The Securities and Exchange Commission (SEC) has increased the number of companies eligible for reduced disclosure by amending its definition of “Smaller Reporting Company.” Certain of the SEC’s disclosure requirements are reduced or eliminated for Smaller Reporting Companies.
Higher Thresholds
Under the amended definition, a company will now be a Smaller Reporting Company if it has a public float of less than $250 million instead of the current $75 million. In addition, a company with a public float of less than $700 million can now also be a Smaller Reporting Company if it has annual revenues of less than $100 million. The SEC staff estimates that the amendments will initially result in an additional 966 companies becoming Smaller Reporting Companies. The amended definition will be effective September 10, 2018.
Accelerated Filer Status
The amendments did not change the current $75 million threshold for “accelerated filer” status. As a result, a Smaller Reporting Company under the new guidelines may remain an accelerated filer based on its public float. Companies with a public float of more than $75 million will continue to be subject to the following requirements applicable to an accelerated filer, among others:
- Meeting accelerated filing deadlines for the periodic reports under the Securities Exchange Act of 1934 (Exchange Act).
- Providing an auditor’s attestation report on management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.
- Disclosing in its Form 10-K annual report unresolved staff comments on periodic or current reports.
However, SEC Chairman Clayton directed the SEC staff to formulate recommendations for possible changes to the accelerated filer definition to also reduce the number of companies that are accelerated filers.
Calculation of Public Float
The amendments do not change the calculation of a company’s public float or the date as of which it is calculated. A company’s public float continues to be the aggregate worldwide number of shares of voting and non-voting common equity held by non-affiliates multiplied by the price at which the common equity was last sold, or the average of the bid and asked prices of the common equity, in the principal market for the common equity. An Exchange Act reporting company continues to measure its public float as of the last business day of its most recently completed second fiscal quarter to determine whether it is a Smaller Reporting Company.
Subsequent Qualification as a Smaller Reporting Company
The amendments also changed the thresholds for when a company will subsequently become a Smaller Company – if it is not currently one – because it exceeds the applicable thresholds. A company that had a public float of more than $250 million will subsequently become a Smaller Reporting Company if its public float is less than $200 million. A company that had a public float of $700 million or more and annual revenues of $100 million or more will subsequently become a Smaller Reporting Company if it has both a public float of less than $560 million and annual revenues of less than $80 million. If a company had annual revenues of less than $100 million, but did not qualify as a Smaller Reporting Company because it had a public float of $700 million or more, it will become a Smaller Reporting Company if its annual revenues remain less than $100 million and its public float is less than $560 million. If a company had a public float of less than $700 million but did not qualify as a Smaller Reporting Company because it had annual revenues of $100 million or more, it will become a Smaller Reporting Company if its public float remains less than $700 million and its annual revenues are less than $80 million.
Reduced Disclosure
A company that qualifies as a Smaller Reporting Company can elect, but is not obligated, to reduce or eliminate some disclosures in its Form 10-K Annual Reports, Form 10-Q Quarterly Reports, proxy statements, and registration statements. The following is the SEC’s summary of the scaled-back disclosure that a Smaller Reporting Company may elect.
Regulation S-K | |
Item | Scaled Disclosure Accommodation |
101 – Description of Business | May satisfy disclosure obligations by describing the development of the registrant’s business during the last three years rather than five years. Business development description requirements less detailed. |
102- Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters | Stock performance graph not required |
301 – Selected Financial Data | Not required. |
302 – Supplementary Financial Information | Not required. |
303 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) | Two-year MD&A comparison rather than three-year comparison. Two year discussion of impact of inflation and changes in prices rather than three years. Tabular disclosure of contractual obligations not required. |
305 – Quantitative and Qualitative Disclosures About Market Risk | Not required. |
402 – Executive Compensation | Three named executive officers rather than five. Two years of summary compensation table information rather than three. Not required:
|
404 – Transactions With Related Persons, Promoters and Certain Control Persons | Description of policies/procedures for the review, approval or ratification of related party transactions not required. |
407 – Corporate Governance | Audit committee financial expert disclosure not required in first annual report Compensation committee interlocks and insider participation disclosure not required. Compensation committee report not required. |
503 – Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges | No ratio of earnings to fixed charges disclosure required. No risk factors required in Exchange Act filings. |
601 – Exhibits | Statements regarding computation of ratios not required. |
Regulation S-X | |
Rule | Scaled Disclosure |
8-02 – Annual Financial Statements | Two years of income statements rather than three years. Two years of cash flow statements rather than three years. Two years of changes in stockholders’ equity statements rather than three years. |
8-03 – Interim Financial Statements | Permits certain historical financial data in lieu of separate historical financial statements of equity investees. |
8-04 – Financial Statements of Businesses Acquired or to Be Acquired | Maximum of two years of acquiree financial statements rather than three years. |
8-05 – Pro forma Financial Information | Fewer circumstances under which pro forma financial statements are required. |
8-06 – Real Estate Operations Acquired or to Be Acquired | Maximum of two years of financial statements for acquisition of properties from related parties rather than three years. |
8-08 – Age of Financial Statements | Less stringent age of financial statements requirements. |
Takeaway
Companies that will now qualify as a Smaller Reporting Company under the amended definition should consider whether to use the reduced level of disclosure that will become available to them. For a company that has a fiscal year ending December 31st: if it does not exceed the thresholds as of June 29, 2018, it will qualify as a Smaller Reporting Company for the fiscal year ending December 31, 2018.
