New Report Demonstrates High Costs and Low Benefits of Sarbanes-Oxley 404(b) Compliance for Emerging Biotechs

Resources for emerging growth biotech companies would be better used
for science than compliance with Section 404(b), economists find.

WASHINGTON–(BUSINESS WIRE)–Today, to recognize National Inventors’ Day, the Biotechnology
Innovation Organization (BIO) released a new report, Science
or Compliance: Will Section 404(b) Compliance Impede Innovation by
Emerging Growth Companies in the Biotech Industry?
report shows the detrimental impact of Sarbanes-Oxley 404(b) on
biopharmaceutical emerging growth companies (Bio-EGCs) and demonstrates
how this regulatory requirement harms innovation and capital formation
without any corresponding investor benefit.

“It’s an exciting time for the life sciences sector,” BIO’s President
and CEO Jim Greenwood noted,
“but we must do more to protect small
business innovators from regulatory burdens that are counterproductive
to their mission. As this study proves, failing to exempt pre-revenue
biotech companies from costly and unnecessary regulations is harming
innovation, capital formation, and the ability of companies to develop
breakthrough medicines and cures.”

In the report, renowned economists Craig Lewis and Joshua T. White of
Vanderbilt University point to mounting evidence that links Section
404(b) compliance to reduced market capitalization, higher audit fees,
exiting of public markets, and a direct reduction in innovation such as
R&D that results in fewer patents.

Under the JOBS Act, enacted in 2012, small companies like Bio-EGCs were
granted a five-year exemption from the costly Section 404(b). Since the
law’s passage, more than 300 Bio-EGCs have gone public representing a
270 percent increase compared to the same period prior to JOBS Act.
However, because drug development is an exceptionally time-consuming
endeavor and often requires a decade or more of research and
development, many life science startups are still pre-revenue when this
5-year exemption expires.

“The reality is that almost 90 percent of Bio-EGCs go public as
early-stage startups and given their potential to create breakthrough
medicines and cures, they often achieve large market capitalizations
despite generating little to no revenue,” Lewis said. “The costs
of Section 404(b) compliance are high and the benefits for small
companies, like Bio-EGCs, and their investors are low, which is why it’s
so important for policymakers to consider extending this important

“It’s important to recognize the significant impact the JOBS Act has had
on accelerating the pace of biotech IPOs since its passage. By providing
a critical on-ramp for small business innovators and targeted regulatory
relief measures, we have seen a dramatic uptick in IPO activity,” White
“To that end, wasting valuable resources on unnecessary
compliance undermines the intent of the JOBS Act which has helped
hundreds of companies facilitate capital formation, bolster employment,
and produce next generation medicines and cures for patients who need

Failing to extend the exemption from Section 404(b) compliance for
Bio-EGCs would have a negative impact on America’s economy and society
for generations to come. Regulators and lawmakers should act swiftly to
ensure unnecessary regulations are not preventing innovative companies
from carrying out their lifesaving work.

This report is available for download here.


Andrew Segerman

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