Today’s guest column comes from Charley Lax , managing general partner of GrandBanks Capital ( www.grandbankscapital.com ).
While sitting back enjoying two passions in my life-the Red Sox and smoking my favorite cigar (Montecristo Habana 2000)-I decided that my contribution to today’s PE Week Wire will take a look closer look comparing our most beloved of baseball teams, the Boston Red Sox, with what has become a personal vendetta to repeal (or revise): Sarbanes-Oxley (SOX).
Take one baseball team that is loved by millions and compare it with a governmental act that is costing our portfolio companies millions of wasted dollars. A team that painstakingly waited 86 years to win a World Series Championship and bring retribution to Red Sox Nation, with a compliance law that looks to keep investors and entrepreneurs in the private market waiting another 86 years before a venture-backed company can claim victory in the public market. A Red Sox team that defined itself as a “collection of idiots,” with a regulation that, in retrospect, was created by a bunch of idiots… well, maybe that term is a bit harsh, but let’s take a closer look at SOX, the regulation, before I continue with the name calling.
Some companies considered to be the greatest of all time have accessed the public markets and created an effective platform for financing innovation and job creation. Renowned companies that have affected millions such as Microsoft, Cisco, and Amgen can attest to the power of the IPO. These companies began their successful track as venture-backed companies and have now become market leaders in their sectors after raising millions by accessing the public markets through the IPO process.
Today’s stalled public market for our venture-backed companies can be attributed to SOX, according to Financial Executives International (FEI), and is costing smaller, private companies with aspirations of filing an IPO an average of $1.5 million to $4 million to comply with SOX. Establishing Section 404 compliance, a requirement of SOX, places sole responsibility on managers for internal control and creating structures for reporting financial results, has devastated their bottom lines. With a higher percentage of earnings diverted to 404 compliance and an 88% jump in auditing fees, smaller companies have no choice but to turn away from the public markets and seek alternate opportunities to raise capital and offer liquidity to their investors. The cost of compliance could result in the reduction of as much as a third of the market cap of our venture-backed companies. Value creation with our portfolio companies does not start with the hiring of more accountants but rather with hiring of more engineering talent. If the Red Sox had kept Nomar, would they have been able to even get to the playoffs?
Many called the Internet Bubble and the resulting Nasdaq market “Irrational Exuberance”, but SOX is whacking any opportunity for creating more public market product, and this is highly irrational and very dangerous for our economy. Job creation is entirely the purview of small and medium size businesses, and the venture community continues to support new enterprises that enjoy rapid growth. Stalling that growth by limiting access to the American public markets is driving investors to pursue foreign markets for financing and exit opportunities. Taking our companies public in Hong Kong, London or even South Africa does not seem so far fetched any more. And instead of supporting local baseball teams it might be more financially prudent to buy into one in other baseball loving countries like Japan . http://www.japantimes.co.jp/cgi-bin/getarticle.pl5?sb20041225a2.htm
There is new hope. Just as Curt Schilling became the end of season warrior bringing us into the playoffs, the SEC has just drafted Christopher Cox, who appears to be the Nasdaq savior. Rolling back SOX for small to medium sized companies is now not as far fetched as it seemed. Basing term and breadth of compliance for 404 on a nascent company’s revenue rather than market cap may give the venture-backed community the relief it needs to access the American public markets again. Entrepreneurs and investors who laboriously work to build value only to see the ball dropped at first base to lose the series can have renewed hope. http://msn.foxsports.com/story/3118274 … Especially if they are down three games in a best-of-seven series.
These musings on a hot summer day remind me of a famous Horace Greely quote: “A cigar has ….. a fire at one end and a fool at the other.”
Submitted by Charley Lax, Managing General Partner of GrandBanks Capital
www.grandbankscapital.com
