Thursday, December 15, 2011

Hearings Held on House On Ramp to Capital Markets Legislation

Hearings were held before the House Capital Markets Subcommittee on bi-partisan legislation creating an on ramp to the public markets for emerging growth companies. Sponsored by Rep. Stephen Fincher (R-TN) and Rep. John Carney (D-DE) the Reopening American Capital Markets to Emerging Growth Companies Act. HR 3606, would reduce the costs of going public for small and medium-sized companies by phasing in certain regulatory requirements. Over the last ten years, noted Rep. Fincher, he number of companies going public has fallen dramatically, hurting the ability of small companies to grow, innovate, and hire new workers. The legislation creates a new category of issuers, called emerging growth companies, with annual revenues of less than a $1 billion and following the initial public offering, less than $700 million in publicly traded shares. Exemptions for these on ramp status companies would end either after five years, or when the company reached $1 billion in revenue or $700 million in public float. The bill mirrors legislation introduced by a bipartisan group of U.S. Senators.

The measure also amends 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. In addition, the bill would only require emerging growth companies to provide audited financial statements for the two years prior to registration rather than three years, saving the companies millions.

The legislation would 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, said Rep. Fincher. 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.

Emerging growth companies would also be exempt from the requirement to hold a shareholder vote at least once every three years on executive compensation packages and golden parachutes. They are also exempt from the requirement to disclose the relationship between executive compensation and financial performance and the ratio of the CEO compensation to the median total compensation of all employees.

Committee members were concerned that investor protection provisions be in place during the on ramp period. Rep. Jim Himes (D-CT) said Congress must ensure that retail investors know that they are getting into something more risky. Rep. Fincher said that investor protection is critical as the legislation creates an environment for investment.