Regulation S-X and Smaller Reporting Companies; ALG

Posted by on October 25, 2018

Regulation S-X and Smaller Reporting Companies; ALG- Today is the continuation in a LawCast series talking about the new amendment to the SEC definition of a smaller reporting company.
On June 28, 2018, the SEC adopted the much-anticipated amendments to the definition of a “smaller reporting company” as contained in Securities Act Rule 405, Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K. In the last LawCast in this series I went through the scaled disclosure requirements for smaller reporting companies under Regulation S-K. I will now go through Regulation S-X.

Rule 8-02 only requires 2 years for the income statements, cash flow statements and changes in stockholders’ equity instead of 3 years.
Rule 8-03 related to interim financial statements Permits certain historical financial data in lieu of separate historical financial statements of equity investees.
Rule 8-04 – only requires a maximum of 2 years of financial statements for business acquired or to be acquired instead of 3 years
Rule 8-05 – related to pro forma financial information has fewer instances in which pro forma financial statements are required for smaller reporting companies;
Rule 8-06 – only requires a maximum of 2 years of financial statements for acquisition of properties from related parties rather than 3 years
Rule 8-08 – is less stress stringent on the age of financial statements requirements.

The new rules did not change the definitions of either “accelerated filer” or “large accelerated filer.” As a result, companies with $75 million or more of public float that qualify as SRCs will remain subject to the requirements that apply to accelerated filers, including the accelerated timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act. However, Chair Clayton has directed the SEC staff to make recommendations for additional changes to the definitions to reduce the number of companies that would qualify as accelerated filers.
The public float threshold for an accelerated filer is $75 million. Companies that currently file as an accelerated filer would continue to do so under the new rules, but would be able to benefit from the scaled disclosure requirements available to smaller reporting companies. The filing deadlines for each category of filer are as follows:

For a large accelerated filer their Form 10-K is due 60 days after fiscal year end and Form 10-Q’s are due 40 days after a quarter end.
For an accelerated filer, non-accelerated filer and smaller reporting company their Form 10-K is due 90 days after fiscal year end and Form 10-Q’s are due 45 days after a quarter end.

Commissioners Hester Peirce and Michael Piwowar made public statements regarding the rule change both supporting the amendment but expressing disappointment that it did not also include a change in the definition of an accelerated filer. Both commissioners think it is not enough to reduce regulatory burdens to encourage more companies to go public. Section 404(b) of the Sarbanes-Oxley Act is one of the largest burdens that face smaller public companies and Commissioner Piwowar believes that until that is changed, there will be no improvement in efforts to raise capital by smaller companies. Ms. Peirce goes further, stating that the failure to make a conforming change to the definition of an accelerated filer will actually be confusing to companies. That is, prior to the rule change, a smaller reporting company was always exempted from Section 404(b) compliance; however, now that will not be the case.

Ms. Peirce points to a poignant example from the comment letters. A group of biotech companies rightfully stated that money spent on compliance is less money spent on research and development and that investors in a smaller biotech company are more interested in getting FDA approval than the auditors’ blessing on internal controls.

On the upside, Chair Clayton has committed to continue to review this matter and work on changes to the definition of accelerated filer and/or changes to the requirements of 404(b) compliance…