SEC Amends Definition of “Smaller Reporting Companies” (SRCs) to Increase the Number of Companies that Qualify for Scaled Disclosures
The SEC has voted to amend the definition of the term “smaller reporting company” as used in its rules and regulations. Under the amended definition, which takes effect on September 10, 2018, SRCs are companies that:
- have a public float[1] of less than $250 million (originally, companies needed to have a public float of less than $75 million in order to qualify as an SRC); or
- have less than $100 million of annual revenues during the previous fiscal year and either (i) no public float, or (ii) a public float of less than $700 million (originally, companies needed to have less than $50 million of annual revenues and no public float in order to qualify as an SRC).
In its adopting release for these changes, the SEC indicates that the amendments “…are intended to reduce compliance costs for registrants and promote capital formation, while maintaining appropriate investor protections.”
Consequences of the Expanded Definition
The change in definition substantially increases the number of companies that are able to qualify as SRCs, which means that more public companies will be able to take advantage of scaled disclosure requirements, and thus will be able to provide less detailed disclosures than those that are required of other reporting companies. A summary of the disclosure accommodations that SRCs may take advantage of is set forth in the chart below. Of course, companies that qualify as SRCs may still elect to provide information that is required of larger issuers on a voluntary basis should they choose to do so.
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Regulation S-K or S-X |
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|
Item |
Scaled Disclosure Accommodation |
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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 are less detailed than disclosure requirements for non-SRCs. |
|
201 — 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. |
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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. |
|
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:
|
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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. |
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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. |
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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.
|
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601 — Exhibits |
Statements regarding computation of ratios not required.
|
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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. |
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8-03 — Interim Financial Statements |
Permits certain historical financial data in lieu of separate historical financial statements of equity investees. |
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8-04 — Financial Statements of Businesses Acquired or to Be Acquired |
Maximum of two years of acquiree financial statements rather than three years. |
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8-05 — Pro Forma Financial Information |
Fewer circumstances under which pro forma financial statements are required. |
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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. |
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8-08 — Age of Financial Statements |
Less stringent age of financial statements requirements. |
Amendments to Accelerated Filer and Large Accelerated Filer Definitions
The SEC also notes that the final rules on the SRC definition do not alter the current thresholds for which companies qualify as “accelerated filers” and “large accelerated filers,” as defined in Exchange Act Rule 12b-2. As a result, companies with $75 million or more of public float that qualify as SRCs will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act. This means that, for example, a company with $100 million in public float would simultaneously qualify as an SRC and as an accelerated filer. However, the SEC notes that SEC Chairman Jay Clayton has directed his staff to formulate recommendations to the SEC for possible, additional changes to the “accelerated filer” definition.
Please contact the Mintz Levin attorney who handles your corporate and securities matters with any questions regarding this information.
[1] Public float refers to the value of an issuer’s outstanding shares owned by investors who are not affiliated with the issuer.
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