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Capital Markets Alert: U.S. House Panel Passes Bill Potentially Improving Opportunities for Small Companies to Go Public


On February 16, 2012, the U.S. House of Representatives' Financial Services Committee passed bipartisan legislation (H.R. 3606, Reopening American Capital Markets to Emerging Growth Companies Act of 2011) that may ultimately improve the ability of small and medium-sized enterprises ("SMEs") to launch initial public offerings ("IPOs"), raise additional capital, and create jobs without compromising investor protection.

The proposed legislation, which passed by a vote of 54-1 and will be subject to approval by the entire House, the Senate, and the President, would reduce the costs of going public for SMEs by temporarily easing regulatory requirements and restrictions. Requirements to audit internal control over financial reporting, to conduct certain shareholder votes, and to provide certain disclosures related to executive compensation would be suspended. Restrictions on the provision of analyst research and company information to investors prior to the IPO would be eliminated. The registration statement for the IPO would only be required to include audited financial statements for two, rather than three, years.

The bill would create a new category for issuers called "emerging growth companies" that have annual revenues of less than $1 billion at the time of an IPO and a float of less than $700 million. The regulatory "on-ramp" with the exemptions for emerging growth companies would expire after five years, or earlier if the company reaches $1 billion in annual revenue or $700 million in public float.

Although the legislation would amend Section 404(b) of the Sarbanes-Oxley Act of 2002 to delay the requirement to hire an independent auditor to verify the company's internal control over financial reporting during the five-year "on-ramp" period, the company's management would still be required to certify the effectiveness of disclosure controls and procedures.

Similar legislation has been introduced on a bipartisan basis in the Senate.

Our View of the News

While still in the very preliminary stages, we believe that the passage of this bill signifies that Congress recognizes that small companies need capital in order to innovate and create jobs that will bolster the economy. For some time, J.H. Cohn has believed that the U.S. needs to "jump start" the corporate engines by restoring access to public capital. Capital, in all its forms, is the underpinning of job creation. Further, we need to create a more efficient delivery system for SMEs to access the capital markets. This includes removing the friction that small companies experience when raising capital. The passage of this bill is a sign toward that very direction.

We will keep you updated on any developments related to this topic.

For more information on this issue or to discuss going public, please contact Richard Salute, CPA, J.H. Cohn partner and Capital Markets and SEC Practice director, at rsalute@jhcohn.com or 516-336-5501, or your J.H. Cohn engagement partner at 877-704-3500.

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This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and J.H. Cohn LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Published date: 2/21/2012

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