SOXing It to the Little Guy

How Sarbanes-Oxley Hurts Small Investors and Entrepreneurs

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Remember 1982, when video games, personal computers, and cordless phones were new—and the companies that made these products were new? If investors could travel back in time, some of them would have fun playing Pac-Man again, but all would love to load up on some of the many great stock bargains around then.

For instance, a new company called Apple Inc. had listed on the Nasdaq stock market in 1980. In 1982, its Apple II personal computer was catching on in offices and even in some homes. But skeptics were saying that computers were changing so fast that this product would soon be overtaken. It certainly was in a few years—by one of Apple’s new products: the Macintosh, soon to become known simply as the Mac. And who would have thought that 25 years later Apple’s iPod would displace Sony’s Walkman as the leading portable music player?

Then there was a regional discount store chain that hadn’t yet caught the eye of most brokerage houses and analysts, even though the company had been founded in 1962 and had gone public in 1970. Operating in 14 states, mostly in the South, Wal-Mart Stores Inc. was selling for $50 per share after its fifth stock split in June 1982. An investment of less than $5,000 in 1982 would be worth more than $300,000 today.

But now, a law is robbing investors of their rights to place their money in stocks that carry risk but also have potential for great returns. This law’s prescriptive mandates are making it more difficult for companies of the size that Home Depot, or even Wal-Mart, were in 1982 to raise money in America’s public capital markets. Even if someone were to come back from the future to 2007 with stock market data through 2032, he just might come up empty-handed if looking for growth companies with the successful returns for investors of Wal-Mart and Home Depot.

Why? Because of the Sarbanes-Oxley Act of 2002. Substantial evidence shows that the law, which was intended to protect investors from corporate abuses, is hindering honest firms’ ability to raise capital and the average investor’s capacity to grow wealth. Enacted after major corporate scandals, the law increases penalties for fraud, but it also contains many mandates that unduly restrict legitimate entrepreneurs.