On December 19, 2007, the Securities and Exchange Commission (the “SEC”) adopted amendments to the Securities Act of 1933 and the Securities Exchange Act of 1934 that permit smaller companies to elect to provide reduced disclosure in their proxy statements, annual reports and quarterly reports. The new rules:
- Establish and apply to a new category of filers called “smaller reporting companies” (“SRCs”). This category generally includes those companies (other than investment companies and asset-backed issuers) with:
- A public float of less than $75 million as of the last business day of their most recent second fiscal quarter; or
- If a public float cannot be calculated, less than $50 million in revenues in the most recently completed fiscal year.
- Effectively merge Regulation S-B into Regulation S-K and allow SRCs to elect to use reduced reporting requirements that were previously only available to small business issuers.
- Are available on an “a la carte” basis. Companies may choose to make either the reduced disclosure or the disclosure required of larger companies, as long as the disclosure allows investors to make period-to-period comparisons.
The new rules are effective for companies currently qualifying as small business issuers, beginning with annual reports for fiscal years ending on or after December 15, 2007. Newly qualifying SRCs have the option to use the new reduced Regulation S-K requirements when filing periodic reports due after February 4, 2008. This means that a calendar fiscal year company that qualifies as an SRC may take advantage of the reduced disclosure in its Form 10-K for the year ended December 31, 2007. Some highlights of the new requirements for SRCs that did not previously file as “small business issuers” under Regulation S-B include:
- Only two years of audited balance sheets, audited statements of income, cash flows and changes in stockholders’ equity are required to be included in an SRC’s Form 10-K rather than two years’ audited balance sheets and three years’ audited statements of income, cash flows and changes in stockholders’ equity.
- Only two years rather than three years of historical financial results need be discussed in Management’s Discussion and Analysis included in an SRC’s Form 10-K.
- An SRC need not provide a Compensation Discussion and Analysis.
- Only three of the seven executive compensation tables (Summary Compensation Table, Outstanding Equity Awards at Fiscal Year End Table, and Director Compensation Table) need be included in an SRC’s Form 10-K or proxy statement.
- No Selected Financial Data information need be included in an SRC’s Form 10-K.
- No performance graph need be included in an SRC’s annual report to shareholders or elsewhere.
- No risk factor disclosure is required in an SRC’s Form 10-K, Form 10-Q or Form 10.
The following chart shows some of the new reduced reporting requirements for SRCs that did not previously file as “small business issuers” under Regulation S-B.
New Smaller Reporting Company Reporting Requirements for Upcoming Proxy Season
The following chart shows some of the new reduced reporting requirements for proxy statements and registration statements relating to dispositions and business combinations for SRCs that did not previously file as “small business issuers” under Regulation S-B.
Entering and Exiting SRC Status
A larger reporting company that meets the requirements for eligibility for SRC status as of the last business day of its most recently completed second fiscal quarter may transition to the reduced Form 10-Q disclosure requirements for that quarter.
SRCs required to transition to larger reporting company disclosure requirements are not required to do so until the first quarter after the fiscal year in which the company is determined to be an SRC.
Once a company fails to qualify for SRC status, it will not become eligible again until its public float is less than $50 million as of the last business day of its second fiscal quarter.
Where public float cannot be calculated, a company that fails to qualify for SRC status because its revenue exceeds $50 million may not become eligible again until its total fiscal year revenues are less than $40 million.