This September, Congress introduced two proposed bills that would make it easier for entrepreneurs and small companies to raise money and avoid certain Sarbanes-Oxley regulatory requirements.
Access to Capital for Job Creators Act
The first bill, named the “Access to Capital for Job Creators Act,” would require the Securities and Exchange Commission (the “SEC”) to remove the current regulatory prohibition that prevents companies, including small, privately-held businesses, from using advertisements to solicit investors.
Currently, any company that seeks to sell its securities must either register the offering with the SEC or qualify for an exemption from such registration requirements. Regulation D under the Securities Act of 1933, as amended (the “Securities Act”) provides several exemptions permitting small companies, as well as large companies, to raise money through the sale of securities without the cost of registration with the SEC. More specifically, Rule 506 of Regulation D exempts from registration the sale of securities if certain requirements are met, including that the company must not have used general solicitation or advertising in order to market its securities. This restriction on solicitation and advertising limits the nature and amount of investors to whom companies can seek to sell their securities. As a result, Regulation D restricts the ability of companies to raise capital, as essentially the company must already have a pre-existing relationship with a potential investor before offering its securities to that investor.
If the Access to Capital for Job Creators Act is passed and the prohibition on general solicitation is removed, small companies would be able to offer their stock or other securities to a greater spectrum of accredited investors. Additionally, this legislation would not only help entrepreneurs and small business owners access the capital they need to grow, but would also help promote job creation and economic growth in the general economy.
Startup Expansion and Investment Act
The second bill, named the “Startup Expansion and Investment Act,” would also make it easier for small and emerging companies to access the capital necessary to grow and create jobs by making the internal control reporting and assessment requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) optional for certain smaller companies.
The Sarbanes-Oxley Act is a federal law that sets standards for United States public companies and their boards of directors and management and public accounting firms. Section 404 of the Sarbanes-Oxley Act requires management and the company’s external auditor to report on the adequacy of the company’s internal control over financial reporting. Section 404 is the most costly aspect of the Sarbanes-Oxley Act for companies to implement. The costs associated with compliance with Section 404 often discourage companies from going public.
The Startup Expansion and Investment Act would modify Section 404 of the Sarbanes-Oxley Act to allow companies with market capitalizations of less than $1 billion to opt out of the internal control over financial reporting assessment and auditor attestation requirements of Section 404 for the first ten years after going public. Currently, companies with less than $75 million of their common equity held by non-affiliates do not have to comply with the auditor attestation provisions of Section 404 of the Sarbanes-Oxley Act.
The purported purpose of the Startup Expansion and Investment Act is to allow emerging companies easier access to capital to allow for expansion and the creation of jobs. If this legislation is passed, it will remain to be seen whether there will be an increase in the number of small companies going public.
This article appeared in the Los Angeles and Philadelphia editions of the Entrepreneurs' Organization newsletter