On July 5, 2007, the Securities and Exchange Commission (the "SEC") proposed rule amendments regarding disclosure and reporting requirements for smaller companies under the Securities Act of 1933 and the Securities Exchange Act of 1934. The proposed amendments would have the effect of extending the benefits of the current scaled disclosure and reporting requirements for smaller companies to those companies with a public float of less than $75 million (up from $25 million), while simultaneously simplifying the rules applicable to these smaller reporting companies. The SEC has requested comments by September 17, 2007; the effective date for the proposal, if adopted, is uncertain. This proposal is one of a series of measures by the SEC to modernize and improve the process of capital raising and reporting requirements for smaller companies.
The SEC has historically made special efforts not to subject smaller companies and their investors to unduly burdensome federal securities regulation, based in part on the special role that small business has played as a driver of economic activity. In March 2005, the SEC chartered the Advisory Committee on Smaller Public Companies to evaluate the current regulatory regime for smaller companies under the federal securities laws. The Advisory Committee's recommendations propelled this SEC proposal.
The SEC's current rules identify two major categories of smaller companies for purposes of scaling the SEC's disclosure and reporting requirements to the needs of smaller companies and their investors:
(1) "Small business issuers" are companies with both a public float and revenues of less than $25 million and are able to make required disclosures based on the less detailed requirements of Regulation S-B;
(2) "Non-accelerated filers" are essentially companies with a public float of less than $75 million (that do not qualify as either "large accelerated filers" or "accelerated filers"), which are allowed to file their annual reports no later than 90 days after the end of the fiscal year and quarterly reports no later than 45 days after the end of each fiscal quarter (in contrast to the shorter filing deadlines for "large accelerated filers" and "accelerated filers").
The SEC's proposals have the primary objectives, each of which the SEC believes is consistent with shareholder protection, of simplifying and improving the disclosure and reporting requirements for smaller companies and of making these simplified procedures available to a larger number of smaller companies.
Expansion of Eligibility for Smaller Company Scaled Regulation
The SEC's proposals would expand the availability of its scaled disclosure and reporting requirements for smaller companies by making those requirements available to most companies with a public float of less than $75 million. The SEC intends to achieve this end by replacing the term "small business issuer" with the new term "smaller reporting company," and including most "non-accelerated filers" within the definition of this new term. Small business issuers are currently eligible to use the Regulation S-B disclosure requirements, and the non-accelerated filers are generally those filers with a public float of less than $75 million.
The public float of a company would be calculated by using the price at which the shares of its common equity were last sold (or the average of the bid and asked prices of such shares in the principal market for the shares as of the last business day of the company's second fiscal quarter) multiplied by the number of outstanding shares held by non-affiliates.
The use of the term "smaller reporting company" for both current groups of companies would combine these two groups into one larger group of companies with a public float of less than $75 million. The SEC stated that it set the initial ceiling for smaller reporting companies at $75 million in public float because it already uses that metric in several rules to distinguish smaller companies. The term "smaller reporting company" would also include companies with annual revenues of less than $50 million in cases where the companies do not have or are unable to calculate a public float. As proposed, these thresholds would be adjusted every five years for inflation. The proposed amendments would also allow all foreign companies that meet the criteria to qualify as smaller reporting companies (foreign companies are not included within the current definition of "small business issuer").
Integration of Requirements of Current Regulation S-B into Regulation S-K
The SEC designed Regulation S-B to provide small business issuers with a single source for their SEC disclosure requirements with the following objectives: reducing compliance costs while maintaining investor protection; improving the ability of small businesses to access public capital markets; and encouraging smaller companies to provide their investors with the benefits of trading in public capital markets. The SEC is now proposing to integrate the substantive provisions of Regulation S-B into Regulation S-K because it believes this action will simplify regulation for small businesses and lower costs. Small business issuers would no longer utilize the current "S-B" registration forms.
Specifically, the SEC is proposing to incorporate alternative requirements on form and content of financial statements, which currently appear in Item 310 of Regulation S-B, as a new Item 310 (Financial Statements of Smaller Reporting Companies) of Regulation S-K. Item 310 of Regulation S-B currently bases its requirements for smaller companies on generally accepted accounting principles ("GAAP"), and does not require smaller companies to conform their financial statements to the SEC's Regulation S-X. Foreign issuers who elect to use Item 310 disclosure for smaller companies would be required to present financial statements pursuant to U.S. GAAP. This portion of the proposal represents a substantive change from the current Item 310 and is premised on the expansion of the definition of "smaller reporting company" to include all foreign companies.
The SEC is also proposing to allow smaller reporting companies to take an "a la carte" approach to its compliance with disclosure requirements under the integrated version of Regulation S-K. A company that qualifies as a smaller reporting company would be able to choose on an item-by-item basis whether to comply with the scaled disclosure requirements available in Regulation S-K (formerly available in Regulation S-B), or to comply with the more rigorous disclosure requirements for other companies in Regulation S-K. This proposal would allow maximum flexibility for smaller reporting companies without disadvantaging investors.
These proposals would allow a larger number of companies to take advantage of the scaled and less rigorous disclosure and reporting requirements now available under Regulation S-B. The proposals would also enable the larger group of eligible companies to utilize the scaled disclosure and reporting requirements in a more efficient manner. These consequences would further the SEC's initiative of improving the ability of smaller companies to access public capital markets while maintaining investor protection.