Sarbanes-Oxley: A Chilling Effect on Venture Capital?

Do we need more financial regulation to deal with the credit crunch and recession?

By + More

Here's something that I didn't go into in my article on venture capital: the role that financial regulation is playing. Sure, it makes sense that given all the financial problems going on in today's economy, venture capital activity would be down. But according to some, this is coming at the worst possible time.

In the wake of Sarbanes-Oxley legislation passed in reaction to the Enron scandals of 2001, "the psychology of the entrepreneur has changed dramatically," say Mark Heesen, president of the National Venture Capital Association. The basic reason is that in a world with Sarbanes-Oxley, everyone who wants to take their company public has to deal with extra paperwork and hoops to jump through. Those costs can add up and sometimes make going public simply not worth it. "Today you have a lot of entrepreneurs who say if acquisition is coming along, I'm taking it," Heesen says. "They say, 'I don't want to deal with all of these accounting rules. It's not fun going public anymore.' They'd rather sell out and go create another company or go play golf."

The possibility that Sarbanes-Oxley has become too much of a burden on companies has become real even in the eyes of previous supporters of the bill. Two years ago, Rep. Nancy Pelosi admitted that Sarbanes-Oxley has had "unintended consequences" and that it needs some "fine-tuning." But we haven't seen any real action from Congress.

At a time when many people are saying that more regulatory oversight is the only way to fix our financial markets, it is important to remember that a "crisis mentality" approach to regulation often results in overreaching that creates new problems. The lack of venture capital-funded IPOs might be one example of such a problem.


TAGS:
venture capitalism
government intervention