United States: New SEC Rules Relax Disclosure Requirements For Smaller Technology And Life Sciences Companies

In an effort to promote capital formation and reduce compliance costs, the U.S. Securities and Exchange Commission has amended its rules to expand the number of public companies that qualify for scaled disclosure accommodations that traditionally have been available only to companies with very small public floats. Companies that previously did not qualify as "smaller reporting companies" — or SRCs — will be able to take advantage of some notable reduced disclosure requirements.

New SEC Rules

The SEC on June 28, 2018 adopted amendments to expand the number of companies that qualify as SRCs. The rules are effective 60 days after publication in the Federal Register, which occurred on July 10, 2018. Accordingly, the expected effective date of the new rules is September 10, 2018. The rules are effective 60 days after publication in the Federal Register. The new rules amend the SRC definition to include companies with a public float of less than $250 million, as well as companies with annual revenues of less than $100 million for the previous year and a public float of less than $700 million. Public float is calculated by multiplying the aggregate number of shares of outstanding common stock held by non-affiliates (i.e., stockholders that are not directors, executive officers or controlling stockholders) by a company's stock price. SRCs were previously defined as companies with less than $75 million in public float or less than $50 million of annual revenues and no public float.

The following table summarizes the amendments to the SRC definition:

Initial Qualification Thresholds

Criteria

Previous SRC Definition

New SRC Definition


Public Float

Public float of less than $75 million

Public float of less than $250 million

Revenues

Less than $50 million of annual revenues and no public float

Less than $100 million of annual revenues and public float of less than $700 million

For already public companies that previously did not qualify as a SRC under the previous definition, the new rules provide that for purposes of the first fiscal year ending after effectiveness of the amendments, a company will qualify as a SRC if it meets one of the initial qualification thresholds noted above as of the date that it is required to measure its public float or revenues. Public float is measured as of the last business day of a company's most recently completed second fiscal quarter and revenue is measured based on a company's most recently completed fiscal year for which audited financial statements are available. For example, a company with a December 31 fiscal year-end that had a public float of $200 million as of June 30, 2018, would not have previously qualified as a SRC because it had over $75 million in public float but will now qualify under the new rules for the fiscal year ending December 31, 2018, because it has less than $250 million in public float as of June 30, 2018.

In order to avoid situations in which companies enter and exit SRC status due to small fluctuations in public float and revenue, the release provides that if a company does not meet the initial qualification thresholds noted above, it will remain unqualified for SRC status until it determines that it meets one or more lower qualification thresholds, which are set at 80% of the initial qualification thresholds. Accordingly, (i) for the public float test, once a company exceeds $250 million as of its most recently completed second fiscal quarter, it will not qualify as a SRC under the public float test until it has public float of less than $200 million; and (ii) for the revenue test, once a company exceeds either or both of the $100 million annual revenue and $700 million public float thresholds, it will not qualify under the revenue test until it meets a lower threshold for the criteria on which it previously failed to qualify ($80 million of annual revenues and $560 million of public float).

For example, for the revenue test, if a company with a December 31 fiscal year-end had a public float of $800 million as of June 30, 2018, and revenues of $120 million for the fiscal year ended December 31, 2017, it will not qualify as a SRC until it falls below $80 million of annual revenues and a public float of less than $560 million. However, if the same company's public float as of June 30, 2018, was $600 million (instead of $800 million) and it had revenues of $120 million for the fiscal year ended December 31, 2017, it will not qualify until it falls below $80 million of annual revenues.

The following table summarizes these subsequent qualification thresholds:

Subsequent Qualification Thresholds

Criteria

Previous SRC Definition

New SRC Definition


Public Float

Public float of less than $50 million

Public float of less than $200 million

Revenues

Less than $40 million of annual revenues and no public float

Less than $80 million of annual revenues (if it previously had $100 million or more of annual revenues) and public float of less than $560 million (if it previously had $700 million or more of public float)

Impact on Smaller Technology and Life Sciences Companies

The SEC's release estimates that approximately 1,000 additional companies will be eligible for SRC status in the first year under the new definition. Smaller technology and life sciences companies that previously did not qualify as SRCs will now be able to take advantage of reduced disclosure requirements. Some of the notable reduced requirements that SRCs can take advantage of include:

  • Executive Compensation: SRCs are only required to provide detailed compensation information for three instead of five named executive officers. They are also not required to include a Compensation Discussion and Analysis and are not required to include certain tabular compensation information, including the grants of plan-based awards table and the option exercises and stock vested table. In addition, SRCs are not required to provide CEO pay ratio disclosure.
  • Stock Performance Graph: SRCs are not required to include a stock performance graph.
  • Financial Statements: SRCs can disclose two years of statements of operations, cash flows, and stockholders' equity instead of three years. They also need to provide two years of balance sheets. SRCs also can take advantage of less stringent age of financial statement requirements and only need to provide a maximum of two years of acquiree financial statements rather than three years.
  • MD&A: SRCs can compare two years rather than three years of financial results in MD&A. They are also not required to make tabular disclosures of contractual obligations.

There are a number of additional scaled disclosure accommodations noted in the adopting release, including with respect to related party transactions and corporate governance.

Newly qualified SRCs will need to determine whether providing additional information, even where scaled disclosure is available, will be useful. Moreover, in determining whether to take advantage of reduced disclosure, companies should also be mindful of institutional investor and proxy advisory firm sentiment, especially where the company had previously been reporting — and has the necessary internal processes and procedures in order to report — the information. With respect to certain disclosures, such as historical financial statements, the ability to reduce disclosure may not be particularly beneficial for newly qualified SRCs because these companies have already previously disclosed this information in their public filings and incurred the costs in compiling this information. Companies exiting emerging growth company status should also keep in mind that they still will be required to hold say-on-pay and say-on-frequency votes even if they qualify as a SRC.

Accelerated Filers

In addition to amending the SRC definition, the new rules preserve the application of the current thresholds contained in the definition of "accelerated filer" or "large accelerated filer" and provide that SRCs are no longer excluded from being an accelerated or large accelerated filer. Previously, SRCs were excluded from being an "accelerated filer" or "large accelerated filer." Accordingly, while SRCs are able to take advantage of reduced disclosure obligations, because the new rules no longer exclude SRCs from being an accelerated filer, SRCs with a public float of $75 million or more must still comply with the requirements applicable to accelerated filers. Accordingly, SRCs that qualify as accelerated filers will still be subject to accelerated periodic report filing deadlines and also would still be subject to Section 404(b) of the Sarbanes-Oxley Act, which requires a company's auditor to attest to management's assessment of its internal controls. Despite this, the SEC did note in the release that it is evaluating possible changes to reduce the number of companies that qualify as accelerated filers and therefore new rules that further relax the requirements on smaller public technology and life sciences companies may be on the horizon.

Finally, consistent with the amendments, the SEC is adopting technical revisions to certain Securities Act Forms, including Forms S-1, S-3, and S-8, and Exchange Act Forms 10-Q and 10-K, to remove the parenthetical next to the "non-accelerated filer" definition that states "(Do not check if a smaller reporting company)." Accordingly, once the rules are in effect, companies should modify their cover page for upcoming Securities Act and Exchange Act filings. After these amendments, a company should check all applicable boxes on the cover page addressing, among other things, non-accelerated, accelerated, and large accelerated filer status, SRC status and emerging growth company status.

For more information regarding the new rules, please see the SEC's adopting release.

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.

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
Events from this Firm
20 Sep 2018, Other, California, United States

CoinAlts is designed to bring together the thought leaders in the cryptocurrency investment space to discuss the investment, legal and operational is​sues for cryptocurrencies as a new asset class.

25 Sep 2018, Conference, California, United States

We're excited to introduce Women's IP Strategy, a 2-day conference that tackles both the IP, legal as well as broader career development obstacles, risks and rewards for women lawyers working in male-dominant industries.

2 Oct 2018, Webinar, California, United States

This CLE webinar will offer suggestions to litigators to help them comply with the new GDPR during e-discovery.

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