On December 19, 2007, the SEC adopted amendments to its disclosure and reporting requirements under the Securities Act of 1933 and Securities Exchange Act of 1934 to expand the number of companies that qualify for the SEC's "scaled" (i.e., significantly less burdensome) disclosure requirements for smaller reporting companies. Eligible issuers have the option to use the new scaled disclosure requirements when filing their next registration statement or periodic report after the effective date of the amendments.
"Smaller reporting companies" are defined generally as those companies with a public equity float of less than $75 million as of the last business day of the most recently completed second fiscal quarter. This public equity float threshold is consistent with the definition of "non-accelerated filer" under Exchange Act Rule 12b-2. A company without a calculable public float will qualify for the scaled disclosure if its revenues were below $50 million for its most recently completed fiscal year.
The newly adopted amendments will allow smaller reporting companies to eliminate the following disclosure items from periodic reports and proxy soliciting materials (all item references are to Regulation S-K unless otherwise indicated):
- Compensation Discussion and Analysis and Compensation Committee Report (Items 402 and 407);
- Risk Factors (Item 503);
- Selected Financial Data and Supplementary Financial Data (Items 301 and 302);
- Quantitative and Qualitative Disclosures about Market Risk (Item 305);
- Compensation Committee Interlock and Insider Participation (Item 407); and
- Performance Graph (Item 201).
Additionally, the newly adopted amendments reduce the disclosure burden on smaller reporting companies by allowing them to:
- Provide a less detailed description of the business, including relief from the requirement that information be provided for each segment (Item 101);
- Provide only two years of financial statements, rather than the three years of financial statements required by larger companies (new Article VIII of Regulation S-X);
- Provide only two years of financial statement analysis (i.e., MD&A) if the company is presenting only two years of financial statements (Item 303);
- Omit tabular disclosure of contractual obligations in MD&A (Item 303);
- Provide executive compensation disclosure for only three named executed officers (including the principal executive officer but not necessarily the principal financial officer) rather than the five required for larger companies (Item 402);
- Provide the Summary Compensation Table for only two years, rather than the three years required for larger companies (Item 402);
- Provide only three (Summary Compensation Table, Outstanding Equity Awards at Fiscal Year End Table and Director Compensation Table) of the seven compensation tables required of larger companies (Item 402); and
- Omit footnote disclosure of the grant date fair value of equity awards in the Director Compensation Table (Item 402).
The new scaled disclosure regime will replace in its entirety the current "small business issuer" disclosure regime (thus eliminating Regulation S-B), and will include approximately 1,600 reporting companies not eligible for the current "small business issuer" reporting system, or 13% of all reporting companies. All the designated "SB" disclosure forms will be eliminated, subject to transition periods for small business issuers currently using the SB forms.
One benefit of the elimination of the Form SB-2 registration statement is that smaller reporting companies will be able to incorporate by reference from Exchange Act filings to the extent allowed by Form S-1, while still taking advantage of the reduced disclosures previously permitted in Form SB-2. Current small business issuers will have the option to file their next annual report for a fiscal year ending on or after December 15, 2007 on either Form 10-KSB or Form 10-K, and may continue to file periodic reports under the Regulation S-B disclosure regime until the annual report is filed for the following fiscal year.
It is important to note that smaller reporting companies may choose to provide the disclosure required of larger companies on an item-by-item or a la carte basis without being required to adopt the full disclosure regime required of larger companies. As such, though not required, we believe that smaller reporting companies should consider carefully whether any of the disclosure items required of larger companies would be useful to (or expected by) its investors and provide such additional disclosure as is appropriate under the circumstances. For example, we recommend that smaller reporting companies continue to provide a separate "Risk Factors" section in their registration statements and periodic reports, as such disclosure helps provide protection against liability and it is helpful for investors to have all of an issuer's risk factors in one location.
There will be a new check box on each registration statement and periodic report form asking if the issuer is a smaller reporting company. An issuer that meets such definition will be required to check that box even if the issuer does not avail itself of the scaled disclosure flexibility.
A non-reporting company filing its first registration statement under either the Securities Act (e.g., an IPO) or the Exchange Act would calculate its public float as of a date within 30 days of the date of filing the registration statement. For an IPO, public float is calculated based on the estimated offering price and the number of shares held by non-affiliates before the offering, increased by the estimated number of shares to be sold in the offering. For an Exchange Act registration, public float is calculated in the same fashion as for already reporting issuers, and if public float is not calculable, then the revenue test will apply.
We believe the new scaled disclosure requirements will be a welcome relief for many newly eligible smaller reporting companies. The scaled requirements provide an opportunity to reduce compliance costs and management and board diversion, particularly with respect to the preparation of proxy soliciting materials, which need not include Compensation Discussion and Analysis or much of the information required in the compensation tables.