The bill, aimed at reducing the cost of Sarbanes-Oxley compliance for biotech and other young companies, would help firms that may have substantial operations but little revenue.
The bill, introduced in the House Financial Services Committee by Pennsylvania Republican Michael Fitzpatrick, would increase from $75 million to $750 million the market capitalization of companies exempt from Section 404-b of the Sarbanes-Oxley Act, which requires public companies to hire outside auditors to verify the company has appropriate internal accounting controls. To qualify for the new exemption, companies must have revenue of $100 million or less.
The bill was approved Wednesday by the committee's Capital Markets Subcommittee by an 18-15 vote. Although the bill faces little difficulty in the Republican-controlled House, there is little chance of passage in the Democrat-dominated Senate right now. However, a strong showing in the House this year could tee up a similar bill for quick passage next year if the GOP gains control of both chambers in the November elections.
Although opposed by Democrats and a variety of investor and accounting industry groups, Fitzpatrick's bill has been endorsed by the Biotechnology Industry Organization. Last week Jeffrey Hatfield, chief executive of Vitae Pharmaceuticals Inc., a company based in Fitzpatrick's state, testified on behalf of his bill.
Democrats on the panel complained that Congress has already done enough to ease smaller companies' Sarbanes-Oxley burdens.
The 2010 Dodd-Frank Act exempted companies with revenues below $75 million and the so-called JOBS Act enacted in April gave companies with capitalization under $700 million and sales under $1 billion a five-year delay in their obligation to audit internal controls.
"In the 10 years since Sarbanes-Oxley, Congress has heard from companies concerned about the compliance burden and we've taken adequate steps to address those concerns," California Democrat Brad Sherman said. He said Fitzpatrick's bill would deny investors much-needed outside assessments of high-risk companies. "The question here is whether we're going to endanger one of this country's most valuable assets -- the belief that we have the best, the cleanest, most reliable capital markets in the world and that the stocks traded there are traded on the basis of real information and not invention," he said.
"We need to not just say, 'What's the easiest way for one or two companies to access the market,' " he added. "We have to say, 'How do we protect investors so that for generations to come our markets will be thought of as the most reliable, the cleanest and best way to get capital.' "
The bill is opposed by the Council of Institutional Investors, the Center for Audit Quality, the California Public Employees' Retirement System, and the American Institute for Certified Public Accountants.
Fitzpatrick countered that the steps taken so far aren't enough to help companies remain in the developmental stage for many years.
"Some very healthy, investment-worthy small businesses may actually have no revenue for six, 10, or 15 years," he said. "These companies are not unique and were not included in the JOBS Act."
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