On June 28, 2018, the Securities and Exchange Commission (SEC) approved amending the definition of “smaller reporting company” (SRC) to increase the financial thresholds for qualification.
This change will significantly expand the number of public companies that qualify as SRCs, thereby decreasing compliance costs and obligations for companies that opt to take advantage of the reduced – referred to as “scaled” – disclosure requirements in SEC filings. The new rules were published in the Federal Register on July 10, 2018 and go into effect on September 10, 2018.
Under the new definition, a public company may qualify as an SRC if it has a public float (that is, the market capitalization of voting and non-voting common equity securities held by non-affiliates) of less than $250 million, as compared to a $75 million threshold under the old definition. A company may also qualify as an SRC if it has less than $100 million of annual revenues and either (a) no public float or (b) a public float of less than $700 million, as compared to less than $50 million in annual revenues and no public float under the old definition.
However, the above qualifications only apply to an initial SRC determination. If a public company exceeds these thresholds and loses its SRC status, then it will be subject to slightly lower thresholds at 80% of the initial requirements, which is intended to reduce the frequency at which a company at the cusp would enter and exit SCR status. Under the new rules, a non-SRC may qualify as an SRC if it has a public float of $200 million if it previously had a public float of greater than $250 million. In the alternative, a non-SRC may qualify as an SRC if it has less than $80 million of an annual revenues and less than $560 million of public float, but only if it previously had $100 million or more of annual revenues and $700 million or more of public float.
SRC status permits companies to provide scaled disclosure in various SEC filings, including reports on Form 10-K and Form 10-Q, proxy statements and registration statements. Among other things, SRCs do not have to include the following in SEC filings:
- Three years of audited financial statements and comparative data, as only two years are required for SRCs;
- Certain executive compensation disclosure, including pay ratio disclosure, compensation discussion and analysis (CD&A), and specified compensation narrative and tabular information need not be made, and the compensation disclosure that is required to be made need only be disclosed for three “named executed officers” as opposed to five;
- Selected financial data and supplementary financial information;
- Ratios of earnings to fixed charges;
- Quantitative and qualitative disclosures about market risk;
- Stock performance graph; and
- Risk factors in periodic reports (although these are often still included).
The new definition of SRC does not amend the date or method for determining SRC status, so public companies will still evaluate their status on the first date of their fiscal year, based on the public float as of the last day of the second quarter of the previous year.
No Increase to Threshold for “Accelerated Filer”
The change to the definition of SRC did not include a conforming change to the threshold for “accelerated filer” in the definition thereof. Therefore, a public company will still qualify as an “accelerated filer” if it has a public float of $75 million or more, even if it qualifies as an SRC. Accordingly, an SRC that qualifies as an “accelerated filer” will still have to comply with the accelerated timelines for Form 10-K filings (75 days after fiscal year end) and Form 10-Q filings (40 days after end of quarter), as well as the requirement that they provide an auditor attestation of internal control over financial reporting, pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002. However, in the adopting release, the SEC stated that it was formulating recommendations for potential changes to the definition of “accelerated filer” to reduce the number of qualifying companies, so the threshold could increase in the future to minimize or eliminate the overlap.
Change to Requirements for Acquired Businesses
The SEC also increased the net revenue threshold, from $50 million to $100 million, for which companies must provide financial statements of businesses acquired or to be acquired, under Rule 3-05 of Regulation S-X. Accordingly, public companies may omit financial statements of businesses acquired for the earliest of the three fiscal years required thereunder, if the net revenues are less than $100 million. This change was made to conform with the change to the revenue requirements in the SRC definition.
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The definition of SRC is found in Item 10(f)(1) of Regulation S-K, Rule 405 of the Securities Act of 1933 and Rule 12b-2 of the Securities Exchange Act of 1934.