This article covers the last three recommendations the Securities and Exchange Commission (SEC)’s Advisory Committee on Small and Emerging Companies considered at its quarterly meeting on February 1. The first of the two articles
on this event discussed the proposal for permitting small and emerging public companies to set their own tick sizes in order to provide an incentive for market makers and analysts to follow their stock, in the hope that this would improve the liquidity of these stocks and help the companies raise capital in the name of promoting innovation and job creation.
The second recommendation was related to this objective, as it called for an effort to establish a special exchange where the stocks of small and emerging companies could be traded. The objective would be to create a level of listing standards in between the full-blown financial reporting obligations of companies that qualify for listing on the New York Stock Exchange or Nasdaq and those that have effectively no reporting requirements and are consigned to the bulletin boards and pink sheets.
Participants stressed that the SEC has the authority to work with proponents of new listing standards to develop such an intermediate standard, but the SEC would not be in the position of creating an exchange. Several years ago, the SEC created a new standard for an exchange for small and emerging companies, and it approved the proposal, but there has been very little activity regarding this exchange.
Therefore, while the recommendation was unanimously approved, concerns were raised over the business prospects for this idea and whether it would provide sufficient information to satisfy the needs of investors outside the initial organizers of a small public company.
Next the committee unanimously approved a list of recommendations to grant relief to small reporting companies (SRCs) from reporting burdens that have been lifted for emerging-growth companies by virtue of the Jumpstart Our Business Startups (JOBS) Act. Thus, the committee would propose so-called “scaled” disclosure requirements intended to tailor the disclosure burden to emphasize information that is of interest to investors in small companies and to relieve the burden of providing information that is costly to provide, but not of interest to investors. Given the size of the committee, the list of items from which members seek relief is a long one:
• Auditor attestation under section 404(b) of the Sarbanes-Oxley Act.
• Shareholder advisory votes on executive compensation and the frequency of such votes.
• Shareholder advisory votes on golden parachute compensation.
• Disclosure of the ratio of median annual compensation of all employees to that of the CEO.
• Disclosure of the relationship between executive compensation and financial performance.
• Date of required compliance with new accounting standards changed to the date that applies to private companies.
• Public Company Accounting Oversight Board requirements for mandatory auditor rotation.
• Filing of exhibits under the material contracts disclosure requirement.
• Filing of periodic reports and other filings in eXtensible Business Reporting Language (XBRL).
Finally, the committee took up separately a proposal to exempt SRCs from whatever regulations the SEC promulgates under the Dodd-Frank mandate to require public companies to make detailed disclosures of the extent to which they use conflict minerals. The members objected to this requirement on the grounds that it goes beyond the mission of the SEC by involving the Commission in humanitarian, social and foreign policy matters that are not of interest to investors generally and investors in SRCs in particular, and that it would require SRCs to engage costly outside vendors to interpret the law and the filing requirements.
Two ideas that one might expect to be discussed at such a meeting did not enter into the debate. One is that many of the recommendations are based on the assumption that the observed decline in the rate of initial public offerings (IPOs) represents a market failure that needs to be corrected for the economy to reach its full potential. The unexpressed alternative view would be to recognize that not every company needs to be a public company and to accept the heavy compliance burden that accompanies a decision to seek funding in the capital markets.
The second thought that was missing from the discussion was recognition that the bursting of the dot-com bubble in the early 2000s had a profound effect on the willingness of investors to consider investing in IPOs and the stocks of small public companies. Therefore, there is no telling what it would take, and how much time would need to lapse, before investors would regain their former appetite for investment in new small and emerging companies.
While the companies are eager to gain a following from the analyst community, investors remember that these were the same analysts who led them astray on a huge scale as they promoted the scores of stocks that boomed and busted during the tech bubble.
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