Citing its ongoing efforts to ease disproportionate burdens imposed by federal securities regulations on small business, the Securities and Exchange Commission has adopted rules substantially as proposed to extend the benefits of scaled disclosure requirements to a broader universe of public companies. Specifically, the new SEC rules (i) establish a new standard of a “smaller reporting company” consisting of a public float of less than $75 million; and (ii) integrate prior “small business issuer” disclosure requirements into Regulations S-K and S-X while eliminating Regulation S-B and its associated forms.
Since 1992, the SEC has maintained a separate, more lenient registration, reporting and qualification system for “small business issuers” under the Securities Act of 1933 and the Securities Exchange Act of 1934. The centerpiece of this separate regime, Regulation S-B, was designed to mimic the parallel reporting system for larger companies under Regulations S-K and S-X. The disclosure standards in Regulation S-B, however, scaled back the detail particularly with respect to the form and extent of financial statements necessary. Qualification for this scaled reporting system required a company to have a public float and annual revenue of less than $25 million.
In addition to the “small business issuer” category, to implement accelerated reporting timetables, the SEC developed a separate designation—“non-accelerated filer”—to capture smaller reporting companies with a public float of less than $75 million (the threshold for companies eligible to register primary offerings on Form S-3). Non-accelerated filers have been eligible to use later deadlines for the filing of their periodic reports under the Exchange Act (45 days and 90 days after the end of each fiscal quarter and year for quarterly reports and annual reports, respectively, as opposed to 40 days and 60 or 75 days for the quarterly reports and annual reports of large accelerated and accelerated filers, respectively) and later implementation dates to comply with Section 404 of the Sarbanes-Oxley Act.
At an open meeting on Nov. 15, 2007, the SEC voted to adopt a new category—“smaller reporting company”—to expand the “small business issuer” designation to parallel the “non-accelerated filer” standard. Companies that satisfy the new definition of smaller reporting company now may utilize the same scaled disclosure and timing advantages historically available for small business issuers.
A “smaller reporting company” is defined as a company with a public float of less than $75 million. As with non-accelerated filers currently, the calculation date for a smaller reporting company’s public float is the last business day of its second fiscal quarter. As a result, issuers will be able to readily calculate more than six months in advance whether they are eligible for the smaller reporting for their next fiscal year. An issuer unable to calculate public float, for example, because no equity market exists or only debt is outstanding, may alternatively qualify as a smaller reporting company if its revenues for the prior fiscal year are below $50 million.
The SEC originally proposed, but did not adopt, any inflation adjustment to the $75 million and $50 million thresholds. Rather, the SEC indicated it will review the feasibility of indexing dollar threshold for inflation as part of a broader project applicable to all companies and offering measurements.
With the expanded definition of smaller reporting companies, the SEC also eliminated Regulation S-B and instead folded its concepts into Regulations S-K and S-X. Each item in the newly integrated Regulation S-K now will include an additional paragraph under a “Smaller reporting companies” heading that generally conforms to the prior Regulation S-B requirements. Accordingly, a broader group of smaller reporting companies now will benefit from scaled reporting standards.
Most notably, the less detailed financial statement provisions previously under Item 310 of Regulation S-B will now appear in a new Article 8 of Regulation S-X, thereby enabling the broader group of smaller reporting companies to provide fewer years of financial statements and current Management’s Discussion and Analysis (“MD&A”). Likewise of significance, the broader group of smaller reporting companies will be able to exclude the Compensation Discussion and Analysis (“CD&A”) and certain executive compensation tables in annual reports or proxy statements under Item 402 of Regulation S-K.
A unique feature of the new regime is that a smaller reporting company is permitted to choose on an “a la carte” basis (even within a single filing) whether to comply with Regulation S-K requirements for larger companies or take advantage of the scaled requirements for smaller reporting companies. As a result, an eligible company could choose in a particular filing to comply with the more extensive Item 101 of Regulation S-K requirement for its description of business applicable to larger companies, while in the same filing providing executive compensation disclosure under Item 402 of Regulation S-K pursuant to the more lenient smaller reporting company requirements. The only limitation to this discretion is in the presentation of financial statements, as a smaller reporting company is prohibited from switching back and forth during a single fiscal year between the more limited number of years of financial information to be presented under new Item 310 of Regulation S-K and new Article 8 of Regulation S-X, on the one hand, and the greater number of years required under Article 3 of Regulation S-X, on the other hand.
Concurrent with the integration of Regulation S-B into Regulation S-K, the SEC also will phase-out all smallbusiness forms: SB-1, SB-2, 10-SB, 10-KSB, and 10-QSB. In their place, smaller reporting companies will transition to filing on the same forms as larger companies, such as Form S-1 which notably since 2005 has permitted incorporation by reference of historical filings. The substance of disclosure in the form nonetheless will remain based on whether a company qualifies under the scaled regime for smaller reporting companies.
The new SEC standard will be effective thirty days after publication in the federal register, and in sufficient time for the 2008 reporting season. Approximately 1,500 more companies are entitled to take advantage of the scaled disclosure in connection with their forthcoming Annual Reports on Form 10-K. Most calendar year-end companies are positioned now to calculate whether they qualify as smaller reporting companies.
Particularly for those qualifying under the new regime that did not qualify as small business issuers previously— companies with a public float in the range of $25 million to $75 million—it is worthwhile to assess soon whether and to what extent to take advantage of scaled reporting. Doing so may alleviate compliance and auditing burdens as non-accelerated filers approach the Sarbanes-Oxley Section 404 implementation deadline. Satisfying the definition of smaller reporting company alone, however, should not automatically dictate a transition to the new scaled regime. Comfort with the known Regulation S-K standard and investor expectations for more detailed disclosure may tip the balance for management and audit committees evaluating the expanded scaled regime.
To assist those companies transitioning to the scaled standards for smaller reporting companies, the SEC intends to issue a short booklet illustrating changes and providing Q&A guidance on adapting to the new regime. In a related area, the SEC announced at the open meeting that it continues to actively review and expects to bring forth in the near future other proposals to benefit small businesses applicable to Regulation D and Form S-3 offerings