SEC Proposes Amendments to Smaller Reporting Company Definition

The Securities and Exchange Commission (SEC) recently issued proposed amendments to increase the financial thresholds in the definition of a “smaller reporting company” that, if adopted, will increase the number of issuers that qualify as smaller reporting companies and thereby would benefit from the scaled disclosure requirements. The proposed amendments are intended to promote capital formation and reduce compliance costs for smaller issuers, while maintaining investor protections. The SEC estimates that approximately 800 additional issuers could become eligible for smaller reporting company status under this proposal, particularly those in the banking and pharmaceutical products industries.

The proposals are contained in a press release issued by the SEC (available here), which we summarize below.

Currently, smaller reporting companies are generally issuers with:

• less than $75 million in public float¹ as of the last business day of their most recently completed second fiscal quarter; or
• no public float² and annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available.

Under the proposed amendments, these thresholds would be revised, such that a smaller reporting company would be an issuer with:

• less than $250 million in public float as of the last business day of its most recently completed second fiscal quarter; or
• no public float and annual revenues of less than $100 million during its most recently completed fiscal year for which audited financial statements are available.

Consistent with current practice, an issuer filing its initial registration statement under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, would calculate its public float within 30 days of filing the registration statement.

An issuer that exceeds either of the smaller reporting company qualification thresholds would be able to qualify as a smaller reporting company if its public float fell below $200 million as of the last business day of its most recently completed second fiscal quarter, or if its annual revenues fell below $80 million during the most recently completed fiscal year in the case of an issuer with no public float. The following table summarizes the proposed amendments to the smaller reporting company definition:

Smaller reporting companies are able to benefit from scaled disclosures under Regulation S-K and Regulation S-X, including the following:

• Disclosing business developments for the past three years as opposed to five years;
• Providing a two-year MD&A comparison rather than a three-year comparison;
• Not requiring a tabular disclosure of contractual obligations;
• Scaled executive compensation disclosures under Item 402 of Regulation S-K, including no requirement for a compensation discussion and analysis; and
• Requiring only two years of income statements, cash flow statements and changes in stockholders’ equity statements as opposed to three years of those items.

However, under Item 404 of Regulation S-K, smaller reporting companies are required to provide certain additional disclosures that are not required of non-smaller reporting companies. Item 404 requires disclosure of related person transactions that exceed the lesser of $120,000 or 1% of the average of the smaller reporting company’s total assets at year-end for the last two completed fiscal years, whereas non-smaller reporting companies are obligated to disclose related person transactions that exceed $120,000 only. As such, companies for whom 1% of their total assets fall below $120,000 would become subject to additional related person disclosure.

The proposed amendments are primarily designed to allow newly qualified smaller reporting companies to take advantage of the scaled disclosures, and do not change the public float threshold in the “accelerated filer” definition. As such, companies with public float values ranging from $75 million to $250 million would continue to be subject to the filing and reporting requirements that currently apply to accelerated filers, including:

• the accelerated timing of filing of periodic reports; and
• the requirement to provide the auditor’s attestation of management’s assessment of internal controls over reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002.

The SEC is accepting comments on the proposal until August 30, 2016.

Endnotes

¹  Public float is generally computed by multiplying the aggregate number of shares of an issuer’s voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity.

²  An issuer may have no public float because it has no public equity outstanding or no market price for its equity exists.

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