Opening the meeting, James Thyen, president and CEO of Kimball International and co-chairman of the SEC’s Advisory Committee for Smaller Public Companies (ACSPC), remarked: ‘This is the beginning of a new day. Our goal is to bring meaningful recommendations for change.’
It seems a simple goal – but achieving it will be far from simple. Opinion over special dispensations for smaller firms is widely split and, even at this early stage, the committee does not agree on all points. Defining what constitutes a smaller public firm is the first challenge; proposals range from $25 mn to $700 mn market capitalization.
The remit of the meeting was to establish which areas will be addressed during the ACSPC’s 13-month tenure. Almost all committee members proposed amendments to the agenda highlighting the differing concerns of various sectors of the economy.
Capital raising dominated much of the discussion, with several representatives raising concerns about the impact on access costs. Relationships with brokers and the disclosures that must be made have led some firms to predict they will not be able to raise sufficient capital to do business. This is seen in an issuer survey from Nasdaq that shows 43 percent of respondents believe Sox will stop firms from going public due to extra costs.
This led one delegate to suggest the commission should seriously examine the merits of establishing an alternative investment market with more relaxed requirements, similar to those currently operating in the UK and Japan and soon to open in Dublin and possibly Germany.
The cost burden
Behavior of the ‘big four’ auditing firms was heavily criticized. The feeling that smaller firms do not get the same access to top-level professional auditing as larger firms, thus increasing the time and cost of implementation, was almost unanimous.
Jere Glover, a lawyer at Brand & Frulla and counsel to the US Senate Committee on Small Business & Entrepreneurship, says ‘stock option valuation and expensing places a large burden on smaller firms, with little discernable benefit.’ The problem, he suggests, is that small companies place greater importance on stock options as payment at the early stages of their development when cash flows are limited. These options can be more difficult to value than those of larger firms with a longer share price history.
According to some prominent governance activists, small companies should not receive any special treatment on the grounds that the potential for problems is higher, so lowering standards will reduce investor protection. But Bob Monks, the well-known shareholder activist, does not entirely agree. ‘The critical notion to keep in mind is a flexible compliance standard,’ he observes.
The ACSPC’s existence is evidence the SEC feels there is scope for flexibility. It may be, however, that it is not in a position to offer the same flexibility it has shown in the past. Herbert Wander, ACSPC committee co-chairman, said at the meeting: ‘I doubt very much we will be pursuing legislation change. But the SEC has strong authority in interpreting rules and regulations in terms of implementing congressional statutes – this is the area that is likely to be most fruitful.’
Glover has similar concerns. ‘The SEC has historically been good at taking smaller company concerns into account but may lose considerable flexibility from a legal perspective under Sox,’ he notes.
The committee may receive a boost from an unlikely source – the London Stock Exchange (LSE). It recently released a statement indicating that it is seeing greater demand from smaller US and other firms that feel listing (or staying listed) in the US is now too expensive. If such a trend were to develop, regulators might feel greater pressure to offer more flexibility to smaller companies.
