Small Caps Suffering from Sarbox

The Wall Street Journal today has an opinion piece from Robert Grady, a venture capitalist, on the economic toll of Sarbanes-Oxley. Grady makes the argument that the greatest casualty of Sarbox is small-cap start-up companies:

"Both sides are missing a key point: It is not only the share of U.S. IPOs that has been dropping precipitously, but, particularly in the small cap, emerging growth sector, it is also the absolute number that has fallen off the cliff. Consider the following: Throughout the 1990s (not just during the bubble at the end of the decade), there were an average of 157 technology IPOs per year in the U. S. For the last six years, the average has been 27 per year. In total, across all industry sectors, venture-backed IPOs have dropped from an average of 178 per year during the 1990s to 50 per year in the last six years. This has serious long-term implications."

Grady gives examples of companies, such Cisco, E*Trade and Intel, that were relatively small IPOs yet now bring in billions in revenue and employ hundreds of thousands of people and goes on to say that in today’s regulatory environment, a company with a market cap of $50 to $100 million is more likely to be acquired than go public, thus depriving the economy of it’s full potential.

He addresses the onerous and costly Section 404 – which can cost small cap companies $2 - $3 million/year (which at time of passage was expected to cost $93,000 per company), and notes that Chris Cox is working to address this issue.

Though the barriers to entry for small-cap IPOs are not quite as dire as Grady makes it seem, he makes some really important points on how Sarbox and the regulatory climate are stifling innovative emerging growth companies in the US and could potentially have serious implications if nothing is done to relax the regulatory environment.

It seems to me that momentum to relax Section 404 is increasing. Hopefully, this will happen sooner rather than later so that our companies can grow and remain competitive on the global market.

Another development that could benefit US companies – the SEC is considering letting US public companies use international accounting standards, which would make it easier and more cost efficient for companies doing business internationally.