Friday, August 25, 2017

Chamber of Commerce group pitches ideas to help more companies go public

By Jacquelyn Lumb

Ten organizations, including the U.S. Chamber of Commerce and Nasdaq, have written to Treasury Secretary Steven Mnuchin with recommendations to encourage more companies to go public. The recommendations will help inform Treasury’s report on capital markets that was ordered by the Administration on February 3. Among the group’s key recommendations are extending the JOBS Act on-ramp for emerging growth companies (EGCs) from five to 10 years, modernizing the internal control reporting requirements, reforming the shareholder proposal rules, and enhancing regulatory oversight of proxy advisory firms. While there are a number of reasons for the decline in public companies, the group said there are issues that policymakers can and should address.

Extend JOBS Act on-ramp. The first recommendation, to extend the on-ramp for all EGCs from five years to 10 years and to include companies that qualify as large accelerated filers, would provide an incentive for businesses to go public by exempting them from a number of costly mandates for a longer period of time. The group said there is no evidence that these exemptions have compromised investor protection or undermined confidence in the markets. The group also suggested making the on-ramp available for all initial public offerings for five years, regardless of whether the companies meet the definition of an EGC.

Modify internal control requirement. The group recommended that Congress, the SEC, the PCAOB and FASB explore ways to provide relief to small and mid-sized companies from some of the more onerous provisions of the internal control requirements in Sarbanes-Oxley Act Section 404(b). The costs of compliance were underestimated, the group explained, particularly for middle market companies in their efforts to meet the standards of the PCAOB inspection process. According to the group, many businesses report that auditors use one-size-fits-all generic templates to walk through the PCAOB inspection points. This is time consuming and does little to enhance the overall quality of controls, the group advised.

Improve disclosure effectiveness. Many CEOs point to the administrative burden of public reporting as a significant challenge in completing an IPO. The group urged the SEC to continue the disclosure effectiveness initiative and to reject further attempts to use corporate disclosure to promote agendas that are not related to providing investors with material information. The group recommended the Supreme Court’s definition of materiality outlined in TSC Industries, Inc. v. Northway Inc. in determining the disclosure requirements.

Reform shareholder proposal process. The group believes that the reform of the shareholder proposal process is long overdue. At a minimum, it urged the SEC to raise the thresholds for when a proposal can be re-submitted. As for proxy advisory firms, the group noted that Institutional Shareholder Services and Glass Lewis exert significant influence over corporate governance in the U.S. but operate with little transparency and have numerous conflicts of interest. The SEC issued guidance in 2014 that was helpful, the group advised, but these firms continue to pose a challenge for many companies. The group urged the SEC to continue to explore ways to make the industry more accountable.

Examine alternative markets for EGCs. The group recommended that the SEC examine possible alternative market structures for EGCs and others that face liquidity challenges in the secondary markets. The group also urged the SEC to find a way to promote company research, such as a safe harbor for pre-IPO research, which it believes would improve the trading environment for these stocks.

These recommendations are just a beginning, the group wrote, and it plans to continue to develop ideas to help incentivize more companies to go public.

The other signatories to the letter are the Intercontinental Exchange; Equity Dealers of America; Steven Bochner, a partner at Wilson Sonsini; Joseph Culley, Jr. with Janney Montgomery Scott; Kate Mitchell, co-founder and partner at Scale Venture Partners; Jeffrey Solomon, president of Cowen Inc.; and Joel Trotter, a partner at Latham & Watkins.