United States: Smaller Reporting Company Regulatory Relief And Simplification

Introduction

Small business reporting companies got their long-awaited Christmas gift from the SEC of simplification and scaling of their disclosure requirements and of expansion of the small business issuer category upon the SEC issuance of SEC Release No. 33-8876. As a result, the Regulation S-B disclosure regimen and the related SB forms are being phased out with the reduced disclosure requirement for small business issuers integrated, and with greater clarity, into Regulation S-K. The amendments to various rules under the Securities Act of 1933 and the Securities Exchange Act of 1934:

• Establish a new category of company called "smaller reporting company" (see "Definition" section below), which greatly expands the number of companies eligible to use the new scaled disclosure item requirements.
• Eliminate Regulation S-B by clarifying and consolidating the 12 non-financial disclosure item requirements into Regulation S-K and moving the Item 310 financial disclosure requirement into Regulation S-X, and eliminate "SB" Forms.
• Eliminate the "SB" registration and report forms; all domestic reporting companies will use Forms S-1, 10-Q and 10-K.
• Permit smaller reporting companies to elect to comply with scaled financial and non-financial disclosure requirements on an item-by-item or "a la carte" basis.
• Permit foreign private issuers that qualify as "smaller reporting companies" to choose to file on domestic company forms, provided their financial statements are prepared in accordance with U.S. GAAP.

Definition

A "smaller reporting company" is defined as having a public float less than $75 million as of the last business day of its most recently completed second fiscal quarter. This is also the date used for measuring the public float for "accelerated filer" status (more than $75 million in public float). Public float is calculated by multiplying the aggregate worldwide number of shares of the company's voting and non-voting common equity by the price at which its shares of common equity were last sold or the average of the bid and asked prices in the principal market for the shares as of the measurement date. A company without a calculable public float would use an alternative test to qualify as a smaller reporting company- whether it had less than $50 million in revenues in its previous fiscal year.

Prior to these amendments, to qualify as a "small business issuer" the company would have had to have had both (i) less than $25 million in public float as of the last business day of its fiscal second quarter and (ii) less than $25 million in annual revenues for its prior fiscal year. The new test aligns the smaller reporting company definition with the non-accelerated filer definition.

A foreign private issuer that qualifies as a smaller reporting company may make its filings on forms available to domestic U.S. companies if it presents financial statements pursuant to U.S. GAAP. Previously, only Canadian companies had the ability to make the small business reporting election.

Investment companies, including business development companies, asset-backed issuers and majority-owned subsidiaries of a parent company that is not a smaller reporting company are not eligible for scaled treatment under rules for smaller reporting companies.

Applicable Dates

The amendments are effective February 4, 2008, except for the following:

(A) Transition Period: A current "small business issuer" has the option to file its annual report for a fiscal year ending on or after December 15, 2007 (and prior to December 15, 2008) on either Form 10-KSB or Form 10-K and may continue to file its periodic reports using the scaled disclosure requirements and Form 10-QSB until such annual report is filed. Thereafter, the company's periodic reports must be filed on a form that does not have the "SB" designation (meaning Forms 10-Q and 10-K), although it may follow the scaled disclosure requirements for so long as it remains a smaller reporting company.

(B) Compliance Dates:

• Form 10-QSB can be used until October 31, 2008- which is 45 days after the last possible third quarter closing date of a company electing to use "SB" reports during the transition period.
• Form 10-KSB can be used until March 15, 2009- which is 90 days after December 15, 2008, the last possible close of the fiscal year of a company electing to use "SB" reports during the transition period.
• Forms SB-1, SB-2 and 10-SB cannot be used after February 4, 2008. If a registration statement was filed on an "SB" form prior to February 4, 2008, any amendment filed after that date must be on a correct form without the "SB" designation, but the issuer may continue to use the prior disclosure format and content based on the "SB" form for six months after February 4, 2008. For example, a company that filed a registration statement on Form SB-2 before February 4, 2008 would be required after such date to file any pre- or post-effective amendment on Form S-1, but would be able to maintain the disclosure item requirement format of its Form SB-2 until August 4, 2008.
• Companies that first qualify as smaller reporting companies after February 4, 2008, including those that are not currently small business issuers, have the option to comply with the scaled disclosure requirements for smaller reporting companies in their registration statements and periodic reports filed after February 4, 2008.

Entering and Exiting Smaller Reporting Company Status

1. Current Small Business Issuers: A current small business issuer would become a "smaller reporting company" and can take advantage of the scaled disclosure until its public float at the end of the second quarter of a fiscal year exceeds $75 million. See "(C) Exiting" below.
2. Larger Reporting Companies: If a larger reporting company (other than one that had been a pre-existing smaller reporting company, see "(D) Reentering" below) determines that it qualifies as smaller reporting company, it may opt for the scaled disclosure requirements beginning with the Form 10-Q covering the second fiscal quarter corresponding to the measurement date used for establishing its eligibility as a smaller reporting company. For example, a larger reporting company on a calendar year basis calculates its public float as of June 30, 2008 as less than $75 million, it can elect to provide the smaller reporting company scaled disclosure beginning with its Form 10-Q for the quarter ended June 30, 2008, and continue such reporting as long as it remains eligible to report as a smaller reporting company.
3. Exiting: A smaller reporting company should take its annual measurement pulse at the end of each second fiscal quarter of each fiscal year to ascertain its continued eligibility. Should the company fail the public float test, it can continue the smaller reporting company status until the first quarter of its next fiscal year. For example, a smaller reporting company that determines it has a $80 million public float as of June 30, 2009 would be permitted to file its second and third quarter 2009 Forms 10-Q and its 2009 Form 10-K as a smaller reporting company and would required to begin filing as a larger reporting company with its Form 10-Q for the fiscal quarter ending March 31, 2010.
4. Re-entering: An issuer that had ceased its eligibility as a smaller reporting company would file its SEC reports and registration statements as a larger reporting company until it calculates its public float as of the close of a subsequent second fiscal quarter at less than $50 million (instead of the initial threshold of less than $75 million). The reentry would begin with the first quarterly report on Form 10-Q after the determination is made. Issuers without a calculable public float would become re-eligible as a smaller reporting company upon their annual revenues being less than $40 million (instead of the initial threshold of less than $50 million) for its previous fiscal year.
5. Non-Reporting Companies Filing An Initial Registration Statement: Companies determining eligibility in connection with the filing of their initial registration statement for shares of common equity under the Securities Act or the Exchange Act must choose a date within 30 days prior to the initial filing date to determine their eligibility for filing as a smaller reporting company. Computing their public float will be based upon:

• estimated offering price per share at the time of filing the registration statement;
• number of shares of common equity outstanding held by non-affiliates before the offering; and
• in case of a Securities Act registration statement, number of shares of common stock to be registered.

For example, a company that has 25,000,000 shares of common stock outstanding held by non-affiliates before the offering and plans to register 7,000,000 shares would multiply the total 32,000,000 shares by the estimated offering price per share in the IPO. If these estimates of shares and offering price are bona fide when made, the issuer would not be required to transition to the larger company requirements if its public float rises to more than $75 million during the pre-effective stage of the registration.

Electing Scaled Disclosure Standards on "A La Carte" Basis

Smaller reporting companies are allowed under the amended rules to choose to comply with either the smaller reporting company scaled disclosure requirements or the larger company disclosure requirements in Regulation S-K on an item-by-item or "a la carte" basis. This selection could be as to any, some, all or none of the these 12 item requirements. A list of these 12 items and the related disclosure elections are set forth in Schedule I hereto.

To the extent that a smaller reporting company chooses to comply with the disclosure requirement on an item-by-item basis, the following guidelines apply:

• the item-by-item scaled disclosures must be consistent on a period to period basis to permit comparison by investors whether quarterly or annually;
• to the extent the smaller reporting company scaled item requirement is more rigorous that the same larger reporting company item requirement, the smaller reporting company must comply with the more rigorous, smaller reporting company requirement; and
• where a larger reporting company item requirement sets a higher threshold for disclosure than that required for a smaller reporting company, it is not appropriate for the smaller reporting company to comply with the larger reporting company item which would otherwise obviate the need for a disclosure. For example, under Item 404, smaller reporting companies are required to disclose additional specific information about underwriting discounts and commission and corporate parents which are not required of larger reporting companies.

To allay concerns of company executives and securities law practitioners whether an SEC reviewer would gauge her examination of a Securities Act or Exchange Act filing of a smaller reporting company by the degree of the company's "a la carte" disclosure selection, the SEC adopting release notes that the SEC "continue(s) to expect that our staff will evaluate item-by-item compliance by smaller reporting companies only with the Regulation S-K requirements applicable to smaller reporting companies, and not with the requirements applicable to larger companies."

The Regulation S-B Item 310 rules on form and content of financial statements for SB issuers was moved to Article 8 of Regulation S-X, and not integrated into Regulation S-K. The only substantive change made when moving Item 310 is requiring the smaller reporting company to provide two years of comparative audited balance sheet data, rather than the prior one year requirement.

SCHEDULE I

Adopted Scaled Disclosure Requirement in Regulation S-K

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