United States: SEC Proposes To Amend Smaller Reporting Company Definition

On June 27, 2016, the SEC proposed amendments to the "smaller reporting company" definition to expand the number of registrants that would qualify for the category. The proposals would also make technical amendments to the "accelerated filer" and "large accelerated filer" definitions so that the proposed changes to the "smaller reporting company" definition would not indirectly increase the threshold in the "accelerated filer" definition.

Currently, a smaller reporting company is a registrant (other than an investment company, an asset-backed issuer or a majority-owned subsidiary of a parent that is not a smaller reporting company) with: (i) less than $75 million in public float or (ii) zero public float1, and annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available. Smaller reporting companies may comply selectively with scaled disclosures available to them on an item-by-item basis in, among others, the following ways: They may omit the performance graph, selected financial data, supplementary financial information, disclosures about market risk, CD&A, certain executive compensation tables, compensation committee report, pay-ratio disclosure, and, in the case of Exchange Act filings, risk-factor disclosure otherwise required by Regulation S-K; and they may provide two years of summary compensation table information instead of three. Smaller reporting companies need only include two years of specified financials statements instead of the three years otherwise required by Regulation S-X, and there are less stringent financial statement age requirements.

Under the proposal, the $75 million public float threshold would be raised to $250 million and the $50 million annual revenue threshold would be raised to $100 million.

Whether or not an issuer is a smaller reporting company is determined on an annual basis under both existing rules and the proposals as follows:

  1. For issuers that are required to file reports under section 13(a) or 15(d) of the Exchange Act, the determination is based on whether the issuer came within the definition as of the last business day of the second fiscal quarter of the issuer's previous fiscal year. An issuer in this category must reflect this determination in the information it provides in its quarterly report on Form 10-Q for the first fiscal quarter of the next year, indicating on the cover page of that filing, and in subsequent filings for that fiscal year, whether or not it is a smaller reporting company, except that, if a determination based on public float indicates that the issuer is newly eligible to be a smaller reporting company, the issuer may choose to reflect this determination beginning with its first quarterly report on Form 10-Q following the determination, rather than waiting until the first fiscal quarter of the next year.
  2. For determinations based on an initial Securities Act or Exchange Act registration statement, the issuer must make the determination within 30 days of filing of the registration statement based on assumptions as to the pricing and size of the offering set forth in the rules. It must reflect that determination in the information it provides in the registration statement and must appropriately indicate on the cover page of the filing, and subsequent filings for the fiscal year in which the filing is made, whether or not it is a smaller reporting company. The issuer must re-determine its status at the end of its second fiscal quarter and then reflect any change in status as provided in paragraph (i) above. In the case of a determination based on an initial Securities Act registration statement, an issuer that determined it was not a smaller reporting company has the option to re-determine its status at the conclusion of the offering covered by the registration statement based on the actual offering price and number of shares sold.
  3. Under the proposal, once an issuer determines that it does not qualify for smaller reporting company status, it will remain unqualified unless it determines that its public float was less than $200 million as of the last business day of its second fiscal quarter (the current threshold is $50 million) or, if that calculation results in zero because the issuer had no public equity outstanding or no market price for its equity existed, if the issuer had annual revenues of less than $80 million during its previous fiscal year (the current threshold is $40 million).

The public float threshold in the definition of "accelerated filer" and the proposed public float thresholds in the definition of "smaller reporting company" overlap. In order to avoid an indirect increase in the public float threshold in the "accelerated filer" definition, the SEC is proposing to eliminate the exclusions for smaller reporting companies in the definitions of "accelerated filer" and "large accelerated filer." 2 As a result, the proposed amendments would preserve the current thresholds contained in the definitions of accelerated filer (public float of $75 million or more, but less than $700 million) and large accelerated filer (public float of $700 million or more).3


1. A registrant may have zero public float because it has no public equity outstanding or no market price for its equity exists. Based on data compiled by the Commission's Division of Economic and Risk Analysis (DERA), in calendar year 2015, approximately 18 percent of smaller reporting companies had no public float.

2. Among other things, being an accelerated filer or a large accelerated filer triggers the requirement contained in Section 404(b) of the Sarbanes-Oxley Act that a non-EGC registrant's registered public accounting firm provide, for inclusion in the registrant's annual report, an attestation report on internal control over financial reporting. In addition, accelerated and large accelerated filers are subject to accelerated periodic report filing deadlines.

3. Although the smaller reporting company exclusion in the large accelerated filer definition would not exclude any otherwise eligible registrants, the SEC is proposing to eliminate this provision because it currently does not capture any registrants, would not capture any registrants if the proposed amendments were adopted, and could lead to confusion if retained.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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