United States: SEC Proposes Amendments To Definition Of "Smaller Reporting Company" To Expand Availability

On June 27, 2016, the SEC proposed amendments that, if adopted, would allow more companies to qualify for "smaller reporting company" (SRC) status. The proposed amendments are intended to promote capital formation and reduce disclosure compliance costs for smaller companies while maintaining investor protections.

The proposed amendments expand the pool of companies that qualify as SRCs and thereby are eligible to provide reduced ("scaled") disclosure in certain SEC filings under Regulation S-K and Regulation S-X. Under the proposed amendments, a company generally qualifies as an SRC if it has a public float of less than $250 million (or annual revenues of less than $100 million if the company has no public float). Currently, the threshold is less than $75 million in public float (or less than $50 million in annual revenues if the company has no public float). 

To prevent scenarios in which a company enters and exits SRC status due to small fluctuations in its public float, under the proposed definition, once a company exceeds the SRC threshold, it would not qualify again as an SRC until its public float dropped below $200 million (or $80 million in annual revenues if the company has no public float). Currently, the threshold is less than $50 million in public float (or less than $40 million in annual revenues if the company has no public float).

Under the proposed amendments, a reporting company continues to calculate its public float for assessing SRC status as of the last business day of its most recently completed second fiscal quarter and a company filing its first registration statement continues to calculate its public float as of a date within 30 days of filing the registration statement. The proposed amendments do not change the methods for calculating public float and revenues to determine SRC status or the scope of the scaled disclosure accommodations available to SRCs.

The SEC's proposed rule includes the following table, which summarizes the proposed amendments to the SRC definition:

The proposed amendments also delink non-SRC status from the definition of "accelerated filer," with $75 million in public float continuing to be the threshold in the "accelerated filer" definition. As a result, companies with a public float of $75 million or more (up to $250 million) could qualify as both an SRC and an accelerated filer, eligible for scaled disclosure but subject to the requirements that apply to accelerated filers, including the filing deadlines for periodic reports (e.g., Forms 10-K and 10-Q) and the requirement to provide an auditor's attestation of management's assessment of internal controls over financial reporting. Importantly, the proposed amendments do not change the threshold for eligibility to use Forms S-3 and S-4, which generally require a public float of at least $75 million. As a result, a company that qualifies as an SRC under the proposed amendments continues to be eligible to use Forms S-3 and S-4—with scaled disclosure—so long as its public float remains at least $75 million. 

The SEC estimates that 782 additional companies will be eligible for SRC status if the SEC approves the proposed amendments as proposed. The SEC posits that, by adopting the proposed amendments, there will be an increase in capital formation and a reduction in compliance costs for those new SRC companies. 

What does this mean for a current accelerated filer with between $75 million and $250 million in public float?

The company can qualify as both an accelerated filer and an SRC, allowing it to use the scaled disclosure accommodations available to SRCs (including no requirement to provide pay ratio disclosure), while remaining subject to the requirements that apply to accelerated filers, including the filing deadlines for periodic reports (e.g., Forms 10-K and 10-Q) and the requirement to provide an auditor's attestation of management's assessment of internal controls over financial reporting. This will not impact the ability to use Forms S-3 and S-4, even after becoming an SRC.

What does this mean for an SRC approaching $75 million in public float?

The company can continue to use the scaled disclosure accommodations available to SRCs upon reaching $75 million in public float (until reaching $250 million in public float) but will become an accelerated filer and also have the ability to use Forms S-3 and S-4, while retaining SRC status.

The SEC is requesting public comments on the proposed amendments, which are due on August 30, 2016.  

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