CEO Frank Watanabe critiques SOX compliance burden for small biotech firms

In a pivotal meeting held by the U.S. House Committee on Financial Services, the discussion centered around the pressing need to reassess the Sarbanes-Oxley Act (SOX) and its impact on small businesses in today’s capital markets. As the room filled with lawmakers and industry leaders, the air was charged with a sense of urgency regarding the financial burdens imposed by compliance regulations.

Frank Watanabe, CEO of Arcutis Biotherapeutics, shared a compelling narrative about the challenges faced by small firms under SOX, particularly Section 404(b), which mandates rigorous internal control audits. Watanabe highlighted that the average compliance cost for companies can soar to $1.5 million annually, with some firms exceeding $2 million. This financial strain diverts crucial funds away from research and development, employee hiring, and growth initiatives, ultimately stifling innovation.

The stark reality is evident in the numbers: the number of public companies has plummeted from approximately 6,500 to around 4,000 since the enactment of SOX, while the landscape of large private companies has flourished. Notable retailers like Nordstrom and Walgreens have opted for private status, citing the burdensome costs of public compliance as a significant factor in their decision.

Investor opinions on SOX compliance are divided. Some investors argue that the external audits mandated by SOX provide little value, especially those focused on long-term investments who prefer conducting their own analyses. Conversely, others, particularly in the index fund community, advocate for the audits, emphasizing the need for oversight. This division underscores the necessity for flexibility in compliance requirements.

Watanabe proposed several reforms aimed at alleviating the compliance burden on smaller firms. He suggested adjusting the thresholds for compliance based on company size and revenue, advocating for a more nuanced approach that recognizes the unique challenges faced by emerging companies. He also called for a shift in focus from rigid internal controls to the accuracy of financial reporting, emphasizing that the primary goal of capital markets should be reliable financial disclosures.

The meeting concluded with a sense of hope for reform, as lawmakers considered the introduction of two pending bills aimed at modernizing SOX. The discussions highlighted a critical opportunity for Congress to support innovation and competitiveness in the U.S. economy by revisiting and revising outdated compliance requirements that disproportionately affect small businesses. As the committee prepares for further deliberations, the future of SOX reform remains a topic of significant importance for the health of American entrepreneurship and economic growth.