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The Drive to Ease Rules for Smaller Public Companies: Will it Help?

o Karen M. Kroll
02.03.2012 kl 22:35 | CFOworld (US)

Almost every week recently, it seems, a new bill has been proposed in Congress, or a recommendation made to the Securities and Exchange Commission, seeking to ease the regulatory burdens of going and staying public, particularly for smaller companies.

 

Almost every week recently, it seems, a new bill has been proposed in Congress, or a recommendation made to the Securities and Exchange Commission, seeking to ease the regulatory burdens of going and staying public, particularly for smaller companies.

Many smaller public companies, as well as those considering a public offering, could benefit from the changes being discussed. Views differ, however, on whether the proposals will move forward in Washington -- and, if they do, just how much of an improvement they'll create.

"All the things on the table now are things that can help small businesses," says David Feldman, a corporate and securities attorney with Richardson & Patel LLP. "How much they can help is the debate." Some believe that more substantive changes are needed if larger numbers of smaller companies are to be enticed to go public, and to stay public.

That's of great concern to policymakers, given the recent drop in the number of initial public offerings.

A 2011 report titled "Rebuilding the IPO On-Ramp: Putting Emerging Growth Companies and the Job Market Back on the Road to Growth" shows that prior to 1999, the number of U.S. IPOs averaged 547 annually, but that the number now has dropped to 192. The decline is significant, as the report shows, because public companies tend to create many more jobs than companies that remain private.

IPO-Killing Regs?

What's behind the dwindling IPO ranks? Proliferating regulations play a role, says Feldman. "Regulations bring transparency, but when you go too far, it sends companies away." He adds that he's seen companies list outside the U.S. to avoid the reporting requirements here.

In addition, business owners have more options for financing today than they did several decades ago, says Leroy Dennis, national director of public policy and regulatory relations with the McGladrey accounting firm, and a member of the SEC Advisory Committee on Small and Emerging Companies. That includes funding from private equity firms and hedge funds.

Both the SEC and Congress have taken steps to try to reduce the regulatory burdens associated with going or staying public. The idea is to "get out of the way of people, and let them get to a certain size and scale" they are required to comply with volumes of regulations, Dennis says.

To that end, his advisory committee has made several recommendations to the SEC. One would allow what are known as "Reg A offerings," for amounts up to $50 million; the current limit is $5 million. Reg A offerings are simpler than full-blown IPOs. For instance, Feldman says, the companies may not need audited financial statements. The current $5 million cap, though, limits the usefulness of this avenue to going public, as most companies need to raise more money.

Along with these initiatives, several proposals aimed at reducing public company regulations are making their way through Congress. Among them is H.R. 1070, the Small Company Capital Formation Act of 2011, which passed the House in November. Like the proposal from the SEC Advisory Committee, this bill would exempt some offerings of up to $50 million from regulation under the Securities Act of 1933, among other changes. Its companion bill in the Senate, S.1544, was introduced in September and currently is with the Committee on Banking, Housing, and Urban Affairs.

H.R. 3606, or the Reopening American Capital Markets to Emerging Growth Companies Act of 2011, would allow companies with up to $1 billion in revenue to phase in regulation over five years. After its introduction in December 2011, the bill passed the Financial Services Committee in February.

Possibility of Change?

It's difficult to say just how far these initiatives might go -- especially in Congress, and in a presidential election year.

Still, it's possible some bills will slide through, Feldman adds, as the proposed legislation enjoys broad, bipartisan support. H.R. 1070, for instance, passed the House in November with a 421-to-one vote.

At the SEC, he notes, much staff time continues to be consumed implementing Dodd-Frank. Yet there, too, change is possible, Dennis says. SEC chair Mary Schapiro, as well as a number SEC employees have participated in the Advisory Committee meetings -- a sure sign that they see these initiatives as important, he adds.

Peter Chepucavage, general counsel with Plexus Consulting Group, and an expert in the securities industry, sounds less optimistic. "It's not gonna happen. It's all talk and no action," he says. The SEC likely is leery of making any moves that could be viewed as loosening current regulations, given the heat it has taken over its failure to act more quickly in the schemes involving Bernie Madoff and Allen Stanford. In addition, Chepucavage says he's noticed within the SEC "a feeling that small companies are more prone to fraud."

That's not to say that Chepucavage favors a free-for-all. However, he supports reducing regulation -- say, by allowing companies to have more shareholders before they're required to report to the SEC -- for a period of two or three years. At that point, regulators would be able to analyze the impact, and see if fraud increased.

At the same time, Chepucavage notes that additional changes, not all of which are regulatory, are needed to really make being public a viable option for small companies. For example, small companies often struggle to find broker/dealers to distribute their stock. "Selling a new issue of stock is more risky than stock that's already trading," he says.

Keeping Small Firms Small?

At the same time, not all smaller public companies favor having vastly different rules applying to them.

Shannon Greene is CFO with $63 million Tandy Leather Factory Inc., a Fort Worth, Texas-based retailer and distributor of leather goods, acknowledges the difficulty of being smaller; namely, such firms work harder to capture Wall Street's attention. Still, she is leery of providing too many exemptions for companies like hers.

"If you're going to be public, be public. You can't really straddle the fence," she says. Greene agrees, for instance, with raising the Reg A limits to $50 million. But she is concerned that creating essentially two sets of reporting regulations would make it difficult for smaller firms to eventually make the leap to big-company reporting requirements.

"My concern," she says, "is that you'll keep small companies small."

Keywords: Business Management  
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