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07.27.16

SEC Proposes Amendments to Smaller Reporting Company Definition

On June 27, 2016, the Securities and Exchange Commission (the “SEC”) proposed amendments that would increase the financial thresholds in the definition of “smaller reporting company” (“SRC”). The definition of SRC is found in Rule 405 under the Securities Act of 1933 (the “Securities Act”), Rule 12b-2 under the Securities Exchange Act of 1934 (the “Exchange Act”), and Item 10(f) of Regulation S-K. Under the current definition, SRCs are generally defined as registrants with:

  • less than $75 million in public float as of the last business day of their most recently completed second fiscal quarter; or
  • zero public float and annual revenues of less than $50 million during the most recently competed fiscal year for which audited financial statements are available.

Under the proposed definition, SRCs would include registrants with:

  • less than $250 million in public float as of the last day of their most recently completed second fiscal quarter; or
  • zero public float and annual revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are available.

If the amendments are adopted, much larger companies would qualify as smaller reporting companies. The proposed amendments would also increase the lower thresholds a registrant must satisfy in order to regain qualification as an SRC after exceeding either the public float or revenue thresholds. Under the current definition, once a registrant that qualified as an SRC under the public float threshold exceeds that threshold, the registrant cannot regain its qualification as an SRC until its public float decreases below $50 million. Similarly, once a registrant with zero public float that qualified as an SRC under the revenue threshold exceeds that threshold, the registrant cannot regain its qualification as an SRC until revenues for the most recently completed fiscal year decrease below $40 million. The proposed amendments would increase these thresholds as follows:

  • a registrant that qualified as an SRC based on public float that subsequently exceeds the amended public float threshold of $250 million will remain unqualified unless and until its public float falls below $200 million as of the last business day of its most recently completed second fiscal quarter;
  • a registrant with zero public float that qualified as an SRC based on revenues that subsequently exceeds the amended revenue threshold of $100 million will remain unqualified unless and until its revenues for the most recently completed fiscal year fall below $80 million.

In addition, the SEC is proposing amendments to the definitions of “accelerated filer” and “large accelerated filer” in order to preserve the application of the public float thresholds currently contained in those definitions. As presently defined, an accelerated filer is a registrant who, among other things, has a public float equal to or greater than $75 million, but less than $700 million, as of the last business day of its most recently completed second quarter. A large accelerated filer is a registrant who, among other things, has a public float equal to or greater than $700 million as of the last business day of its most recently completed second quarter. The definitions of both accelerated filer and large accelerated filer explicitly exclude registrants who are eligible to rely on the SRC requirements under Regulation S-K for their quarterly and annual reports. The SEC’s proposed amendments to these definitions would “eliminate the provision[s] in each [definition] that specifically exclude registrants that are eligible to use the [SRC] requirements under Regulation S-K for their annual and quarterly reports.”

The reason behind this proposed amendment is relatively straightforward. If the SEC were to increase the public float threshold for SRCs, as proposed, without also making this amendment to the definition of accelerated filer, the effect would be to indirectly increase the public float threshold in the definition of accelerated filer, because registrants with public floats of up to $250 million would be excluded from qualification as accelerated filers due to their qualification as SRCs. This amendment maintains the current application of the $75 million public float threshold contained in the accelerated filer definition.

Under either the current SRC public float threshold of $75 million, or the proposed SRC public float threshold of $250 million, no registrants are excluded from qualification as large accelerated filers by the SRC provision in the large accelerated filer definition, because of the much larger minimum public float to qualify as a large accelerated filer ($700 million). The SEC is proposing removing this provision partly because of this irrelevance, and in order to clarify the definition of large accelerate filer and avoid confusion.

Registrants that qualify as SRCs are permitted to selectively provide scaled disclosures on an item-by-item basis under Regulation S-K and Regulation S-X, thereby saving the registrant considerable time and expense. The scaled disclosures allow the registrant to abbreviate or omit altogether several disclosure items that the registrant would otherwise be required by Regulation S-K to include in its registration statements, periodic reports, proxy statements and other filings under the Securities Act and the Exchange Act. In addition, the scaled disclosures shorten the reporting periods for, or abbreviate the content of, various financial reports required under Regulation S-X.

In the materials accompanying the proposed amendments, the SEC states that its goal in raising the financial thresholds contained in the definition of SRC is to “expand the number of registrants that qualify as [SRCs] and thereby benefit from scaled disclosure requirements.” The current definition of SRC was adopted when the SEC established the SRC category of registrants in 2007, and the public float and revenue thresholds have not been revised since. At that time, about 42% of registrants qualified as SRCs under the $75 million public float threshold. At present, 31.9% of registrants qualify as SRCs under that threshold. If the public float threshold is increased to $250 million, as proposed, the SEC estimates that 41.8% of registrants will qualify as SRCs. The SEC does not have sufficient data to compare the percentage of registrants with zero public float that qualified as SRCs under the $50 million revenue threshold in 2007 to the percentage that would qualify under a $100 million revenue threshold today, but they note that the proposed increase would result in 10.7% of registrants qualifying under the $100 million revenue threshold versus 10.3% under the $50 million threshold.  If the public float and revenue thresholds are amended as proposed, the SEC estimates that approximately 782 registrants would become newly eligible to use scaled disclosure as SRCs for purposes of their annual and quarterly reports on forms 10-K and 10-Q.

Public comments on the proposed rule are due 60 days after publication in the Federal Register. Click here to read the entire proposed rule.

If you have any questions concerning the above, feel free to contact a member of our Securities & Finance Practice Group at (303) 573-1600.

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This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the subjects mentioned herein.