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Statement on Final Rules Regarding Smaller Reporting Companies

Commissioner Robert J. Jackson, Jr.

June 28, 2018

Thank you, Chairman Clayton, and thank you to the Staff in the Divisions of Corporation Finance and Economic and Risk Analysis for their work on today's proposal. For early, frequent, and very thoughtful briefings, I'm especially grateful to Sebastian Gomez Abero from the Chairman's Office, Jenny Riegel, Amy Reischauer, and Charlie Guidry from the Division of Corporation Finance, and our colleagues in the Division of Economic and Risk Analysis, including Hari Phatak, Cindy Alexander, Tristan Chiapetti, Mariesa Ho, and Daniel Bresler, who provided thoughtful analysis and key data.

Today's rule says that we are merely "expand[ing] the number of registrants that qualify as SRCs and thereby benefit from scaled disclosure requirements."[1] So far as it goes, for the reasons Commissioner Stein has given, that is relatively unobjectionable—so I therefore vote in favor of the rule. But there is a deeper assumption behind today's rule that I cannot accept: that the hidden secret to helping small companies go and stay public is simply cutting red tape.[2] For the following three reasons, I am unprepared to make policy on the basis of that assumption going forward.

*          *          *          *

First, there's zero evidence for it. As finance scholars like to say, there is no free lunch: reducing disclosure requirements can lead to increased costs of capital.[3] Investors are forced either to diligence the risk of fraud on their own or demand higher returns in light of that risk. Whether that trade is a good one for investors is an empirical question on which this release features no evidence at all, and as I've explained before, letters from trade groups aren't evidence.[4] Fortunately, today's adopting release gives us an opportunity to test the effects of reduced disclosure on public-company fraud and the cost of capital. That's why I'm noting today that my staff and I will be studying the effects of today's rule change in detail—and plan to use our results in inform any future policymaking in this area.

Second, our actual experience with the red-tape theory is hardly promising. We've tried to roll back disclosure requirements in an effort to encourage small-company capital formation before, and the torrent of IPOs that commenters predicted at the time never materialized.[5] In the meantime, as I've noted before, we have ignored the actual costs of going public, despite longstanding evidence that those costs are much more significant than the costs of so-called red tape.[6] Focusing on so-called red tape rather than the real costs middle-market businesses pay to Wall Street when they go public has led to the unsurprising result that many of America's most exciting young companies today choose to stay private.

Third, I'm worried that rolling back disclosure requirements makes it harder for the retail investors we all care about to participate in small-company capital formation. I'm worried because there is evidence for the proposition that less disclosure makes retail investors wary of investing in small companies.[7] So not only is there no evidence that rolling back disclosure rules is good for investors. There is evidence that it shuts ordinary American investors out from investing in the Nation's small businesses.

In this respect, I note that the proposal ominously suggests that there may be more to come. The release indicates that the Commission soon intends to reduce the number of registrants that would be subject to Section 404(b) of the Sarbanes-Oxley Act—that is, the number of registrants required to attest to their internal controls over financial reporting.[8]

Yet the data offer no support whatsoever for the claim that exemptions to 404(b) would be good for American companies or investors. Our own staff conducted a study of this question just seven years ago and concluded that there was "no conclusive evidence . . . linking the requirements of Section 404(b) to IPO activity."[9] Those findings are consistent with overwhelming academic research showing, among other things, that "[t]he costs of Section 404(b) have declined since the Commission first implemented the requirements of Section 404" and "[i]nvestors generally view the auditor's attestation . . . as beneficial."[10]

While I support the adoption of today's rules related to smaller reporting companies, I want to make clear that the evidence we have offers no support for the notion that making changes to our rules under Section 404(b) would serve any part of our mission of investor protection, fair markets, and capital formation. Unless and until I see robust and reliable economic analysis suggesting otherwise,[11] I will remain extremely concerned about the possibility of any exemptions to those rules.

I thank the Staff for their work on this release. And I look forward to continuing the conversation about how best to finance America's small business while protecting investors.


[1] Securities and Exchange Commission, Adopting Release, Amendments to Smaller Reporting Company Definition, Release No. 34-10513 (June 28, 2018), at 9. 

[2] For recent work that has helped me develop my thinking with respect to these matters, see John C. Coffee, Jr., The Irrepressible Myth that SEC Overregulation Has Chilled IPOs, Columbia Law School Blue Sky Blog (May 29, 2018) (noting that many industry proposals in this area are "sadly ideological attempts to dismantle core provisions of our contemporary disclosure system").

[3] Milton Friedman, There's No Such Thing as a Free Lunch (Open Court Publishing, 1975) (arguing that no lunches are truly free).

[4] See, e.g., Letter from Center for Capital Markets Competitiveness, U.S. Chamber of Commerce to Mr. James Schnurr, U.S. Securities and Exchange Commission and James R. Doty, Public Accounting Oversight Board (May 29, 2015), at 7-11, available at (variously asserting, without evidence, that "[m]ost of the work related to gathering additional evidence of review controls has been non-value added", "[a]uditors appear to have a bias to exclude review controls", "[r]equirements for documentation and levels of precision around management review controls are increasing without regard to the underlying control environment", and, in a sweeping statement featuring no evidence at all, "[w]hat is actually most important to companies is now being deemphasized.").

[5] Compare Michael Dambra, Laura Casares Field, and Matthew T. Gustafson, The JOBS Act and IPO Volume: Evidence that Disclosure Costs Affect the IPO Decision, 116 J. Fin. Econ. 121 (2015) (providing premature, and in the authors' own description "preliminary," evidence that the JOBS Act "has affected IPO volume") with Ernst & Young, Update on Emerging Growth Companies and the JOBS Act, at 2 (Nov. 2016) ("IPO activity rebounded after the JOBS Act was enacted in April 2012, peaking in 2014 before declining in 2016 to what so far is the lowest level of IPO activity since the financial crisis in 2008 and 2009.").

[6] Commissioner Robert J. Jackson, Jr., United States Securities and Exchange Commission, The Middle-Market IPO Tax (April 25, 2018) (citing Hsuan-Chi Chen & Jay R. Ritter, The Seven Percent Solution, 55 J. Fin. 1105 (2000)).

[7] Colleen Honigsberg, Robert J. Jackson, Jr. and Yu-Ting Forester Wong, Mandatory Disclosure and Individual Investors: Evidence from the JOBS Act, 93 Wash. U. L. Rev. 293-334 (2015).

[8] See Adopting Release, supra note 1, at 6-7 (noting that the Chairman has "directed the staff to formulate recommendations to the Commission for possible additional changes to the 'accelerated filer' definition that, if adopted, would have the effect of reducing the number of registrants that qualify as accelerated filers'").

[9] Securities and Exchange Commission, Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 For Issuers With Public Float Between $75 and $250 Million (April 2011), at 46, https://www.

[10] See id. at 7-8.

[11] Compare Center for Capital Markets Competitiveness, supra note 4.

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