About a year ago, the SEC established the Advisory Committee on Smaller Public Companies to examine the impact of the Sarbanes-Oxley Act of 2002 (SOX) and other federal securities laws on smaller public companies. The Committee conducted its work with a view of protecting investors, considering whether the costs imposed by the current securities regulatory system for smaller public companies are proportionate to the benefits, identifying methods of minimizing costs and maximizing benefits, and facilitating capital formation by smaller companies. Recently, the Committee released a draft of its final report to the SEC. It is important for smaller public companies and their investors to read and comment on this report.
The primary recommendation in the draft report is to establish a system of scaled securities regulation for “smaller public companies”, generally those with market capitalization of less than $787 million. Smaller public companies would then be stratified into two groups - “microcap” companies (those with market capitalization of less than $128.2 million) and “smallcap” companies (those with market capitalization between $128.2 million and $787.1 million). It is the Committee’s belief that this overarching scaling principal could be incorporated into existing and new securities regulations.
Other primary recommendations of the Committee include the following:
- Until a framework for assessing internal control over financial reporting is developed that recognizes the unique characteristics of smaller public companies, microcap companies with less than $125 million in annual revenue and smallcap companies with less than $10 million in annual product revenue should be exempt from all of the SOX 404 internal control reporting requirements, subject to achieving certain corporate governance standards and the reporting of any known material weaknesses. Smallcap public companies with less than $250 million in annual revenue but greater than $10 million in annual product revenue and microcap companies with between $125 and $250 million in annual revenue should be exempt from the external audit requirement of SOX 404, but be required to complete management’s assessment of internal controls under SOX 404 and achieve certain additional corporate governance standards.
- A private offering exemption that would not prohibit general solicitation and advertising for transactions with certain purchasers should be adopted.
- Permission should be granted for microcap companies to apply the same effective dates that the Financial Accounting Standards Board provides for private companies in implementing new accounting standards.
- Additional guidance should be considered for all public companies with respect to materiality related to previously issued financial statements.
- A de minimis provision in the application of the SEC’s auditor independence rules should be implemented.
Joseph (Leroy) Dennis, Executive Partner of McGladrey & Pullen, LLP and a member of the SEC Advisory Committee, commented on the release of the draft report, “I would like to hear from smaller public companies and their shareholders since most of the comments so far have come from investors in billion dollar companies. The Committee will carefully review all comments received and consider them prior to issuing the final report.” The final report is expected to be closely reviewed by the SEC; however, the Committee's recommendations will not change current rules or regulations unless formally adopted by the SEC.
The draft report is available in full at http://www.sec.gov/rules/other/33-8666.pdf. Comments on the report may be submitted until April 3, 2006. You may contact the Committee electronically by using the submission form at http://www.sec.gov/info/smallbus/acspc.shtml or by sending an e-mail message to rule-comments@sec.gov, referring to File Number 265-23 on the subject line.
If you have questions or need further information about the Committee’s draft report, our Firm will be pleased to help. Please call us at 1.866.776.5276. Your active involvement in these issues will be welcomed. Smaller public companies are encouraged to contact their shareholders and ask them to comment on the recommendations.
The comments made in this article do not necessarily reflect the views of the SEC or the SEC Advisory Committee on Smaller Public Companies. |
