JOBS Act exemptions won’t protect execs from lawsuits
Any U.S. corporate executives who think they can use the JOBS Act’s relaxed rules for public listing to cut corners on accounting and disclosure may want to think again, according to Reuters analysis.
The Jumpstart Our Business Startups (JOBS) Act, signed into law by President Barack Obama on Thursday, may allow smaller companies new to the markets to reduce their financial regulation, and it removes the requirement for an expensive internal audit. However, it does not protect CEOs and chief financial officers from being sued by regulators and investors for fraud.
So-called emerging growth companies – those with less than $1 billion in revenue – will be exempt from an outside audit of internal controls for up to five years. Yet senior management must continue to hold its accounting systems to the same standards introduced in 2002 under the Sarbanes-Oxley Act. The corporate reform law, passed after the Enron scandal, was designed to ensure that companies’ internal controls were in order.
Despite the loosening of some provisions, “this isn’t the Wild West,” said Brian Margolis, a corporate partner at Orrick, Herrington & Sutcliffe in New York. “Management that uses this for carte blanche to not have internal controls is really missing the boat.”
Lawyers say it is not yet clear whether risk for company executives will increase under the JOBS Act. Companies that neglect bookkeeping will face regulatory action and investor lawsuits. If management is not viewed as trustworthy, market valuations stand to be punished.
“The moment you fall from following best practices … you’ll be viewed as something less than premium, and that is going to impact your stock price,” said Payam Zamani, CEO of online marketer Reply.com. The company is considering a public offering after withdrawing plans for one earlier this year.