The Jumpstart Our Business Startups Act (JOBS Act), passed in April of 2012, stands as a rare Congressional acknowledgment that legislators and regulators had gone too far in stifling small business growth and access to capital markets. In particular, the JOBS Act is supposed to ease restrictions on private securities issuers and to relax the decade-old Sarbanes-Oxley (Sarbox) rules that are particularly onerous on small cap issuers. While the JOBS Act was intended to make access to capital markets easier for entrepreneurs by, among other things, allowing certain forms of solicitation previously prohibited, it remains to be seen whether layering new legislation upon old can reverse the tide of over-regulation.
Already there is reason to be skeptical. In addition to imposing more onerous requirements on companies to verify investors’ accredited status, the SEC has proposed rules under the JOBS Act that would require businesses to make pre-fundraising filings with, and provide fundraising materials to, the SEC”something not previously required. Despite flaws, however, the JOBS Act at least attempts to repudiate some of the shackling Sarbox requirements on small companies. But it should also serve as a new reminder that more reform may be needed.
On the heels of massive corporate accounting scandals at Enron, WorldCom and elsewhere, Sarbox enhanced standards for all U.S. public company directors, management, and public accounting firms. These requirements made the IPO environment particularly challenging for small businesses, as many of the new rules imposed materially high costs on smaller issuers. While lawmakers hoped the law would boost investor confidence, it also contributed to a documented decline in smaller cap IPOs over the last decade.
Of particular controversy, Sarbox required public companies to disclose executive compensation, enact internal controls regarding financial disclosures that requires signed off by independent auditors, the CEO, and the CFO of the company, and, most significantly, report on the adequacy of various internal controls. While the law imposed requirements on all publicly traded companies, it actually benefited larger cap companies in many ways by reducing smaller company competition. Additional compliance costs at small companies, after all, can represent a crippling expense.
The JOBS Act attempts to ease some of these burdens and eliminate certain requirements, like external audits of internal controls for “emerging growth companies,” which are companies seeking to go public with less than $1 billion in revenue and an initial public offering of less than $700 million. However, it only applies to companies selling common equity after December 8, 2011.
Another area where the JOBS Act explores reform is in revisiting the effects of decimalization on publicly traded stock prices. The law requires the SEC to study whether decimalization has made small cap public offerings more difficult. The theory is that when bid-ask spreads were reduced to as low as a penny, brokerage firms lost the revenues necessary to pay for the cost of analysts covering small cap companies. Market-makers also lost the spread needed to incur the risk of holding small cap, low volume share inventory. Some feel that the result has been a huge increase in price