For this season’s annual report and annual proxy statement, instead of repeating the basic affirmative disclosure and reporting obligations for public companies, the following 21-point “anti-disclosure list” sets out the items that are not required to be provided by smaller reporting companies (SRCs), which are issuers with a public float of less than $75 million as of the last business day of their most recently completed second fiscal quarter or annual revenues of less than $50 million during their most recently completed fiscal year, and in some cases, emerging growth companies (EGCs), which are issuers with less than $1 billion in total annual gross revenues during their most recently completed fiscal year:
Form 10-K Annual Reports
1. An SRC’s annual report on Form 10-K is due on March 30, 2016, rather than February 29 or March 15 for larger reporting companies.
2. An SRC must describe its business development activities in Item 1 of Form 10-K for the most recent three fiscal years, rather than the past five years for larger reporting companies.
3. An SRC must describe its products and services and name its customers only to the extent material to an understanding of the company, rather than disclosure required for larger reporting companies based on a 10% contribution materiality threshold.
4. An SRC does not have to disclose any risk factors under Item 1A of Form 10-K.
5. An SRC does not have to disclose unresolved staff comments under Item 1B of Form 10-K.
6. An SRC does not have to prepare a comparative stock performance graph in Item 5 of Form 10-K.
7. An SRC does not have to provide selected financial data tables in Item 6 of Form 10-K. An EGC must provide selected financial data, but does not need to provide information for any period before the earliest audited period presented in its IPO registration statement.
8. An SRC’s discussion of its results of operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) under Item 7 of Form 10-K must cover only the two most recent fiscal years and may be presented either using the traditional year-to-year comparisons or any other format that in its judgment enhances a reader’s understanding.
9. An SRC does not have to provide tabular disclosure of contractual obligations in MD&A under Item 7 of Form 10-K.
10. An SRC does not have to disclose any quantitative or qualitative information about market risk in Item 7A of Form 10-K.
11. An SRC must present two years of audited financial statements and comparative data in Item 8 of Form 10-K, rather than three years of financial information for larger reporting companies.
12. An SRC does not have to provide supplemental schedules under Item 8 of Form 10-K.
13. Neither an SRC nor an EGC has to provide an annual attestation report of its auditors addressing the effectiveness of the company’s internal controls over financial reporting in Item 9A of Form 10-K.
14. An SRC does not have to file any statements regarding the computation of certain ratios as an exhibit under Item 15 of Form 10-K.
Proxy Statements or Part III of Form 10-K
15. An SRC is not required to provide disclosure on compensation committee interlocks and insider participation or a compensation committee report in Item 10 of Form 10-K or its proxy statement. An EGC is also not required to provide a compensation committee report (unless it voluntarily provides Compensation Disclosure and Analysis (CD&A) disclosure).
16. Both an SRC and an EGC may comply with the abbreviated executive compensation disclosure requirements in Item 11 of Form 10-K or its proxy statement, such as (a) compensation for only three named executive officers (which includes its principal executive officer), (b) no CD&A section, (c) two executive compensation tables (versus four additional tables for larger reporting companies) and a directors’ compensation table, and (d) executive compensation information in the tables for only the two most recent fiscal years.
17. An SRC does not have to quantify payments due to the named executive officers on termination or severance under Item 11 of Form 10-K or its proxy statement.
18. An SRC does not have to disclose its policies for reviewing and approving related party transactions in Item 13 of Form 10-K, but is required to disclose any related party transactions in its last two fiscal years if the amount involved in the transaction exceeded the lesser of $120,000 or 1% of the average of the SRC’s total assets at year end for the last two fiscal years.
19. Effective in 2017, an SRC and an EGC do not have to disclose pay-ratio information, that is, the ratio of annual compensation of its chief executive officer to the median annual compensation of all of its employees other than the CEO.
20. An EGC is exempt from holding the “say on pay” and “frequency of say on pay” voting provisions. Since January 2013, an SRC has been required to include a non-binding resolution in its annual proxy statement on these matters.
21. An EGC is exempt from any Public Company Accounting Oversight Board (PCAOB) rules regarding mandatory audit firm rotation or an expanded auditor report.
It is worth noting that an SRC may choose to comply with either the SRC disclosure requirements or the larger company disclosure requirements on an item-by-item, or a la carte basis. Similarly, a smaller public company with annual gross revenues of less than $1 billion during its most recent fiscal year can elect EGC status at the time of its IPO and take advantage of the reduced disclosure requirements, but may also opt out at its IPO to follow larger reporting company disclosure requirements. Of course, a company that qualifies as both an SRC and an EGC is entitled to the benefits of both.
As a practical matter, a decision by an SRC or an EGC to voluntarily include additional disclosure not required by SEC rules without a compelling reason, such as to avoid misleading disclosures, could subject the company and its executive officers and directors to unnecessary liability for the voluntarily-included disclosure.
PartnerArmed with more than three decades of capital market experience, Spencer represents smaller publicly traded companies, and often underwriters and investment funds, in public and private securities offerings. He focuses ...