The SEC has proposed amendments that would increase the financial thresholds in the “smaller reporting company” definition. The proposal to update the definition would expand the number of companies that qualify as smaller reporting companies, thus qualifying for certain existing scaled disclosures provided in Regulation S-K and Regulation S-X.

The proposed rules would enable a company with less than $250 million of public float to provide scaled disclosures as a smaller reporting company, as compared to the $75 million threshold under the current definition.  In addition, if a company does not have a public float, it would be permitted to provide scaled disclosures if its annual revenues are less than $100 million, as compared to the current threshold of less than $50 million in annual revenues.

In addition, as in the current rules, once a company exceeds either of the thresholds, it will not qualify as a smaller reporting company again until public float or revenues decrease below a lower threshold. Under the proposal, a company would qualify only if its public float is less than $200 million or, if it has no public float, its annual revenues are less than $80 million.

The SEC is not proposing to increase the $75 million threshold in the “accelerated filer” definition. As a result, companies with $75 million or more of public float that would qualify as smaller reporting companies would be subject to the requirements that apply currently to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal controls over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.

The SEC gave a variety of reasons for the proposed rule change. According to the SEC the proposal addresses several recommendations made to us multiple times by our Advisory Committee on Small and Emerging Companies (ACSEC) and the SEC Government-Business Forum on Small Business Capital Formation (Small Business Forum), as well as comments from small registrants, Congress and others. The SEC also noted the FAST Act requires the Commission to revise Regulation S–K to further scale or eliminate disclosure requirements to reduce the burden on a variety of smaller registrants, including smaller reporting companies, while still providing all material information to investors.  Because a number of Regulation S-K items already provide scaled disclosure requirements for smaller reporting companies, raising the financial thresholds in the smaller reporting company definition would be responsive to the FAST Act because it would reduce the burden on smaller registrants by increasing the number of registrants eligible for scaled disclosure.

Generally smaller reporting companies can pick and choose which of the scaled disclosure provisions they want to apply. There is one instance where that is not the case.  Item 404 of Regulation S-K provides for expanded disclosure requirements applicable to smaller reporting companies for related party transactions.  Smaller reporting companies must comply with this more stringent standard.