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Statement at Open Meeting on Amendments to Smaller Reporting Company Definition

Commissioner Hester M. Peirce

June 28, 2018

Thank you, Mr. Chairman and thank you Bill and Amy. This project has been, as rulemaking always is, a considerable undertaking.  I appreciate the efforts of CorpFin, DERA, and GC in working through these issues with us, and I look forward to working with all of you as we move forward with the next steps in the process, which I hope will be particularly meaningful for smaller issuers.

Today we are adopting a rule the purpose of which is to reduce the burdens on smaller issuers, allowing more of them to qualify as "smaller reporting companies."  It is no secret that companies, in particular smaller companies, have been avoiding our public markets.  There are good reasons for a company to opt for a private offering over a public one, and it makes sense for some companies to stay private indefinitely.  When private offerings start to dwarf public offerings, however, it becomes our duty as regulators to ask whether we had a hand in this trend.  Have we created a regulatory framework for public companies that comes with so many extraneous bells and whistles that neither the companies nor their investors deem the benefit of being public worth the cost?

I am pleased that we, as a Commission under Chairman Clayton's leadership, have decided to investigate this question and options for making the public markets work better for investors and issuers.  I am also pleased that today we are eliminating certain requirements that burden issuers without necessarily benefiting investors.  Today's steps are a cautious beginning—a welcome prelude to more meaningful future steps, but not on their own likely to make a definitive difference for small companies considering going public. 

We have not yet evaluated the full panoply of options available to us to achieve a balance in small company regulation that meets the needs of both issuers and investors.  We have not yet grappled with the most glaring burden on smaller issuers—Section 404(b) of Sarbanes-Oxley.  As both our adopting release today and the Chairman's statements signal, fresh efforts are underway to rethink the value of Section 404(b) for smaller issuers.  Informed by the input we received during the comment process on this rule, I would have preferred to provide Section 404(b) relief today.  Indeed, doing so would have been consistent with past practice.

Changing the thresholds for "smaller reporting companies" without making comparable changes to the "accelerated filer" definition may prove confusing to issuers.  Smaller reporting companies, or "SRCs," are permitted to opt into a scaled disclosure regime that allows them to, for example, file only two years of audited financials instead of three.  While this scaled disclosure is undoubtedly useful at the margins, it is not what small companies tell us really matters.  It is the qualification as a non-accelerated filer—and the 404(b) exemption associated with that qualification—that matters.  The reason that the discussions about SRCs and non-accelerated filers are often mixed up is that, in an effort to streamline and simplify regulation for smaller companies, we, the Commission, brought SRCs and non-accelerated filers in line with one another when we created the SRC definition in 2007.[1]   

Until today, qualifying as a smaller reporting company, or SRC, also meant that a company qualified, by definition, as a non-accelerated filer.  That is, the company, by qualifying as an SRC, also qualified for exemption from the requirements of section 404(b) of Sarbanes-Oxley.  This provision, as we have heard this morning, requires companies to obtain an auditor attestation of internal controls.  The cost of this exercise is considerable.  In 2011, DERA estimated compliance at close to $1 million annually, although other estimates have placed the cost at several times that amount for smaller companies.[2]    

In response to the Commission's 2016 proposal, on which today's rule is based, several commenters balked at the notion that we might raise the cap on SRCs without touching the 404(b) exemption.  As one comment, a group of biotech companies, aptly stated "high regulatory costs represent a damaging diversion of innovation capital from science to compliance."[3]  Investors in a small, pre-revenue pharmaceutical company are less interested in getting the auditor's blessing on internal controls than in getting the Food and Drug Administration's blessing on the company's new drug.  Dollars paid to auditors are dollars deducted from the research and testing budget. That trade-off may not make sense for the investors in a very small, pre-revenue company.

Our Advisory Committee on Small and Emerging Companies recommended in 2013 and again in 2015 that we raise the thresholds for non-accelerated filers.[4]  More recently, in 2017, the Treasury Department made the same recommendation in its report on capital markets.[5]  As early as 2006, academics had begun to notice the effect that section 404(b) was having on smaller issuers' entrance (or non-entrance) into the public markets.[6]  More recent academic findings suggest that 404(b) continues to have a negative effect on smaller issuers.[7] 

I am voting in favor of this rule today because it is evidence of this Commission's and this Chairman's commitment to capital formation.  The real change will not come until we tackle 404(b) in the coming months.  In today's rule, small issuers may not hear the opening bars heralding relief, but they will hear the tap, tap of the conductor's baton, signaling that the music is about to start.  I commend the staff for the work they are already undertaking at the Chairman's behest in that direction, and I look forward to a future meeting when we can offer more substantial regulatory improvement to issuers and investors alike.


[1] U.S. Securities and Exchange Commission, Release No. 33-8876, Dec. 19, 2007.

[2] U.S. Securities and Exchange Commission, Division of Economic and Risk Analysis, 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 (available at  Dhammika Dharmapala, of the University of Chicago Law School, has found, however, that for firms around the $75 million threshold, the costs are closer to $4 to $6 million.  Dharampala, "Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(b)," Harvard Law School Forum on Corporate Governance and Financial Regulation, Aug. 17, 2016 (available at 

[3] Letter from Charles Crain, Director, Tax & Financial Service Policy, and E. Cartier Esham, Executive Vice President, Emerging Companies, Biotechnology Innovation Organization to Brent J. Fields, Secretary, U.S. Securities and Exchange Commission, Aug. 30, 2016 (available at

[4] U.S. Securities and Exchange Commission, Advisory Committee on Small and Emerging Companies, Recommendations About Expanding Simplified Disclosure for Smaller Issuers, Sept. 23, 2015 (available at; U.S. Securities and Exchange Commission, Advisory Committee on Small and Emerging Companies, Recommendations Regarding Disclosure and Other Requirements for Smaller Public Companies, Feb. 1, 2013 (available at

[5] U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities: Capital Markets, October 2017, pp. 36-37 (available at

[6] See, e.g., Leuz, Triantis, Wang, Why Do Firms Go Dark?  Causes and Economic Consequences of Voluntary SEC Deregistrations, Journal of Accounting and Economics 45 (2008) 181-208 (submitted Jul. 22, 2006). 

[7] See, e.g., Dharampala, supra n. 2 (finding that firms "bunch" around the threshold, intentionally limiting growth to just below the threshold to ensure they remain small enough to be exempt from the requirements of 404(b)); Nondorf, Singer, and You, "A Study of Firms Surrounding the Threshold of Sarbanes-Oxley Section 404 Compliance," Advances in Acct. 96, 96-110 (2012), (also finding that firms engage in behavior that appears designed to keep the firm below the 404 threshold during the threshold measurement quarters); Ellen Engel, Rachel M. Hayes, and Xue Wang, The Sarbanes-Oxley Act and Firms' Go Private Decisions 44 J. Acct. & Econ. 116 (2007) (finding that firms now go private with higher frequency); Ge, Koester, and McVay, "Benefits and Costs of Sarbanes-Oxley Section 404(b) Exemption: Evidence from Small Firm's Internal Control Disclosures," Journal of Accounting and Economics 63 (2017) 358-384, (finding that, for firms just over the threshold, the costs of 404(b) compliance costs exceed the benefits); Ivy Xiying Zhang, Economic Consequences of the Sarbanes-Oxley Act of 2002, 44 J. Acct. and Econ. 74, 74-115 (2007) (finding firms experienced a cumulative abnormal return around key Sarbanes-Oxley events); Sarah Rice and David Rudovsky, How Effective is Internal Control Reporting under SOX 404? Determinants of the (Non-)Disclosure of Existing Material Weaknesses, 50 J. Acct. Res. 811, 811-843 (2012) (finding that only 32.4% of restating firms acknowledged a control weakness, diminishing the benefits of Section 404. See also Michael D. Bordo and John V. Duca, The Impact of the Dodd-Frank Act of Small Business, Federal Reserve Bank of Dallas (2018) (noting that Sarbanes-Oxley " appears to persistently restrain business formation", in particular, small businesses).

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