The U.S. Securities and Exchange Commission (SEC) is floating a new proposal that proponents hope will encourage more Initial Public Offerings (IPOs) by reducing auditing requirements for smaller public companies. However, experts have pointed out the proposal creates a new grey area that leaves questions for regulators and for small businesses too.
The SEC is seeking comments on its proposal to reduce auditing regulations that were enacted to improve internal controls for public companies and reduce securities fraud. Under Sarbanes-Oxley 404(b), businesses are required to utilize independent auditors to review internal controls, and strong internal controls lead to accurate financial reporting. The Sarbanes-Oxley Act of 2002 was a response to the early 2000s accounting scandals at companies like Enron and WorldCom.
The SEC estimates the changes could save small companies $110,000 in audit fees and $100,000 in non-audit costs annually. It’s obvious that small businesses would welcome this regulatory and financial relief. But what exactly counts as a small business? Last June, the SEC updated its definition of smaller reporting companies (“SRCs”) to include businesses with up to a $250 million market capitalization. Critics pointed out the updated definitions did not provide significant relief because an SRC was often still considered an “accelerated filer” or a “large accelerated filer” and still subject to the audit requirements.
So how do small public companies know if they qualify for small business regulatory exemptions involving public disclosures and auditing requirements? That’s a tough question to answer based on the current complex regulations. According to SEC Commissioner Hester Peirce, the current proposal doesn’t simplify regulations for small businesses as much as it should. She also points out the SEC has so many categories of public companies that regulators “often need diagrams to figure it out.”
While the SEC struggles to create and adopt simplified requirements and regulations for smaller public companies, businesses and investors are paying the price. Confusing regulations greatly increase the likelihood that smaller reporting companies will face securities litigation. When regulators struggle to understand the regulations they impose, businesses are almost certain to face litigation for possible infractions.
At Burford Perry LLP, we regularly handle cases involving complex securities issues. We have represented both small businesses and individuals in securities litigation. We work to resolve matters quickly and efficiently. If you are anticipating or considering securities litigation, contact us today and schedule an appointment with one of Houston securities litigation attorneys.