Should The SEC Allow For A SOX-Less Market?

from the might-we-suggest-the-Amex? dept

As evidence that Sarbanes-Oxley has made it too burdensome for small companies to go public, many have pointed to the rise of London’s Alternative Investment Market (AIM), where several American companies have chosen to list. This market is basically a haven for shakier companies that can’t list on more established exchanges. A new academic paper suggests that AIM itself represents a model of financial market regulation that warrants exploration. The basic idea is that if you have a system like Sarbanes-Oxley in place, you could also have a market that is exempt from the regulation. Smaller, shakier companies would flock to this market, but investors would know to be wary about investments in these firms. Such a market might resemble the NASD-owned OTC BB market, which trades penny stocks, except that even that market is currently subject to SOX. You can see this concept in place to some extent in the private stock exchanges being established by Wall Street banks, which offer companies a place to list without being subject to regulation. But these are off limits to most investors, and for smaller companies, listing on them doesn’t make much sense. One possible objection is that if a SOX-less market were to exist, companies of all sorts would try to list on it, but they’d be imperiling their reputation by doing so. Most likely, the majority of companies would opt to remain on established, reputable exchanges. Seeing as the SEC is actively looking for ways to reform Sarbanes-Oxley, it might be worthwhile to explore the possibility of allowing for the establishment of such an exchange.

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Comments on “Should The SEC Allow For A SOX-Less Market?”

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Mike (profile) says:

Re: Re:

What a silly story…SOX is at its most basic, only a forced accounting and documentation that you’re doing things the right way… that too much to ask….or do ‘internet’ companies and IPO’s see all that ethics stuff as too hard to do….

When it costs millions and millions of dollars just to document what you’re doing, that millions and millions of dollars that could be going towards more productive things that actually help grow the economy.

Anonymous Coward says:

Ways to get around SOX

How soon we forget the reasons for SOX – and other regulations.

Anyone who thinks people will understand the risks involved in SOXless exchanges, especially in the face of the advertising storm that will exist, needs to get back to the real world.

When tens of thousands of people loses their ass-ets – yet again – due to corporate wrongdoing, they’ll blame the government for not protecting them – and they will be right.

For you who are so worried about corporate “time wasting” and harm done to the “economy”, just let these whining corporations go private where SOX doesn’t apply. Then they can stop wasting time on SOX.

In privately held corporations, you can be sure that somebody is keeping an eye on the money – because they own it. But then they won’t be able to fleece the “stockholders” (theoretical owners, yeah right!) – always an easy, fun and profitable exercise. It’s much easier than simply running their firms so that it makes an honest profit over the long term.

Just look at what they pay top executives, including obscene “golden parachutes” even if they are fired for screwing up. I don’t hear any complaints about the cost to corporations about that.


While I’m on a roll – “the economy”.

The way me measure the economy is based on ridiculous concepts. Even so, I bet not 1 in a 1,000 people know what the hell “the economy” really means.

Here’s what I mean by ridiculous concepts: The inputs that are used to measure the economy are value neutral. In other words, the assumption is that any spending is a beneficial.

By that reasoning, all health spending is a plus for the economy, even though more of it may mean that more people are sick.

More lawsuits are also good for the economy because all that money is being spent on lawyers, and court clerks – salaries are paid, jobs are created.

High gas prices raise corporate profits – must be good for the economy.

During WW2, manufacturing went sky high – millions of jobs were created. WW2 actually pulled us out of the great depression. It was good for the economy. Was WW2 a good thing, then?

If the way the economy is measured was in line with our actual values, the numbers would look entirely different. They would also be a more useful tool for measuring how we’re actually doing.
For anyone still reading this, thank you for your patience.

Nipsey Russell says:


i need to go back and re-read sox to try and understand how much of the problem is inherent to the regulation and how much is overzealous interpretation, but i can personally vouch that the fortune 500 company i work for forces me to waste an inordinate amount of my day in non-productive compliance busy work. trust me, i know that this impacts a lot of our organization and is certainly harming our shareholders more than not doing this busy work would

Phil Hunt (user link) says:

SOX aims to reduce corporate fraud — surely a good thing. But it also imposes compliance costs on firms, which can be especially onorous on smaller firms — surely a bad thing.

The question is: does the good outweigh the bad? I suggest that it is, in general, hard to know the answers to such questions.

So maybe the best solution is to have a non-SOX-compliant market such as AIM. Then, investors who like the protections that SOX brings can choose not to invest there. And investors who think SOX imposes too much costs can choise to invest in non-SOX firms.

Anonymous Coward says:

Re: non-SOX-compliant market such as AIM

Beware of unintended consequences.

It can easily happen that many well known firms will abandon NASDQ and the NYSE and move to a SOXless exchange, because SOX is so “unfair”.

At that point, the corporations that move will be joined in their attack on SOX by NASDAQ and the NYSE.

Then SOX will be – eliminated all at once – or emasculated a little at a time. Then it’s bring on the Enrons.

For goodness sake:

1) stop giving so much importance to the “horrible” compliance costs that you see in your company. Your company isn’t going out of business because of SOX.

2) if SOX went away tomorrow, neither you or your customers would see a penny of the savings. They didn’t cut management salaries, or yours, to pay for SOX.

3) want to know why SOX (and other regulations) are still necessary? Just read the business section of any national newspaper, on any day. I suggest the Wall Street Journal, Washington Post, NY Times – any of them. Get your nose off the blogs a little. I read this one and others daily; but they are opinions. Read the newspapers.

SOX isn’t there for the protection or convenience of corporations. It’s for the protection of ordinary people who want to invest. It was enacted because of the actions of crooks – lots of them – who were running corporations.

It was and is needed.

Anonymous Coward says:

This is just like forcing every public school to install a 10 million dollar x-ray scanning system at every entrance and establish a full-scale TSA style security checkpoint.

Pros: you will stop some school shootings
Cons: you will waste a lot of money, and according to murphy’s law of crime prevention, you will still have some school shootings

balance and risk in all things. think about whether its really worth it. might those children be better off with that money being spent on higher quality teachers and facilities?

humans are adept at ignoring massive but infrequent risks and carrying on their daily lives anyway. are brains are structured to do that. it doesnt make sense to destroy our daily lives in an effort to mitigate a risk that we’ve factored out anyway. it only seems wise after the risk has bitten us, and we bitch and moan to people that feel obliged to do something about us.

Anonymous Coward says:

Re: Re:

This is just like forcing every public school to install a 10 million dollar x-ray scanning system at every entrance and establish a full-scale TSA style security checkpoint.

Pros: you will stop some school shootings
Cons: you will waste a lot of money, and according to murphy’s law of crime prevention, you will still have some school shootings

balance and risk in all things. think about whether its really worth it. might those children be better off with that money being spent on higher quality teachers and facilities?

Yeah, it’d be better to just arm all the kids and let them take care of themselves.

Giovanni Patota says:

Why SOX is killing innovation and new start-up's..

I am an active Angel Investor. Since the advent of SOX, me and many of my colleagues have pulled back on our investment activities since the chance of getting a big ‘hit’ via an IPO has been greatly muted. Now successful start-up companies get bought-out rather than IPO which typically equates to much less profit potential for Angel Investors. These big hits are vital to us since most start-up companies we invest in go to ZERO hence we lose 100% of our $$. However, a succesful IPO can provide a return of 10 to 20x our original investment. The enormous costs of SOX compliance is killing the IPO market and thus scaring away high risk taking early stage investors. Consequently, more and more innovators/entrepreneurs with great ideas are not getting their seed funding thus the wishful companies die before they get started — thus all economic benefits and competitive benefits that are ultimately passed on to the consumer never materialize. This is tragic when you think about it.

SOX makes sense for established mid to large organizations but not the start-up company that desires to IPO but cannot afford the exhorbitant costs necessary in order to meet mandated compliance. The SEC should significantly raise the minimum market cap requirement for SOX compliance. Larger/consistently profitable companies can afford to pay and this the point where SOX makes sense.


Anonymous Coward says:

Re: Why SOX is killing innovation and new start-up

Giovanni’s scenario may be true to a certain degree; but lets not get carried away with our own importance. Neither angels nor venture capitalists are requirements for new business success. It sounds like he is more interested in losing his own opportunity to profit, rather than promoting innovation.

Innovation and back breaking work are what makes new businesses succeed. Profiting from your own startup, and the satisfaction of making your ideas become real are enough incentives to innovate. And, in my personal experience, selling your company is very lucrative – and I kept all the money.

In any case, privately held companies are just not subject to the rigorous standards that public ones are. That’s why the thorough accountability that SOX requires is needed before a company makes their IPO.

Need a (yet another) recent example? Look at the cooked books involved in the Time Warner/AOL transactions. AOL’s numbers were booooogus. Unfortunately, nobody went to jail (Steve Case).

Everyone has a reason to allow loose accounting standards – until they themselves get screwed. That’s like saying robbery is kind of ok unless you steal from me.

RandomThoughts (user link) says:

Take a good look at the folks who are talking about making SOX weaker or allow companies to forgo the rigors of regulation. Ask yourself why they are talking about that?

SOX was not put in place to prevent fraud, it was put in place to punish executives for committing fraud (which in the end prevents fraud.)

Progressive companies (like nasty old geezer pointed out) actually see business improvement from SOX. They use SOX as a way to improve their process and their business. It just isn’t a cost for them, because they see a return.

Basically, SOX comes down to one thing. It says that the leadership actually promises that the financial information they give to investors is correct. Would you want to buy stock in a company that can’t do that? That if as an investor, you are lied to concerning the companies financial statements, you would have no recourse?

That is why the whole stock option backdating issue is a big deal, even though you hear many say (industry and the media) that it really isn’t. A company can pay their employees what ever they wish, that is there choice. What is wrong about stock option backdating is that they didn’t tell investors about it. Executives gave out financial information to investors and it was wrong (and they knew it.) That is the crime of options backdating.

An exchange without SOX? SOX’s purpose is to ensure confidence in the stock market. Would you give money to someone that basically says “trust me”?

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