One of the things the new Congress can do is repeal — or at least, curtail — the Sarbanes-Oxley regulations.
To those who aren’t familiar with it, Sarbanes-Oxley (also known as “Sox” or “Sarbox”) was implemented after the financial accounting scandals of companies like Enron. For huge companies, the cost of Sox is relatively small compared to the good it generates. For larger companies, it might make sense to keep it in place.
Some research has shown that the collective cost to the economy for SOX compliance is $1.4 Trillion. However, that doesn’t account for the disproportionate cost of SOX for smaller companies and startups. The cost of compliance for a small company can be as much as 2.5% of revenue. Often, startups are able to go public with revenues of around $50MM — you do the math and decide whether you think this hidden tax is worth it. Furthermore, the regulation is driving smaller companies to do IPOs in non-US markets.
IPOs and small companies are inherently riskier investments. We’re not talking about companies that can individually sink large pension funds; but if these companies grow and prosper, their upside potential can be enormous. Let’s stop preventing them from going public (or worse, exporting our capital markets to Asia and Europe).
Fortunately, Nancy Pelosi promised reform on SOX during this year’s tour of Silicon Valley. Let’s hope this isn’t forgotten in 2009, and helps make the United States IPO market healthy again.
