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New Law Eases Regulatory Pressure Decade Later

In the Market: Ceres in Thousand Oaks. In the months leading up to Kythera Biopharmaceuticals Inc. transitioning from a private company to a public one last year, the Calabasas drug maker put in place accounting procedures to give transparency to its financial reporting. As a public company operating under the regulations of the Sarbanes-Oxley Act (SOX), Kythera would have needed to put those policies in place eventually. Getting a jumpstart, said Chief Financial Officer John Smither, was a smart move because it showed investors that Kythera was serious about transparency in the new era ushered in by financial reform. “It communicates to (Wall Street) that we take public reporting responsibilities seriously,” Smither said. Kythera is one of a handful of companies in the San Fernando Valley region that has gone public in the past two years with a sale of stock to raise funds. In addition to Kythera, which is developing a drug to reduce chin fat and had its initial public offering in October, other companies that went public are Wesco Aircraft Holdings Inc. of Valencia, in July 2011; energy crop developer Ceres Inc. of Thousand Oaks, in February 2012; and mortgage lender PennyMac Financial Services of Moorpark, in May 2013. All these companies operate under the new responsibilities required by Sarbanes-Oxley, which passed Congress in 2002 following accounting scandals at Enron Corp., WorldCom Inc. and other large public companies. Since April 2012, a change to SOX went into effect through the federal Jumpstart Our Business Startups Act (JOBS), a law intended to facilitate financing and ease regulations on small businesses. Companies with annual revenue of less than $1 billion were given five years until they had to be compliant with mandatory internal control audits. At the end of the first year in which its shares were traded, Kythera did not report any revenue. While Smither would not disclose how much Kythera pays to be in compliance with SOX, he said it was not cost-prohibitive under the altered regulatory regime. The company worked with its accounting firm Ernst & Young LLP to find an outside organization to handle the internal control audits and found it in CNM LLP in Woodland Hills. In broad terms, some of the controls that Kythera executives have in place are using separate staff to approve vendor contracts and separate staff for handling payments to vendors, and creating a culture and environment that fosters reviewing business functions, Smither said. Off Broadway Still, SOX has been a huge burden to public companies. There are between 11,000 and 13,000 registered public companies in the U.S. For the purposes of Sarbanes-Oxley they are divided into three market-cap categories: $75 million or less, $75 million to $700 million, and more than $700 million. In the San Fernando Valley region most of the public companies fall in the accelerated category, or the market capitalization of $700 million and higher. This means there are certain deadlines those companies must meet when filing financial reports. And for Wesco, that meant going through an intensive and rigorous process of working with its auditors to carefully go over the internal controls – policies and procedures – that govern how financial statements are compiled and reported, said Mark Davidson, the head of investor relations for the aircraft parts distributor and supply-chain management firm. “You have to go from top to bottom in all of your controls and procedures to make sure you are compliant,” he said. The effort and cost of that compliance has meant some companies have opted out of traditional exchanges such as the New York Stock Exchange or the Nasdaq and are being traded over the counter, where there are fewer requirements. Public companies registered with the SEC file quarterly and annual financial reports, management reports on the company’s performance, disclosure of when managers sells shares, and other communications needed by investors. The OTC Markets Group in New York runs the OTCPink (formerly called the Pink Sheets), which trades all securities of registered companies; the OTCQX, which included foreign companies trading in the U.S.; and the OTCQB, for venture stage companies. There are currently 2,500 companies trading on the three OTC markets registered with the SEC. That is a decrease from the 4,816 registered companies as of Dec. 31, 2009. Tim Ryan, vice president and managing director of the OTC Markets Group, has identified three waves of when companies came to the OTC markets, starting in 2003 after the passage of Sarbanes-Oxley. The next wave took place in 2008 when SOX rules were amended to allow foreign companies to trade in the U.S. but not register with the U.S. Securities and Exchange Commission. The third was in 2012 following the passage of JOBS, which allowed many small community banks to deregister and stop complying with reporting requirements. “Companies are finding different alternatives to provide that information in a less complex regulatory manner,” said Ryan.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.
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