Republicans say retail investors are missing out on the ‘lottery tickets’ of private firms going public

Congressional Republicans believe the cost of going public, and being a public company, is too darn high. That means retail investors are missing out on huge gains, since private company “unicorns” are avoiding public markets and the “unnecessary regulatory burdens” imposed by the 2002 Sarbanes-Oxley Act.

In a hearing on Tuesday of the House Financial Services subcommittee on capital markets, Rep. Warren Davidson, a Republican from Ohio, compared the stock market to buying a ticket to the lottery. “We don’t stop people from spending money on lottery tickets and clearly the risk of losing your capital in the lottery is much greater.”

Rep. Bill Huizenga of Michigan, the subcommittee chairman led the full court press on his fellow lawmakers, and regulators like the Securities and Exchange Commission and the Public Company Accounting Oversight Board—created by Sarbanes-Oxley—to expand investing options for mom and pop investors and remove more obstacles to more capital formation.

Huizenga said businesses that stay private can’t “reward hardworking Americans.”

Michael Piwowar, a Republican appointee at the Securities and Exchange Commission , agrees with Huizenga and Davidson. At an event at the Heritage Foundation on Monday, Piwowar told the audience he’s questioned the premise of having accredited versus nonaccredited investor categories. An accredited investor is one with a net worth of at least $1 million, not including a house, or with income at least $200,000 each year for the last two years.

“We are protecting investors by prohibiting them from investing in certain high-risk securities,” Piwowar told the Heritage Foundation audience. “We know high risk equals higher expected returns, so we are protecting investors form higher expected returns. Mom-and-pop investors are not sharing in the return because these companies are taking longer to go public.”

New York Stock Exchange President Tom Farley, who also testified Tuesday, went a few steps further. He’s calling for an expansion of the Emerging Growth Company classification created by the Jumpstart Our Business Startups, or JOBS, Act signed into law by President Obama. He wants to raise the annual gross revenue threshold ceiling for companies to remain an EGC to above $1 billion from the current $1 billion level. NYSE also supports eliminating the requirement for EGCs and companies with less than $250 million in gross revenue from “the SEC’s costly financial statement format requirements known as XBRL format.”

Farley also said lawmakers should strip the PCAOB of authority over the external auditor’s review of internal controls at companies. In his opening statement Farley said that “listed companies are increasingly concerned that the PCAOB’s regulatory agenda is expanding the organization’s footprint beyond the originally intended scope by virtue of the PCAOB inspection process and corresponding changes to issuer internal control systems.”

“Sarbox, or just simply SOX as the law is colloquially known,” said witness John Berlau, a fellow at the conservative Competitive Enterprise Institute and a contributor to Newsmax, “has caused auditing costs to double, triple, and even quadruple for many firms.” Section 404 of the law requires an auditor to give an opinion on management’s assessment of its internal controls over financial reporting has been interpreted too broadly by interpreted broadly by the PCAOB, according to its critics.

Don Whalen, general counsel & director of research at Audit Analytics told MarketWatch, “The PCAOB’s decision beginning in 2010 to more thoroughly review the auditor attestation work during audit inspections would have caused audit firms to increase efforts during the audit of certain clients. Nevertheless, the increases from year to year are not that high.”

Audit Analytics figures show modest increases in audit fees from year to year that could also be explained by more work required because of more risk at certain clients.

Year Growth in audit fees
2015 1.57%
2014 3.20%
2013 2.88%
2012 3.45%
2011 3.18

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