs continue to push for change.