Next week, we are scheduled to meet with one of the SEC commissioners, Troy Paredes, and his Counsel, Scott Kimpel. They will be here in Silicon Valley to meet with a number of venture firms to get our perspectives on:
- The investing environment / opportunities to sustain the growth and competitive advantage of the American economy
- The exit environment
- The capital raising environment for VCs
- The positive and negative impacts of rules and regulations on the venture community and its portfolio companies
In my opinion, the root cause of all issues that are curently having the greatest negative impact on the venture business – and our collective ability to raise funds so we can invest in your companies – is tied to liquidity. Every regulation that gets in the way of supporting liquidity ultimately affects the economy, Limited Partners, portfolio companies, and the venture community in general.
In my mind, there are three things the SEC could do to make an immediate impact upon liquidity for small, private companies:
SarBox. According to my own experience and industry experts, companies can expect to pay at least $2M/year just to service SarBox expenses. Meeting SarBox requirements eats up a good portion of earnings and therefore makes it impractical to even consider an IPO unless you are a much bigger company. Proposal: Relax the reporting requirements for companies generating less than $250M annual revenue. The market will build in a discount to the stock price to account for the additional market risk. This risk can be socialized in the Prospectus.
R&D Tax Credits. Proposal: Enable small companies to carry forward all R&D expenses generated as a private company as a future tax credit thereby enabling small companies that IPO to generate strong earnings as a nascent public company so that their balance sheets can successfully compete against the incumbents for investor support.
Employee Stock Options. In this unstable economy, small companies are finding it more difficult to attract employees from large relatively stable companies. And, with all the stock option scandals that surfaced earlier in the decade, it’s dampened the enthusiasm for companies to broadly disseminate stock options as a mechanism to entice employees to join/stay with a small company. Proposal: Allow all vested stock options to be treated as a capital gain, irrespective of the exercise/holding period.
Those are a few of my ideas. But, I am quite confident you will have even better ones. Why don’t you comment with your ideas and I will see if I can compile them into some sort of categorized/logical order and get them in front of the Commissioner.
Looking forward to hearing your suggestions.