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New BIO Report on Impact of Sarbanes-Oxley 404(b) on Emerging Biotech Innovators

Andrew Segerman
February 11, 2019

BIO is out with a new report illustrating the negative impact of Sarbanes-Oxley 404(b) on biopharmaceutical emerging growth companies (Bio-EGCs), demonstrating how this regulatory requirement harms innovation and capital formation without any corresponding investor benefit.

In the report, Science or Compliance: Will Section 404(b) Compliance Impede Innovation by Emerging Growth Companies in the Biotech Industry?, renowned economists Craig Lewis, a Senior Advisor at Patomak Global Partners and Professor of Finance and of Law at Vanderbilt University, and Joshua T. White, Assistant Professor of Finance at Vanderbilt University point to mounting evidence that links Section 404(b) compliance to reduced market capitalization, higher audit fees, exiting of public markets, and a direct reduction in innovation such as R&D that results in fewer patents.

Under the JOBS Act, enacted in 2012, small companies like Bio-EGCs were granted a five-year exemption from the costly Section 404(b). Since the law’s passage, more than 300 Bio-EGCs have gone public representing a 270 percent increase compared to the same period prior to JOBS Act. However, because drug development is an exceptionally time-consuming endeavor and often requires a decade or more of research and development, many life science startups are still pre-revenue when this 5-year exemption expires.

Lewis and White conclude that failing to extend the exemption from Section 404(b) compliance for Bio-EGCs would have a detrimental impact on America’s economy and society for generations to come. For these reasons, regulators and lawmakers should act swiftly to ensure unnecessary regulations are not preventing innovative companies from carrying out their lifesaving work.

This report is available for download here.