KUHN CAPITAL Monday, October 23, 2017
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SOX 1, Business 0

April 7

We were recently approached by an accounting firm extolling the business advantages of adapting to Sarbanes-Oxley (SOX) regulations. Of course, SOX would be a business advantage for accountants, IT vendors and lawyers: billable hours are billable hours. But the discussion made us want to investigate just how beneficial to their clients SOX is.

Our conclusion: at least from the perspective of job-creating entrepreneurs and public company shareholders, SOX is bad news. We’ve talked to a number of micro-cap company CEO’s and chairmen who feel the $1.5 million they spend each year complying with SOX redirects resources better used to grow and compete.

And we know several founders of successful private companies that are clearly IPO material but who won’t file: they’re not interested in SOX’s regulatory hassle and expense, and especially board member tort lawsuit liability.

Other industry watchers agree with this perspective: “The cost of going public has gone up dramatically," says Alex Khutorsky, technology banker with Bear Stearns. Says Fritz Thomas, partner with law firm Mayer Brown Rowe & Maw, "CEOs say, 'We'd rather stay private'."

More SOX fallout may be evident in the abrupt decline in European company filings for American publicly-traded securities like ADR's. Used to be that access to the huge US capital market was red meat to growing overseas players.

We think the market distortions introduced by SOX are also contributing to the currently strong M&A pace. Some analysts say Microsoft's proposed acquisition of Groove Networks and Akamai's plan to buy Speedera Networks would not have occurred in a friendlier IPO environment.

"When a business is going well and someone expresses an interest these days, it more or less points to M&A activity," says Jon Bayless, a Sevin Rosen Funds partner. Going public is out of favor for several reasons he thinks: younger companies either don't have the scale to sell products to large customers who are paring down their suppliers, or “they can't afford to spend millions of dollars to make sure their books are audited to meet Sarbanes Oxley anti-fraud provisions.”

Some movement is afoot in Congress to revisit SOX: we hope soon.


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