The SEC approved amendments to the definition of “smaller reporting company” (an “SRC”) increasing the public float threshold (the cap on portion of shares held by public investors) to $250 million, up from the prior $75 million threshold. An issuer with a public float of less than $700 million may also qualify for SRC status under the amended rule if its annual revenues are less than $100 million.
No change was made to the exclusion of issuers that are an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not an SRC.
Benefits of SRC Status
The less rigorous reporting requirements for SRC’s provide a number of benefits to qualifying companies. The SEC noted in its proposed rule that extending SRC status to a greater number of registrants may encourage companies that have been hesitant to go public to do so, thus increasing capital formation. SRC status significantly reduces filing and audit expenses for qualifying companies. An ICBA study estimates that SRC status—thus exemption from the 404(b) reporting requirements—could cut audit fees for certain types of qualifying institutions by as much as 50%. Some of the reduced filing requirements for SRCs are the following:
- Audited historical financial statements:
- Two years of income statements (rather than three)
- Two years of cash flow statements (rather than three)
- Two years of changes in stockholders’ equity (rather than three)
- Acquired company financial statements – maximum of two years (rather than three)
- Pro forma financial statements – fewer circumstances when required
- Two-year MD&A comparison (rather than three)
- Two years of summary compensation data (rather than five)
- Three named executive officers (rather than five)
- No requirement to provide:
- Selected or supplementary financial data
- Risk factors in periodic reports
- Stock performance graph
- Quantitative and qualitative disclosures about market risk
- Executive compensation analysis, certain stock award tables, pension or deferred compensation benefits tables or pay ratio disclosure
- Compensation committee report
However, SRCs are subject to some additional disclosure requirements. For example, for related-person transactions, the threshold is the lesser of $120,000 or 1% of total assets, rather than the $120,000 threshold under S-K Item 404, and the disclosure must go back two years. SRCs are also subject to additional Item 404 disclosure requirements relating to the company’s parent and related persons receiving underwriting compensation.
Methods of Calculation
A company’s public float, the total market value of the company’s outstanding common stock (voting and non-voting) held by non-affiliates or non-insiders, is the amount reflected on the first page of the company’s 10-K as the “aggregate market value of the common stock held by nonaffiliates of the registrant.” The public float is measured as of the last business day of the most recently completed second fiscal quarter, based on the last sale price or the average of the bid and asked prices in the principal trading market. For an initial registration statement, a registrant must choose a date that is within 30 days of the filing to determine SRC eligibility.
A company’s “annual revenues” for the $100 million SRC limit calculation is the total revenues as presented on the income statement for the most recently completed fiscal year for which audited financial statements are available. If the company is a financial institution however, it must calculate its gross revenues earned from traditional banking activities.
A company that determines it does not qualify under the new calculation of smaller reporting company will remain unqualified until it meets the subsequent qualification thresholds at the 80% level: (i) public float of less than $200 million, if it previously had $250 million or more; or (ii) less than (a) $80 million of annual revenues, if it previously had $100 million or more and (b) $560 million of public float, if it previously had $700 million or more.
For the first fiscal year after September 10, 2018, existing public companies may qualify by applying the new initial qualification thresholds rather than the lower subsequent qualification thresholds.
The annual revenues threshold for financial statements of acquired businesses was increased from $50 million to $100 million, and as a result acquirers (including non-SRCs) may omit the earliest of the three fiscal years of audited financial statements of such businesses.
The new rule also eliminated the exclusion of SRCs from the accelerated filer and large accelerated filer definitions so as to maintain the current thresholds at which companies are subject to those requirements, including the timing of the filing of periodic reports and Section 404(b) of the Sarbanes-Oxley Act. As a result, some registrants may qualify as both and SRC and an accelerated filer.
Finally, the new rule includes minor changes to the cover pages of registration statements and periodic reports (to remove the parenthetical next to the “non-accelerated filer” definition), including Forms 10-K and 10-Q, as of the September 10, 2018 effective date of the amended rules. A registrant should now check all applicable boxes, e.g., both the Smaller Reporting Company box and the Non-Accelerated Filer box, as appropriate.
The adopting release, including the list of the scaled disclosure requirements for SRCs and changes to the cover pages of SEC forms can be found here.