Too SOXy for Your Audit Committee?

The official line coming out of the National Venture Capital Association about the zero IPO story is that Sarbanes Oxley is to blame. In a damage control press released titled “IPO Drought Creates Capital Market Crisis for Start-up Community” the NVCA argued 57 percent of venture capitalists surveyed said that excessive capital markets regulation was to blame for the falling number of venture-backed IPOs. In the same survey, 77 percent said that “skittish investors” were the problem, while 64 percent said the “Credit crunch/mortgage crisis” prevented venture-backed companies from coming out on the public markets. Still, the NVCA reserved the bulk of its ire for Sarbanes Oxley - a securities regulation law enacted in the wake of Enron, WorldCom, Adelphia, and a host of other financial accounting scandals from the late 1990s and early 2000s.

These corporate fraud cases cost the U.S. economy billions of dollars, shook public confidence in the capital markets, and, in combination with the growth of capital markets elsewhere, aided in the mass migration of capital out of the U.S. Critics, such as the U.S. Chamber of Commerce, argue SOX’s presumably byzantine structure adds additional complexity and cost to public company accounting requirements. They advocate repealing a number of SOX previsions, including the much reviled Section 404, which mandates the establishment of internal auditing committees to document company financial controls. By and large, though, SOX was necessary to restore trust and certainty in a dysfunctional securities market largely bereft of both.

With today’s press release, the NVCA has placed itself squarely in the Chamber’s court. NVCA president Mark Heesen argues, “we need to put regulators, legislators, presidential candidates, and the private sector on notice that this situation represents a serious problem that will have long reaching economic implications.” The press release states, “the NVCA has been advocating for Sarbanes Oxley reform for several years as the cost for small companies to go public has risen dramatically under the law.”

One of the primary arguments against SOX is that drives companies away from the U.S. capital markets and into the arms of foreign competitors in London, Hong Kong, Frankfurt, and elsewhere. In fact, one of the Chamber’s key pieces of evidence for why SOX has negatively impacted the U.S. capital markets is that the number of IPOs in the U.S. has dropped from 507 in 1999 - in the brief pre-tech bubble window, in the heart of the financial accounting scandals, and a full three years before SOX was enacted - and 235 in 2006, while the number of IPOs listing in the leading foreign exchanges has skyrocketed. If we follow the Chamber’s logic, the lack of venture-backed IPOs in the U.S. markets would be primarily attributable to the fact that these companies were driven away by the cost of SOX and decided to list on other exchanges, like the AIM. This was, however, not the case. Maybe it’s time the Chamber and the NVCA stop playing SOX for a red herring and start focusing on some of the larger problems affecting the economy, such as “skittish investors” and the “Credit crunch/mortgage crisis.”