Chairman Huizenga, Ranking Member Maloney, and honorable members of this subcommittee, thank you for this opportunity to present testimony on behalf of my organization, the Competitive Enterprise Institute, a Washington-based free-market think tank. It is our mission to advance the freedom to prosper for consumers, entrepreneurs and investors.
Despite the conversation on more recent financial regulation such as Dodd-Frank, the Sarbanes-Oxley Act of 2002 still very much matters. The mandates to audit “internal controls” from the law’s Section 404, as interpreted broadly by the Public Company Accounting Oversight Board – the accounting body created by this law – are still a primary concern for companies considering going public on U.S. stock exchanges. And in reading through S-1s – the forms that companies file with the Securities and Exchange Commission when contemplating going public – I still always see prominent mention of the costs Sarbanes-Oxley imposes on being a public company. Auditing costs imposed by SOX are the biggest drain on these firms.
However, some of the biggest costs SOX imposes are to middle-class Americans looking to build wealth in their investment portfolios. This is the primary reason this law should be reformed. In the early 1990s, then-small businesses such as Starbucks and Cisco Systems were able to get capital from the public to grow, and middle-class investors grew wealthy with them. Before SOX, 80% of firms going public had IPOs of less than $50 million. A few years after SOX, however, 80 percent of firms went public with IPOs greater than $50 million. This is a big change for small and midsize public companies, which now face additional hurdles when raising capital, but it is middle-class investors who have been most harmed by being almost totally shut out of this early stage of growth of America’s fastest growing companies. Instead, these financial opportunities are being snapped up by the “accredited investor” class that has the freedom to buy shares in companies that aren’t weighed down with much of SOX and other mandates. Directly fingering SOX, President Obama’s Council on Jobs and Competitiveness observed: “Well-intentioned regulations aimed at protecting the public from the misrepresentations of a small number of large companies have unintentionally placed significant burdens on the large number of smaller companies. As a result, fewer high-growth entrepreneurial companies are going public.”
Another adverse consequence of SOX is the lack of job creation. As President Obama’s Jobs Council and others have noted, 90 percent of a public company’s job creation occurs after it goes public. This is important because in comparing the public equities markets before and after SOX, the first thing that’s apparent is that – despite a recent uptick in IPOs – there are far fewer public companies today. In 2001, the year before SOX became law, there were more than 5,100 companies listed on exchanges such as NASDAQ and the New York Stock Exchange. By 2015, there were just 3,700. This is a purely American phenomenon because from 1996 to 2012, non-U.S. stock listings rose 28 percent according to the National Bureau of Economic Research.
The good news is that with the Jumpstart Our Business Startups (JOBS) Act, members of Congress from both parties have realized that smaller public companies should not be subject to all the mandates of Fortune 500 companies. However, there is much more to be done and I urge Congress to pass bipartisan initiatives to allow middle-class investors to build wealth by expanding exemptions for investment crowdfunding and creating ways for non-wealthy Americans to qualify as accredited investors.
I would also urge Congress and the SEC to use their authority to narrow SOX’s definition of “internal controls” to processes that have proven their effectiveness in preventing fraud.
Thank you again for inviting me to testify. I look forward to any questions you may have.