Corp Fin has just posted A Small Entity Compliance Guide for Issuers that summarizes the recent amendments to the definition of “smaller reporting company” and related amendments. (See this PubCo post and this Cooley Alert.) The Guide also provides some clarification regarding timing and transition to the new definition.
The Guide summarizes the new amendments to the SRC definition, which expanded eligibility for SRC status, allowing more companies to take advantage of the accommodations for scaled disclosures. Under the “public float test” in the new definition, the cap to qualify as an SRC will be raised to “less than $250 million” in public float. In addition, under the “revenue test,” a company with less than $700 million in public float (or no public float) could qualify as an SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year. (A company may have no public float because it has no public common equity outstanding or no market price for its common equity exists.)
Determining SRC status. Typically, a reporting company determines SRC status annually as of the last business day of its second fiscal quarter. Each reporting company would calculate its public float annually as of the last business day of its second fiscal quarter. If it does not qualify under the “public float” test, it would then determine whether it qualified as an SRC based on its annual revenues in its most recent fiscal year completed before the last business day of the second fiscal quarter. The Guide confirms that, if the company qualifies as an SRC on that date, “it may elect to reflect that determination and use the SRC scaled disclosure accommodations in its subsequent filings, beginning with its second quarter Form 10-Q. A company must reflect its SRC status in its Form 10-Q for the first fiscal quarter of the next year.”
Determining SRC Status in connection with an IPO. When filing an IPO registration statement, the company would calculate its public float as of a date within 30 days of the filing date of the registration statement. The calculation is computed by multiplying the aggregate worldwide number of shares of voting and non-voting common equity held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of shares of voting and non-voting common equity included in the registration statement by the estimated public offering price of the shares. If the company determined that it was not an SRC, it could still recalculate its status under the “public float” test at the conclusion of the offering based on the actual offering price and number of shares sold. If the company did not satisfy the “public float” test, it could still qualify based on its annual revenues in its most recent audited financial statements available on the initial public float calculation date.
Determining SRC status after exceeding initial caps. If the company does not qualify as an SRC under the initial qualification caps above, it will remain unqualified until it meets other lower caps set at 80% of the initial qualification caps: under the public float test, until it determines that its public float is less than $200 million or, under the revenue test, until it has annual revenues of less than $80 million during its previous fiscal year, if it previously had $100 million or more of annual revenues, or less than $560 million of public float, if it previously had $700 million or more of public float, or both, if both are exceeded. That is, the company needs to qualify under the relevant lower cap with respect to the cap or caps it previously exceeded. For example, for a company that did not qualify because it had $100 million or more in revenues in the prior year, but less than $700 million in public float, to qualify, it would need to have less than $80 million in revenue, but could still qualify with a public float of less than $700 million. If the company had exceeded both caps—that is, $100 million or more in revenues and $700 million or more in public float, to later qualify as an SRC, it would need to have less than $80 million in revenue and less than $560 in public float. Here is the Corp Fin example:
“Example: A company has a December 31 fiscal year end. Its public float as of June 28, 2019 was $710 million and its annual revenues for the fiscal year ended December 31, 2018 were $90 million. It therefore does not qualify as a SRC. At the next determination date (June 30, 2020), it will remain unqualified for SRC status unless it determines that its public float as of June 30, 2020 was less than $560 million and its annual revenues for the fiscal year ended December 31, 2019 remained less than $100 million.”
Below is the Corp Fin chart (footnotes omitted) showing the application of the revenues test after one or more of the caps has been exceeded but the public float or revenues subsequently declines:
| Prior Annual Revenues (for the fiscal year before the most recently completed fiscal year) |
Prior Public Float (as of the second quarter of the fiscal year before the most recently completed second fiscal quarter) |
|||
|---|---|---|---|---|
| None or less than $700 million | $700 million or more | |||
| Less than $100 million | Neither threshold exceeded; company remains a SRC. | Public float required: (as of the most recent second fiscal quarter) |
Less than $560 million; and | |
| Revenues required: (for the most recently completed fiscal year) |
Less than $100 million. | |||
| $100 million or more | Public float required: (as of the most recent second fiscal quarter) |
None or less than $700 million; and | Public float required: (as of the most recent second fiscal quarter) |
Less than $560 million; and |
| Revenues required: (for the most recently completed fiscal year) |
Less than $80 million. | Revenues required: (for the most recently completed fiscal year) |
Less than $80 million. | |
Foreign companies. If a foreign company meets the caps in the SRC definition, it is eligible for SRC status, but only if it uses domestic forms (instead of the “F” forms for FPIs) and prepares its financial statements using US GAAP.
Exclusions. Investment companies (including business development companies), asset-backed issuers and majority-owned subsidiaries of a parent that is not an SRC are not eligible for SRC status.
Transitioning to the amended SRC definition. For purposes of the first determination of SRC status after September 10, 2018, the effective date of the amendments, a company will qualify as an SRC if it meets the initial qualification caps in the revised definition as of the date it is required to measure its public float (the last business day of its second fiscal quarter) and, if applicable, had annual revenues of less than $100 million in its most recently completed fiscal year, even if the company previously did not qualify as a SRC. A company that completed its IPO since the end of its most recent second fiscal quarter may elect to determine whether it qualified as an SRC based on its public float as of the date it estimated its public float prior to filing or as of the conclusion of the offering based on the actual offering price and number of shares sold.
A company that qualifies as an SRC under the new definition after September 10, 2018, becomes eligible for scaled disclosure, regardless of whether it qualified under the old definition, in its next periodic or current report due after September 10, 2018 or, for transactional filings without a due date, in filings or amended filings made on or after September 10, 2018. (Note that, because all Forms 10-Q for the quarter ended June 30, 2018 are due before the September 10, 2018 effective date, companies may not rely on the amended definitions for purposes of those filings.)
Below is the Corp Fin chart (footnotes omitted) of examples applying the amendments with regard to the first periodic filings after effectiveness of the amendments, assuming that the filer is an “accelerated filer.” (Note that the amendments preserve the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Rule 12b-2.) Based on this table, it appears that the determination date of SRC status can precede the effective date of the amendments; the date of the first filing as an SRC, however, will not occur until after the effective date.
| Fiscal Year End | Public Float Calculation Date |
Public Float | Annual Revenues | First Periodic Filing Eligible to Rely on SRC Accommoda-tions |
|---|---|---|---|---|
| June 30 | Dec. 29, 2017 | $220 million | No need to calculate; company qualifies under “public float” test | Form 10-K due Sep. 13, 2018 |
| Sep. 30 | March 30, 2018 | $600 million | $90 million for FYE Sep. 30, 2017 | Form 10-K due Dec. 14, 2018 |
| Dec. 31 | June 29, 2018 | None | $85 million for FYE Dec. 31, 2017 | Form 10-Q for the quarter ending Sep. 30, 2018 due Nov. 9, 2018 |
Acquired businesses. The amendments modify Rule 3-05(b)(2)(iv) of Reg S-X to increase the net revenue cap from $50 million to $100 million, allowing companies to omit financial statements of businesses acquired or to be acquired for the earliest of the three fiscal years otherwise required by Rule 3-05 if the net revenues of that acquired business are less than $100 million. The Guide clarifies that a company may apply the amended threshold in Rule 3-05(b)(2)(iv) in periodic or current reports due after September 10, 2018 or, for transactional filings without a due date, in filings made on or after September 10, 2018. For example, if financial statements of a business acquired are required to be filed on Form 8-K and the due date of either the initial Form 8-K or the amended Form 8-K (per Item 9.01) is on or after September 10, 2018, then the company may apply the amended threshold in Rule 3-05(b)(2)(iv) in the Form 8-K.
Scaled disclosure. SRCs may comply with scaled disclosure requirements on an item-by-item basis. Where the SRC requirement is more rigorous, however, as in S-K Item 404, the company must meet the more rigorous standard. The Guide provides a table summarizing the scaled disclosure accommodations.
