More offerings, less oversight?

As part of the Trump administration's effort to boost initial public offerings, the Securities and Exchange Commission has proposed for public comment two rule changes designed to lower the cost of raising capital for small- and midcap companies.

SEC Chairman Paul S. Atkins touted the plans during a speech last week at the Stanford Rock Center for Corporate Governance.

While the proposed rule changes have not drawn as much attention as Atkins' plan to eliminate mandatory quarterly reporting, attorneys say the latest proposals - while complex and hundreds of pages long - are more significant.

"It would be a complete game-changer that, if it goes through, would have a hugely material effect on how capital is raised and reducing the cost and time to go to market for these companies," said Morrison & Foerster LLP partner Larry Medvinsky.

Joseph A. Grundfest, a professor emeritus at Stanford Law School, agreed that the rules are aimed at Atkins' goal of making going public a more attractive option for companies.

"These specific changes will make it cheaper and faster for companies to raise more capital in the public markets after their initial IPOs," he said.

"That ability can be very important to new companies that expect to need more capital than they raise in their initial public offerings -- particularly if the companies have smaller capitalizations," Grundfest added.

Fewer SEC regulations

The changes would exempt companies from requirements under Section 404(b) of the Sarbanes-Oxley Act of 2002, which established strict new reporting and auditing requirements to protect shareholders. Critics have long complained that the internal control reporting is too costly.

The first SEC proposal would add exemptions and expand access to the shelf registration process to almost every public company so they could raise money quickly without getting regulatory approval.

It also would affect real estate investment trusts (REITs) and business development companies, some listed on exchanges and others not, making it easier for them to raise capital, attorneys said.

A Paul Hastings LLP client alert said the changes would make thousands of companies newly eligible to use Form S-3 or raise larger amounts of capital.

"Overall, the proposal would be the most significant change to the public offering rules since 2005, and it is primarily designed to lower the cost of raising capital for small- and mid-cap publicly-traded companies," said Robert P. Bartlett III, a professor at Stanford Law School and co-director at the Rock Center.

The second proposal would reduce the number of public company categories from four to two and extend reporting deadlines and eliminate an auditor attestation requirement on internal control over financial reporting for companies valued at less than $2 billion.

That's a significant increase from the current limit of $700 million.

"Currently, that benefit is reserved for newly public and smaller companies," Atkins said at the Rock Center event last Tuesday. "Filer status reform would broaden it to approximately 81% of public companies, including certain seasoned and mid-sized issuers."

Ryan J. Adams, a Morrison & Foerster partner, said the proposed filer status change would simplify the current framework.

"It would also enable a much larger number of companies to take advantage of 'scaled' disclosure accommodations, which let companies provide reduced information to investors - saving both time and money," he added. "In short, the rule change would lessen the burdens of being a public company, which the SEC hopes will encourage more companies to go public earlier."

Erik Gerding, a partner with Freshfields US LLP and director of the SEC's division of corporate finance during the Biden administration, said registered offering reform would have an added benefit for companies because they could avoid regulation by the SEC and individual states.

"By streamlining review, you take the SEC and its reviewing process out of the equation," he said. "The main thing the SEC is focused on is reducing the compliance burden."

The auditing attestation requirement has been "a real pain point" for companies, Gerding added.

More IPOs, but at what cost?

The premise of the SEC changes and proposed rules is to "make IPOs great again," a riff on President Donald Trump's campaign slogan. Other proposed changes would allow mandatory arbitration clauses in registration statements and permit semiannual reporting.

Atkins said that when he was an SEC staff member in the 1990s, there were 7,800 public companies listed on U.S. exchanges. That number has dropped by 40% since then.

"Revitalizing our public markets means dismantling the barriers that drove companies away in the first place," he added. "Overly burdensome SEC rules may not be the sole reason for this decline -- but where regulatory frictions are a determinant of it, the agency is moving intently to remove them."

Legal observers on all sides agree that the decline in public companies is not desirable, as some rapidly expanding firms stay private for a long time, getting funding from venture capital funds and other investors while the details of their operations remain opaque.

But critics - such as Benjamin Schiffrin, director of securities policy for Better Markets, an organization that advocates for stronger financial regulation - said Atkins' proposal misses the point and makes it easier for companies to mislead or defraud investors.

"Under the guise of modernizing its framework for registered securities offerings, the SEC proposes to allow public companies to provide investors with less information," he said.

Schiffrin added that Atkins cannot accomplish his goal of boosting IPOs "without curbing the private offering exemptions that allow companies to raise unlimited sums privately. In the absence of such reforms, all today's proposals will do is allow public companies to provide less information to the public, thus endangering investors."

Medvinsky said the proposed SEC rules could face legal challenges if approved after the current comment period.

In the end, the test for the new rules, assuming they are approved by the commission and survive any legal challenge, is whether they will accomplish the goal of boosting IPOs without harming investors.