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Locke Lord QuickStudy: More Public Companies Will Soon Be Able to Qualify for Scaled Disclosures

capitalmarkets.lockelord.com
June 29, 2018
 

On June 28, 2018, the U.S. Securities and Exchange Commission (“SEC”) adopted amendments to the definition of “smaller reporting company” (“SRC”) in order to expand the number of companies that qualify for certain existing scaled disclosure accommodations (the “Amendments”).1 However, the Amendments did not modify the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2.

Background

The Securities Exchange Act of 1934, as amended (the “Exchange Act”) contains ongoing disclosure requirements for “reporting companies” designed to keep investors informed on a current basis of information concerning material changes in the financial condition or operations of such reporting company.

In 2008, in an effort to provide general regulatory relief for smaller reporting companies, the SEC established SRCs as a category of reporting companies under Regulation S-K of the Exchange Act. Reporting companies who qualify as SRCs may provide scaled disclosures, which permit SRCs to include less extensive narrative disclosure than required of other reporting companies (particularly in the description of executive compensation) and to provide audited financial statements for two fiscal years, in contrast to other reporting companies, which must provide audited financial statements for three fiscal years.

The Amendments to the SRC Definition

Under the Amendments, reporting companies with a public float of less than $250 million will qualify as a SRC. Additionally, a company with no public float or with a public float of less than $700 million will qualify as a SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year.

The following table summarizes the Amendments to the SRC definition.

 Criteria Previous SRC Definition  Revised SRC Definition
 Public Float Public float of less than $75 million Public float of less than $250 million
 Revenues Less than $50 million of annual revenues and no public float
Less than $100 million of annual revenues and
  • no public float
  • public float of less than $700 million

Additionally, under the Amendments, a reporting company that determines that it does not qualify as a SRC will remain unqualified until it determines that it meets one or more lower qualification thresholds provided in the table below.

 Criteria Previous SRC Definition  Revised SRC Definition
 Public Float Public float of less than $50 million Public float of less than $250 million
 Revenues Less than $40 million of annual revenues and no public float
 
Less than $80 million of annual revenues, if it previously had $100 million or more of annual revenues; and Less than $560 million of public float, if it previously had $700 million or more of public float.


Takeaways

The Amendments will have an immediate impact on hundreds of reporting companies that may now qualify as SRCs and can take advantage of scaled disclosures. However, the Amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2. As a result, companies with $75 million or more of public float that qualify as SRCs will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and, most importantly, the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002, which is costly and a significant burden on SRCs. However, SEC Chairman Jay Clayton has directed the SEC staff to formulate recommendations to the SEC for possible additional changes to the “accelerated filer” definition that, if adopted, would have the effect of reducing the number of companies that qualify as accelerated filers in order to promote capital formation by reducing compliance costs for those companies, while maintaining appropriate investor protections.

The Amendments will be effective 60 days after their publication in the Federal Register.

Amendments to Smaller Reporting Company Definition, Release Nos. Release Nos. 33-10513; 34-83550; File No. S7-12-16, available here.

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