(FORTUNE Small Business) – In a post-enron fit of buyer's remorse, congress passed corporate-reform legislation in July 2002. But small companies are finding themselves disproportionately affected by another, more pernicious law: the one that guarantees unintended consequences.

Sarbanes-Oxley, as the legislation is known, is Congress's attempt to spank Wall Street into good behavior. Among other things, it requires publicly traded companies to create independent boards, to report more detailed information to the SEC, and to have their top executives sign off on financial statements, on pain of indictment. The law is well meaning; it is also costly. Gabor Garai, the managing partner of the Boston office of Epstein Becker & Green, a law firm, estimates that setting up compliance will cost several hundred thousand dollars, and that maintaining it will require at least an extra $50,000 a year each in accounting and legal fees. The law has also pushed up the cost of finding board members and insuring them against liability. Those fees may not be debilitating for a firm like GE, but it's a significant sum for small businesses. According to a recent PriceWaterhouseCoopers survey, 58% of executives at smaller companies (with revenues of less than $1 billion) said Sarbanes-Oxley compliance was burdensome, compared with 38% of executives at larger firms.

As a result, entrepreneurs who would have gone public a few years ago are deciding against it today. "Sarbanes-Oxley has definitely affected the IPO market," says Kathleen Smith, an analyst at Renaissance Capital in Greenwich, Conn., which researches and invests in new public offerings. "It has made it more expensive to be a public company." Rackspace, a profitable, San Antonio-based web-hosting company, wanted to raise $50 million in the capital market. But Sarbanes-Oxley simply made it too expensive. So Rackspace's executives decided to hold off going public for at least two years, when they hope to be so big that absorbing the extra costs won't be too painful. Sarbanes-Oxley "makes the efficiency of the capital market lower for a smaller company," says Rackspace president Lanham Napier. "And when you don't get money as quickly, your growth is impacted."

The law is also pushing some businesses out of the capital markets. According to research conducted by FactSet Mergerstat, which provides financial and economic information to investors, 67 firms went private through July this year, compared with 97 for all last year. Take the Philadelphia-based Judge Group--except you can't anymore; the $100-million-a-year temporary-staffing company went private in June. "Sarbanes-Oxley was a big part of the decision," says CFO Robert Alessandrini; he figures it would have increased the firm's costs by $200,000 a year. "The risks of being public increased," he concludes, "but the rewards weren't there."

Renaissance Capital's Smith insists that it still makes sense for strong companies to go to market, and in fact the IPO market is picking up, with 20 filings in August, the most since April 2002. But it is clear that even sound companies are staying private for reasons having nothing to do with the quality of their operations. The details of complex laws like Sarbanes-Oxley tend to get worked out in court, a fact that scares a lot of people, particularly since the law makes executives and directors liable in ways they have never been before. Gabor says that companies are skittish about doing anything that "could possibly be seen by future shareholders with 20/20 hindsight to be problematic." For firms without a time machine, that's an impossible prospect.