As a result of the Jumpstart Our Business Startups (JOBS) Act, signed into law by President Obama on April 5, emerging growth companies will be exempt from certain requirements of the Sarbanes-Oxley Act (SOX). Companies planning an initial public offering (IPO) will have more time to ramp up their SOX programs, allowing the companies to focus on expanding their business.
What exemptions does the JOBS Act provide? For the first five years after issuing an IPO, companies with revenues of less than $1 billion a year will no longer need to comply with Section 404(b) of SOX – which requires that the company’s external auditors attest to its internal control over financial reporting – unless:
- The company’s revenue grows to more than $1 billion,
- The company issues more than $1 billion in nonconvertible debt over a three-year period, or
- The company’s worldwide public float exceeds $700 million.
Although exempt from the Section 404(b) requirement, these companies (like their larger counterparts) must continue to comply with the other provisions of SOX. Management still must certify that internal controls are operating effectively, meaning that controls must be documented and tested.
By delaying the auditor attestation, the management of an emerging growth company can take a gradual approach to Section 404(b) compliance. The JOBS Act will allow the company to build the scale and complexity of its compliance program over time, save on initial implementation costs, and focus on business growth.
During the five years following the IPO, emerging growth companies should take a risk-focused approach to SOX compliance – in particular, managing the organization’s risk of costly restatements or other material weaknesses that can hurt its reputation. Management should aim for the right balance between, on the one hand, implementing internal controls that enable management to certify with confidence and, on the other hand, maintaining the entrepreneurial culture that’s so vital to growing companies.