Nov. 13 (Bloomberg) -- For Silicon Valley venture capitalists eager to weaken the Sarbanes-Oxley corporate- governance law, it may pay to have friends in high places. The speaker's rostrum of the U.S. House of Representatives, for instance.

Nancy Pelosi, the leader of newly empowered House Democrats, received more campaign money this year from partners at Kleiner Perkins Caufield & Byers, the venture capital firm that helped launch Google Inc. and Amazon.com Inc., than she got from Democrats' traditional friend, the AFL-CIO labor federation. She in turn has already identified revising the 2002 Sarbanes-Oxley law as a top priority when she becomes House speaker in January.

Venture-capital firms have been lobbying the White House, Washington lawmakers and regulators for months to water down the law, arguing that higher auditing and legal fees are driving companies to take initial public offerings overseas.

Now, they have a powerful ally in Pelosi, 66, whose San Francisco district is just 35 miles north of Menlo Park, home to Kleiner Perkins and other venture-capital firms including Sequoia Capital Ltd. and Benchmark Capital.

``Pelosi has stated several times that there needs to be changes to Sarbanes-Oxley, particularly for smaller, emerging- growth companies,'' said Mark Heesen, president of the National Venture Capital Association in Arlington, Virginia. ``There is a real possibility that there will be changes.''

`Bipartisan Cooperation'

Revising Sarbanes-Oxley ``will take bipartisan cooperation,'' says Robert Grady, a former aide to President George H.W. Bush who now oversees U.S. venture investments for the Washington-based Carlyle Group, a private-equity company.

Grady, who's also chairman of the venture-capital association, says the timing is good because both the law's authors, Maryland Democratic Senator Paul Sarbanes and Ohio Republican Representative Michael Oxley, are retiring at the end of the year.

``There is a certain reluctance among members of Congress to offend them while they are there,'' says Grady, 49.

Pelosi isn't the only Democrat looking to soften the statute. Massachusetts Representative Barney Frank, who's poised to head the House panel that oversees the U.S. Securities and Exchange Commission, says he supports easing Sarbanes-Oxley's compliance costs.

Connecticut Senator Chris Dodd, who's in line to lead the Banking Committee now that Democrats have taken the Senate as well, wants to review the law to make sure it's working as intended.

Shaken Confidence

Congress passed the Sarbanes-Oxley law after the financial meltdowns of Enron Corp. and WorldCom Inc. shook investor -- and public -- confidence. Critics say the law's requirement for extra audits to assure accurate financial statements imposes a disproportionate hardship on small companies. The result, they say, has been fewer IPOs and a slower-than-necessary recovery from the bursting of the technology bubble.

``This is becoming a crisis,'' Grady says. ``Our capital markets are not functioning well.''

The venture capitalists have found a sympathetic ear in Pelosi, who says she wants to ease compliance rules for small companies to ``ensure Sarbanes-Oxley requirements are not overly burdensome.''

At first blush, softening a law designed to protect investors from company malfeasance, and detested by many corporate chieftains, seems an odd priority for a lawmaker whose other plans include raising the minimum wage and allowing the federal government to negotiate lower prescription-drug prices for senior citizens. Pelosi's district is a Democratic stronghold that in 2004 gave Massachusetts Senator John Kerry, the Democratic presidential nominee, 84 percent of its votes.

Start-Up Culture

On the other hand, the district's proximity to the high-tech start-up culture of Silicon Valley -- not to mention the valley's well-heeled campaign contributors -- makes the cause more attractive.

Taking on Sarbanes-Oxley ``would certainly be good politics in that part of the world,'' says William Mayer, a securities lawyer at Goodwin Procter LLP in Boston.

Firms such as Kleiner Perkins make their money by investing in start-ups and profiting when the companies sell shares publicly. A survey by New York-based PricewaterhouseCoopers LLP found that two-thirds of companies considering IPOs say the costs of complying with Sarbanes-Oxley are a potential barrier to going public.

Slow Going

From July through September 2006, eight venture-backed companies went public in the U.S., the slowest quarter since 2003, according to Thomson Financial and the venture-capital association. For companies in the Standard & Poor's Smallcap 600 Index, average annual auditing costs have quadrupled since 2001 to $1.34 million last year, according to a June report from Foley & Lardner LLP, a Boston law firm.

In April, an advisory committee to the SEC concluded that Sarbanes-Oxley requirements should be reduced for companies whose market value is below $787 million. ``The cost of being Sarbanes- Oxley-compliant is prohibitive,'' says Ted Schlein, a partner at Kleiner Perkins and a panel member.

While Pelosi spokesman Drew Hammill says that ``we cannot afford to disadvantage small companies with overly burdensome regulatory costs,'' some say his boss and her party may be running a risk by pushing a Sarbanes-Oxley rollback.

Bruce Cain, director of the Institute for Government studies at the University of California at Berkeley, says that Democrats did well in the Nov. 7 elections partly because of voter disgust at Republican ethics scandals. Weakening regulations designed to protect investors from corporate fraud might backfire on Democrats by opening the door to new scandals of their own.

`A Dumb Move'

``That would be a dumb move,'' Cain says. ``Pelosi needs to be holier than the angels out of the box.''

And not everyone buys the argument that companies are avoiding share sales because of Sarbanes-Oxley. SEC Commissioner Annette Nazareth, a Democrat, says fewer companies are going public in part because of the accumulation of cash by private equity firms; leveraged buyouts present a less-risky option for venture-backed companies that want to cash out.

Private equity firms including Blackstone Group LP have raised a record $170 billion this year, according to Private Equity Intelligence Ltd., a London-based research firm.

Raising the Bar

Josh Lerner, a finance professor at Harvard Business School, says Sarbanes-Oxley protects investors by raising the bar for IPOs. Investors were burned earlier this decade when companies that sold shares before they had any revenue tumbled into bankruptcy. ``A lot of companies went public who didn't have any business being public,'' says Lerner, 46.

In pushing to revise Sarbanes-Oxley, securities lawyer Mayer says, Pelosi may be following a strategy of appropriating traditionally Republican themes similar to that of former Democratic President Bill Clinton. In 1996, Clinton declared that ``the era of big government is over'' and later that year signed a Republican-backed measure overhauling the nation's welfare system.

``There are probably few things in our political culture that are more sacred than protecting the interests of small businesses,'' Mayer says. ``If this can be viewed as reducing the burdens on small businesses, then that could be a very positive thing for Democrats.''

To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Jesse Westbrook in Washington at jwestbrook1@bloomberg.net.

Last Updated: November 12, 2006 19:06 EST