Sarbanes Oxley small business "Relief" a joke

Lorenzo Carver · November 13, 2009 · Short URL:

Liquid Scenarios / Microsoft IPO event transcript

1997 IPO (Easier Road) 2008 (Rough Road)

I got very excited for startups, VCs and angel investors last week when I heard "small companies wouldn't be subject to Sarbanes Oxley."  Then I read the fine print.  It's disappointing on multiple levels.  Perhaps the biggest source of disappointment was that the news was released as being some kind of special relief for small companies.  It's not. 

This isn't really changing anything - the exemption relates to 404(b) - which in its simplest is additional auditing of management's assertions [404(a)] concerning internal controls. Small public companies have effectively been exempt from that provision [404(b)] for years, but it was positioned as relief for small companies (there should be fair disclosure rules for political releases).

The good news is that between that announcement and a great write-up by Matt Bowman here on Vator I was reminded about a transcript from an event we held that was sponsored by Microsoft, Microsel of Colorado and organized by Liquid Scenarios. 

One of the anchors of the discussion was an assertion (mine) that if Amazon (AMZN) tried to go public post Sarbanes Oxley, for instance in 2008 instead of 1997, Seattle would have fewer millionaires, thousands of missed jobs and hundreds of missed businesses.  A key reason is the massive increase in cost (4X greater, just with respect to expenses) and time (4X longer just based on time from the date of filing to the date the stock starts to trade).  That means greater risks for companies trying to go public.


Amazon (AMZN)

Rosetta Stone (RST)


Approx. Revenue

On Date Of IPO (MRYE)

 $ 8,600,000



Registration Filed



Trading / Effective




52 Days

205 Days


Costs Net of



 $   850,000


$     3,500,000



Offering Price





$  1.26

$   1.26


Year Founded



Years From Start To IPO








 Meliza Solan, of's "What Am I Missy" moderated from San Francisco.  Panelists included Adeo Ressi, of the and the Founder's Institute, from Silicon Valley, Dave Taylor of in Boulder Colorado and Jason Haislmaier, a partner with the law firm Holme Roberts and Owen's (HRO) Intellectual Property Group practice (more detailed bios for the panelists are at the end of this post).

A partial transcipt of the event follows below.

MELIZA SOLAN:  I'm sre all of you are familiar with Sarbanes Oxley, correct?  I'd like to hear each of you convey your understanding of what impact Sarbanes Oxley has had on a) stopping major financial fraud at publicly traded companies versus its impact on the ability of companies to go public?

JASON HAISLMAIER:  I can jump on that.  The effect that Sarbanes Oxley has had on the ability of companies to go public [is] the expense that it takes companies to go public.  I think Sarbanes Oxley was a law coming out of some of the egregious violations of the law that we saw coming from Enron and Health South.  Some of these were not even close [calls] they were just garden variety fraud more than everything else that resulted in new laws that apply to all public companies, not just larger public companies and not just public companies that are in a fixed category.

And what we see on the tech side, again with the smaller size companies, what you really see is an increase not just in the cost of going public but also in the cost of maintaining a private company that may be acquired or one day go public.

Whether it's additional costs on the accounting side, whether it's additional costs on the legal side, whether its additional exposure to shareholder lawsuits we definitely see that.

Now, is there good that comes out of Sarbanes Oxley?  Certainly.   Again I think it's well meaning and it does have value, but I think its general application has almost undeniably raised the cost of going public and maintaining yourself as a publicly traded company for smaller and medium sized companies, which many tech companies are when they are in a position to go public.

Is there an inordinate impact on tech companies? I don't have data on that but I wouldn't be surprised if you could show that.

DAVE TAYLOR:  Yeah I'll jump in on this also.

I think that a law of unintended consequences that has come out with Sarbanes Oxley is that for large publicly traded companies, certainly Fortune 500 level, it's been really nice to have some enforced transparency of financials but I completely agree with Jason that for the little guy trying to get into the public market it's really proved to be an extraordinary burden and for companies that are positioning to in the future possibly go public it's a considerable burden on their financial reporting, depending on how they structure their finances in the first place.

Now having said that I don't know that I would be in favor of losing Sarbanes Oxley because prior to that things were worse.  But I think the requirements might [need to] be a little more lax for companies coming into the public market of a certain size perhaps.  So, just another perspective.

MELIZA SOLAN:  I'd like to get your input on how the role of founders has changed in venture backed IPOs.

JASON HAISLMAIER:  Sure, I think there's probably a number of reasons [specifically] two basic data points.

One there's an interesting quote that Trevor Loy down at Flywheel Ventures in Santa Fe made about VC not being dead.  This may [not] be new school being dead but the old school, pre-1996 VC industry.  If you are going to run yourself as a VC that way not being dead at all and I think if you look at the snapshot for say 1996, 1997 through 2001, you had a greatly accelerated timeframe from inception to exit when it came to technology companies.  Almost laughably fast sometimes, as we look back at it now with all of our sanity here in 2009 right.  And I think because of it you had the founders involved you had a valuation that justified a higher valuation and also had less regulation so you had less of a burden to go through the mechanics of going public.

I think that if you look at companies now it does hold true that it takes longer, that it has been a harder road that there have been more ups and downs, you'd see what holds true for most companies is that it's very rare to have a founder carry through as leader of the company from inception to the end of the company.  Usually it's a founder that's better suited to startup in stealth mode for the company and a different founder or a different leader stepping forward when they're commercializing or releasing their product.  Then, when they're a mature company, yet another leader stepping in to take over for that person and if it's at that the point when the company's going public then you could actually see management change over several times.  Not because of missed performance but just because of the right management skill set being applied at the right time.

If you look at the press releases around companies going public today, the companies are just a little bit later in their lifecycle and as a result that have had different changes in management that resulted in founding members, including people personally attributed as being the founder, having been shifted out of the company.

ADEO RESSI:  I'd just like to chime in on that comment and something else on Sarbanes Oxley and the investment philosophy.  But the reality is that Sarbanes Oxley does not add a ton more regulatory or expense burden to a company that goes public.

Compared to previous regulations it's definitely more, but it's not as significant as would warrant the type of slowdown in companies going public.

I think what's happened is that these days the lore or the perception among founders that going public is the ultimate way that they can achieve liquidity has been lost and that's part of the reason why you don't see founders still in companies that end up going public.  It's just not attractive to a modern day founder to bring their company into the public markets.  But you find companies where the founders are in fact still in companies that go public two situations going on.  Number one, they reached their employee threshold limit through option pool and other stock grants and they are essentially forced to go public, which is something that happened with Google.

Then the other scenarios is where the investors force the founder led companies into going public markets so that they can gain liquidity and that happens a lot because the venture funds have a 10 year life on their individual funds.  If they don't have liquidity in their portfolio at the end of those 10 years they have to push the companies to do something.  Now normally they'll just fire the founder and install someone that will take the company public within two years of that 10 year window occurring.  That happens all of the time and that's part of the reason why you don't see founders taking their companies public because the investors are coming to the edge of their fund.  There's no desire of the founders to take their companies public so there's essentially a misalignment of interest and the venture capitalists can easily coop the other board members and have the founders fired.    

So I think it's not so black and white.

So just going back to the earlier comment on investor philosophy going back to the 1996 philosophy, and I don't know if there's a vintage year for investor philosophy, but I think that for the modern day investor they need to look at their position in companies as an owner versus a short term investor. 

And when you look at your investment as an owner and not a short term investment, then your perspective and the founder's perspective become aligned and you can have a discussion about going public.  Not arbitrarily when it's the end of your fund's 10 year life cycle but when it's the right time based on the number of shareholders or when you know it's the right time when they have well north of $250MM in revenue in annual revenue, which seems to be the sweet spot more and more.

MELIZA SOLAN:  Who gets the money, where do the proceeds go?

Panelists (Group):  [Couldn't hear question - distortion/audio issues]

LORENZO CARVER:  The question was regarding how several of the companies that have managed to go public recently - the deals that have gone through, have had VCs exiting as selling shareholders versus waiting for a secondary offering after the initial offering (where proceeds from the shares sold would just go to the company).  Do you have any comments on that?

JASON HAISLMAIER:  I supposed whether it makes sense depends on whether you're the VC or one of the other shareholders.

I don't know that there's a answer that that I can give to definitive one way or the other I think it certainly has an effect on the results of the offering in terms of the capitalization of the company the position of the shareholders in the company pre-offering and post offering and in terms of investors along the way having had a successful exit personally as well.

I've not necessarily seen it come up as a contentious issue in discussions around whether or not a an offering should take place and some that may be that VCs typically control the board and typically are making the decision as to whether of not the company should go public and there making the decision at least as much as to whether or not it benefits them as an investor as if it benefits the company.

Even if they are in face acting in the best interest of the company it's often in the view that "Well if we are acting in our own self interest it's also in the interest of the company, so everybody wins

Well maybe it's not quite everybody, but at least it's enough of everybody that it goes ahead and happens.

You know I think in any corporate action offering or otherwise you can always look at the transaction and say somebody didn't make out as well as someone else.     That's just the nature of the beast.


I would just ask a couple of follow up questions if could.  One would be for Dave Taylor, based on your initial point regarding how some of these companies are building themselves better because they don't see a public exit as a possibility.  That makes good sense.

But on the other hand, the size of the economic impact of a company that has access to a wide base of shareholders and a liquidity base, that generates like tons of jobs.

An example would be, for instance, Microsoft, which started out with just 1,000 employees immediately before they went public and today, according to research reports,  is estimated to be responsible for 14.3 million jobs in their ecosystem and also to have had created 10,000 or so millionaires. 

So that economic impact is hard to match as a private company.  It's unlikely that a private company would have the resources, even in the form of margins, to grow that quickly.  It's also unlikely that they would be able to fund that kind of growth with private debt.

Another example would be Amazon, or Google, any of those companies where if you look at their employee count immediately before they went public it's substantially less.  There's a massive ramp-up in headcount following a public offering for many high-growth firms.

And it's hard to find an analog to that with private companies that haven't accessed public markets. 

DAVE TAYLOR RESPONSE:  Yeah, I agree and you know if you look at the analog of space and space research, or space exploration, you'll find that that's an industry that's gone through a huge evolutionary change in the last 15 or 20 years.  Whereas there used to be a small number of huge companies, Martin Marietta, Hughes, Lockheed, and now it's much more characterized by lots and lots, thousands actually, of small nimble companies.  So the industry as a whole is innovating in ways that would have never had been anticipated 15 or 20 years ago.

Is it better or worse?  I'm not sure that it makes any sense to look at it that way because it's just evolving it's just changing.   In the same way that you could say it's a good thing to get rid of opportunistic VCs and that they are figuring out ways to exploit changes in the market so they cash out immediately on IPO, which is arguably not actually helpful for companies being mature and growing to their next stage immediately subsequent to an IPO.  But on the other hand you could look at it differently which I'm sure other people will represent those other opinions (laugh).

But I think it's just changing and your right there's so many stories of companies that go public and immediately have so much more resources and they can grow really quickly.

But I will also suggest, and again I'll admit I haven't done this research but I think if you were to go back and look at the IPOs in the dot com explosion, in that period of time we had just this 12 month old companies IPO'ing for hundreds of millions of dollars and then just vanishing 18 month later.

 Anything in the market that causes companies to slow down enough to be mature enough to truly be ready to be publicly traded and to represent both the interest of their shareholders and their customers in the boardroom and not so much be worrying so much the about interests of their investors because those are three very different constituents, I think that that's arguably very positive to long term health of the marketplace and the industries represented.

JASON HAISLMAIER:  I completely agree that.  What's often lost sight of on the legal issue is that the company's interests often aren't aligned with all investors' interests, all shareholders interests and the broad brush approach can often be that they are one interest.

And again I haven't done research on this but you do see situations these days where you have multiple counsels involved representing different factions from each of those parties, particularly one for the company, certainly the underwriters and perhaps some of the major investors and perhaps a group of minority investors as well to make sure that their concerns are properly represented. 

And I think that that should be the case.


You had mentioned that you didn't feel that the actual costs had increased substantially as a result of Sarbanes Oxley.  Could you expand on that a bit?

ADEO RESSI RESPONSE:  Part of my thinking on that evolved majorly when I spoke at length with Bill Hambrecht recently.  We sat down for about 2 hours - He has a boutique firm looking to redo how underwriting is done through a Dutch auction model

I think it's a common perception about costs and about Sarbanes Oxley and I think that we walked through a bunch of examples and it wasn't that it was so expensive.  I started looking into the matter further and again I'd say it's not a cost issue.

There has to be a process of educating founders

NOTE:  There were a few technical issues with video and audio during the conference, so some of the comments by panelists may be missing a word (or sentence) or two.

Panelist Bios:

Dave Taylor

Dave Taylor, founder of the popular Ask Dave Taylor site, has been successfully involved with Internet initiatives since 1980.  Dave is widely recognized as an expert in both technical and business issues.  He has been published over a thousand times, while also having written twenty business and technical related books.  In addition, he has launched four Internet startup companies, including AnswerSquad and ClickThruStats, along with The Internet Mall, Inc., the first internet shopping directory.  Dave currently maintains three weblogs which include: The Business Blog at, focused on business and industry analysis; the eponymous Ask Dave Taylor, devoted to tech and business Q & A; and The Attachment Parenting Blog, discussing relevant topics of interest to parents.  He is an award-winning speaker, popular conference and workshop participant and a frequent guest on numerous radio and podcast programs.  Dave holds an MBA from the University of Baltimore and MS Ed. from Purdue University.

Adeo Ressi

Adeo Ressi is The Founding Member of, an online resource for CEO's to research, rate, and review venture funds worldwide. Adeo also serves on the Board of the X PRIZE Foundation, a non-profit chartered to inspire human achievements through competition.   He is a serial entrepreneur, focused on launching companies in new markets. Over the course of his career, Adeo was an early pioneer in the growth of the World Wide Web, an advocate for the burgeoning private space exploration industry, and a champion of casual games and related entertainment.  Adeo was most recently the founder and former CEO of Game Trust, Inc., the leading community and ecommerce software platform for online casual game play. Game Trust, Inc. was sold to RealNetworks, Inc. (RNWK) on October 1st, 2007, for an undisclosed amount. He secured over $15 MM in venture capital and acquired two companies to build Game Trust, as well as orchestrated large licensing opportunities with AOL, Viacom, MiniClip, and other global media brands.   In addition, Adeo has founded and sold several successful ventures including Total New York, Inc., which was sold to AOL and Tribune Media; methodfive, which was sold to Xceed for $88 million in 2000.  Mr. Ressi was then Chief Strategy Officer of Xceed, Inc., the NASDAQ-listed web architecture and design firm with over 1,000 employees worldwide. At Xceed, he oversaw the filing of a secondary stock offering, organized complimentary service offerings across 13 offices worldwide, and developed the first intra-company financial projections. Before founding Game Trust in 2002, Mr. Ressi founded Sophos Partners, a venture consulting and turnaround firm with offices in New York, Boston, Sao Paulo, and Tokyo, where he acted as interim CEO of, an idealab company.


Jason Haislmaier

Jason Haislmaier is a Partner with Holme, Roberts and Owen, working in the firm's Intellectual Property Group. He joined the firm in 2002 and is resident in the Boulder office. Jason concentrates his practice on representing emerging and established companies in technology and intellectual property transactions, with an emphasis on developing strategies for protecting, managing, and commercializing technology and intellectual property assets.

Jason's technical experience spans a range of industries and technologies, including computer software, hardware, data storage, networking, telecommunications, cable television, digital and online content distribution, semiconductor development and fabrication, and other high technology sectors.

Jason has developed a special area of expertise involving open source software licensing and compliance. He works with clients in the US and abroad to develop and implement open source software license compliance strategies. He also helps clients contend with, and respond to, open source software license enforcement inquiries. Jason has also lectured in both the US and Europe on topics involving open source software and other areas of intellectual property.

Prior to joining HRO, Jason was a member of the Technology Transactions practice at Cooley Godward Kronish LLP.


IMAGE SOURCE:  Liquid Scenarios (bpCentral, Inc.) Artist:  Susan Jarvis, Waterkopf

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