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A Better Partnership


Sep 2005
September 05, 2005

Pair of SOX Revisions Could Ease Small Business Burden

Small businesses may be getting some relief when it comes to complying with the Sarbanes-Oxley Act.

This past March the Securities and Exchange Commission extended the deadline for compliance to Sarbanes-Oxley Section 404 for small business from the first fiscal year ending after June 2005 to the first fiscal year ending after June 2006. Under that ruling, any small business with a market capitalization of under $75 million was considered a “non-accelerated filer” and was granted the extension.

In mid-August, the SEC’s Advisory Committee on Smaller Companies proposed changes to the law, including a call for another one-year extension for small businesses to meet the requirements of SOX Section 404. That would move the compliance deadline to June 2007.

Warner Norcross & Judd LLP Partner Jeffrey Ott is chairman of the reporting companies and registered offerings group at WN&J. Ott told MiBiz that although the SEC and its advisory committee are engaging in dialogue about SOX relief, small business owners shouldn’t expect immediate action.

“The committee has a list of 29 questions (on ways to improve the regulatory system for smaller companies) that are posted on the SEC Web site. The committee was asking for public comments on those questions during August. Right now they’re in the middle of it all,” he said.

Among the questions: Has SOX changed the thinking of smaller companies about becoming or remaining a public company? Do you believe SOX has enhanced, or diminished, the value of smaller companies? Do the benefits of SOX Section 404 outweigh its costs for smaller companies?

Along with possible relief from SOX, the advisory committee also is pushing for a new definition of a small business, although at this point no one is sure what the final definition will be. Ott explained that during meetings last month in Chicago the committee reviewed a study that showed that approximately half the public companies have market caps of a billion or less, and that sparked discussion.

“In trying to define a small business, they seem to be focusing on 6 percent market cap. They’re saying ‘We’re going to consider a small public company anybody whose market cap is at or below the 6 percent market capitalization of all public companies. They’ve put the figure at around $720 million market cap. That is the suggested range for companies that might expect some relief, but they haven’t indicated what kind of relief they’re talking about,” said Ott.

The revised definitions would affect a good number of public companies in West and Southwest Michigan. According to Ott, Spartan Stores Inc. and X-Rite Inc. are two examples of firms that would be in the revised small business group, based on the number of shares outstanding reported by Spartan and X-Rite in their last quarterly reports filed with the SEC.

There has been all kinds of speculation on the kind of relief that might be offered to small businesses, but it remains speculation until the SEC reviews all the comments submitted to them over the past month. Some experts have called for the elimination of Section 404 compliance for small firms, while others are suggesting that a streamlined approach to the regulation is in order.

“I, at least with the clients I work with, have not seen a lot of benefit that comes out of the 404 process. My personal reaction to all this is, I’d just like to see it eliminated for these smaller companies,” said Ott. “It is a horrendous amount of work. It is a lot of documentation, and it’s a time-consuming and very expensive process that takes a lot of human resources. It takes away from a lot of these smaller companies being able to implement their business plan.”

Ott said that the SEC has issued no firm timetable for action on the revisions. The advisory committee meets again Sept. 20 and will hear more public comment on the proposed revisions. Ott said the yearlong deadline extension indicates that the committee needs time to fully prepare its report, which he feels will be released in spring 2006.

Once the report is presented to the SEC, the commission could propose a ruling. That ruling would be subject to a public comment period. Only after that series of actions is taken could the SEC issue a final ruling.

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Jeff Ott is a partner in the Grand Rapids office of Warner Norcross & Judd LLP. He specializes in the areas of counseling publicly held and publicly traded companies, and their directors, officers and shareholders, on strategic and compliance issues under federal and state securities laws for financial reporting, public offerings, stock transactions, proxy solicitations, tender offers and acquisitions. He may be reached at 616.752.2170. Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Holland, Metro Detroit and Muskegon. Because each business situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.



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