JOBS Act Clears the Way for Small Companies

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Earlier this week, the House and Senate passed a bill aimed at easing the burden of going public for smaller companies. The bill gained widespread bipartisan support and is expected to be signed into law by President Obama soon.

The Jumpstart Our Business Startups Act, or simply the JOBS Act, achieves two major objectives: reducing cost and regulation for smaller companies seeking to go public and allowing for “crowdfunding” to solicit small investments, typically through the Internet. The legislation creates a new category of issuers with the Securities and Exchange Commission (SEC), called “emerging growth companies”—those with total annual gross revenues of less than $1 billion during the most recently completed fiscal year.

The new law scales back existing regulations in favor of allowing easier access to capital markets for smaller companies. Top among the reduced regulations is a decrease in auditing mandates. Currently, under Sarbanes-Oxley (SOX), public companies are required to pay an outside auditor to attest to an assessment of the company’s internal controls and procedures. The JOBS Act eliminates this requirement for the emerging growth company and will likely save small issuers millions of dollars in the process. Additionally, the emerging growth company will be required to show only two years of audited financial statements as opposed to three under the original SOX rule. Finally, in any registration statement to be filed with the SEC, an emerging growth company will not need to disclose financial data for any period before the earliest audited period presented in connection with its initial public offering.

The JOBS Act does not stop at SOX-era reductions; the new law also addresses the recent corporate governance provisions of Dodd-Frank. The act removes the need to hold say-on-pay and golden parachute votes on executive compensation.

Companies may only benefit from the emerging growth category for a limited time. There are four scenarios that will trigger a company’s exclusion from the emerging growth category. The first exclusion is triggered when the company’s annual gross revenues meet or exceed $1 billion. Alternatively, a company would be excluded after five years in the emerging growth category. The next and final two scenarios involve the company issuing over $1 billion in non-convertible debt or becoming a large accelerated filer.

In passing this law, Congress also took the opportunity to address some recent developments coming from the Public Company Accounting Oversight Board (PCAOB). Emerging growth companies will be exempt from any possible future rules requiring mandatory audit firm rotation or supplements to the auditor’s report in which an auditor would be required to provide additional information about the audit and the company’s financial statements, sometimes referred to the auditor’s discussion and analysis (AD&A). These limitations on the audit firm rotation and auditor’s reports are only speculative, as the PCAOB has only issued concept releases on the issues.

Opponents to the rule argue that the JOBS Act removes shareholder protections. Ann Yerger, of the Council for Institutional Investors (CII) said the act “will create greater risks for investors and ultimately could erode confidence in our capital markets.”

While NACD shares CII’s concerns, it supports the JOBS Act and sees it as a vehicle to reduce costly and burdensome regulations for small companies seeking access to the capital markets to grow their business. The benefits of this act, combined with well-functioning boards, outweigh the need for additional and costly shareholder protections. It is a board’s responsibility to protect shareholders by ensuring that the company is operating efficiently and ethically. While regulations can provide some measure of assurance, there is no replacement for a board when they have the right tools, education and shareholder input.

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