CONGRESSWOMAN ELISE STEFANIK
On Monday, May 23, 2016, the House will consider H.R. 4139, the Fostering Innovation Act of 2015, under suspension of the rules. The bill was introduced on December 1, 2015, by Rep. Kyrsten Sinema (D-AZ) and was referred to the Committee on Financial Services, which ordered the bill reported by a vote of 42 to 15 on March 2, 2016.
H.R. 4139 extends the five-year exemption period for some emerging growth companies (EGCs) to comply with Section 404(b) of the Sarbanes-Oxley Act (SOX). Specifically, the bill extends the SOX exemption available to EGCs for up to ten years after the EGC went public, the end of the fiscal year in which the EGC’s average gross revenues exceed $50 million, or in certain other circumstances.
Securities and Exchange Commission (SEC) rules require the issuers of securities to both conduct an internal and external assessments of their internal control over financial reporting. An external auditor must examine management’s assessment, attest to its accuracy and file the attestation with the SEC. The Jumpstart Our Business Startups Act of 2012 (JOBS Act) exempted EGCs) with annual revenue and debt issuance under specified thresholds from the requirement of an external auditor’s attestation of its internal control report for up to five years after its first sale of equity securities.
There are significant costs associated with compliance with Section 404(b) of SOX, which can disproportionately affect smaller public companies. A 2011 SEC study found that Section 404(b) compliance can cost over $1 million annually. A 2014 survey conducted by compliance and audit consultant Protiviti similarly found that approximately 53 percent of large organizations currently spend $1 million or more each year on SOX compliance, and 30 percent spend $2 million or more annually. The Protiviti survey concluded that “SOX compliance costs are rising more sharply than in the past,” partly as a result of recent Public Company Accounting Oversight Board (PCAOB) inspections of external auditing firms, which indicated that “external auditors were not doing enough work and thus needed to invest more time in [SOX Section 404] audits.”
By granting these EGC issuers additional time to comply with Section 404(b) of SOX, the legislation encourages small companies to go public and ensure that they move to full compliance with regulatory requirements as they become large enough to support the legal, accounting, and compliance infrastructure typical of mature enterprises. The Fostering Innovation Act’s provisions, which both maintain the JOBS Act’s Title I public float test but reduces the annual revenue test from $1 billion to $50 million limits its application to a specific universe of truly small companies and recognizes the small business economic life-cycle and supports their growth.
 See SEC Report, “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.
A Congressional Budget Office (CBO) estimates that implementing H.R. 4139 would cost less than $500,000 for personnel and administrative costs to revise SEC rules. However, the SEC is authorized to collect fees sufficient to offset its annual appropriation; therefore, CBO estimates that the net effect on discretionary spending would be negligible, assuming appropriation actions consistent with that authority. Enacting H.R. 4139 would not affect direct spending or revenues; therefore, pay-as-you-go procedures do not apply. CBO estimates that enacting H.R. 4139 would not increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2027.
For questions or further information please contact John Huston with the House Republican Policy Committee by email or at 6-5539.