My colleague Ryan Radia and I recently wrote in an editorial for Investor's Business Daily that the 2002 Sarbanes-Oxley Act should be dismantled for the sake of up-start businesses specifically in the technology sector. We argue that the burden of regulation imposed by the law is inequitable and puts businesses today at a disadvantage not experienced by businesses before the law's passage. Read the full article here.
Companies like Microsoft, Apple and Google created immense wealth and opportunity in an era of less heavy-handed regulation. Firms such as Facebook and Skype may well represent tomorrow's giants, but mandates such as Sarbanes-Oxley make these innovative firms much less likely to launch independent public companies.
Seeking an acquirer is often a sensible move for startups, but whether and when to go public should be based on market opportunities, not the costs of short-sighted legislation.
For the sake of today's entrepreneurs and investors, Congress needs to take a close look at burdens that discourage companies from seeking public offerings. Revisiting the Sarbanes-Oxley Act would be an excellent first step. Section 404, which purports to prevent conflicts of interest, should be scrapped. The section establishes duplicative layers of oversight that are exorbitant to maintain. For instance, companies must assess for fraud, assess the measures to assess for fraud, then assess the assessors!
The murky waters on the tech IPO front should serve as a wake-up call to legislators. If America's entrepreneurial spirit is to realize its full potential, many more capable high-tech firms may need to go public to raise the capital they'll need to grow. The next generation of innovation depends on it.
It is worth noting, however, that some progress has been made in dismantling the magnificently ill-conceived law.
In June 2010, the Supreme Court ruled that the method of removing members of the Public Company Accounting Oversight Board, established by the Sarbanes-Oxley Act and responsible for enforcing its compliance, violated the Constitution. The section in question was separated from the rest of the act and stricken. Sam Kazman and Hans Bader of the Competitive Enterprise Institute served as co-counsel on the case.
Steps like this ruling are very encouraging, but they should be a starting point. Not the end of the effort against Sarbanes-Oxley.
Congress should heed the warnings of CEI and others that Sarbanes-Oxley is wrong-headed and destructive. Until a serious revision is done of the law, the entrepreneurial spirit of America will be threatened.