September 4, 2018

Capital Formation: The SEC’s Upcoming “Concept Release”!

As noted in this WSJ article, SEC Chair Jay Clayton recently noted in this speech that a concept release on capital formation is on the way. Here’s an excerpt from this recap of the speech by Cooley’s Cydney Posner:

The main topic was the plan to revisit the thresholds that trigger the SOX 404(b) requirement to provide an auditor attestation report on internal control over financial reporting. One thing is pretty clear from this speech: odds are excellent that relief from SOX 404(b) is in the offing for more small companies.

First, Clayton focused on a point that he viewed as “often misunderstood”: that even those companies that are not now required to obtain a SOX 404(b) auditor attestation must still “establish, maintain and assess the effectiveness of ICFR, and, even if not engaged to report on ICFR, independent auditors are still responsible for considering ICFR in the performance of their financial statement only audits. In considering ICFR, independent auditors can better plan their audits and provide management and audit committees with observations about the company’s ICFR. I believe this scaled approach has proven to be appropriate for smaller reporting companies and again reflects the perspective that one size regulation of public companies does not fit all.”

To support that last point, he highlighted the difference in size between the 50th largest exchange-listed company (market cap of approximately $100 billion) and the median exchange-listed company (market cap of less than $1 billion). Moreover, he pointed out, many companies could benefit from relief as there are more than 1,200 exchange-listed companies with a market cap of less than $250 million. (In connection with the expanded definition of “smaller reporting company”—an expansion similar to the one likely under consideration here—the staff estimated that 966 additional companies would be eligible for SRC status in the first year. See this PubCo post.)

Other potential beneficiaries of relief, according to Clayton, are companies with little or no revenue, such as many biotechs. In those cases, he asserted, the money that would otherwise be used for the SOX 404(b) attestation “could instead be used to hire new scientists to advance life-enhancing or life-saving developments.” He concluded by reminding us that he had directed the staff to come up with potential amendments to reduce the number of companies subject to SOX 404(b), while, of course, maintaining appropriate investor protections.

The SEC Conducts Far More Town Halls These Days…

As part of the ongoing effort to promote capital formation, it seems that one of the priorities of SEC Chair Jay Clayton is to engage with small businesses across the country and to conduct town halls with entrepreneurs & retail investors (which Jay started calling “Main Street” investors before the “Main Street Investor Coalition” was formed).

In fact, all five Commissioners attended a town hall in Atlanta in June – and Corp Fin Director Bill Hinman joined Jay recently at a “fireside chat” with the Tennessee Governor at Nashville’s “Wildhorse Saloon”. I don’t recall a Corp Fin Director attending a town hall before – but it’s possible that happened in the past…

By the way, the SEC has a whole page devoted to Chair Clayton’s “fireside chats” – with videos going back to last summer…

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Broc Romanek