The SEC has proposed changes that would expand the number of registrants that qualify as “smaller reporting companies” under the SEC rules and regulations. Under the proposed definition, the pool of registrants qualifying as smaller reporting companies would be enlarged by increasing the thresholds for eligibility based on either a registrant’s public float or its previous year’s revenues, permitting an estimated additional 782 registrants to file as smaller reporting companies.
A smaller reporting company is currently defined as a registrant having less than $75 million in public float or zero public float and annual revenues of less than $50 million for the prior year. “Public float” is calculated by multiplying the aggregate worldwide number of shares of a registrant’s voting and non-voting common equity held by non-affiliates 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. A registrant filing its initial registration statement calculates its public float by multiplying the aggregate worldwide number of shares of its 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 such shares included in the registration statement by the estimated public offering price of the shares. A reporting company calculates its public float as of the last business day of its most recently completed second fiscal quarter, and a registrant filing its initial registration statement would calculate its public float as of a date within 30 days of filing the registration statement. A registrant may have no public float if it has no public equity outstanding or no market exists for its equity.
Under the proposed definition, a registrant with less than $250 million in public float would qualify as a smaller reporting company, as would a company with no public float if its revenues during the prior year were below $100 million. Once a registrant has exceeded the smaller reporting company threshold, to again qualify as a smaller reporting company it must have less than $200 million in public float at the end of its second fiscal quarter, up from $50 million in public float under the current rule, or, if the registrant has no public float, it must have less than $80 million in revenues in its most recent fiscal year, up from $40 million in revenues under the current rule.
Smaller reporting companies currently enjoy “scaled” reporting requirements, which would not be altered by the proposed changes. These include substantially reduced disclosure requirements in a number of areas. For example, smaller reporting companies are only required to provide two years of audited financial statements (rather than three) and two-year management’s discussion and analysis of financial condition and results of operations (MD&A) comparisons (rather than three-year comparisons). A smaller reporting company’s description of the development of its business must cover only three years, as opposed to the standard requirement of five years. Likewise, executive compensation is only required for three named officers (rather than five), and only for two years of summary compensation table information (rather than three years), with no compensation discussion and analysis or pay ratio disclosure required, among other reduced requirements.
The proposed changes would not alter the thresholds for qualifying as an accelerated filer or large accelerated filer, but would eliminate the provision in each definition that excludes registrants that are eligible to use the smaller reporting company category for their annual and quarterly reports. This change would preserve the current thresholds for accelerated filers and large accelerated filers so that smaller reporting companies with between $75 million and $250 million in public float would still be subject to the disclosure requirements and filing deadlines that apply to accelerated filers.
The proposed changes are responsive to the Fixing America’s Surface Transportation (FAST) Act of 2015, which requires the SEC to revise Regulation S-K to further scale or eliminate disclosure requirements to reduce the burden on a variety of smaller registrants. The changes are intended to promote capital formation and reduce compliance costs for smaller companies, while maintaining protections for investors. The smaller reporting company category was created in 2007 to reduce the regulatory compliance burden on smaller companies.
The proposed changes also fit within a broader review of disclosure requirements the SEC is currently conducting under a disclosure effectiveness initiative, with the aim of updating the requirements to facilitate timely, material disclosure by companies and shareholders’ access to that information. In furtherance of the disclosure effectiveness initiative, the SEC issued a Regulation S-K concept release in April 2016, seeking comment on various concepts for a scaled disclosure system, including the categories of registrants eligible for scaled disclosure, whether certain types of registrants should be excluded from the use of scaled disclosure, and whether and how the disclosure requirements should be scaled. Additional proposed changes may be forthcoming in response to this release.
