Client Alert

Amended Definition of “Smaller Reporting Company” Expands Eligibility for Scaled Disclosure

July 03, 2018

By Yariv Katz, Will Burns & Cecilia Wang

On June 28, 2018, the Securities and Exchange Commission (the “SEC”) adopted amendments to the definition of a “smaller reporting company” (“SRC”), as used in the SEC’s rules and regulations, that expand the number of companies that would be eligible for certain existing scaled disclosure accommodations under Regulation S-K and Regulation S-X.[1] The SEC originally established the SRC category of companies in 2008 in order to provide smaller companies with certain regulatory relief through reduced disclosure obligations.

Amendments to SRC Definition

The new definition enables a company to qualify as an SRC if: (1) it has a public float of less than $250 million (as compared to the $75 million threshold under the prior definition) or (2) it has (A) either no public float or a public float of less than $700 million and (B) annual revenues of less than $100 million during its most recently completed fiscal year (as compared to the prior definition’s threshold of $50 million of annual revenues for a company with no public float). The new definition will become effective 60 days after publication in the Federal Register.

Consistent with the prior definition, a company that does not qualify as an SRC initially under the above thresholds will remain unqualified as an SRC until the company determines that it meets one or more lower qualification thresholds set at 80% of the initial qualification thresholds.

The SEC estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition.

Companies that meet the definition of an SRC qualify for certain reduced disclosure requirements, including (i) two years of financial statements and corresponding MD&A and (ii) significantly reduced executive compensation disclosure requirements.

Amendments to Rule 3-05 of Regulation S-X Ease Financial Statement Disclosure Requirements

In connection with the changes to the SRC definition, the SEC also adopted amendments to Rule 3-05 of Regulation S-X. As a result, if the net revenues of businesses acquired or to be acquired are less than $100 million (versus $50 million under the old standard), companies may omit financial statements for the earliest of the three fiscal years otherwise required by Rule 3-05.

Amendments to the Accelerated Filer and Large Accelerated Filer Definitions

While the SEC amendments did not make conforming changes to the thresholds in the definitions of “accelerated filer” and “large accelerated filer” as set forth in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, the final rules do include amendments to the definitions of “accelerated filer” and “large accelerated filer” to remove the automatic exclusion of SRCs. Therefore, SRCs with a public float of $75 million or more will be subject to the requirements that apply to accelerated filers including compliance with the timing requirements of the filing of periodic reports applicable to such filers and the requirement to obtain an auditor attestation of internal control over financial reporting as required by Section 404(b) of the Sarbanes-Oxley Act of 2002. It should be noted that the SEC Staff has begun to formulate recommendations for potential changes to the “accelerated filer” definition with the focus on reducing the number of companies that qualify as accelerated filers and reducing compliance costs for such companies.

[1]   See https://www.sec.gov/news/press-release/2018-116.

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Yariv C. Katz

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Michael L. Zuppone

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Keith D. Pisani

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