Easing the small-cap regulatory burden

Companies at the low end of the market cap spectrum often view compliance with Securities and Exchange Commission regulations as a Sisyphean burden, with costly, recurring, quarterly and yearly work. While designed to protect investors, the level of detail demanded can be daunting. Adding to the practical burden of finding and reaching investors in a competitive capital market, small-cap managements can struggle with the weight of legal and accounting fees built into corporate overhead.

This week, the SEC provided some relief for nearly 1,000 businesses. As reported by The Wall Street Journal, the new rule classifies a company with less than $250 million in publicly traded shares as a “smaller reporting company,” with less detailed reporting requirements, especially on executive compensation. That enlarges the category from the previous threshold of $75 million. The SEC also added companies with less than $100 million in annual revenue and a public float of less than $700 million.

The new rule also allows smaller reporting companies (SRCs) to report two years of audited financial statements rather than three. Read the SEC’s announcement on the changes here or the full 100-plus page final rule here.

SEC Chairman Jay Clayton was quoted in the agency’s release:

I want our public capital markets to be a place where smaller companies can thrive … Expanding the smaller reporting company definition recognizes that a one size regulatory structure for public companies does not fit all.  These amendments to the existing SRC compliance structure bring that structure more in line with the size and scope of smaller companies while maintaining our long-standing approach to investor protection in our public capital markets.  Both smaller companies — where the option to join our public markets will be more attractive — and Main Street investors — who will have more investment options — should benefit.

In my mind, the main beneficiaries will be emerging businesses like biotech and IT companies, starting up the market-cap scale – plus small, regional businesses that seem to stay in the $100-200 million range. In both cases, the costs and time involved in reporting have discouraged going public or remaining public. Simplifying seems like a good thing.

No doubt there are critics. And regulatory philosophies are cyclical – the next time there’s a bear market, we’ll hear cries of “Never again!” along with tightening up on rules that are being relaxed now. For now, it’s a positive for our small-cap friends.

© 2018 Johnson Strategic Communications Inc.

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