Regulatory Relief: House Passes SOX Relief Bill

In 2010, a lessening of the regulatory burden on biotech startups looks promising.

The House has passed the Wall Street Reform and Consumer Protection Act of 2009,  (H.R. 4173), which aims to protect consumers and investors and features two provisions that would ease the regulatory burden on emerging biotech companies. Now, the bill must clear the Senate.

Reps. Scott Garrett (R-N.J.) and John Adler (D-N.J.) authored a provision to permanently exempt small businesses with market capitalizations of $75 million or less from Section 404(b) of the Sarbanes-Oxley Act of 2002. Complying with Section 404(b) of SOX has proved to be expensive and onerous for small public companies.

Based on market research, BIO estimates that 41 percent of active publicly traded biotech companies fall under the $75 million market-cap threshhold.

“Burdensome regulations on small businesses hurt our economy,” says Rep. Adler, a member of the House Financial Services Committee. “As our economy begins to rebound, allowing small businesses to grow is crucial. This reform will help keep and create jobs for hardworking Americans.”

The Garrett-Adler language received broad bipartisan support against an effort to remove it. With 271 voting in favor of the provision, the tally included 170 Republican votes and 101 Democrats.

Cost Concern

“Although the stated intent of Sarbanes-Oxley was to provide investor confidence in our markets through greater accountability and disclosure, the act has had the unintended effect of creating undue — and often unbearable – burdens on small businesses,” says Rep. Garrett.

“Many biotech startups seek public investment to fund the R&D that’s required to bring a biotech product to market,” says BIO President and CEO Jim Greenwood. “Spending money on external consulting costs and legal fees for regulatory compliance diverts money from research.”

To comply with SOX, small companies would end up “diverting valuable resources away from other legitimate business needs, creating massive and tedious documentation requirements and discouraging the public listing of both international and domestic companies on U.S. markets,” Rep. Garrett says.

Small companies have been exempt from Section 404(b) requirements. But that exemption was set to expire in early 2010; the Garrett-Adler amendment will make the exemption permanent.

There may be additional help for more companies, too. Rep. Michael Capuano (D-Mass.) has authored a provision that would direct the Securities and Exchange Commission to perform a study evaluating the costs and benefits of compliance with SOX Section 404(b) for companies that have public floats of less than $700 million and revenues of less than $250 million.

To determine if reforms are meeting their objectives, BIO strongly supports a rigorous economic study of the costs and benefits associated with implementation of Section 404.

“These bipartisan provisions would provide much-needed relief for small public biotechs during current economic conditions,” Greenwood says.