Recently, on May 9, 2019, the Securities and Exchange Commission proposed amendments to the accelerated filer and large accelerated filer definitions in Rule 12b-2 under the Securities Exchange Act of 1934. The proposed amendments would (i) exclude low-revenue smaller reporting companies from the accelerated and large accelerated filer definitions, (ii) increase the transition thresholds for accelerated filers and large accelerated filers becoming non-accelerated filers, and (iii) add a new revenue test to the transition thresholds.
The Commission press release announcing the proposal explains that the amendments are designed to ensure that low-revenue smaller reporting companies would not be required to obtain an attestation of their internal control over financial reporting (ICFR) from an independent outside auditor. As noted by SEC Chairman Jay Clayton, “[t]he proposed rules build on the JOBS Act of 2012 and are aimed at a subset of smaller companies where the additional requirement of an ICFR auditor attestation may not be an efficient way of benefiting and protecting investors.” The proposed amendments would also impact filing deadlines for low-revenue smaller reporting companies that are also accelerated filers under the current definitions, as those smaller reporting companies would no longer be subject to the shorter SEC filing deadlines applicable to accelerated filers.
The amendments follow recent amendments to the smaller reporting company definition, which was amended by the SEC last year to (i) substantially increase the public float threshold (from $75 million to $250 million) and the revenue threshold (from $50 million to $100 million), and (ii) expand the availability of the revenue test to companies with a public float of less than $700 million. The SEC release for the proposed amendments is available here and our prior analysis of last year’s amendments to the smaller reporting company definition is available here.
Proposal to Exclude Low-Revenue Smaller Reporting Companies
The proposal would partially conform the accelerated and large-accelerated filer definitions to the revised smaller reporting company definition by expressly excluding low-revenue smaller reporting companies from those definitions. Prior to the revised smaller reporting company definition, the three reporting regimes were definitionally aligned. But as a result of the amended smaller reporting company definition, certain companies satisfied both the smaller reporting company and accelerated filer definitions, requiring those companies to, among other things, comply with the burdensome requirement that the company’s independent auditor attest to the effectiveness of the company’s ICFR, despite the company’s eligibility for smaller reporting company status.
Pursuant to Rule 12b-2, the existing definition of accelerated filer includes companies that: (i) have a public float of $75 million or more, but less than $700 million (as of the last business day of the issuer’s most recently completed second fiscal quarter); (ii) are subject to the reporting requirements under Sections 13(a) or 15(d) of the Exchange Act for a period of at least 12 calendar months; and (iii) have filed at least one annual report pursuant to Sections 13(a), 15(d). Large accelerated filers are defined to include companies with a public float of $700 million or more that satisfy the second and third requirements noted above.
The proposal would amend both definitions to expressly exclude companies that are eligible for smaller reporting company status pursuant to the revenue test in that definition (i.e., because the company had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available). Companies with a public float between $75 million and $250 that did not satisfy the revenue test under the smaller reporting company definition would, however, continue to be both smaller reporting companies and accelerated filers.
The amendments would, therefore, ensure that companies with revenues less than $100 million would (i) not be required to obtain an attestation of their ICFR from an independent outside auditor and (ii) not be subject to the shorter filing deadlines for quarterly and annual reports that are applicable to accelerated filers (40 and 75 days for accelerated filers, respectively, compared to 45 days and 90 days for non-accelerated filers).
Proposed Amendments to Transition Thresholds
The proposal would also align the transition thresholds for accelerated and large accelerated filers with the revised transition thresholds for smaller reporting company eligibility by (i) increasing the thresholds to 80% of the initial definitional threshold and (ii) including a revenue-based transition threshold matching the exclusion of low-revenue smaller reporting companies from the definition of accelerated and large accelerated filer. The proposed amendments would amend the transition thresholds as follows:
- The transition threshold from accelerated filer to non-accelerated filer would increase from $50 million to $60 million (80% of the $75 million initial definitional threshold).
- The transition threshold from large accelerated filer to non-accelerated filer would increase from $500 million to $560 million (80% of the $700 million initial definitional threshold).
- The transition thresholds for both accelerated filers and large accelerated filers would also include companies that satisfy the revenue test under the smaller reporting company definition (i.e., annual revenues of less than $100 million).
The SEC has requested public comment on many aspects of the proposed amendments; public comments are due 60 days following publication in the Federal Register.