The mounting pressure on Congress and the Obama Administration to find some job-creating ideas to jumpstart the ailing economy is stirring growing interest in a couple of Congressional proposals that would lessen investor protections for the sake of allowing businesses more growth opportunities.
One proposal, already filed as a House bill by Rep. Ben Quayle, R-AZ, with the intent of accelerating the growth of younger companies, would suspend for most newly public companies what many view as a costly and troublesome provision of the Sarbanes-Oxley Act.
Quayle's proposal would allow a much greater number of public companies to opt out of Sarbanes Oxley Section 404, which requires public companies to disclose the scope and adequacy of their internal-controls structure. The measure would raise the current $75 million market-value threshold for reporting to $1 billion.
The other proposal would help entrepreneurial and start-up companies, many currently hamstrung in their ability to attract growth capital, to reach large numbers of investors for limited amounts of money via the internet in what's being called crowd-fund investing.
The proposals have come to center stage only in the last couple of weeks. And each has attracted growing support from those who contend the measures are vital to the goal of job creation. And each is also starting to stir opposition from those who question the idea of setting aside shareholder and investor protections.
Each proposal merits an in-depth look and thus in this first of two columns we'll examine the discussions surrounding Quayle's bill, the support being gathered for it and the comments of those expressing concerns.
Next week's column will focus on the crowd-funding proposal, including a look at those backing it and the concern it is stirring from many angel-investor leaders, particularly those up and down the West Coast.
Quayle's bill would allow public companies with market valuations below $1 billion to opt out of Sarbanes-Oxley Section 404 for the first 10 years after going public. The original Sarbanes-Oxley Act was amended in last year's Dodd-Frank Wall Street Protection and Consumer Protection Act to create the under-$75 million exemption.
Quayle and supporters of his measure, including the entrepreneur-focused Kauffman Foundation, contend that the costs for complying with the requirements of this section of Sarbanes-Oxley can exceed $1 million for new companies and can cost them up to $20 million in loss of valuation.
Quayle's measure is close to a plan outlined by the Kauffman Foundation a few months ago as "a set of non-partisan ideas to jump-start the ailing U.S. economy and increase job creation by accelerating the growth of startups and young businesses."
Kauffman, the nation's largest non-profit foundation focused on entrepreneurs, noted that the role high-growth startups play is vital to assure U.S. economic strength.
"Virtually all of the growth in U.S. jobs has been driven by the formation of firms less than five years old, and these new firms have been disproportionately responsible for commercializing the cutting-edge innovations that characterize modern life," the Foundation said.
"I believe this bill is an important step as we try to increase the number of companies that go public in the United States," said Robert Litan, Kauffman's vice president for research and policy. "The ability to raise capital in public markets will be essential as new companies create the jobs required to put Americans back to work."
One of the most pervasively visible proponents of both lowering the regulatory barriers for newly public companies and the proposal for crowd-fund investing is a Miami, FL, entrepreneur named Sherwood Neise, who has testified before Congress about both. He was co-founder of a company called Flavorx, which added flavors to medicine, that went public and was later sold.
In 2006, he was among those decrying what he called the "unintended consequences of Sarbanes-Oxley on small businesses," saying that meeting 404's requirements "ate up 14 percent of our net income."
But among those urging caution is former SEC Chief Accountant Lynn E. Turner, who said in an e-mail that contained the subject line "Short Memories:" "Clearly people have forgotten the hundreds of billions in dollars of losses investors suffered during the corporate financial reporting frauds, and the tens of thousands of jobs lost."
Neil McReynolds, a corporate-governance consultant in Seattle, said that while the original Sarbanes-Oxley requirements created some real cost and regulatory problems for smaller public companies, the changes brought about by the Dodd-Frank bill corrected some of those.
McReynolds, who has been a member of a number of boards of private companies and consulted with boards of public companies, said that while extending the exemption to $75 million cap companies, as Dodd-Frank did, made sense, "extending the exemption to $1 billion companies may be a bit of a stretch." He added that "there's still value in disclosure and internal controls."
Sharon Philpott, managing partner of national accounting firm BDO's Seattle practice, agreed, saying her firm supports the positions of the CFA Institute, Center for Quality Audit and the Council of Institutional Investors, who have all urged caution against further exemptions from Sarbanes-Oxley.
In the end, success or failure of expanding the exemption for internal controls may hinge on whether the pressure for jobs trumps the pressure to protect shareholders and investors.