79–006 

115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 115–425 

FOSTERING INNOVATION ACT OF 2017 

NOVEMBER 28, 2017.—Committed to the Committee of the Whole House on the 

State of the Union and ordered to be printed 

Mr. HENSARLING, from the Committee on Financial Services, 

submitted the following 

R E P O R T 

together with 

MINORITY VIEWS 

[To accompany H.R. 1645] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 1645) to amend the Sarbanes-Oxley Act of 2002 to provide a temporary exemption for low-revenue issuers from certain 

auditor attestation requirements, having considered the same, report favorably thereon without amendment and recommend that 

the bill do pass. 

PURPOSE AND SUMMARY

On March 21, 2017, Representatives Kyrsten Sinema and Trey 

Hollingsworth introduced H.R. 1645, the ‘‘Fostering Innovation Act 

of 2017’’, which amends Section 404(b) of the Sarbanes-Oxley Act 

(SOX) to extend the exemption available to emerging growth companies (EGCs) from the auditor attestation of a company’s internal 

controls over financial reporting requirement beyond the five-year 

period that applies under current law. Specifically, the bill extends 

the exemption until the earlier of ten years after the EGC went 

public, the end of the fiscal year in which the EGC’s average gross 

revenues exceed $50 million, or when the EGC qualifies with the 

Securities and Exchange Commission (SEC) as a large accelerated 

filer, $700 million public float, which is the number of shares available to trade freely between investors that are not controlled by 

corporate officers or promoters. 

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BACKGROUND AND NEED FOR LEGISLATION

The goal of H.R. 1645 is to extend the exemption status for EGCs 

from SOX 404(b) requirements beyond the initial five year period 

under current law. The legislation does not relieve an EGC from 

its responsibilities under SOX 404(a), which require that management establish and maintain an adequate internal control structure and procedures for financial reporting. 

Title I of the Jumpstart Our Business Startups (JOBS) Act established EGCs as a new category of issuers. These issuers have 

less than $1 billion in annual revenues or $700 million in public 

float when they register with the SEC and are given up to five 

years—known as an ‘‘on ramp’’—to comply with certain regulatory 

requirements, including SOX Section 404(b). By granting these 

issuers temporary ‘‘on ramp’’ status, Title I encourages small companies to go public while ensuring that they move to full compliance with regulatory requirements as they become large enough to 

support the legal, accounting, and compliance infrastructure more 

typical of mature enterprises. 

Pursuant to SOX Section 404, the management of a public company must assess the effectiveness of the company’s internal controls over financial reporting. A key driver of SOX compliance costs 

is Section 404(b), which requires a public company’s auditor to attest to, and report on, management’s assessment of the company’s 

internal controls. Studies of compliance costs overwhelmingly indicate that Section 404 has increased public companies’ accounting 

and auditing expenditures, regardless of company size. 

In fact, the costs to comply with Section 404(b) have far exceeded 

the SEC’s original estimates. A 2008 report by the Heritage Foundation stated that while the SEC initially estimated the cost of 

complying with Section 404 to be $1.24 billion in the aggregate, 

multiple studies have projected the actual cost to be $35 billion, almost 30 times that of the original estimate. Moreover, these costs 

impact small accelerated filers disproportionately when compared 

with large accelerated filers. CRA International’s survey data indicates that for a small accelerated filer—which includes companies 

with market capitalization between $75 million and $700 million— 

the total year-one Section 404 implementation cost per company is 

$1.5 million, or 0.46 percent of revenue. For a large accelerated 

filer—which is a company with market capitalization above $700 

million—the total is $7.3 million, or 0.09 percent of its revenue. 

Similarly, in 2010, the Independent Community Bankers Association (ICBA) concluded that: 

while [Section] 404 auditor costs declined 5.4% from 2006 

as the auditor scope of work narrowed, these costs were 

offset by a reported [5%] increase in the average hourly 

audit rate charged by auditors. [Financial Executives 

International] also found that auditor attestation fees paid 

by accelerated filers in 2007 constituted 23.7% of the accelerated filer’s total annual audit fees and averaged 

$846,000, representing only a 5.4% decrease from 2006. In 

September 2009, the SEC’s Office of Economic Analysis 

issued its 140 page report on the costs of complying with 

SOX 404 . . . [and] found that for companies that were already complying with Section 404(b), the mean total SecVerDate Sep 11 2014 04:29 Nov 30, 2017 Jkt 079006 PO 00000 Frm 00002 Fmt 6659 Sfmt 6602 E:\HR\OC\HR425.XXX HR425
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tion 404 compliance cost following the issuance of the SEC 

guidance was still a staggering $2.33 million per year. Section 404(b) audit fees were a significant portion of those 

total costs, amounting to a mean average of $1,127,325. . 

. . [T]he Study showed that for filers with public float 

lower than $75 million, the mean SOX 404 compliance cost 

following the issuance of SEC guidance was very high 

$690,000 per year and the mean 404(b) audit cost was 

$259,004. From its Study, the SEC generally concluded 

that smaller publicly held companies have higher SOX 404 

compliance costs as a fraction of their asset value [than 

larger reporting companies]. 

A May 2014 survey conducted by compliance and audit consultant Protiviti similarly found that around 53% of large organizations currently spend $1 million or more on SOX compliance, and 

30% spend $2 million or more annually. The Protiviti survey concluded that ‘‘SOX compliance costs are rising more sharply than in 

the past,’’ partly as a result of recent Public Company Accounting 

Oversight Board (PCAOB) inspections of external auditing firms, 

which indicated that ‘‘external auditors were not doing enough 

work and thus needed to invest more time in [SOX Section 404] audits.’’ 

The significant burdens associated with SOX Section 404(b) compliance disproportionately affect smaller public companies, divert 

resources from growth to regulatory costs, and harm the ability of 

these firms to compete against larger peers and foreign competitors. According to Heritage, ‘‘Section 404 compliance cost constitutes a substantial fixed cost component that imposes a disproportionate burden on smaller public companies as they are inherently unable to spread the cost with the economies of scale.’’ 

Heritage found that ‘‘in the first compliance year, the median audit 

fee as a percentage of revenue for companies with a market cap of 

less than $75 million and between $75 million and $250 million 

was 0.75 percent and 0.48 percent, respectively. In contrast, that 

for companies with a market cap of more than $5 billion was 0.07 

percent.’’ 

Increased compliance costs also serve as a disincentive for smaller companies to become and remain public companies. For example, 

ICBA pointed out: 

[W]ith more limited resources, fewer internal personnel 

and less revenue with which to offset the costs of Section 

404 compliance, both micro-cap and small-cap companies 

are disproportionately impacted by the burdens associated 

with Section 404 compliance . . . . [T]he benefits of documenting, testing and certifying the adequacy of internal 

controls, while of obvious importance for large companies, 

are of less value for micro-cap and small-cap companies, 

who rely to a greater degree on ‘tone at the top’ and highlevel monitoring controls, to influence accurate financial 

reporting. . . . [T]he proportionately larger costs for smaller 

public companies to comply with Section 404 adversely affect their ability to compete with larger public companies 

and even with foreign competition. This reduction in the 

competitiveness of U.S. smaller public companies hurts 

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their capital formation ability and, as a result, hurts the 

U.S. economy. 

In its report on Capital Markets mandated by President Trump’s 

February 3, 2017 Executive Order, the Department of Treasury 

recommended an increase in the length of time a company may 

maintain its EGC status for up to 10 years, subject to a revenue 

and/or public float threshold, in order to more appropriately tailor 

compliance costs associated for a smaller public company. 

HEARINGS

The Committee on Financial Services and the Subcommittee on 

Capital Markets, Securities, and Investment held a hearing examining matters relating to H.R. 1645 on March 22, 2017, April 26, 

2017, April 28, 2017, and July 18, 2017. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on October 11, 2017, October 12, 2017, and ordered H.R. 1645 to be reported favorably to the House without amendment by a recorded 

vote of 48 yeas to 12 nays (Record vote no. FC–91), a quorum being 

present. 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. The sole recorded 

vote was on a motion by Chairman Hensarling to report the bill favorably to the without amendment. The motion was agreed to by 

a recorded vote of 48 yeas to 12 nays (Record vote no. FC–91), a 

quorum being present. 

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Insert graphic folio 6 here HR425.001
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COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X 

of the Rules of the House of Representatives, are incorporated in 

the descriptive portions of this report. 

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House 

of Representatives, the Committee states that H.R. 1645 will reduce regulatory compliance costs for EGCs by extending the exemption to comply with Section 404(b) of the Sarbanes-Oxley Act. 

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

CONGRESSIONAL BUDGET OFFICE ESTIMATES

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, the following is the cost estimate provided by 

the Congressional Budget Office pursuant to section 402 of the 

Congressional Budget Act of 1974: 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, November 1, 2017. 

Hon. JEB HENSARLING, 

Chairman, Committee on Financial Services, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 1645, the Fostering Innovation Act of 2017. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Stephen Rabent. 

Sincerely, 

KEITH HALL, Director. 

Enclosure. 

H.R. 1645—Fostering Innovation Act of 2017 

Under current law, the Securities and Exchange Commission 

(SEC) requires issuers of securities to file assessments of their internal control structures and procedures for financial reporting and 

have those reports be attested to and covered in an audit report. 

The Jumpstart Our Business Startups Act of 2012 exempted companies with annual revenue and debt issuance under specified 

thresholds from the requirement to have an auditor’s attestation as 

part of their internal control reports for up to 5 years after their 

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first sale of equity securities. H.R. 1645 would increase that maximum exemption period to 10 years. 

Based on an analysis of information from the SEC, CBO estimates that implementing H.R. 1645 would have no significant effect on the agency’s costs because the SEC would not have to update agency rules to implement the bill. Moreover, the SEC is authorized to collect fees sufficient to offset its annual appropriation; 

therefore, assuming appropriation actions consistent with that authority, CBO estimates that the net effect on discretionary spending would be negligible. 

Enacting H.R. 1645 would not affect direct spending or revenues; 

therefore, pay-as-you-go procedures do not apply. 

CBO estimates that enacting H.R. 1645 would not increase net 

direct spending or on-budget deficits in any of the four consecutive 

10-year periods beginning in 2028. 

H.R. 1645 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act. 

The CBO staff contact for this estimate is Stephen Rabent. The 

estimate was approved by H. Samuel Papenfuss, Deputy Assistant 

Director for Budget Analysis. 

FEDERAL MANDATES STATEMENT

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995. 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the 

Federal Advisory Committee Act were created by this legislation. 

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 

accommodations within the meaning of the section 102(b)(3) of the 

Congressional Accountability Act. 

EARMARK IDENTIFICATION

With respect to clause 9 of rule XXI of the Rules of the House 

of Representatives, the Committee has carefully reviewed the provisions of the bill and states that the provisions of the bill do not 

contain any congressional earmarks, limited tax benefits, or limited 

tariff benefits within the meaning of the rule. 

DUPLICATION OF FEDERAL PROGRAMS

In compliance with clause 3(c)(5) of rule XIII of the Rules of the 

House of Representatives, the Committee states that no provision 

of the bill establishes or reauthorizes: (1) a program of the Federal 

Government known to be duplicative of another Federal program; 

(2) a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public 

8 

Law 111–139; or (3) a program related to a program identified in 

the most recent Catalog of Federal Domestic Assistance, published 

pursuant to the Federal Program Information Act (Pub. L. No. 95– 

220, as amended by Pub. L. No. 98–169). 

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, (115th Congress), the following statement is made concerning directed rulemakings: The 

Committee estimates that the bill requires no directed rulemakings 

within the meaning of such section. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title 

This Section cites H.R. 1645 as the ‘‘Fostering Innovation Act of 

2017’’ 

Section 2. Temporary exemption for low-revenue issuers 

This section amends Section 404 of the Sarbanes-Oxley Act of 

2002 to extend the exemption from 404(b) compliance for EGCs 

until the earlier of ten years after the company went public, the 

end of the fiscal year in which the EGC’s average gross revenues 

exceed $50 million, or when the EGC becomes a large accelerated 

filer—at least $700 million public float—with the SEC. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, 

and existing law in which no change is proposed is shown in 

roman): 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italic 

and existing law in which no change is proposed is shown in 

roman): 

SARBANES-OXLEY ACT OF 2002 

* * * * * * * 

TITLE IV—ENHANCED FINANCIAL 

DISCLOSURES 

* * * * * * * 

SEC. 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS. 

(a) RULES REQUIRED.—The Commission shall prescribe rules requiring each annual report required by section 13(a) or 15(d) of the 

Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) to contain an internal control report, which shall— 

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(1) state the responsibility of management for establishing 

and maintaining an adequate internal control structure and 

procedures for financial reporting; and 

(2) contain an assessment, as of the end of the most recent 

fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting. 

(b) INTERNAL CONTROL EVALUATION AND REPORTING.—With respect to the internal control assessment required by subsection (a), 

each registered public accounting firm that prepares or issues the 

audit report for the issuer, other than an issuer that is an emerging growth company (as defined in section 3 of the Securities Exchange Act of 1934), shall attest to, and report on, the assessment 

made by the management of the issuer. An attestation made under 

this subsection shall be made in accordance with standards for attestation engagements issued or adopted by the Board. Any such 

attestation shall not be the subject of a separate engagement. 

(c) EXEMPTION FOR SMALLER ISSUERS.—Subsection (b) shall not 

apply with respect to any audit report prepared for an issuer that 

is neither a ‘‘large accelerated filer’’ nor an ‘‘accelerated filer’’ as 

those terms are defined in Rule 12b–2 of the Commission (17 

C.F.R. 240.12b–2). 

(d) TEMPORARY EXEMPTION FOR LOW-REVENUE ISSUERS.— (1) LOW-REVENUE EXEMPTION.—Subsection (b) shall not apply 

with respect to an audit report prepared for an issuer that— 

(A) ceased to be an emerging growth company on the last 

day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933; 

(B) had average annual gross revenues of less than $50,000,000 as of its most recently completed fiscal year; 

and 

(C) is not a large accelerated filer. 

(2) EXPIRATION OF TEMPORARY EXEMPTION.—An issuer ceases 

to be eligible for the exemption described under paragraph (1) 

at the earliest of— 

(A) the last day of the fiscal year of the issuer following 

the tenth anniversary of the date of the first sale of common 

equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933; 

(B) the last day of the fiscal year of the issuer during 

which the average annual gross revenues of the issuer exceed $50,000,000; or 

(C) the date on which the issuer becomes a large accelerated filer. 

(3) DEFINITIONS.—For purposes of this subsection: 

(A) AVERAGE ANNUAL GROSS REVENUES.—The term ‘‘average annual gross revenues’’ means the total gross revenues 

of an issuer over its most recently completed three fiscal 

years divided by three. 

(B) EMERGING GROWTH COMPANY.—The term ‘‘emerging 

growth company’’ has the meaning given such term under 

section 3 of the Securities Exchange Act of 1934 (15 U.S.C. 

78c). 

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(C) LARGE ACCELERATED FILER.—The term ‘‘large accelerated filer’’ has the meaning given that term under section 

240.12b–2 of title 17, Code of Federal Regulations, or any 

successor thereto. 

* * * * * * * 

(11) 

MINORITY VIEWS 

H.R. 1645 would amend the Sarbanes-Oxley Act of 2002 (SOX) 

to exempt certain companies from Section 404(b) audit requirements for up to a decade if they have average annual gross revenues of less than $50 million and a public float of less than $700 

million. 

Congress enacted SOX fifteen years ago in the wake of Enron 

and several other high-profile corporate and accounting scandals 

that collectively cost investors billions of dollars and undermined 

confidence in U.S. capital markets. SOX protects investors from 

similar misconduct by increasing the accuracy and transparency of 

financial reporting by public companies. Specifically, Section 404(b) 

requires an external auditor to attest to and report on management’s assessment of the company’s internal controls over financial 

reporting. H.R. 1645 would create an unnecessary and harmful exemption from these important requirements. 

The Dodd-Frank Wall Street Reform and Consumer Protection 

Act of 2010 (P.L. 111–203) already provides a permanent exemption from Section 404(b) for any company with a public float of less 

than $75 million (i.e., companies that are not classified ‘‘as accelerated filers’’ or ‘‘large accelerated filers’’). This exemption currently 

applies to fully half of all public companies. 

Additionally, the Jumpstart Our Business Startups (JOBS) Act of 

2012 (P.L. 112–106) created a five-year exemption from Section 

404(b) for companies that go public with less than $1 billion in annual revenues, referred to as ‘‘Emerging Growth Companies’’ 

(EGCs). Since the enactment of the JOBS Act, 85% of companies 

that have gone public have done so as EGCs. 

The JOBS Act ensures that large companies adhere to the SOX 

404(b) auditor requirements by terminating EGC status (and the 

associated exemption) after a company has been public for five 

years; or when the company has a public float of more than $700 

million, annual revenues exceeding $1.07 billion, or debt issuance 

exceeding $1.07 billion. 

H.R. 1645 would further delay compliance for up to a decade for 

companies that no longer qualify as EGCs. This new exemption is 

unnecessary in light of existing exemptions and could prove harmful to the companies that H.R. 1645 purports to help. In 2013, a 

Government Accountability Office (GAO) report found that companies that do not undergo an audit of their internal controls over financial reporting have a significantly higher likelihood of restating 

their financial statements. Financial restatements are major reporting errors that can damage a public company’s reputation and 

reduce investor confidence in the company, its management, and 

the broader capital markets. 

Removing Section 404(b) requirements can also harm investors, 

who rely on corporate financial statements when making investVerDate Sep 11 2014 04:29 Nov 30, 2017 Jkt 079006 PO 00000 Frm 00011 Fmt 6604 Sfmt 6604 E:\HR\OC\HR425.XXX HR425
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ment decisions. For this reason, academics, investor advocates, and 

regulators have opposed expanding SOX 404(b) exemptions. For example, Rick Fleming, the Securities and Exchange Commission’s 

Investor Advocate, opposed an identical bill last Congress on the 

grounds that expanding 404(b) exemptions to a new class of issuers 

would ‘‘weaken[ ] an important investor protection’’ and ‘‘further 

compound[ ] the complexity of securities law reporting requirements . . . .’’ Professor Robert Brown of the University of Denver, 

Sturm College of Law has also advised against expanding exemptions to SOX 404(b) requirements. During a July 18, 2017, hearing 

of the Capital Markets Subcommittee, Professor Brown testified 

that, as a matter of ‘‘human nature, if you are inside a company, 

and you are responsible for internal controls, if you know somebody 

from the outside is going to come and look at them, you are going 

to do a better job.’’ Investor advocacy groups including Americans 

for Financial Reform, Center for American Progress, Consumer 

Federation of American, and Public Citizen have also opposed H.R. 

1645 on the basis that increasing exemptions from SOX 404(b) 

would endanger investors and diminish the integrity of U.S. capital 

markets. 

In short, SOX 404(b) auditor requirements provide substantial 

benefits to investors and companies. These requirements promote 

investor confidence in U.S. capital markets, strengthen internal 

controls, and help prevent fraud. For these reasons, we oppose H.R. 

1645. 

MAXINE WATERS. 

KEITH ELLISON. 

MICHAEL E. CAPUANO. 

JOYCE BEATTY. 

EMANUEL CLEAVER. 

WM. LACY CLAY. 

AL GREEN. 

STEPHEN F. LYNCH. 

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