Community banks are warming up to a move by the Securities and Exchange Commission that allows companies to advertise private offerings.
The SEC lifted its advertising ban in July, as mandated by the Jumpstart Our Business Startups Act, but bankers have been hesitant to test the waters. Slowly, some banks are realizing that advertising could be the best way for them to raise capital in a tough investment climate.
"We are a small, locally owned community bank in a narrow and confined market" of less than 100,000 people, says Matthew Converse, president and chief executive of Sevier County Bank in Sevierville, Tenn. "Having the ability to market our wares to a broader base of investors, when we have a story to tell, would be huge."
The $305 million-asset bank, tucked in the Great Smoky Mountains, is considering newspaper ads and direct mail to promote a potential preferred stock offering. Earlier this year, the bank tried to raise $15 million in a common stock offering and only achieved about a tenth of its goal.
For small community banks, the capital-raising environment remains treacherous. There are investors on the prowl, but they are interested in bigger banks. Further, analysts are beginning to advise their clients to buy the buyers, hoping to catch the pop that some bank stocks are seeing after M&A deals are announced.
As a result community banks, particularly those in small rural markets or ones that have tapped out existing shareholders, could benefit from advertisement to a broader audience, industry experts say.
"It could be a very successful strategy," says Walter Todd 3rd, a portfolio manager at Greenwood Capital Associates in Greenwood, S.C. "Going to market is a real challenge for community banks, and this somewhat democratizes capital raising for them."
The SEC's new rules, meant to stimulate growth of small businesses, allow them to advertise private placements in mass media such as television and the Internet. However, investors still must meet certain criteria to participate in offerings. Individuals must have an income of $200,000 or net worth of $1 million, excluding their home. Only 7% of all U.S. households qualify, the SEC says.
Several banks in cities such as Chicago and Bellevue, Wash., have shown an interest in advertising stock offerings, says Lee Bradley, senior managing director at Community Capital Advisors, which is advising Sevier.
"We will see more of this," Bradley says. "It is not a total game-changer for community banks, but it is like a [vitamin] B-12 shot."
Sevier expects costs tied to its planned offering to stay well below $100,000, Converse says. The bank plans to run advertisements in newspapers in Knoxville, Tenn.; Asheville, N.C.; and Bristol, Va. "Tactically, we're scoping out markets that are within a two-hour drive of our location," he says.
"We would also buy a list of individuals with net worths that matched or exceeded" the SEC's rules, Converse says. "We can narrow that list down to the type of investors who would have an interest in us specifically."
Some concerns have been raised that there aren't enough protections for investors.
Direct mail presents strong potential for fraud in some eyes, Todd says.
"It is a bit puzzling that the SEC would allow" direct mail, Todd says. "This could rock along for a couple of years until some deal goes south and someone starts screaming at the top of their lungs. That's when the rule will change. I can see that coming like a freight train."
The SEC will be on the lookout for people who try to abuse the process, especially in the first year or two, Bradley says. "We'll have to see how it goes but there is no doubt that community banks needed something to kind of level the playing field," he says.
Sevier spent months looking into the process. "There are some unknowns and a certain degree of liability among management, directors, legal counsel, the broker/dealer and the sales agent," Converse says. "We've got a lot of players so the objective was to get everyone comfortable."
The SEC also requires any companies that advertise to provide disclosures that are in accordance with the state regulations where they run ads. "We have to make sure that we're comfortable with those securities laws," Converse adds. "We are likely to go beyond the requirements on those states in regards to disclosures."