United States: SEC Proposes Changes To The Accelerated Filer And Large Accelerated Filer Definitions

On May 9, 2019, the U.S. Securities and Exchange Commission (the "SEC") proposed amendments to the "accelerated filer" and "large accelerated filer" definitions adopted under the Securities Exchange Act of 1934 (the "Exchange Act").1 The SEC believes that it can promote capital formation for smaller reporting issuers by more appropriately tailoring the types of issuers that are included in the categories of accelerated and large accelerated filers and revising the transition thresholds for accelerated and large accelerated filers. The proposed amendments would:

  • Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available;
  • Increase the transition thresholds for accelerated and large accelerated filers becoming non-accelerated filers from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million; and
  • Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.

In the Proposing Release, the SEC indicates that certain low-revenue issuers would not be required to obtain an auditor attestation of internal control over financial reporting; however, such issuers would continue to be required to establish and maintain internal control over financial reporting and assess the effectiveness of such controls. 

Background

On June 28, 2018, the Commission adopted amendments to the definition of a "smaller reporting company" to expand the number of issuers that can utilize the scaled disclosure requirements that are available to smaller reporting companies. Following these amendments, however, some issuers are now categorized as both smaller reporting companies and accelerated or large accelerated filers, and issuers falling into this category must comply with the requirement to obtain an auditor attestation of their internal control over financial reporting.

When the SEC adopted these amendments, Chairman Jay Clayton directed the SEC staff to formulate recommendations for rule amendments that, if adopted, would appropriately redefine the issuers that are designated as accelerated filers. The Chairman directed the staff to consider, among other things, the historical and current relationship between the smaller reporting company and accelerated filer definitions, as well as how the rule change could reduce compliance costs for certain registrants, while maintaining investor protections. The proposed rule changes are consistent with these objectives.

Proposed Amendments to Exclude Low-Revenue Smaller Reporting Companies

The SEC has proposed amendments to revise the accelerated and large accelerated filer definitions to exclude from those definitions issuers that are eligible to be a smaller reporting company under the smaller reporting company revenue test.

Under the existing accelerated filer definition, an issuer must satisfy three conditions to be an accelerated filer:

  • The issuer must have a public float of $75 million or more, but less than $700 million, as of the last business day of the issuer's most recently completed second fiscal quarter;
  • The issuer must have been subject to the requirements of Exchange Act Section 13(a) or 15(d) for a period of at least twelve calendar months; and
  • The issuer must have filed at least one annual report pursuant to Exchange Act Section 13(a) or 15(d).

Under the existing large accelerated filer definition, an issuer must meet the second and third conditions described above and have a public float of $700 million or more as of last business day of the issuer's most recently completed second fiscal quarter.

The proposed amendments would add a new condition to the definitions of accelerated filer and large accelerated filer that would exclude from those definitions an issuer eligible to be a smaller reporting company under the revenue test in the smaller reporting company definition.2 These proposed new conditions would only be available to issuers that are eligible to be a smaller reporting company under the revenue test set forth in Rule 12b-2. As a result, issuers that are eligible to be a smaller reporting company that have a public float between $75 million and $250 million would be accelerated filers if their annual revenues are $100 million or more, and thus they would remain subject to all of the requirements applicable to accelerated filers. Under the proposed amendments, a foreign private issuer that qualifies as a smaller reporting company under the revenue test of the smaller reporting company definition and is eligible to use the scaled disclosure requirements available to smaller reporting companies would qualify for the exclusion under the accelerated filer definition.3

The SEC states in the Proposing Release that the proposed amendments would increase the number of issuers that are exempt from the requirement to provide an auditor attestation of internal control over financial reporting by increasing the number of non-accelerated filers.

Proposed Amendments to the Transition Provisions in the Accelerated and Large Accelerated Filer Definitions

Under the existing transition rules, an issuer that is an accelerated or a large accelerated filer will not become a non-accelerated or accelerated filer until its public float falls below a lower threshold than the public float threshold that was required to qualify an accelerated or large accelerated filer. This lower threshold for exiting accelerated filer and large accelerated filer status is intended to avoid situations in which an issuer would enter and exit accelerated and large accelerated filer status due to relatively small fluctuations in its public float.

The SEC proposed to amend the transition thresholds for issuers exiting accelerated filer and large accelerated filer status as follows:

  • The proposed amendments would revise the public float transition threshold for accelerated and large accelerated filers to become a non-accelerated filer from $50 million to $60 million;
  • The large accelerated filer public float transition provision would be revised from $500 million to $560 million; and
  • The smaller reporting company revenue test would be added to the transition threshold for accelerated and large accelerated filers.

The SEC proposed to increase the public float transition thresholds so that the transition thresholds are 80% of the initial thresholds, which would be consistent with the percentage used in the transition thresholds for smaller reporting company eligibility. The SEC also believes that raising these thresholds would limit the cases in which an issuer could be both an accelerated filer and a smaller reporting company or a large accelerated filer and a smaller reporting company.

The proposed amendments would also add the smaller reporting company revenue test to the public float transition thresholds for accelerated and large accelerated filers. Under the proposed amendments, an issuer that is already an accelerated filer will remain one unless either its public float falls below $60 million or it becomes eligible to use the smaller reporting company accommodations under the revenue test in paragraphs (2) or (3)(iii)(B), as applicable, of the smaller reporting company definition. An issuer that is initially applying the smaller reporting company definition or that previously qualified as a smaller reporting company would apply paragraph (2) of the smaller reporting company definition. Once an issuer determines that it does not qualify for smaller reporting company status, it would apply paragraph (3)(iii)(B) of the smaller reporting company definition when making its next annual determination.

Next Steps

The SEC has requested public comment on many aspects of the proposed amendments. Public comments are due 60 days following publication of the Proposing Release in the Federal Register.

Footnotes

1 Amendments to the Accelerated Filer and Large Accelerated Filer Definitions, Release No. 34-85814 (May 9, 2019), available here.

2 The revenue test is set forth in paragraphs (2) or (3)(iii)(B), as applicable, of the "smaller reporting company" definition in Rule 12b-2.

3 This position is consistent with the SEC's prior guidance regarding foreign private issuers. See Smaller Reporting Company Regulatory Relief and Simplification, Release No. 33-8876 (Dec. 19, 2007) (noting that a foreign private issuer may also qualify as a smaller reporting company, and therefore has the option to make filings on forms available to U.S. domestic issuers if it presents financial statements pursuant to U.S. GAAP).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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