The SEC recently posted to its website a slide deck (PDF) from a staff presentation at the Forums on Auditing in the Small Business Environment.  The slides describe, among other things, some of the issues that the SEC frequently encounters in periodic filings made by smaller reporting companies.

When commenting on the periodic reports of smaller reporting companies, the SEC generally requests:

  • additional information;
  • additional or clarifying disclosure in future filings; or
  • filing amendments to revise financial statements or disclosure.

The SEC identified the following nine areas as “frequent” comment areas for smaller reporting companies:

  • Reverse mergers;
  • Disclosure controls and procedures, internal control over financial reporting and certifications;
  • Equity transactions;
  • Stock compensation;
  • Embedded conversion options and freestanding warrants;
  • Deferred tax valuation allowances;
  • Form 8-K – Item 4.01 (Changes in Registrant’s Certifying Accountant) and Item 4.02 (Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review);
  • Audit reports; and
  • Smaller reporting company status.

The slides describe, on a high level, the issues often encountered by the SEC in each of the above comment areas.  Those comment areas are non-exclusive, and the slides indicate that the SEC tailors its comments to the reporting company, including its current circumstances, industry developments and other factors.

OUR TAKE:  Smaller reporting companies, while eligible for scaled disclosure in some areas, remain subject to complex reporting rules and SEC scrutiny.  The SEC typically reviews the periodic filings of each reporting company (including smaller reporting companies) once every three years, and some companies are subject to more frequent review.  For this and other reasons, smaller reporting companies, and persons who wish to acquire control of a smaller reporting company by reverse merger or otherwise, would be well-advised to become familiar with the reporting rules applicable to smaller reporting companies and seek experienced counsel and accountants to avoid compliance issues and liability.