In light of the recent SarbOx relief for small businesses, I checked in with IVP
's Todd Chaffee on the state of federal regulation vis-à-vis the venture world. Todd is one of the most successful (and under-hyped) VCs in the last decade. In the last four years alone, his portfolio has seen two IPOs--ArcSight had an $380M opening market cap and Comscore opened at $870M--and four high-profile acquisitions: Hands-On Mobile, Mobile365, AtRoad, and Omniture. Here’s what he thinks about the recent SarbOx changes and how Congress could stimulate the industry:
MB: On Nov. 4th, the House voted to permanently exempt
public companies with market caps under $75 from SOX 404b requirements. That's a pretty low market cap ceiling. Could this have any effect at all on the venture capital industry?
TC: Not really. Most high quality venture-backed IPOs have market caps over $250 million, so this won't really help the venture industry much.
MB: The amendment also calls for a study to determine how the SEC could reduce the burden of complying with Section 404(b) for companies with market caps between $75 million and $250 million. Could this have any effect on VC exits?
TC: Again, they would need to raise the market cap threshold above $250 million to significantly improve the situation. Rather than using a market cap threshold, a better metric would be a revenue threshold. For example, if Congress created an environment where companies with less than $100 million in revenue per quarter were exempt, then we would see more venture-backed IPOs and great velocity in the IPO market. That would stimulate the venture industry, which would lead to more job creation and give the economy a boost.
MB: Are secondary markets (SecondMarket
) viable alternatives for companies that are ready to go public but for the SarbOx compliance costs?
TC: Not really. So far these secondary exchanges haven't really worked, and we don't see them as a viable alternative to an IPO.
MB: Will we continue to see an IPO exodus
to foreign exchanges?
TC: Perhaps. Congress needs to strike the appropriate balance between reasonable IPO investor protections and globally competitive IPO exchange rules. If the SEC rules are too onerous and unreasonably expensive for NASDAQ IPOs, then companies will be forced to seek out foreign exchanges. That is not a good thing for the US economy or our competitive position in the global marketplace.