The Securities and Exchange Commission is mulling reducing the number of public companies that need to provide auditor attestation reports under the Sarbanes-Oxley Act, and rethinking how the agency approaches exempt offerings for private companies.
During an Aug. 29 speech in Nashville in which he addressed the capital raising measures taken by the SEC as well as Congress, SEC Chairman Jay Clayton stated that he’s directed commission staffers to formulate recommendations for possible amendments that would reduce the number of companies that need to provide the auditor attestation report required by Section 404(b) of the law while maintaining appropriate investor protections.
Over the next several months, he said, the SEC “will be taking a fresh look at the thresholds that trigger Section404(b) of the Sarbanes-Oxley Act of 2002, which requires certain registrants to provide an auditor attestation report on internal control over financial reporting,” or ICFR.
Market participants, as well as the agency’s former Advisory Committee for Small and Emerging Companies, have said “the costs associated with this requirement can divert significant capital from the core business needs of companies without meaningful benefit,” particularly for smaller companies.
As it stands now, “companies with a public float of less than $75 million or no public float have relief from the Section 404(b) auditor attestation requirements,” Clayton said. “Importantly, and I believe that this is often misunderstood, those companies are still required to establish, maintain and assess the effectiveness of ICFR, and, even if not engaged to report on ICFR, independent auditors are still responsible for considering ICFR in the performance of their financial statement only audits.”
SEC staffers, Clayton continued, are also working on a recommendation “to expand the ability of companies who are contemplating raising capital to ‘test the waters.’”
The Jumpstart Our Business Startups (JOBS) Act “permitted emerging growth companies to test the waters, that is, engage in communications with certain potential investors prior to or following the filing of a registration statement for an IPO,” he explained, adding that he’s “seen firsthand how this has benefited companies considering an IPO, as they are able to engage investors earlier to explain their business and obtain feedback in advance of an offering.”
Investors and shareholders also benefit “as companies are better able to determine the appropriate time for an offering and to more effectively size and price the offering,” Clayton added.
Also on tap in the coming year will be a “comprehensive review” by the agency of the options available to raise capital in exempt offerings, which “have grown significantly since the JOBS Act.”
A comprehensive review of the agency’s “exemptive framework” needs to occur “to ensure that the system, as a whole, is rational, accessible and effective,” Clayton said. “We should take a critical look at our exemption landscape, which can be fairly described as an elaborate patchwork.”
He offered the following areas for the agency to consider during such a review:
- Evaluate the level of complexity of our current exemptive framework for issuers and investors alike, and consider whether changes should be made to rationalize and streamline the framework. For example, do we have overlapping exemptions that create confusion for companies trying to navigate the most efficient path to raise capital? Are there gaps in our framework that impact the ability of small businesses to raise capital at key stages of their business cycle?
- Consider whether current rules that limit who can invest in certain offerings should be expanded to focus on the sophistication of the investor, the amount of the investment, or other criteria rather than just the wealth of the investor.
- Take a look at whether more can be done to allow issuers to transition from one exemption to another and, ultimately, to a registered IPO, without undue friction.