The United States Securities and Exchange Commission (SEC) has recently proposed to expand the number of US public companies that qualify as a “smaller reporting company” and who would therefore be eligible to provide reduced disclosures under Regulation S-K and Regulation S-X. Under the proposed rule, a company would qualify as a smaller reporting company if (i) it has an unaffiliated public float of less than $250m (increased from $75m currently) or (ii) it does not have a public float and has annual revenues that are less than $100m (increased from $50m currently).

The United States Securities and Exchange Commission (SEC) has recently proposed to expand the number of US public companies that qualify as a “smaller reporting company” and who would therefore be eligible to provide reduced disclosures under Regulation S-K and Regulation S-X. Under the proposed rule, a company would qualify as a smaller reporting company if (i) it has an unaffiliated public float of less than $250m (increased from $75m currently) or (ii) it does not have a public float and has annual revenues that are less than $100m (increased from $50m currently).

The benefits of qualifying as a smaller reporting company include, among other things, requiring only two years of annual financial statements rather than three years, requiring only two years of MD&A discussion rather than three years, requiring summary compensation discussion of only three officers rather than five officers and being exempt from the requirements to disclose selected financial data, risk factors in periodic reports, CD&A and a compensation committee report. These benefits would apply not just at the time of the smaller reporting company’s initial public offering (IPO) but also on an ongoing basis in its periodic reports filed with the SEC. Comments on the SEC proposal are due by August 30, 2016.

Expanding the definition of smaller reporting company

The SEC’s proposed rule would amend the definition of “smaller reporting company” to raise the financial thresholds that govern the size of companies that qualify as smaller reporting companies, thereby enabling a larger number of companies to qualify as smaller reporting companies. First, the proposed rule would permit a company with a public float of up to $250m (increased from $75m currently) to qualify as a smaller reporting company.[1]
Second, the proposed rule would permit a company that lacks a public float but has annual revenue of up to $100m (increased from $50m) to qualify as a smaller reporting company.

The SEC also proposed to change when a lapsed smaller reporting company could requalify as a smaller reporting company. Under the current rules, once a company exceeds either of the financial thresholds listed above, it no longer qualifies as a smaller reporting company unless it requalifies by having a public float below $50m or, if the company does not have a public float, its annual revenue decreases below $40m. Under the proposed rule, a company could requalify as a small reporting company if its public float decreases below $200m or, if the company does not have a public float, its annual revenue decreases below $80m.

The determination date for assessing a company’s public float for purposes of determining its status as a smaller reporting company would remain unchanged under the proposed rules. For reporting companies, the determination date would continue to be the last business day of the company’s most recently completed second fiscal quarter. For companies filing their initial registration statement under the Securities Act of 1933 or the Securities Exchange Act of 1934, the determination date would continue to be a date within 30 days of filing the registration statement.

The SEC estimated that the amended definition of smaller reporting company would permit an additional 782 registrants (out of 7,557 total SEC reporting companies) to qualify as smaller reporting companies. These 782 registrants would have an average public float of $149m, an average market value of $257m and average revenue of $248m. The SEC estimated that in 2015, 32 percent of registered companies had a public float under $75m whereas 42 percent of registered companies had a public float under $250m, while 10.3 percent had revenue under $50m compared to 10.7 percent with revenue under $100m.

Benefits of smaller reporting company status

The table below provides a brief overview of the main benefits for companies that qualify as smaller reporting companies (adopted largely from the SEC’s proposing release). While emerging growth companies (generally, companies with revenue of less than $1bn) also benefit from certain disclosure relief at the time of their IPO and in some cases thereafter, the relief for smaller reporting companies described herein would apply not just at the time of the smaller reporting company’s IPO but also thereafter so long as the company remains a smaller reporting company. In addition, while emerging growth companies lose such status after five years, there is no similar temporal limitation applicable to smaller reporting companies.

Regulation S-K

Item

Disclosure Accommodation for Smaller Reporting Companies

101 − Description of Business

May satisfy disclosure obligations by describing the development of its business during the last three years rather than five years. Business development description requirements are less detailed than disclosure requirements for non-smaller reporting companies.

201 − Market Price of and Dividends on the Registrant’s Common Equity

Stock performance graph not required.

301 – Selected Financial Data

Not required.

302 – Supplementary Financial Information

Not required.

303 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

Two-year MD&A comparison rather than three-year comparison.

Two year discussion of impact of inflation and changes in prices rather than three years.

Tabular disclosure of contractual obligations not required.

305 – Quantitative and Qualitative Disclosures About Market Risk

Not required.

402 – Executive Compensation

Three named executive officers rather than five.

Two years of summary compensation table information rather than three.

Not required:

  • Compensation discussion and analysis.
  • Grants of plan-based awards table.
  • Option exercises and stock vested table.
  • Pension benefits table.
  • Non-qualified deferred compensation table.
  • Disclosure of compensation policies and practices related to risk management.
  • Pay ratio disclosure.

404 – Transactions With Related Persons, Promoters and Certain Control Persons[2]

Description of policies/procedures for the review, approval or ratification of related party transactions not required.

407 – Corporate Governance

Audit committee financial expert disclosure not required in first year.

Compensation committee interlocks and insider participation disclosure not required.

Compensation committee report not required.

503 – Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges

No ratio of earnings to fixed charges disclosure required.

No risk factors required in Exchange Act filings.

601 – Exhibits

Statements regarding computation of ratios not required.

 

 

 

Regulation S-X

 

Rule

Scaled Disclosure

8-02 – Annual Financial Statements

Two years of income statements rather than three years.

Two years of cash flow statements rather than three years.

Two years of changes in stockholders’ equity statements rather than three years.

8-03 – Interim Financial Statements

Permits certain historical financial data in lieu of separate historical financial statements of equity investees.

8-04 – Financial Statements of Businesses Acquired or to Be Acquired

Maximum of two years of acquired entity financial statements rather than three years.

8-05 – Pro forma Financial Information

Fewer circumstances under which pro forma financial statements are required.[3]

8-06 – Real Estate Operations Acquired or to Be Acquired

Maximum of two years of financial statements for acquisition of properties from related parties rather than three years.

8-08 – Age of Financial Statements

Less stringent age of financial statements requirements.[4]

  1. A reporting company calculates its public float by multiplying the aggregate worldwide number of shares of the company’s voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity. A registrant filing its initial registration statement under the Securities Act of 1933 or the Securities Exchange Act of 1934 calculates its public float by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of such shares included in the registration statement by the estimated public offering price of the shares. A registrant may have zero public float because it has no public equity outstanding or no market price for its equity exists.
  2. Item 404 also contains the following expanded disclosure requirements applicable to smaller reporting companies: (1) rather than a flat $120,000 disclosure threshold, the threshold is the lesser of $120,000 or 1 percent of total assets, (2) disclosures are required about parents and underwriting discounts and commissions where a related person is a principal underwriter or a controlling person or member of a firm that was or is going to be a principal underwriter, and (3) an additional year of Item 404 disclosure is required in filings other than registration statements.
  3. Rule 8-05 requires pro forma information only if financial statements of a business acquired or to be acquired are presented.
  4. Rule 8-08 provides that the date of filing of the financial statements in filings other than Form 10-K must be not less current than the financial statements that would be required in Form 10-K and 10-Q if such forms were required to be filed. If required financial statements are as of a date 135 days or more before the effective date of a registration statement, they must be updated to a date ending within 135 days of the effective date. In addition, Rule 8-08 requires financial statements only as current as the end of the third fiscal quarter of the smaller reporting company when the anticipated effective date falls within 45 days after the end of the fiscal year, and if the effective date falls 45 days after the smaller reporting company’s fiscal year end but within 90 days of the smaller reporting company’s fiscal year end, then the smaller reporting company is not required to provide financial statements for such year provided certain requirements are met.