NVCA Wants to Knock Your SoX Off

Many companies view IPOs as the ultimate exit strategy — venture capitalists get a return on their investments, businesses raise millions to fund growth and, perhaps most importantly, the economy thrives.

But that’s not happening among small companies, which make up the majority of businesses in the United States. They can’t afford the expense of being public because of costs imposed by 2002’s Sarbanes-Oxley Act (SoX).

The National Venture Capital Association (NVCA) is hoping to change the situation. The organization continues to lobby for fewer restrictions within Section 404 of SoX, the part that requires companies to attest to financial reporting controls and have auditors check numbers.

“It has basically become a hornet’s nest,” says Mark Heesen, president of NVCA.

The federal government, including the SEC and the House Small Business Committee, has been examining the matter. Lawmakers held a hearing in June, at which Heesen testified, and the SEC is taking comments on possible Section 404 revisions.

Heesen and the NVCA argue there are plenty of companies with enough profit run-rate to do IPOs. But, instead, many choose to be acquired so they don’t have to deal with SoX regulations. That’s a shame in an economy where startups funded by venture capital accounted for 10.5 million U.S. jobs in 2006 and $2.5 trillion in revenue, Heesen told lawmakers on June 5.

“Imagine if Google had been acquired by Microsoft, or Dell acquired by Compaq, or Genentech acquired by J&J,” Heesen said during testimony to the House Small Business Committee. “Perhaps the innovation would have survived, but the market value, jobs and revenues would have been diluted substantially.”

There are two other problems with M&A, Heesen says. The first is that venture capitalists prefer to have their investment companies go public, as they make more money that way. The second is that promising new technologies often get lost within larger companies.

Despite drawbacks, there are more IPOs this year than there have been for a while, especially in telecom/tech, Heesen says. “You’re seeing more companies that are venture-backed going public today than you have in many years. But we’re still not where we should be.”

Now it’s up to the SEC to act. No one knows when that might happen. But, Heesen says, if the final rules don’t help small companies, “I think you will see a major push by many groups for congressional intervention. We hope it doesn’t have to get to that point.”

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