CLSA Endorses SEC-proposed Changes to Sarbanes-Oxley to Provide Regulatory Relief to Small & Emerging Companies

June 12, 2019
By Jenny Nieto

In May 2019, the Securities and Exchange Commission (SEC) proposed a new rule to expand the universe of small public companies exempt from Sarbanes-Oxley (SOX) Section 404(b) to companies with annual revenues of less than $100 million. SOX 404(b) was established with the intent to protect investors against corporate fraud by increasing the quality of a company’s financial reporting via enhanced transparency and auditor oversight of internal control systems. However, SOX 404(b) has been a longstanding challenge for small biopharmaceutical and medical technology companies because of its extraordinary compliance expense (over $800,000 per year), the company’s pre-revenue status, and the fact that information gained through reporting is of little use to their investors. A recent report from the Biotechnology Innovation Organization (BIO) demonstrated that SOX 404(b) reduces market capitalizations, significantly increases audit fees, causes companies to exit public markets, and harms innovation (such as R&D) that results in fewer patents.

If adopted as proposed, the SEC’s rule would broaden the scope of life sciences companies that benefit from regulatory relief from the onerous auditor attestation of internal controls over financial reporting requirement under SOX 404(b). In June 2019, CLSA submitted comments to the SEC expressing support for the proposed rule. We applaud the work of BIO for their engagement and leadership on this issue over several years. Other life sciences sector stakeholders are also supportive of the proposal, including AdvaMed and the National Venture Capital Association.

In addition to our recent comments on the important impact this proposed rule will have on California’s small and emerging companies, CLSA is also cosigning a multi-state life sciences association letter in support of the proposed rule, led by BIO’s Council of State Bioscience Associations (CSBA). CLSA previously joined CSBA’s efforts in 2016 to advocate for related definition adjustments to protect small and emerging companies and capital formation.

Questions? Please contact Jenny Nieto, CLSA’s Vice President of Federal Government Relations and Alliance Development (