The cost of being a public company has risen dramatically in recent years. This cost, mainly due to compliance, is a big reason why there are fewer and fewer public firms.
In recognition of this challenge, the Securities and Exchange Commission (SEC) has proposed new rules that would allow firms to file semiannual reports instead of quarterly reports.
Companies that decide to file semiannual reports would file one semiannual report and one annual report for each fiscal year. Public companies would be able to determine the reporting frequency that would best serve their investors.
SEC Chairman Paul Atkins noted that reducing reporting requirements is just part of the equation in encouraging more companies to go public. He said semi-annual reporting is just the first step in a larger, more comprehensive review.
“Over the next few months, I expect that the Commission will be considering a series of proposals that, if adopted, will not only redefine what it means to be a public company, but will make being public attractive again,” said Atkins.
Commissioner Hester Peirce voiced her support for the proposal, sharing that semi-annual reports were the norm at one time. She said that some companies may view the frequency of reports, and the required disclosure, as another reason to stay out of the public markets.
“By providing greater flexibility, today’s proposal, if adopted, could help to alleviate one facet of the reporting burden, and thus potentially make the public markets more attractive to companies.”
The US Chamber of Commerce welcomed the proposal to reduce the reporting burden.
“Transparency and disclosure are vital to healthy and efficient capital markets, but when reporting requirements make it harder and more costly for companies to go and stay public, these rules should be reevaluated,” said Mike Flood, Senior VP of the Center for Capital Markets Competitiveness at the Chamber.
It is estimated that, for large companies, filing a quarterly report can cost over $5 million. In the past twenty years, compliance burdens have risen dramatically. Filing requirements have grown and, at times, the benefit has been dubious. The last administration sought to turn the SEC into the Securities and Environment Commission, a silly ambition that would have drowned public firms in unknown costs and extensive liability traps.
Meanwhile, there is an ocean of private money waiting to invest in private firms. A Form D to raise money from accredited investors is a simple two-page document with no requirements for future filings. While investors typically receive a private placement memorandum outlining the deal, this does not need to be filed with the Feds. Private markets in the US have become the envy of the world, raising trillions in money each year, in part due to the simplicity of Regulation D.
Technology has also improved liquidity for private securities. Multiple platforms now provide access for secondary trading in private securities before a company goes public, if it ever chooses to do so. The one issue for private securities trading is that it is an arena only for the affluent, but pending legislation may change this.
Chair Atkins wants to make public markets great again, while improving private markets as well. He has his work cut out, but at least he is addressing the issue, something prior administrations simply ignored, kicking the can down the road.
The SEC is now accepting comments on the proposal from interested parties.