Is it too hard for companies to go public? Auditors too expensive? Are companies just too frustrated by bureaucratic red tape to even bother with the IPO process? That’s the question behind a bill the House of Representatives is scheduled to vote on tomorrow.
The Reopening American Capital Markets to Emerging Growth Companies Act, announced in December, would make it easier for companies that make less than $1 billion to go public. According to a press release by the bill’s sponsor, Sen. Pat Toomey (R-Pa.), CEOs cite accounting and compliance costs and regulatory risks as key concerns about going public. Billed as the “Jumpstart Our Business Startups Act” (JOBS Act), the bill eases regulations for what Washington deems small and mid-sized companies to encourage them to hit up the capital markets, and in turn hire more workers.
Under the bill, companies that make less than $1 billion and have less than $700 million in publicly traded shares wouldn’t have to hire an outside auditor to review their books. They’ll have a five-year grace period (or until they hit the $1 billion mark) before hiring an auditor. Prior to the IPO, a company’s CEO and CFO would still be personally liable to certify their books. Instead of submitting financial statements for the past three years, it would only be two. And they would only have to hold a stockholder vote on executive compensation arrangements once every three years.
Now, I think the $1 billion mark is pretty high. I don’t know that a company that rakes in even $100 million should be considered a startup. There’s a reason we have regulations, you know. Companies have been required to hire outside auditors since 2002 as part of the Sarbanes-Oxley Act after the Enron, Tyco, and WorldCom scandals. Toomey’s office notes the SEC reports Sarbanes-Oxley compliance costs companies more than $2 million per year.
But that’s better than investors being out $2 million over stock fraud. I think easing these regulations increases investors’ risk. Remember when all the Chinese companies were going public through reverse mergers, which allowed them to bypass some regulatory requirements? As it turned out, some of those companies were not so honest if they weren’t legally forced to perform due diligence, and investors lost out.
But of course the politicians are filing this one under job creation. Toomey’s office reports that “more than 90 percent of job growth occurs after companies go public.” So the idea is that all these companies now competing for venture capital dollars will be more likely to hit up the public markets to gain access to capital. Then they’d hire a bunch of people as they grew.
But what about all those auditors’ jobs?