The Republican-led House voted 390-23 to approve legislation that would among other things undo a ban on closely held firms soliciting investments, increase the number of investors such firms can have and exempt newly public companies with less than $1 billion in revenue from some reporting requirements of the Dodd-Frank and Sarbanes-Oxley laws.
Consumer advocates and former regulators say the legislation is an evisceration of investor protections that have been in place since the 1930s.
President Barack Obama has backed the bill as a way to help spur job creation, and Senate Democrats have said they will move quickly to write-up their own version.
Supporters of the legislation include the U.S. Chamber of Commerce, New York-based exchange operators Nasdaq OMX Group Inc. (NDAQ) and NYSE Euronext. They say the bill targets rules that impede economic growth by making it more difficult for companies to raise capital or conduct initial public offerings. That view has won support from Democrats including Senator Charles Schumer of New York.
“I do think Congress has an ongoing obligation to ask whether the policy framework for public offering is striking the right balance between facilitating capital formation on the one hand, and attempting to protect the investors on the other,” Schumer said at a March 7 Senate hearing, citing a “drastic decline” in the number of U.S. IPOs since the 1990s. “That’s always a needle we have to thread.”
Opponents, including former SEC Chairman Arthur Levitt and Barbara Roper, director of investor protection for the Consumer Federation of America, say this approach will hurt investors and will not achieve the stated goal.
“You don’t increase jobs growth by rolling back regulatory protections, and it’s frankly bewildering that the Democrats have been so willing to buy into the traditional Republican argument,” Roper said in an interview.
Mary Schapiro, SEC Chairman, “believes that portions of the legislation either unnecessarily eliminate important investor protections or are not balanced with sufficient safeguards,”John Nester, an agency spokesman, said in a statement.
The bill includes a provision that would de-regulates analyst research in a way that “could take us back to the conflicted practices of the dot-com bubble,” Nester added.
There is also a provision that would permit companies to raise capital by soliciting and pooling investments online. An SEC small-business advisory committee that reviewed some of the legislative ideas rejected crowdfunding last month, saying it could foster fraud.
Another proposal would give companies with less than $1 billion in revenue an easier “on ramp” to SEC registration. That would represent a “fundamental reduction in the level of transparency and regulation for companies going public,” said Lynn E. Turner, a former SEC chief accountant., who is now managing director of Litinomics Inc., an economic and legal consulting firm.
So-called “emerging growth” companies taking advantage of the on ramp would avoid audits of their finances for up to five years and would be required to file no more than two years of audited financial statements in order to register.
“A billion dollars in gross revenue is nearly everybody,” Roper said. “You’re talking about allowing most companies that go public to go public without meeting these basic standards.”
Rep. John P. Sarbanes of Maryland, one of 23 Democratic opponents in the House, warned colleagues in a letter that the bill could lead to “Enron-Type fraud”.
Senate Democrats, who have been meeting to craft their version of the bill, have said they will address some of the concerns raised.