Jul 14, 2014
From the Global Enterprise Institute
The business issues grabbing all the political attention these days include such hot buttons as implementation (and complications) of the Affordable Care Act and possible new EPA regulation of carbon emissions. To be sure, these policies have important impacts on private companies, and you should be aware of them. But beyond the headline topics, several recently implemented regulations will impact private companies in the coming years, some less obvious than others.
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Of immediate concern, the phased-in rollout for conflict minerals determination will continue to impact private companies of all sizes that participate (directly or indirectly) in a public-company supply chain. While all SEC registrants were required to file Form SD on the status of conflict minerals in their products and supply chain by May 31, smaller issuers—and, effectively, their suppliers—who are unable to determine the source of conflict minerals have until December 31, 2017, to put systems in place to make a judgment.
Private companies may also experience a similar knock-on effect, if not a direct impact, from the Obama administration’s efforts regarding cyber security. Diverse businesses in the energy, telecommunications, utilities, defense, and financial industries are among those affected by the recent framework of best practices for companies connected to physical "critical infrastructure." Though adopting the framework is currently voluntary, growing awareness and evolving expectations for cyber security suggest that the practical reach of the framework and the underlying executive order may make these best practices pseudo-mandatory over time.
For private companies that are considering becoming SEC registrants through public offerings of debt or equity, the governance implications of recent rules from the U.S. Securities and Exchange Commission should be front and center.
First, most SEC companies will be required to disclose the ratio of chief executive officer total compensation to that of the median employee total compensation. While the rule itself is yet to be finalized, it will apply to most issuers of public securities, with some exemptions for smaller companies and foreign issuers. (Accompanying rules from the listing exchanges require that the compensation committee consists of only independent directors and has the authority to hire a fully independent compensation advisor.)
Furthermore, as a result of JOBS Act-related rulemaking, so-called emerging growth companies—with recent annual revenue of less than $1 billion—are permitted to begin the S-1 filing process for an initial public offering discreetly with the SEC. While the filings would eventually be made public, the intention of the rule is to allow companies to hash out details and concerns directly with regulators and advisers before exposing drafts to the investing public. Additionally, the rule allows for companies to go public with fewer years of audited financials and a delayed timeline for 404(b) internal control attestation.
Proponents of so-called stealth IPOs argue that the new rules give a company the ability to test market conditions before going public with the registration, protect sensitive financial information from competitors as long as possible before an IPO, and safeguard employees and existing investors from disappointment if the offering is pulled.
While the majority of new filers, particularly start-up businesses, have chosen this route, governance experts and institutional investors have warned that limited exposure to a company’s S-1 filings before its offering may end up deterring new investors, pushing crucial auditing work and financial reporting controls into the company’s public life where it will be exposed to even greater scrutiny.
Though lawmakers in Washington rarely, if ever, focus on private companies specifically, such wide-ranging legislative and regulatory actions will continue to impact your company and, therefore, its governance.