United States: SEC Expands Definition Of Smaller Reporting Company

On June 28, 2018, the US Securities and Exchange Commission (SEC) revised the definition of "smaller reporting company" in order to expand the number of registrants that will qualify as smaller reporting companies.1 The amendments to the definition of smaller reporting company had been proposed in 2016,2 and the amendments had been well-received by commenters. The change to the definition of smaller reporting company is intended to reduce compliance costs for those registrants, while maintaining appropriate investor protections. At the same time, the SEC amended the definitions of "accelerated filer" and "large accelerated filer" to preserve the existing qualifying thresholds in those definitions. This means that qualifying as a smaller reporting company will no longer automatically make a registrant a non-accelerated filer. These changes and related changes to the cover pages of certain forms applicable to all issuers become effective 60 days after they are published in the Federal Register. It is expected that the changes will become effective by the middle of September 2018.

Background

The SEC created the smaller reporting company category in 2008 to provide regulatory relief for smaller companies by allowing them to provide scaled disclosures under Regulation S-K and Regulation S-X. Prior to this most recent SEC action, smaller reporting companies generally were required to have less than $75 million in public float. Companies that did not have any outstanding public equity, or that had no market price for their public equity, had to have less than $50 million in annual revenues in order to be considered a smaller reporting company.

Revisions to Definition of Smaller Reporting Company

The SEC has revised the definition of "smaller reporting company" in Rule 405 under the Securities Act of 1933 (Securities Act); Item 10(f) of Regulation S-K; and Rule 12b-2 under the Securities Exchange Act of 1934 (Exchange Act), to mean an issuer that, as of an applicable determination date, had:

  • A public float of less than $250 million or
  • Annual revenues of less than $100 million and either:

    • No public float or
    • A public float of less than $700 million.

For reporting companies, the date for determining public float is the last business day of the issuer's most recently completed second fiscal quarter, while for companies filing an initial registration statement, public float is to be determined as of a date within 30 days of the date of the filing of the registration statement. In both cases, annual revenues are as of the most recently completed fiscal year for which audited financial statements are available.

As with the current definition, issuers that are investment companies, asset-backed issuers or majority-owned subsidiaries of a parent that is not a smaller reporting company cannot qualify as a smaller reporting company.

Once an issuer determines that it does not qualify as a smaller reporting company, it will remain unqualified unless when making its annual determination either it determines that:

  • Its public float was less than $200 million or
  • Its public float and its annual revenues meet the requirements for qualification included in the following chart:

    Prior Annual Revenues Prior Public Float
    None or less than $700 Million $700 million ormore
    Less than $100 Million Neither threshold exceeded. Public float Less than $560 million and

    Revenues Less than $100 million.
    $100 million or more Public float None or less than $700 million and

    Revenues Less than $80 million.
    Public float Less than $560 million and

    Revenues Less than $80 million.

Revisions to the Definitions of Accelerated Filer and Large Accelerated Filer

The SEC has revised the definitions of "accelerated filer" and "large accelerated filer" in Rule 12b-2 under the Exchange Act to eliminate the prohibition on smaller reporting companies being able to qualify as an accelerated filer or large accelerated filer. This means that a smaller reporting company will now need to consider whether it qualifies as either an accelerated filer or a large accelerated filer as of the end of its second fiscal quarter and, if so, comply with the accelerated filing deadlines for Exchange Act reports and other applicable provisions beginning in its next fiscal year. In addition, accelerated filers and large accelerated filers that aren't emerging growth companies must comply with the auditor attestation requirements relating to internal control over financial reporting imposed by Section 404(b) of the Sarbanes-Oxley Act, while, up to this point, smaller reporting companies were exempt from this requirement as they could not be accelerated filers or large accelerated filers.3

In their comments on the proposed amendments, market participants, trade groups and various SEC advisory groups had noted that the threshold for triggering the Section 404(b) auditor attestation requirement ought to be reevaluated given that for many smaller reporting companies the requirement may be unduly burdensome. In the SEC's open meeting, Commissioner Piwowar and Commissioner Peirce both addressed the importance of reevaluating the threshold triggering the Section 404(b) auditor attestation requirement, with Commissioner Piwowar noting that changes to the accelerated filer definition "are inextricably linked to the [smaller reporting company] regime"4 and Commissioner Peirce noting that "Section 404(b) of Sarbanes-Oxley" is "the most glaring burden on small issuers."5 In the adopting release, the SEC noted that Chairman Clayton "has directed the staff to formulate recommendations to the SEC for possible additional changes to the 'accelerated filer' definition that, if adopted, would have the effect of reducing the number of registrants that qualify as accelerated filers" and, as a result, reverse, or at least lessen, the impact of the SEC's changes to the definitions of accelerated filer and large accelerated filer.

Changes to Securities Act and Exchange Act Forms

In addition to the changes to the definitions of "smaller reporting company," "accelerated filer" and "large accelerated filer," the SEC also revised the cover pages of Forms S-1, S-3, S-4, S-8 and S-11 under the Securities Act and Forms 10, 10-K and 10-Q under the Exchange Act, in each case to eliminate the instruction informing filers to not check the "Non-accelerated filer" box if the issuer is a smaller reporting company.

Revisions to Rule 3-05(b)(2) of Regulation S-X

Rule 3-05 of Regulation S-X sets forth the requirements for when financial statements of a newly acquired business or a business to be acquired must be provided in Securities Act and Exchange Act filings.

The SEC has amended Rule 3-05(b)(2)(iv) to allow registrants to omit financial statements for the earliest of the three required fiscal years if the net revenues of the business to be acquired are less than $100 million, up from $50 million in the current rule. This rule change applies to all companies, not just smaller reporting companies.

Practical Considerations

In order to make informed decisions for the future, existing smaller reporting companies should consider the new qualification thresholds, particularly those issuers that were close to the current thresholds for losing their status or may lose their status based on the current definition and their annual determination as of the end of the second quarter (June 30, 2018, for most companies). The changes could allow these companies to benefit from the revised smaller reporting company thresholds, particularly the scaled disclosure requirements, for some time going forward.

The amendments did not modify any of the scaled disclosure accommodations for smaller reporting companies, which may continue to be complied with on an item-by-item basis. A smaller reporting company may want to consider undertaking a review regarding the accommodations that it will rely on in light of its prior disclosures, the types of disclosures made by peer companies and the types of information typically sought out by research analysts and other financial professionals.6 As part of this review and even though there is a substantial overlap in the accommodations provided, a smaller reporting company that also qualifies as an emerging growth company should examine the accommodations provided to emerging growth companies as it determines what types of disclosure it will provide going forward.

A smaller reporting company will now need to determine whether it also qualifies as an "accelerated filer" or a "large accelerated filer." If it does, going forward, this could impact the timing of when the issuer files its quarterly reports on Form 10-Q and its annual reports on Form 10-K, as those filers have shorter filing deadlines for these reports than smaller reporting companies have. In addition, smaller reporting companies that qualify as accelerated filers or large accelerated filers and that aren't otherwise emerging growth companies need to comply with the auditor attestation requirements on the registrant's internal control over financial reporting. Now that the end of the second quarter has passed for most companies, smaller reporting companies should examine whether they will be accelerated filers or large accelerated filers and plan their future filing schedules and attestation processes accordingly, as late filings can result in the loss of eligibility to use Form S-3.

A company that does not qualify as a smaller reporting company under the existing definition should look closely at the new thresholds to determine whether it is eligible to subsequently become a smaller reporting company. If so, the smaller reporting company should take into account the accommodations made for smaller reporting companies when planning their future SEC filings.

When the SEC adopts new or revised rules, it is not unusual for the staff of the Division of Corporation Finance to issue interpretations to help issuers navigate the new provisions. Smaller reporting companies, under either the existing or the revised definitions, should monitor any developments in this area.

Finally, all issuers, whether or not smaller reporting companies, will need to revise the cover pages of various forms that they file with the SEC after the effective date of the revised rules. For most companies, this change will need to be reflected beginning with the Form 10-Q that is to be filed for the quarter ending September 30, 2018.

Footnotes

1. Amendments to Smaller Reporting Company Definition, Securities Act Release 33-10513, available at https://www.sec.gov/rules/final/2018/33-10513.pdf ("Adopting Release").

2. Amendments to Smaller Reporting Company Definition, Securities Act Release 33-10107, available at https://www.sec.gov/rules/proposed/2016/33-10107.pdf.

3. See Item 308(b) of Regulation S-K.

4. https://www.sec.gov/news/public-statement/statement-piwowar-src-062818

5. https://www.sec.gov/news/public-statement/peirce-statement-smaller-reporting-companies-062818

6. A useful chart summarizing the scaled disclosure accommodations for smaller reporting companies is provided on pages 7 though 9 of the Adopting Release.

Originally published 9 July 2018

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions