Friday, December 09, 2011

Bi-partisan House Legislation Would Provide On-Ramp to Public Markets for Emerging Growth Companies

Groundbreaking bi-partisan legislation has been introduced in the House to make it easier for small and medium-sized companies to access capital through public markets so they can expand and create jobs. The Reopening American Capital Markets to Emerging Growth Companies Act, HR 3606, co-sponsored by Rep. Stephen Fincher (R-TN) and Mark Carney (D-DE), would create an on-ramp to public markets for a new category of issuers, called emerging growth companies that have less than $1 billion in annual revenues at the time they register with the SEC and less than $700 million in publicly-traded shares after the IPO. The legislation creates a transitional on-ramp status for these companies to encourage them to go public. The on-ramp period would last as many as five years, or until a company reaches $1 billion in annual revenue or $700 million in publicly-traded shares.

Full compliance with certain obligations would be phased in during that period. On-ramp status is designed to be temporary and transitional, encouraging small and medium-sized companies to go public but ensuring they transition to full compliance over time or as they grow. There is similar legislation pending in the Senate, S 1933. The House Capital Markets Subcommittee has scheduled hearings on HR 3606 for December 15, 2011.

The House legislation would amend Section 404(b) of Sarbanes-Oxley to delay hiring an additional outside auditor to verify the company's internal controls for the five year on ramp period. Section 404 regulations cost companies over $2 million per year, said Rep. Fincher (R-TN), with Section 404(b) accounting for 32.5% of those costs. In addition, the measure only require Emerging Growth Companies to provide audited financial statements for the two years prior to registration rather than three years.

The legislation will also make it easier for potential investors to get access to research and company information in advance of an IPO. This is critical for small and medium-sized companies trying to raise capital that have less visibility in the marketplace. Currently, there are regulations in place that make it difficult for investors to find the detailed research reports they need to make an informed decision about new companies, noted Rep. Fincher.