Square-Off: Should IPO Regs Be Relaxed?
In a May op-ed in the Financial Times, Harvard University professor Hal Scott lowered the boom on the SEC for what he called its “stringent” disclosure regulations for initial public offerings. A strong IPO market is economically desirable because going public allows companies to grow and create jobs. Regardless, the U.S. market has spent most of the past decade in a fairly pronounced slump. If historical norms had held, the number of public companies today would be at least 1,500 greater ..
Companies with less than $1 billion in revenue at the time they go public could ease into their publicly held status under legislation the House Financial Services Committee overwhelmingly passed last week.
The bill would give so-called emerging growth companies a five-year break from parts of the Sarbanes-Oxley Act, the Dodd-Frank Act, and some Securities and Exchange Commission rules. They would have to file only two years of audited financial statements (compared with the three years’ worth other companies have to provide) with the SEC prior to going public. They also would be exempt from the otherwise-required shareholder say-on-pay votes and having their internal-controls reports audited. (The Dodd-Frank Act exempts companies with public floats below $75 million from that latter Sarbox requirement, known as Section 404(b).)
The legislation also addresses rules that have not yet been finalized. For example, if the Public Company Accounting Oversight Board approves a proposal requiring companies to switch audit firms every few years, emerging growth companies would be exempt from it. They also would not be subject to the Dodd-Frank rule requiring companies to report the ratio of their CEO’s total pay to the median annual total compensation of all other employees.
If the bill — called the Reopening American Capital Markets to Emerging Growth Companies Act — becomes law, businesses would be exempt from such rules until they either earned more than $1 billion in revenue or became large accelerated filers, which have a public float of $700 million or more.
The financial-services committee voted 54-1 for the bill, leading to predictions that it will be passed by the full House. “There is a strong commitment from both parties and the executive branch to foster capital formation as a way to create jobs and help small companies raise capital,” says James Hamilton, principal securities law analyst for Wolters Kluwer Law & Business. A similar bill was introduced in the Senate last December.
Meanwhile, other rulemaking is in the works that could help smaller companies during the current ho-hum economy. The SEC and Congress are considering raising the 500-shareholder threshold that requires private companies to register with the SEC. And President Obama has expressed interest in changing regulations for crowd-funding, an increasingly popular tool entrepreneurs use to raise capital.
While Facebook’s preparation for its initial public offering early this month generated much hoopla, the IPO market has not fully recovered for emerging growth companies. Only 52 venture-backed companies went public last year, down from 75 in 2010, according to the National Venture Capital Assn.
Regardless, regulations can’t be assigned all the blame for deterring companies from listing their securities. “It’s inaccurate to say that companies aren’t going public because of Sarbanes and other regulations,” says Ed Pease, a partner at law firm Brown Rudnick who represents emerging companies. “The biggest, most successful tech companies are managing their way through that.”
Still, the cost of compliance is often a factor companies weigh when considering whether to make the move. The legislation “allows companies not the size of the Facebooks and LinkedIns to say, the cost of doing this has come down a bit” and give the U.S. capital markets another serious look, Pease adds.