Because small biotechnology companies do not have product revenue, burdensome regulations have an outsized effect on them. One-size-fits-all compliance requirements – such as Section 404(b) of the Sarbanes-Oxley Act (SOX) – divert funds from the lab and slow the development process.
We have already seen the benefits that positive legislative reform can have for capital formation for emerging growth companies (EGCs). The JOBS Act has led to a sea change in the regulatory landscape and has shown that a commonsense reporting standard can support capital formation. More than 80 biotechs have gone public in the last two years – compared to just 30 in the two years before the JOBS Act.
Transparency for investors is critically important. JOBS Act testing-the-waters meetings have been universally praised by my biotech colleagues – largely because the additional time with investors allows for increased dialogue and greater information flow. But the key is to share the right information that investors want and need.
The Fostering Innovation Act (H.R. 2629), introduced by Rep. Michael Fitzpatrick (R-PA), will help emerging innovators strike that balance. This bill will provide the SEC with more accurate company classifications in order to institute a commonsense regulatory burden outside of the EGC On-Ramp created by the JOBS Act.
GlycoMimetics will likely still be in the lab and the clinic when the five-year On-Ramp and its SOX exemption expire. When the EGC clock runs out, small biotechs will still be reliant on investor capital – but will face a full-blown compliance burden identical to that faced by commercial leaders. Investors would be better served by analyzing clinical trial results, but pre-revenue biotechs will instead be forced to issue costly reports that do not tell the true story of their business. Rep. Fitzpatrick’s bill recognizes the pre-revenue reality of many small businesses by incorporating a revenue test into SEC Rule 12b-2 – which is used to determine the extent of a public company’s regulatory burden, including SOX compliance. The bill will allow small biotech companies to focus on delivering medicines to patients rather than time-consuming and costly reporting.
Two other recently introduced pieces of legislation also have the potential to reduce unnecessary regulatory barriers and enhance capital formation for emerging biotechs.
The Small Company Disclosure Simplification Act (H.R. 4164), introduced by Reps. Robert Hurt (R-VA) and Terri Sewell (D-AL), will provide an exemption for growing companies from the costly requirement to file financial statements using eXtensible Business Reporting Language (XBRL).
The Small Cap Liquidity Reform Act (H.R. 3448), introduced by Reps. Sean Duffy (R-WI) and John Carney (D-DE), will also stimulate capital formation by providing small businesses with tick size flexibility through a pilot program designed to relieve them from the one-size-fits-all trading standard imposed by decimalization. I believe that these are important steps toward a public market that better supports funding for vital research.
Targeted capital markets enhancements will allow smaller issuers increased access to investors and avoid siphoning off innovation capital to spend on costly compliance burdens. These emerging businesses will be able to fund their growth and, in the biotech industry, further research that will change the lives of patients and their families.
Brian Hahn Chief Financial Officer of GlycoMimetics