David Feldman's book, Reverse Mergers: Taking a Company
Public Without an IPO, now in its third printing, was published in 2006
by Bloomberg Press (available on http://www.amazon.com).
View David Feldman's reverse merger blog at www.reversemergerblog.com.
Joseph Smith and David Feldman are coauthors of PIPES:
Revised and Updated Edition - A Guide to Private Investments in Public Equity
(Bloomberg Press, 2005) available on http://www.amazon.com.
In the News
David
Feldman quoted in New York Law Journal
Thursday May 31, 2007 concerning Sarbox.
Cautious
Optimism Greets New Sox Guidance
by
Beth Bar
LOCAL
ATTORNEYS are reacting with cautious
optimism to an attempt by the Securities
and Exchange Commissions to make it
easier for smaller companies to comply
with Selection 404 of the Sarbanes-Oxley
Act.
With the new "interpretive guidance"
adopted last week, regulators aim to
strike a balance between reducing the
costs of regulation and preserving safeguards
for investors, and to clarify how the
rules are interpreted and implemented.
The guidance encourages management to
focus on risks and the need for controls
when compiling their financial statements.
"The changes that have been brought
about to continue the rigor and integrity
if the 404 process and allow room for
sensible changes," said Harvey J. Goldschmid
of Columbia University Law school, a
former SEC commissioner.
But since the SEC has not yet released
the full text of its new interpretive
guidance, some local observers cautioned
that the full impact of its action remains
to be seen.
"Time will bear out whether the SEC
actions has its intended results," said
Richard F. Langan Jr., a partner at
Nixon Peabody. "If the guidance is followed
as articulated by the SEC, it will provide
a smaller issuer and its audit firm
more flexibility in scaling their processes
and renew procedures geared to Section
404 compliance to the actual circumstances
of the smaller issuer."
John T. Bostelman, a partner at Sullivan
& Cromwell, said the question on
everyone's mind is how much better life
will be under the new initiatives.
"But you can't know (this) until the
new guidance is implemented" he said.
"The proof is in the pudding.
Section 404 requires public companies
to publish information in their annual
reports concerning the scope and adequacy
of their internal procedures for financial
reporting and to provide an assessment
of the effectiveness of such controls
and procedures.
In addition, accounting firms must attest
to the effectiveness of the financial
reporting internal control structures
and procedures.
SEC Chairman Christopher Cox said in
a statement after the agency's action
that Congress never intended for the
404 process to become inflexible, burdensome
and wasteful.
"The objective of Section 404 is to
provide meaningful disclosure to investors
about the effectiveness of the company's
internal controls systems, without creating
unnecessary compliance burdens or wasting
shareholder resources," he said.
Mr. Cox said that with the SEC's new
interpretative guidance, companies of
all sizes will be able to scale and
tailor their evaluation procedures according
to the facts and circumstances.
David Feldman, a partner at Feldman
Weinstein & Smith, said the passage
of such guidance provides smaller public
companies with an incentive to continue
listing their shares on U.S. exchanges.
Mr. Feldman noted that Sarbanes-Oxley
was passed in 2002 as a response to
the fraud, mismanagement and eventual
downfall of some of America's largest
companies, including Enron and WorldCom.
"But the burden of complying with 404
has hit smaller companies harder because
it was harder to bear the costs," he
said.
Scott D. Musoff, a partner at Skaden,
Arps, Slate, Meager & Flom said
the goal of the changes is to give small
businesses more latitude and flexibility."
"But in the reality we have to see whether
this will be the case," he said. "Hopefully,
[the initiatives] will assist smaller
companies, but there will be some companies
that will still have to spend a significant
time and expense in order to comply
with 404."
Companies with less than $75 million
in market capitalization are required
to comply with management guidance portion
of Section 404 at the end of 2007. Despite
the calls of some congressman and others,
the SEC has decided not to extend the
deadline.
Mr. Langan said the decision was appropriate.
"It has been four years since the adoption
of SOX and, if the internal control
requirements are going to be implemented,
it's the right time for smaller issuers
to begin working under the Section 404
regime," he said. "Absent a congressional
mandate amending SOX, Section 404 will
continue to apply to smaller issuers."
The day after the SEC action, the Public
Company Accounting Oversight Board Voted
to adopt a revised version of its auditing
standard designed to complement the
SEC's guidance.
The organization said the new standard
would tailor audit requirements to the
size and complexity of a company under
examination.
"The new auditing standard, by focusing
the auditor's attention on those matters
that are most important to effective
internal control, presents another significant
opportunity to strengthen the financial
reporting process," said Tom Ray, the
board's chief auditor and director of
professional standards.
