Risk

Community Bank’s Shares Pulled from SecondMarket

In April, First Advantage Bancorp moved its shares off a stock exchange and put them on SecondMarket, a private trading platform. But in July that ...
Vincent RyanAugust 27, 2013

Finding the right home for the trading of its delisted stock has not been easy for First Advantage Bancorp.

After voluntarily delisting from Nasdaq last April and engaging SecondMarket, a private share exchange, to handle trading, the community-banking company has now decided to dump the SecondMarket arrangement and let its shares trade unfettered on an over-the-counter (OTC) trading platform.

It’s a surprising move, given that Earl Bradley, First Advantage’s chief executive officer, told CFO in May that the 500-plus long-term holders of the banking company’s stock would be better off trading on the SecondMarket platform “because they have no intentions of trading on a daily basis, but need a good source of liquidity if they want to sell or buy.”

Bradley said at the time that by engaging SecondMarket he was hoping to get sellers of the stock a fairer price. “I’ve watched it hundreds of times [with bank stocks],” Bradley told CFO. If a shareholder places an order to sell a block of 20,000 shares, traders, recognizing the stock is thinly traded, bid the price down. The relatively large order artificially lowers the bank’s stock price and “unwary shareholders don’t get the best value,” Bradley said.

SecondMarket CEO Barry Silbert told CFO that the platform — which facilitated $40 billion in trading of pre-IPO shares of Facebook — is a better for highly illiquid stocks of small companies. On SecondMarket, the equity issuer restricts trading to certain events or time periods (every three months, for example) and decides who can sell shares and how many. Compressing the trading days means small orders (1,000 shares, for example) do not move the stock’s price by several percentage points, as can happen on an exchange, Silbert told CFO.

But in a July 17 letter to shareholders posted on the front page of First Advantage’s investor relations section of its web site, Bradley announced that First Advantage’s shares (FABK) would only trade on OTC Markets.com, an “open exchange which allows investors, using a broker, to make daily trades.”

“The arrangement replaces the previously announced SecondMarket arrangement, as we see that many shareholders were actively trading on OTC Markets to buy and sell shares,” Bradley wrote in the letter to shareholders. First Advantage’s shares were to trade on the OTC Markets network of broker dealers anyway, but now they will only trade there.

Bradley was out of the office this week and unavailable for comment on the decision, and a SecondMarket spokesman declined to comment on why the relationship was severed.

OTC trading platforms used to be a backwater for delisted stocks and the domain of issuers that are under financial strain, but they are much more sophisticated now. OTC Markets’ electronic platforms combine a company’s financial results with its stock pricing and trading information. The company offers different market tiers based on the quality of the issuer’s business and its financial-reporting standards. The OTCQX marketplace, seen as just a level below being traded on an exchange, added 86 companies in 2012 and now has issues from 400 companies trading electronically among broker-dealers.

The OTCQB, on which First Advantage shares will trade, is the next level down from the OTCQX. The OTCQB does not have any financial reporting standards, but issuers have to be current in their reporting with a U.S. regulator, as banks usually are.

First Advantage is not the only community bank that’s faced a decision about how its delisted stock will trade. As CFO reported in March, more companies are voluntarily moving to OTC trading platforms from exchanges, instead of being forcibly delisted from an exchange. Community banks are at the forefront. They are taking advantage of a provision in the Jumpstart Our Business Startups (JOBS) Act that lets banks have as many as 1,200 stockholders of record, up from 300, without filing with the Securities and Exchange Commission.

Image courtesy of bfishadow on Flickr, under the Creative Commons Attribution 2.0 generic license.