A House subcommittee held a hearing this week on the cost of going public and how the federal government can ease the regulatory and financial burdens for companies looking to do so.
Federal corporate governance policies – particularly Sarbanes-Oxley and Dodd-Frank Acts – have made it more difficult to facilitate capital formation and promote economic growth, Subcommittee on Capital Markets, Securities, and Investment Chairman Bill Huizenga (R-MI) said.
“I find it extremely concerning that the number of publicly traded companies is approximately half of what it was twenty years ago,” Huizenga said. “While there are many factors as to why the number of public companies has declined, the main challenges I continue to hear about are how difficult it is to go public and how difficult it is to remain public.”
The chairman said Congress must build upon the success of the Jumpstart Our Business Startups (JOBS Act) by further modernizing the securities regulatory structure to ensure a free-flow of capital, job creation, and economic growth.
“It’s time to get the federal government working to ensure that American businesses are able to raise the capital they need to expand, support innovation, and reward hardworking Americans,” Huizenga added.
Several speakers said Congress should review the effectiveness and compliance cost of the Sarbanes-Oxley Act (SOX), which turns 15 this year.
“Section 404(b) of Sarbanes-Oxley (SOX) divert innovation capital away from the lab, while external forces like proxy advisory firms and manipulative short sellers increase costs and deter vital investment,” John Blake, senior vice president of finance at Atyr Pharma, said. “These barriers, and others, reduce the viability of the public market as a capital formation option for emerging biotechs, ultimately harming issuers, investors, and patients alike. Given the importance of public capital formation for life-saving innovation, I am hopeful that the Subcommittee can take action to enact regulatory and corporate governance policies that bolster America’s world-leading capital markets and prioritize both capital formation and resource efficiency for innovative small businesses.”
Thomas Farley, president of the NYSE Group, said the burdens of SOX are just part of the problem.
“In recent years, as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, through the SEC’s rulemaking agenda, and in response to calls from the investor community, public companies are engaged more than ever before in evaluating corporate disclosures and demonstrating compliance with a myriad of new and enhanced regulatory requirements. The increasingly difficult class-action litigation environment for public companies today amplifies these concerns across the board,” Farley said.
John Berlau, senior fellow at the Competitive Enterprise Institute, said there are adverse consequences of entrepreneurs delaying or forgoing taking their companies public. It hurts job growth, he said. Also, it diminishes the ability of investors to build wealth in their portfolios.
“No one single event or regulation lies at the heart of the public company crisis,” Tom Quaadman, executive vice president, U.S. Chamber of Commerce, concluded. “Like straw upon a camel’s back, the burdens and reporting requirements associated with being a public company have steadily accumulated over the years, to the point where many businesses today are saying “no thanks” to a model that was once the ultimate dream of American entrepreneurs. The JOBS Act was a good first step towards arresting this worrisome trend, but there is more that can and should be done.”