THE TECHNOLOGICAL ISSUES WITH OUR CURRENT SYSTEM OF GOING PUBLIC
Although we like to give practical information in this space, we would be remiss to discuss a few of the technological anachronisms and overly burdensome regulations the SEC imposes on IPOs and on public companies.
If you are familiar with the launch of the website of the Affordable Care Act, the following discussion will be easily understandable.
Nearly all filings have to made with the SEC electronically, on the EDGAR (Electronic Data Gathering, Analysis and Retrieval system. EDGAR became mandatory starting in 1996. The format for all filings was ASCII. That is, filings in the popular word processing programs of the day were not allowed. Later, the SEC adopted an HTML standard for EDGAR filings. However, the SEC only accepts documents in HTML 3.2, which was designed in 1996 and is now obsolete. Documents can be filed in pdf as well, but only if the document is primarily filed in HTML 3.2. Apparently, the SEC wants to be sure that even investors who are still using Windows 3.0 are able to access EDGAR.
The insistence on HTML 3.2 imposes significant costs on reporting companies as well as those seeking to go public. Because 3.2 is obsolete, while EDGAR filing parameters continue to evolve, companies are required to purchase expensive software conversion programs, or pay third party providers to “Edgarize” their documents.
The SEC has also adopted a requirement to file financial statements in a second format known as XBRL. Without going into technical details, filing financial statements in XBRL format is supposed to assist securities analysts to analyze and compare different companies. However, for the overwhelming majority of public companies, XBRL has no practical use. But according to an AICPA study, most companies pay an average of $2,000 to $12,000 annually for XBRL. The SEC itself has stated that small companies pay an average of about $30,000 per year for Edgarization and XBRL; the SEC believes this cost is “not high.”
In short, if the SEC permitted pdf filings of documents and eliminated XBRL for smaller companies, they would save about $30,000 per year on average. This would also reduce the time and delay, as well as the introduction of errors, imposed by the current system.
