During late December, the Securities and Exchange Commission (“SEC”) adopted amendments to the disclosure and reporting requirements applicable to smaller companies. The amendments expand the universe of issuers eligible for scaled-down disclosure by creating a new category of issuers known as “smaller reporting companies,“ which combines small business issuers and most non-accelerated filers into a single category. To be a smaller reporting company, an issuer must have (i) a common equity public float of less than $75 million or (ii) if it is unable to calculate its public float, annual revenues of $50 million or less. This new category of issuer replaces the “small business issuer“ designation, which consisted of issuers with revenues and public float of less than $25 million. According to the SEC‘s calculations, approximately 1,500 additional issuers are eligible for scaled disclosure as a result of these amendments.
The new smaller reporting company disclosure requirements are in most respects the same as those that were applicable to small business issuers. The smaller reporting company requirements are contained in Regulation S-K, as well as in amendments to Forms 10-Q and 10-K, rather than in a separate body of forms and rules. In connection with this rule change, the SEC is phasing out its small business issuer designation, as well as Regulation S-B and the related Regulation S-B forms.
The SEC‘s smaller reporting company amendments took effect on Feb. 4, 2008.
Qualifying as a Smaller Reporting Company
To qualify as a smaller reporting company, an issuer must have a common equity public float of less than $75 million. Alternatively, if the issuer does not have a common equity public float or cannot calculate its common equity public float (for example, because the issuer has only public debt or due to an illiquid market in its equity securities), it will qualify as a smaller reporter company if it had revenues of less than $50 million in its most recently completed fiscal year.
Public float is calculated annually as of the last day of the issuer‘s second fiscal quarter. It is calculated by multiplying the number of outstanding shares of common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and ask prices of the issuer‘s common equity. A foreign private issuer also may take advantage of the smaller reporting company disclosure regime if it satisfies the public float or revenue requirements for smaller reporting companies and prepares its financial statements in accordance with U.S. GAAP. Alternatively, a foreign private issuer may continue to use the current foreign private issuer forms and follow the requirements of those forms.
Investment companies, including business development companies and asset-backed issuers, are not eligible to use the scaled disclosure requirements applicable to smaller reporting companies.
A smaller reporting company that currently qualifies as a small business issuer may file its annual report for its first fiscal year ending on or after Dec. 15, 2007 on either Form 10-KSB or Form 10-K. After the annual report is filed, the issuer must file all future annual reports on Form 10-K and quarterly reports on Form 10-Q. In addition, prior to filing its first annual report for the fiscal year ending on or after Dec. 15, 2007, the issuer may continue to file its quarterly reports on Form 10-QSB or it may file on Form 10-Q.
A reporting issuer that qualifies as a smaller reporting company after Feb. 4, 2008, but that is not already a small business issuer, may, at its option, follow the smaller reporting company scaled disclosure requirements beginning with its next periodic report. To determine its reporting status, an issuer will look back to its most recent second fiscal quarter end calculation. An issuer that became a reporting company before the effective date of the new rules, but that has not yet had a completed second fiscal quarter as a public company, will base its reporting status on its public float calculated after its initial public offering.
If an issuer filed a Securities Act registration statement on an SB form before Feb. 4, 2008, amendments will need to be filed on the appropriate “S“ form, for example as an “S-1/A.“ The issuer may, at its option, retain the SB disclosure format in the amendment for up to six months after the effective date of the new rules, or Aug. 4, 2008.
Changes in Smaller Reporting Company Status
Reporting status of an issuer is determined annually as of the last business day of the issuer‘s second fiscal quarter. If, as of the measurement date, an issuer ceases to qualify as a smaller reporting company, it will be required to comply with the larger company reporting requirements beginning with its Form 10-Q for the first quarter of the next fiscal year.
An issuer that previously did not qualify as a smaller reporting company, but now does so as a result of its annual calculation, may provide scaled disclosure beginning with the Form 10-Q for its second fiscal quarter; in other words, it does not need to wait until the first quarter of the next fiscal year. However, once an equity issuer fails to qualify as a smaller reporting company because its public float exceeds $75 million, it will not become eligible for smaller reporting company status until its public float falls below $50 million. For an issuer relying on the revenue test, once its annual revenues exceed $50 million, it will not become eligible for smaller reporting company status until its revenues fall below $40 million.
Determining Reporting Status in Connection with an Initial Public Offering
For a non-reporting issuer conducting an initial public equity offering, in order to determine whether it qualifies as a smaller reporting company for purposes of its registration statement disclosure, it must calculate public float as of a date within 30 days prior to the filing of the registration statement. Public float is calculated by multiplying the aggregate number of common equity shares outstanding then held by non-affiliates plus the number of shares included in the registration statement by the estimated public offering price.
If the issuer subsequently decides to increase the number of shares offered in the public offering or the price per share, resulting in it no longer qualifying as a smaller reporting company, it is not required to amend the registration statement prior to effectiveness to comply with larger public company disclosure requirements, so long as the eligibility determination at the time of the filing of the registration statement was bona fide. Under these circumstances, the issuer will continue to qualify as a smaller reporting company until its next annual determination date.
Conversely, if the issuer has not filed as a smaller reporting company and downsizes the public offering, it may, at its option, upon completion of the public offering, recalculate its public float, providing periodic disclosure as a smaller reporting company if it is eligible to do so.
The disclosure requirements for smaller reporting companies are substantially the same as those under Regulation S-B for small business issuers, with a few minor exceptions. For example, smaller reporting companies are required to provide two years of audited balance sheet data, while, under Regulation S-B, small business issuers were only required to provide one year of audited balance sheet data.
An issuer that qualifies as a smaller reporting company generally can choose à la carte (item-by-item), whether to comply with the larger company disclosure requirements or the scaled disclosure requirements applicable to smaller reporting companies. The SEC has indicated that it expects to evaluate item-by-item compliance by smaller reporting companies with only the scaled disclosure requirements, even if the smaller reporting company elects to report as a larger company. However, to the extent that smaller reporting company standards are more rigorous than larger company standards, as is currently the case for disclosure of related person transactions, the issuer must comply with the smaller reporting company standard.