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Public Statements

"Sarbanes-Oxley Has Devastated The U.S. IPO Market"

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Location: Washington, DC

No, it isn't the latest unemployment number, and it certainly isn't the yield on 10-year Treasuries.

Rather, it was America's share of global initial public offerings last year. The home of the deepest, most liquid capital markets in the world produced fewer than one-tenth of the IPOs around the globe in 2011.

Troubling on its own, our share of this pie has plummeted from more than half of the world's initial offerings during the early 1990s.

Some will point to the rise of financial hubs throughout Europe and Asia as the reason for this decline. This pitch tells only half the story.

No system on earth has been more successful in pairing those businesses seeking financing with interested investors than our public markets.

While we have come to take it for granted, the jobs generated by these businesses and the wealth created for investors because of this system is truly profound.

Instead of shirking responsibility and blaming increased competition from Frankfurt or Singapore, it's time for Washington to take a hard look at the policies put into place that are impairing our ability to attract companies seeking to list on exchanges.

Exhibit A is Sarbanes-Oxley (SOX), which was signed into law 10 years ago this week. According to a survey by the Securities and Exchange Commission, the most often cited reason companies chose to list elsewhere was not location or even our sky-high corporate tax rate. It was the regulatory compliance and legal liability produced by SOX.

Certainly the law has positive aspects. For instance, safeguards were put in place to ensure auditors remain unbiased and independent.

But the costs of compliance and legal liability have overshadowed the potential benefits.

In part, that is because not enough work occurred on the front end.

At the time of passage, the SEC estimated that the cost of Section 404 of SOX would average $91,000 per company. Subsequent studies have shown that the true cost is on the order of $3.5 million per company -- more than 35 times the SEC's original estimate.

A Fix That Lasts

More than a dollar amount, however, this law and the red tape that followed did a number on the mindset of those companies that make up our capital markets.

Public companies became more inward-looking. Instead of focusing on developing products and boosting their business, the best minds at these companies increasingly turned to compliance and limiting legal exposure.

Both the implicit and explicit costs of this law tell the same story. If the law is left unaddressed, our capital markets and our economy will be worse off.

Incremental steps have been taken. A key provision in the JOBS Act provides a regulatory on-ramp for smaller startups hoping to list on U.S. exchanges.

But a five-year delay on regulatory filings only gets us so far. Businesses, especially smaller ones, need a permanent fix.

According to the SEC, the burden of complying with regulations such as Section 404(b) of Sarbanes-Oxley is more than seven times that imposed on large firms relative to their assets.

Enter the Small Business Access to Capital Act, which I introduced to relieve companies with a market cap of up to $1 billion from mandatory 404(b) compliance. Believe it or not, the president's Jobs Council came to the same conclusion and endorsed this approach.

If investors in a given company make it clear that they believe 404(b) compliance is necessary, nothing in this bill would prevent companies from appeasing their investors. It simply removes the mandate.

A renowned mathematician once said, "The most fertile source of insight is hindsight." We have spent a decade under SOX; we know its benefits and have witnessed its costs. If nothing is done to ease the burden, that meager 8.6% of public startups around the globe will tower over our share in future years.

Foreign jurisdictions are hungry to supplant America as the center of the global capital markets. These hubs offer consistent and pragmatic regulatory and legal systems that provide a stark contrast to the U.S. business environment. This must be matched, not with a race to the bottom, but by singling out and taking on the most egregious impediments we have in place.

On this anniversary of SOX passage, the Small Business Access to Capital Act seems like a good place to start.


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