SecondMarket Inc., the private shares marketplace that rose to prominence through its relationship with Facebook Inc., is expanding into the secondary market for bank shares.
The firm began a trial program today in New York, New Jersey, Texas and Pennsylvania to create a secondary market for shares of closely held community banks, according to Caryn Feinberg, SecondMarket’s senior vice president. The effort is designed to give banks new avenues to raise capital and provide a “robust” new marketplace for the company, Feinberg said in a telephone interview.
“We as a company really look to try and find inefficiencies in the market and try to help create capital solutions,” said Feinberg, who is leading the trial program. “That’s exactly what we think we’re doing with this product.”
The expansion comes as New York-based SecondMarket seeks to make up for the loss of closely-held stock trading volume that will come with Facebook’s initial public offering. The pilot program, which Feinberg said will involve about six lenders, represents the company’s first attempt to tap community banks searching for ways to raise capital in the wake of the subprime mortgage crisis and an uncertain regulatory environment after the passage of the Dodd-Frank Act.
“The recovery has been frustratingly slow” for smaller lenders despite signs of improvement in the economy, Federal Reserve Chairman Ben S. Bernanke said today at a community banking conference in Arlington, Virginia, adding that “actual and prospective changes in the regulatory landscape have also raised concerns among community bankers.”
SecondMarket, which started its platform for trading private shares in 2009 and completed $558 million in transactions last year, is trying to tap into that market, Feinberg said. The pilot program will give banks the chance to decide when their shares will trade and who can trade them.
Secondary exchanges like those run by SecondMarket and competitors such as SharesPost Inc. and Gate Technologies LLC allow investors and employees of closely held firms sell shares without companies having to pursue an IPO.
For banks facing increased pressure to raise capital, the platforms may provide another avenue for generating funding. The banking industry continues to recover from a financial crisis that has led to more than 400 bank failures since the beginning of 2008. The decision on where to hold the pilot program was driven by locations where banks were among the healthiest, Feinberg said.
Investors may benefit from SecondMarket’s involvement by gaining access to more prospective buyers when they want to sell. Closely held banks currently provide limited options for investors looking for ways to exit stock, said James Arnold, executive vice president at Lubbock National Bank in Texas.
The inability to facilitate future stock transactions for investors can create a “major obstacle to raising capital,” Arnold, whose 95-year-old closely held bank has less than 200 shareholders, said in a telephone interview.
Feinberg said the firm has been exploring the shares of closely held community banks for a little less than a year. If the pilot is successful, it will expand to the broader market by the end of the year, she said.
The move into the community bank shares tracks with the company’s decision last year to deploy lobbyists in Washington last year to push the its interests. SecondMarket joined the largest Washington-based bank trade groups in pushing for legislation to increase the number of shareholders a bank can have while staying private.
Lawmakers from both parties and both chambers of Congress have embraced the idea, with members of the House and Senate signing up to co-sponsor bills aimed at easing the rules for closely held companies looking to raise capital. Both chambers have held multiple hearings on the issue, with the House Financial Services Committee moving first on the legislation.
Barry Silbert, SecondMarket’s 35-year-old chief executive officer, said in December testimony before the Senate Banking Committee that increasing the bank shareholder threshold was among three measures that warranted “immediate passage by this Congress.”
The House in November passed a measure to increase to 2,000 from 500 the shareholder threshold for closely held banks. The Senate hasn’t moved forward on its own version of the legislation, which has 10 bipartisan co-sponsors.
“As bank regulators demand higher capital levels, community banks must be able to raise capital from more shareholders without SEC registration,” Camden R. Fine, the chief executive officer of the Independent Community Bankers of America, said in a November letter to senators urging passage of the legislation.
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