On May 9, 2019, the Securities and Exchange Commission ("SEC") proposed amendments (the "proposed amendments") to the accelerated filer and large accelerated filer definitions in Rule 12b-2 under the Securities Exchange Act of 1934 ("Exchange Act") .1 If the proposed amendments are adopted, an issuer that qualifies as a Smaller Reporting Company ("SRC") and had less than $100 million revenues in the most recent fiscal year for which audited financial statements are available would be excluded from the definitions of accelerated filer and large accelerated filer. 2 As a result of this status change, these issuers would have more time to file their periodic reports and would no longer be required to obtain an attestation on their internal control over financial report ("ICFR") from an independent outside auditor.3 The proposal also includes revisions to the transition thresholds for exiting accelerated filer and large accelerated filer status.4
I. The Existing Rules
Under the current reporting regime, there are three categories of issuers: non-accelerated filers, accelerated filers and large accelerated filers. An issuer is considered an accelerated filer if, as of the end of its fiscal year, (1) it has a public float5 of $75 million or more but less than $700 million, (2) it has been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least 12 calendar months and (3) it has filed at least one annual report pursuant to Exchange Act Section 13(a) or 15(d).6 A large accelerated filer is one that has a public float of $700 million or more and satisfies the other two conditions applicable to accelerated filers.7 An issuer is considered as a non-accelerated filer if it does not meet either of the accelerated filer and large accelerated filer definitions.8
The category of an issuer determines the filing deadlines for its periodic reports. Accelerated filers must file their annual reports within 75 calendar days and quarterly reports within 40 calendar days after the end of the period.9 Large accelerated filers have a tighter deadline for filing annual reports--60 calendar days after the end of the period--and the same 40-calendar-day-deadline for filing quarterly reports.10 Non-accelerated filers have 90 calendar days to file their annual reports and 45 calendar days to file their file their quarterly reports.11 In addition to the differences in filing deadlines, accelerated filers and large accelerated filers are required to obtain an independent auditor attestation and report on the internal control assessment made by the management of the issuer.12 Non-accelerated filers are exempt from such requirement.13
In June of 2018, the SEC adopted amendments to the definition of SRC to increase the number of issuers qualifying as SRCs and reduce compliance costs of these smaller issuers through scaled disclosure accommodations.14 However, at the same time, these amendments created overlaps between the SRC category and the categories of accelerated and large accelerated filer, disrupting the alignment between the reporting regimes for SRCs and non-accelerated filers.15 The chart below summaries the existing relationship between SRCs and nonaccelerated filers and accelerated filers.
II. The Proposed Amendments
Under the proposed amendments, a new condition would be added to the definitions of accelerated filer and large accelerated filer, excluding an issuer eligible to be an SRC under the revenue test in the SRC definition.17 In other words, SRCs with annual revenues of less than $100 million18 would have the non-accelerated filer status. The chart below summarizes the proposed relationship between SRCs and non-accelerated and accelerated filers.
In addition, the SEC also proposes to revise the transition thresholds for issuers exiting accelerated and large accelerated filer status. Specifically, the proposed amendments would (1) increase the public float transition threshold for accelerated and large accelerated filers becoming non-accelerated filers from $50 million to $60 million,20 (2) increase the public float transition threshold for large accelerated filers becoming accelerated filers from $500 million to $560 million21 and (3) allow accelerated and large accelerated filers to exit accelerated filer status and become non-accelerated filers if their annual revenues fall below the applicable revenue threshold--$80 million (for issuers that did not qualify as SRCs)22 or $100 million (for SRCs)23. The SEC explained in the proposing release that the new transition thresholds ($60 million and $560 million) were selected to be consistent with the percentage used in the transition thresholds for SRC eligibility, which is 80% of the initial qualification thresholds.24 The proposed addition of a revenue test for the transition thresholds also aligns the non-accelerated filer category with the SRC category.
The SEC estimates that 539 issuers would move from the accelerated or large accelerated filer categories to the non-accelerated filer category as a result of the proposed amendments, mostly as a result of the newly added revenue component.25 These issuers, according to SEC's analysis, are heavily concentrated in the following industries: pharmaceutical products (30.2%), banking (20.2%) and financial trading (10.2%).26 Hence, the proposed amendments could lead to a "noticeable decrease in the presence of `Pharmaceutical Products' and `Banking' issuers in the pool of accelerated filers."27
The proposed amendments aim to reduce compliance costs for certain lower-revenue issuers, thereby allowing these issuers to redirect funds into business development while maintaining appropriate level of investor protections. The SEC has stated that the affected issuers may find the compliance costs "particularly burdensome," 28 while "the benefits of having those issuers comply with the accelerated and large accelerated filer requirements may be more limited than for other issuers."29 Some underlying factors cited by the SEC include these issuers' typically less complex financial and internal control systems and reduced willingness to expend resources on remediating ICFR issues, as well as the fact that investors tend to focus more on these issuers' prospects than on their current financial performance.30 Additionally, the SEC notes that the reduced burden on smaller issuers may make smaller companies more willing to register an offering or a class of their securities.31
The SEC is currently soliciting comments on the proposed amendments, issues and alternatives discussed in the proposing release as well as other matters that may be relevant.32 Comments are due 60 days after the release's publication on the Federal Register.33