Securities Law Blog

The Securities and Exchange Commission (SEC) maintains different levels of disclosure and reporting requirements under the Securities Act of 1933, as amended (Securities Act), and the Securities Exchange Act of 1934, as amended (Exchange Act), depending on the size of the issuer as measured under specific financial tests. On June 28, 2018, the SEC amended those tests so that more public companies can be classified as smaller reporting companies (SRCs), according them the least rigorous level of public company disclosure and reporting. SEC Chairman Jay Clayton indicated that these amendments are intended to make “our public markets . . . more attractive” to smaller companies, and give “Main Street investors . . . more investment options” when these companies go public. 

Effective September 8, 2018, a smaller reporting company will be defined to include a company that has either:

• less than $250 million in public common equity float, calculated as of the end of its most recently completed second fiscal quarter; or
• for companies with a zero public common equity float or a public float that is less than $700 million, revenue of less than $100 million during its previous fiscal year.

(An SRC is defined in Rule 405 under the Securities Act, Rule 12b-2 under the Exchange Act and Item 10(f)(1) of Regulation S-K. Public common equity float of a reporting company is calculated by multiplying the price at which shares of common stock were last sold (or the average of the bid and ask prices) on the last business day of the company’s second fiscal quarter by the number of outstanding shares held by non-affiliates on that date.)

The annual qualification thresholds above apply only to a company’s initial SRC determination. Once a company is no longer eligible for SRC status (for example, its public common equity float has increased above the initial qualification thresholds), it cannot regain SRC status in another fiscal year unless it determines that it meets one or more lower subsequent qualification thresholds, which are either (i) a public common equity float of less than $250 million or (ii) less than $80 million of annual revenues, if it previously had $100 million or more of annual revenues, or less than $560 million of public float, if it previously had $700 million or more of public float.

For a larger reporting company already filing reports under the federal securities laws (that is not otherwise an emerging growth company (EGC)), opting into SRC status can provide considerable benefits with regard to its continuing disclosure and reporting obligations, including:

• the filing deadline for an SRC’s annual report on Form 10-K is 90 calendar days after fiscal year-end, rather than 60 days for large accelerated filers or 75 days for accelerated filers;
• audited historical financial statement filing requirements are reduced -- only two years of audited financial statements and comparative data is required, rather than three years of financial information for larger reporting companies;
• an SRC is not required to obtain an independent auditor’s attestation report on its internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002; and
• Regulation S-K allows SRCs a less rigorous level of disclosure for their annual and quarterly reports, proxy statements and registration statements; for example, information that an SRC does not have to provide includes the following:

- a performance graph under Item 201;

- the selected financial data and supplemental financial information required by Items 301 and 302;

- the market risk disclosure required by Item 305;

- a Compensation Discussion and Analysis (CD&A) section under Item 402(b); and

- a compensation committee report required by Item 407.

Some of the reduced disclosure and reporting obligations available to SRCs apply to EGCs as well.

According to SEC data, 966 additional companies will be eligible for SRC status in the first year under the broadened definition.

In a related amendment to the accounting provisions for businesses acquired or to be acquired under Regulation S-X Rule 3-05, public companies can omit audited historical financial statements of target businesses for the earliest of the three fiscal years required by such rule if the net revenues of that business are less than $100 million. Regulation S-X Rule 8-04 is unchanged.

For more information about SRCs and EGCs, see S. Feldman “Determining Smaller Reporting Company Status and Understanding Key Differences in Its Disclosure and Reporting Requirements,” Practical Law Company.