If a small, private Colorado Springs technology company like Celis Semiconductor were to go public, it would open a doorway to greater investor capital and a shot at exponential growth.
But for small companies, there’s one daunting hurdle in the equation – Sarbanes-Oxley.
Congress passed the Sarbanes-Oxley Act in 2002 to restore investor confidence after the Enron accounting scandal rocked the public-trading world. The act calls for greater corporate transparency and requires stricter accounting rules.
The reporting rules for small companies will become effective in July 2007.
When that happens, some say the requirements, especially ones found under Section 404 of the act, will diminish the opportunity for small companies that consider an initial public offering.
“It’s very expensive,” said LuAnn Hanson, Celis’ chief financial officer. “It’s cumbersome and very difficult for small businesses that don’t have the resources.”
Part of section 404 requires an outside auditor to attest to the company’s effectiveness of internal controls and procedures for financial reporting.
Those auditing costs routinely add up to nearly $1 million, according to research information by the CFO trade association, Financial Executives International.
“The fees can easily be anywhere from 75 to 100 percent of the company’s worth because of the amount of work and detail that’s required,” Hanson said.
Critics say that the those costs outweigh the benefits for smaller companies and may be forcing some companies to list their stock overseas or keeping them from considering an IPO.
“That’s a concern we have,” said Michael See, assistant chief counsel for the U.S Small Business Administration Office of Advocacy. “What we’re hearing is that basically the outside auditor fees are just too expensive, and we don’t want those costs to become so high that it hinders companies from entering into the public market.”
Although See said it is a concern, he also added that just how many companies would be dissuaded from going public isn’t known.
“Most small companies have not been hit by the (Sarbanes-Oxley) rules yet, so it’s hard to say, but they’re going away from the idea in droves yet,” he said.
However, what happens in the next six months could change that, See said.
Companies that plan to go public by July 2007 are making plans to do so now, so changes to the act could affect the number of IPOs next year.
That’s something authorities are well aware of.
The U.S. House Small Business Committee and the Securities and Exchange Commission, which oversees Sarbanes-Oxley reporting enforcement and rulemaking, recently held hearings and roundtable discussions about the section 404 burdens on small businesses.
That prompted an advisory panel to the U.S. Securities and Exchange Commission to recommended exempting small companies from Section 404 requirements.
It also prompted a group of Republican lawmakers to announce they will introduce legislation to modify section 404 and make small companies exempt from the reporting requirements.
The bill, according to a statement from the lawmakers, would likely allow companies with market capital of less than $700 million and revenue of less than $125 million to opt out of compliance, but companies that skip the requirements would be subject to random SEC audits.
The lawmakers reason that small companies that would be eligible to opt out of the requirements pose less of a threat to investors than larger companies because of their comparatively small value.
The section 404 reporting practices will likely be made optional because if a company decided to proceed with the section 404 reporting requirements, it could earn more credibility with investors.
Despite the advisory panel’s suggestion, SEC officials have given little indication of what the agency might decide to do.
“I can tell you that the SEC doesn’t have anything on the table yet,” said spokesman John Heine. “We recognize this could be a big deal to businesses right away, but there are no plans for changes yet.”
The Republican-led bill could force that issue, Heine said.