We invite you to download a free copy of the updated edition of our book, or to request free hard copies for you and your colleagues.

Foreign Banks Financing in the United States, published by IFLR, provides a timely discussion of the approaches used by foreign banks to raise capital from US investors.

Foreign banks may rely on exempt offerings, such as 4(a)(2) offerings, 144A/Reg S offerings and 3(a)(2) offerings, or registered offerings to issue securities to US investors. We discuss each of the possible offering formats, as well as the practical considerations for issuers and their intermediaries when establishing or accessing a medium-term note program, a commercial paper program, a covered bond program, or a structured products program.

As foreign banks contemplate the potential need to raise additional capital, this guide offers an overview of regulatory consideration.

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Many banks have taken advantage of the provisions of the JOBS Act regarding the holder-of-record threshold to deregister and terminate their registration.  Banks may want to consider their capital-raising alternatives going forward.  A community or small bank that is no longer subject to Exchange Act filing requirements may consider a Rule 506 offering.  A Rule 506 offering to accredited investors will be an attractive alternative for many banks.  However, capital-raising always has been a challenge for community banks.  Some institutional investors may be reluctant to invest in “restricted securities” if these investors are subject to caps or limitations on the amount of restricted securities that they may hold in their portfolios.  Some banks may want to focus on issuances at the bank level (not the holding company level) and rely on the Section 3(a)(2) exemption available to banks.  Section 3(a)(2) of the Securities Act exempts from registration any security issued or guaranteed by a national bank, or any banking institution organized under the law of any state, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the state or territorial banking commission or similar official.  To qualify for the exemption under Section 3(a)(2), the institution must meet two requirements: (i) it must be a national bank or any institution supervised by a state banking commission or similar authority and (ii) its business must be substantially confined to banking.  Securities issued by bank holding companies are not exempt from registration under Section 3(a)(2).  Securities issued pursuant to this exemption will not be considered “restricted securities” and, as a result, there may be more investor interest.

Banks would benefit from a specific exemption under Section 3(b)(2).  The Commission has an opportunity in connection with its 3(b)(2) rulemaking (required by Title IV of the JOBS Act) to consider a streamlined approach for banks to offer securities publicly (relying on a framework similar to that provided by existing Regulation A), which will not be “restricted securities.”  Under existing Regulation A, an issuer must prepare an offering statement.  Banks, however, are already subject to significant regulatory oversight and make available financial and other information to their regulators (and bank call reports are accessible to investors).  It would make good sense to consider a tailored 3(b)(2) exemption for banks, with reduced information requirements, especially given that many banks will have availed themselves of the modified holder-of-record provisions to terminate their filing obligations, but still need access to capital.

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.