by Cydney Posner
Without holding an open meeting, the SEC has proposed changes to the definition of a “smaller reporting company” that would raise the financial cap from “less than $75 million” in public float to “less than $250 million,” allowing more companies to take advantage of the scaled disclosures permitted for companies that meet the definition. The proposal is “intended to promote capital formation and reduce compliance costs for smaller registrants, while maintaining investor protections.” The proposal was apparently also prompted in part by the FAST Act, which required the SEC to revise Reg S–K to further scale or eliminate disclosure requirements to reduce the burden on smaller registrants. (See this PubCo post.) As indicated in the press release, the SEC is not raising the $75 million threshold in the “accelerated filer” definition, which means that, even though they might qualify as smaller reporting companies, companies with $75 million or more of public float would remain subject to the “accelerated filer” requirements, including the accelerated timing of filing of periodic reports and the requirement to provide a SOX 404(b) auditor’s internal control attestation. So much for the harmonization recommended by the SEC’s Advisory Committee on Small and Emerging Companies last year. (See this PubCo post.) Comments are due within 60 days after publication in the Federal Register.
Under current rules, a registrant qualifies as a smaller reporting company if it has either (1) less than $75 million in public float as of the last business day of its most recently completed second fiscal quarter or (2) no public float (e.g., because it has no public equity outstanding or no market price exists for its equity) and annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available. (To calculate public float, the aggregate worldwide number of shares of voting and non-voting common equity held by non-affiliates is multiplied by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity.) Smaller reporting company status is determined annually. Smaller reporting companies are allowed to comply with the SEC’s disclosures requirements on a scaled item-by-item basis, and may, for example, omit some disclosures that many view as fairly onerous, including several of the otherwise required compensation tables, CD&A and, da DAH, the pay-ratio disclosure. The proposing release includes a great table showing the items of Regs S-K and S-X and the various accommodations made for scaled disclosure.
Under the proposed definition, the cap to qualify as a smaller reporting company would be raised to “less than $250 million” in public float as of the last business day of its most recently completed second fiscal quarter. For an IPO (or initial Exchange Act registration), the registrant would calculate its public float as of a date within 30 days of filing the registration statement. In addition, a registrant with no public float could qualify as a smaller reporting company if it had annual revenues of less than $100 million during its most recently completed fiscal year. Under the proposed definition, a registrant that determines that it does not qualify as a smaller reporting company (either on an initial determination in the case of an IPO or as of an annual determination in the case of reporting registrants) will remain unqualified until it determines that its public float was less than $200 million as of the last business day of its most recently completed second fiscal quarter. If its public float was zero, it would remain unqualified until it had annual revenues of less than $80 million during its previous fiscal year. The release explains that this “definitional structure helps to avoid situations in which registrants enter and exit smaller reporting company status due to small fluctuations in their public float.”
Interestingly, when considering these amendments, the SEC also considered just adjusting for inflation, but the resulting increases were not sufficiently significant; if adjusted for inflation, $75 million in public float set in 2007 would be equivalent to $85.7 million, and $50 million in revenue would be equivalent to $57.2 million. At the same, however, the number of registrants eligible to qualify as smaller reporting companies has diminished significantly: when the smaller reporting company definition was established, approximately 42% of registrants were eligible, while, in 2015, approximately 32% of registrants had less than $75 million in public float. Increasing the public float cap to less than $250 million would again increase the percentage of qualifying registrants to 42%.
As noted above, the SEC is not proposing to amend the public float thresholds for qualifying as an accelerated filer or large accelerated filer. To avoid indirectly increasing those thresholds, however, the SEC is proposing to amend the definitions of accelerated filer and large accelerated filer to eliminate the current exclusion from those definitions of registrants that are eligible to use the smaller reporting company requirements under Reg S-K. The result is to preserve the application of the current thresholds contained in the accelerated filer and large accelerated filer definitions.
In September 2015, the SEC’s Advisory Committee on Small and Emerging Companies approved a set of Recommendations about Expanding Simplified Disclosure for Smaller Issuers, a key focus of which was to attempt to harmonize or streamline the jumble of rules applicable to the various categories of small companies and to expand the application of the small-company disclosure accommodations generally. (See this PubCo post.) Among the recommendations was that the SEC increase the threshold for “accelerated filers” to include companies with a public float of $250 million or more, but less than $700 million, with the result that the requirement to provide an auditor attestation report under SOX 404(b) would no longer apply to those companies.
SideBar: Note that the discussion draft of the Financial CHOICE Act (see this PubCo post) would, if adopted in its current form, exempt from the requirements of SOX 404(b) any issuer with a total market cap of less than $250 million, introducing yet another category of small company issuer determined this time by market cap instead of public float. Apparently, practititioners can only dream about the possibility of having just one or two coherent categories of small company.
In this proposal, the SEC expressly rejects that Committee recommendation on the basis of a 2011 staff study, which found “no specific evidence that any potential savings from exempting registrants with public floats between $75 million and $250 million from the auditor attestation provisions of Section 404(b) would justify the loss of investor protections and benefits to registrants from such an exemption. Rather, the staff found that accelerated filers (including those with a public float between $75 million and $250 million) that were subject to the Section 404(b) auditor attestation requirements generally had a lower restatement rate than registrants that were not subject to the requirements. Moreover, the staff found that the population of registrants with public floats between $75 million and $250 million did not have sufficiently unique characteristics that would justify differentiating this population of registrants from other accelerated filers with respect to the Section 404 auditor attestation requirements.” The proposing release observes that subsequent academic research on this topic has been mixed, and, as a result, the SEC is not proposing to raise the accelerated filer public float threshold or to modify the Section 404(b) requirements. It is, however, requesting comment below on whether the public float threshold in the accelerated filer definition should be raised.