Risk & Compliance

Cry of Pain from Small Companies

Sarbox 404 puts investment in biotech and other small-company sectors in danger, says one panelist.
Tim ReasonMay 10, 2006

See our special report on “The 404 Debate.”

Noting that he was “the only officer of a small public company on any of the panels,” Dr. Stephen Sherwin, CEO of Cell Genesys, launched a soft-spoken but biting complaint about the impact of Section 404 of the Sarbanes-Oxley Act.

Speaking during the second panel at the Securities and Exchange Commission’s roundtable discussion on Wednesday, Sherwin noted that the biotech industry he represents is made up almost exclusively of small companies. “We are also part of an industry in which the U.S. still maintains a global position, and we don’t want to lose that,” he said.

Beyond the dangers of “falling prey to this regulation,” Sherwin said that “what’s more important than talking about the real dollar and personnel costs is talking about the opportunity costs for small companies. This would be true in any small company, but in biotech, as a physician, I know what it means to spend a million dollars on [compliance] rather than on cancer research.”

Sherwin added that he has seen many small biotech firms, and their venture-capital backers, “wonder whether that company should go public or list overseas.” As a 25-year veteran of the biotech industry, he said, “I’m terribly concerned.”

Asked if the public was suffering in terms of innovation, job creation, and global competitiveness as a result of 404, Sherwin responded: “The short answer is yes. There is no question that venture-capital financers of small emerging companies are taking a very hard look at the value equation of taking those small companies public.” He added: “The concern I have about this is what it will do to the start-up opportunities, particularly in the [biotech] industry. I’ve heard enough conversations where venture capitalists are questioning whether they want to pursue the initial public offering liquidity event.”

The SEC made it clear in recent weeks that smaller-public-company issues were not going to be directly addressed at Wednesday’s roundtable, which was intended to focus on the second-year experiences of larger public filers. Sherwin closed his remarks by saying to SEC acting chief accountant Scott Taub, “I’m not sure I even really directly answered your question. I felt I needed to [express my concern] because I am the only small company officer on any of the panels.”