At a meeting of the SEC’s Advisory Committee on Small and Emerging Companies at the end of last month, the Committee approved a set of Recommendations about Expanding Simplified Disclosure for Smaller Issuers.  A key focus underlying the recommendations is some effort at harmonizing the jumble of rules applicable to the various categories of small companies and expanding the application of the small-company disclosure accommodations generally.

Current categories: 

  • Smaller reporting companies (SRCs) — companies that, among other things, have a public float of less than $75 million in common equity or, where there is no public float or public market for the common equity, companies that had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements were available.
  • Non-accelerated filers – companies with a public float of less than $75 million as of the last day of the most recently completed second fiscal quarter.
  • Emerging growth companies (EGCs) – companies with total annual gross revenues of less than $1 billion during the most recently completed fiscal year that first sold equity in an IPO after December 8, 2011, have not issued more than $1 billion in non-convertible debt over three years, have not passed their five-year IPO anniversaries and are not large accelerated filers.

Recommendations:

  • Increase the number of companies eligible to take advantage of the accommodations for SRCs by revising the SRC definition to include companies with a public float of up to $250 million. This change would allow more public companies to be exempt from the pay-ratio rule and the CD&A requirement and allow more public companies to provide scaled disclosure.
  • Provide SRCs with the same disclosure accommodations as EGCs, including exemptions from the SOX 404(b) auditor attestation requirement, the pay-versus-performance disclosure requirement, the requirement to solicit advisory say-on-pay votes and say-on-frequency votes, and the requirement to comply with any new or revised financial accounting standards unless and until the standard is applicable to private companies or with any rules that may be adopted by the PCAOB requiring mandatory auditor rotation or “enhanced” or supplemented audit reports that would require the auditor to provide additional information or comment about the audit.
  • Increase the threshold for “accelerated filers” to include companies with a public float of $250 million or more, but less than $700 million. As a result of that proposed revision, the requirement to provide an auditor attestation report under SOX 404(b) would no longer apply to companies with public floats between $75 million and $250 million.
  • Exempt SRCs from XBRL data tagging
  • Exempt SRCs from filing immaterial attachments to material contracts.

Soapbox: Just a wild idea, but perhaps the SEC might consider extending an exemption of that nature to all public companies?

Whether these recommendations prompt the SEC to engage in any rulemaking remains to be seen. As noted in thecorporatecounsel.net blog, the House has passed by voice vote H.R. 1525, the Disclosure Modernization and Simplification Act of 2015, which is, not surprisingly, pretty much the same as the Disclosure Modernization and Simplification Act of 2014.  See this PubCo post.  Among the provisions of the bill is a requirement for the SEC, within 180 days after enactment, to revise Reg S-K to further scale or eliminate requirements to “reduce the burden on emerging growth companies, accelerated filers, smaller reporting companies, and other smaller issuers, while still providing all material information to investors” and to eliminate duplicative, outdated or unnecessary provisions for all issuers.  The bill also requires the SEC to conduct (yet another) modernization and simplification study. In addition, it includes the same provision as the prior bill requiring the SEC to adopt regs to permit issuers to submit a summary page to the Form 10-K that cross-references to the related material contained in the Form 10-K.

Soapbox: Of course, the provision  is rather pointless given that there’s nothing in the current rules  preventing issuers from including a summary page anyway.

If the bill is ultimately signed into law, it might provide some impetus to take up the Committee’s recommendations, particularly since it directs the SEC to consult with the Committee. Of course, the SEC is already in the midst of a major “Disclosure Effectiveness” project to revise Reg S-K disclosure, so the Committee’s recommendations may factor into that process, even if the bill does not become law.  In the past, however, some Committee members have expressed a bit of skepticism regarding that project.