One of important considerations for companies that are deciding whether or not to “go public” is the cost involved with being a public company. Current securities regulations require many detailed disclosures from public companies, some of which require considerable resources to collect. However, starting in December 2007, the Securities and Exchange Commission has lessened disclosure obligations of smaller public companies, thus reducing their costs associated with being “public”. These rules allowed approximately 42% of all public companies to provide reduced disclosure, as opposed to 29% prior to the adoption of the rules, as of 2006.
The rules apply to companies with a public equity float held by non-affiliates of less than $75 million or, if the company does not have common equity or there is no market for its common equity, with revenues below $50 million for the last fiscal year. Under these rules, smaller reporting companies can omit risk factors, compensation discussion and analysis, disclosure about the market risk, performance graphs, selected financial data, supplementary financial data and certain other disclosures. Companies are also allowed to shorten description of their businesses, describe business activities for only three instead of five years and provide audited financials for two instead of three years.
Additionally, the Wall Street Reform and Consumer Protection Act, signed into law in July 2010, has exempted smaller reporting companies from compliance with Section 404(b) of the Sarbanes-Oxley Act internal control auditor attestation requirements.
Smaller companies can voluntarily include the no longer required disclosures on an item-by-item or “a la carte” basis, if they deem certain disclosures to be particularly relevant for their investors. I encourage smaller reporting companies to do so, especially with respect to the risk factors that help protect companies from potential liability.
Overall, these rules have been a welcome relief for smaller public companies, as they reduce compliance costs and minimize diversion of attention of the management and the board from running the company.