SEC Trends & Developments - Spring 2012 - New IPO Rules for Smaller Companies

A recent bill, approved by the House of Representatives, may speed the IPO process by creating a so-called “on-ramp” for smaller companies looking to launch their initial public offering.  This “on-ramp” is for companies with annual revenue below $1 billion and less than $700 million in publicly traded stock.

The bill reverses certain sections of the Sarbanes-Oxley Act that require companies' outside auditors to also attest to the company's internal controls.  In addition, the new bill would allow small, private companies to use direct mail or advertisements to solicit private offerings, allow individuals to invest up to $10,000 in start-ups over the Internet without the Company having to register with the SEC and double the number of shareholders that smaller companies can have before they are required to register with the SEC. Finally, the bill would bar accounting standard setting bodies from applying new or revised financial accounting standards to “emerging-growth companies.” 

Current rules require registrants with over $75 million in market capitalization to have an audit of their internal controls over financial reporting and require all companies with more than 500 shareholders to register with the SEC.

The new rules would also impact executive-pay disclosures and rules aimed at curbing analysts' conflicts of interest.

Sponsors of the new rules have argued that current securities regulations have blocked IPOs and kept companies from raising capital and adding jobs. Critics of the new legislation argue that the current IPO market is due to poor economic conditions and that the market will now demand significantly higher interest rates to invest in companies that take advantage of the bill's shortcuts.

In the past, SEC Chairman Mary Schapiro has said that any attempt to reduce the regulatory burden on small business should be balanced with investor protection designed to prevent fraud.

Lynn Turner, a former chief accountant at the SEC, said that, based on IPO data going back to the 1970s, up to 98% of IPOs could utilize the regulatory shortcuts of the new bill. 

Last year, President Obama created a task force that concluded, among other items, that the slowdown in initial public offerings over the last decade may have cost the U.S. as many as 22 million jobs.

SEC Trends & Developments - Spring 2012 Issue 

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