Think the corporate reforms of 2002 were targeted entirely at publicly owned corporations?

Think again. The Sarbanes-Oxley Act, created in the wake of Enron and other corporate scandals, can also affect private companies that might become publicly owned, according to securities attorneys. The Sarbanes-Oxley corporate governance reforms tighten regulation of five key areas: disclosure, board of directors, auditors, ethics, and compensation.

When a private company files a registration statement (to offer securities to the public) with securities regulators or when a publicly owned corporation acquires it, the company becomes subject to Sarbanes-Oxley regulations.

A private company might need to demonstrate its readiness to meet Sarbanes-Oxley requirements if it anticipates being acquired or plans to make an initial public offering of stock. Its readiness - or lack of readiness - might impact the acquisition, offering price, or its ability to complete a transaction.

Leaders of emerging companies who contemplate entering a public environment should consider how their firms would function in that environment. Examining and implementing practices in the five key areas can also help a private company position itself more effectively with venture capitalists, early-stage investors, strategic partners, and management talent.