On July 5, the Securities and Exchange Commission issued proposed rule amendments relating to the disclosure and reporting requirements for small companies under the Securities Act of 1933 and the Securities Exchange Act of 1934. Many of the proposed rule amendments stem from the April 2006 recommendations of the Advisory Committee on Smaller Public Companies. The proposed rule amendments provide in part for the following:
- The categories of “small business issuer” and “non-accelerated filer” would be combined to form a new category “smaller reporting company”. A “smaller reporting company” would be defined as an issuer with a public (non-affiliate) float of less than $75 million as of the last business day of the issuer’s second fiscal quarter or an issuer which has no common equity public float or market price and which has reported annual revenues of less than $50 million in the most recently completed fiscal year for which audited financial statements are available. Foreign private issuers that meet the criteria for a “smaller reporting company” would be eligible to utilize the disclosure and reporting standards for a “smaller reporting company”. Foreign private issuers who qualify would be able to choose to file pursuant to the requirements of Form S-1, Form S-3, Form S-4, Form 10-Q and Form 10-K or the “F” forms such as Form F-1, Form F-3, Form F-4 or Form 20-F.
- The substantive provisions of the current Regulation S-B would be integrated into Regulation S-K. For example:
- A new Item 310 (Financial Statements of Smaller Reporting Companies) would be added to Regulation S-K to set forth the alternative requirements on form and content of financial statements for smaller companies that now appear in Item 310 of Regulation S-B. New Item 310 of Regulation S-K would base the requirements on form, content, and preparation of financial statements for smaller companies solely on generally accepted accounting principles (GAAP). It would not require smaller companies to conform their financial statements to Regulation S-X. Item 310 of Regulation S-B would allow smaller companies to provide an audited balance sheet for the latest fiscal year only and audited statements of income, cash flows, and changes in stockholders’ equity for each of the latest two fiscal years only, rather than an audited balance sheet for the latest two fiscal years and audited statements of income, cash flows, and changes in stockholders’ equity for each of the latest three fiscal years, as required in Regulation S-X.
- Items 301 (Selected Financial Data), 302 (Supplementary Financial Information) and 305 (Quantitative and Qualitative Disclosures about Market Risk) of Regulation S-K would be amended to provide that smaller reporting companies are not required to present the information required by these items.
- Item 303 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of Regulation S-K would be amended to permit only two years of analysis if the company is presenting only two years of financial statements instead of the three years of analysis required of larger companies as required in Regulation S-X.
- Item 402 (Executive Compensation) of Regulation S-K would be amended to provide for the alternative standards for smaller reporting companies for disclosure of compensation such as the exclusion of the Compensation Discussion and Analysis section, executive compensation disclosure for only three officers, and Summary Compensation Table disclosure for only two years.
- Item 404 (Transactions with Related Persons, Promoters and Certain Control Persons) of Regulation S-K would be amended to provide for alternative standards for disclosure of related person transactions.
- An issuer that qualifies as a smaller reporting company would be permitted to choose, on an item-by-item or “a la carte” basis, to comply with either the scaled disclosure requirements made available in Regulation S-K for smaller reporting companies or the disclosure requirements for other companies in Regulation S-K. A smaller reporting company would have the option to take advantage of the smaller reporting company requirements for one, some, all or none of the items, at its election, in any one filing, provided that, a smaller reporting company provide its financial statements on the basis of either Item 310 of Regulation S-K or Regulation S-X for an entire fiscal year.
- The Forms associated with Regulation S-B such as Forms 10-SB, 10-QSB, 10-KSB, SB-1 and SB-2 would be eliminated. Comments to the proposed rule amendments should be received on or before 60 days after publication in the Federal Register.