Companies go public for a number of reasons, such as to raise capital, expand opportunities for growth, increase liquidity, attract employees, and create brand awareness. However, many argue that the regulatory environment for companies looking to issue an initial public offering (IPO) in the United States has become too overwhelming (perhaps even painful). In an effort to encourage small business funding by easing some of the regulations, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law in 2012 — but the efforts have not stopped there.
The SEC’s Advisory Committee on Small and Emerging Companies – which deals with businesses having stock market values of less than $250 million – has made recent proposals to ease the burden. The SEC has also been working feverishly to reduce the broader disclosure requirements of Regulation S-K. All of these efforts are designed to make it easier for all public companies, especially smaller organizations, to comply with the SEC’s IPO regulations.
“Medicinal” Revisions to the JOBS Act
The JOBS Act was passed with bipartisan support. Nevertheless, there is still controversy around balancing between the cost savings and reduced requirements provided by the JOBS Act and the investor protections provided by the Sarbanes-Oxley Act. Finding the proper equilibrium has caused the implementation of the JOBS Act to occur over several years. Most recently, the SEC has made revisions to Title V and Title VI of the JOBS Act, such as those to:
- revise the definition of “holder of record” to exclude securities received through an employee stock compensation plan and securities issued through permitted crowdfunding;
- delay registration requirements for small businesses by raising the holder of record threshold from 500 to 2,000 shareholders;
- delay registration requirements for banks, bank holding companies, and savings and loan companies by raising the holder of record threshold from 500 to 2,000 shareholders; and
- allow “deregistration” if the holder of record count falls below 1,200 shareholders for banks, bank holding companies, and savings and loan companies. (Note: Under previous regulations, this threshold was 300 and remains at this level for other types of issuers.)
These revisions are subject to certain restrictions.
Additional Doses of IPO Regulations
In addition to the updates in response to the JOBS Act, the SEC has been working to address suggestions from its Advisory Committee on Small and Emerging Companies. One recommendation, which the committee has made twice in the last three years, is to increase the minimum market value of a small company. Currently, a “small company” is one with at least $75 million in market value. The committee would like to raise this amount to $250 million, allowing many more companies to potentially be exempt from:
- Section 404(b) of the Sarbanes-Oxley Act, which requires an auditor to attest to management’s internal controls over financial reporting;
- certain executive compensation disclosures in proxy statements, as currently required by Regulation S-K; and
- the “pay-ratio disclosure” outlined in the Dodd-Frank Act.
Furthermore, the SEC has taken aim at reducing dated and redundant requirements through broader disclosure reforms. In April 2016, the SEC issued Release 33-10064, which (among other things) solicits input regarding the:
- elimination of some disclosures rules or adjusting them according to company size, and
- rules that cover information provided outside of the financial statement but in periodic filings.
Let CRI “Diagnose” the Impact of the SEC’s IPO Regulations on Your Company
Just as visiting the doctor can help you stay healthy, speaking with CRI’s SEC compliance professionals about these regulatory changes could make going public a much more enjoyable experience for your organization. Contact us today!