Impact of Sarbanes-Oxley on Small Rural Telecom


As if an ever-changing communications regulatory environment isn’t enough, some small, private telecommunications companies are also having to deal with regulations spawned from the 2002 Sarbanes-Oxley Act. As background and according to the SEC website, Sarbanes-Oxley, “mandated a number of reforms to enhance corporate responsibility, enhance financial disclosures and combat corporate and accounting fraud, and created the “Public Company Accounting Oversight Board,” also known as the PCAOB, to oversee the activities of the auditing profession.” The intent was to prevent the sort of financial shenanigans that brought the downfall of Enron and Worldcom.

In the above interview, John Klatt, General Manager of 108 year old, Wisconsin-based, Lakeland Communications, explains how the merger of two privately held communications companies meant that Lakeland exceeded the 500 shareholder limit that defines a public company. This forced Lakeland to implement a share buy-back program to reduce the number of shareholders. The money used for purchasing those shares was then unavailable for reinvestment in the local network.

He points out complying with SEC rules as a publicly traded company would incur over one million dollars in annual expenses, wiping out profit and, potentially, jeopardizing the local ownership Lakeland’s customers now enjoy. He has to work closely with his shareholders in planning their estates to make sure they don’t inadvertently cause Lakeland to exceed the shareholder limits when passing on shares to heirs. As he points out, these are shareholders that are largely made up of customers and, in that sense, his organization is more like a cooperative than a publicly held company.

To solve this dilemma, Klatt is asking Congress in help to change the law to provide an exemption to allow additional shareholders for community broadband networks and, potentially, other businesses in similar circumstances. There is precedent, as Klatt points to the 2012 JOBS act, where community banks were given an exemption that allows up to 2,000 shareholders. Given that the customers and its assets are also in the community, Klatt makes a strong case that independent telecommunications providers should also received the same exemption.


 

Author’s Note: This isn’t the first time I have heard of this issue, as, several years ago, another WI-provider explained to me the financial hoops they had to go through to raise money to buy-out shareholders to keep them under the limit. Similarly, this community-based provider wasn’t big enough to carry the costs of SEC regulations for a publicly held company.