SEC Updates CDI Related to Smaller Reporting Company Definition
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. For more information on the new rules, see HERE
Among other benefits, it is hoped that the change will help encourage smaller companies to access US public markets. The amendment expands the number of companies that qualify as a smaller reporting company (SRC) and thus qualify for the scaled disclosure requirements in Regulation S-K and Regulation S-X. The SEC estimates that an additional 966 companies will be eligible for SRC status in the first year under the new definition.
As proposed, and as recommended by various market participants, the new definition of a SRC will now include companies with less than a $250 million public float as compared to the $75 million threshold in the prior definition. In addition, if a company does not have an ascertainable public float or has a public float of less than $700 million, a SRC will be one with less than $100 million in annual revenues during its most recently completed fiscal year. The prior revenue threshold was $50 million and only included companies with no ascertainable public float. Once considered a SRC, a company would maintain that status unless its float drops below $200 million if it previously had a public float of $250 million or more. The revenue thresholds have been increased for requalification such that a company can requalify if it has less than $80 million of annual revenues if it previously had $100 million or more, and less than $560 million of public float if it previously had $700 million or more.
The SEC also made related rule changes to flow through the increased threshold concept. In particular, Rule 3-05 of Regulation S-X has been amended to increase the net revenue threshold in the rule from $50 million to $100 million. As a result, companies may 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 business are less than $100 million.
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.
Furthermore, the conforming changes include changes to the cover page for most SEC registration statements and reports including, but not limited to, Forms S-1, S-3, S-4, S-11, 10-Q and 10-K. On November 7, 2018, the SEC made conforming changes to its Compliance and Disclosure Interpretations (C&DI).
In particular, the SEC issued four new C&DI to reflect the impact of the larger size threshold for SRC status and withdrew four C&DI addressing transition issues for SRCs and two additional obsolete C&DI which still referred to the old Regulation S-B.
New C&DI 102.01 illustrates that, under the new amendments, companies can now be both accelerated filers and SRCs, which means that, as SRCs, they can use the scaled disclosure rules but, as accelerated filers, their periodic reports are due under the time frames for accelerated filers and they must provide Sarbanes-Oxley Section 404(b) auditor attestation reports in their 10-Ks. In an example, a company was an accelerated filer with respect to filings due in 2018 and had a public float of $80 million on the last business day of its second fiscal quarter of 2018. Because its public float at that measurement date was below $250 million, the company would qualify as an SRC for filings due in 2019; however, it would also need to file its 10-K within 75 days as an accelerated filer and would need to comply with Section 404(b). Since the company was an accelerated filer with respect to filings due in 2018, it would be required to have less than $50 million in public float on the last business day of its second fiscal quarter in 2018 to exit accelerated filer status for filings due in 2019.
New C&DI 102.02 recaps the circumstances under which a reporting company that fails to qualify as an SRCcan later re-qualify if its revenues or public float decreases. Once a reporting company determines that it does not qualify as a smaller reporting company, it will remain unqualified unless, when making a subsequent annual determination, either:
- It determines that its public float is less than $200 million; or
- It determines that:
(i) for any threshold that it previously exceeded, it is below the subsequent annual determination threshold (public float of less than $560 million and annual revenues of less than $80 million); and
(ii) for any threshold that it previously met, it remains below the initial determination threshold (public float of less than $700 million or no public float and annual revenues of less than $100 million).
The C&DI provides an example where the company had exceeded one of the caps, but not the other: “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 smaller reporting company. At the next determination date, June 30, 2020, it will remain unqualified 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.”
New C&DI 202.01 provides that in calculating annual revenues to determine whether a company qualifies as a SRC as defined in Regulation S-K, the company should include all annual revenues on a consolidated basis. As such, a holding company with no public float as of the last business day of its second fiscal quarter would qualify as a smaller reporting company only if it had less than $100 million in consolidated annual revenues in the most recently completed fiscal year for which audited financial statements are available.
New C&DI 104.13 confirms that a company that is transitioning from an SRC (in the example, the company qualifies as an SRC in 2019 but will no longer qualify in 2020 based on its public float on the last day of its 2019 second quarter) may still rely on General Instruction G(3) to incorporate by reference executive compensation and other disclosure required by Part III of Form 10-K into the 2019 Form 10-K from its definitive proxy statement to be filed not later than 120 days after its 2019 fiscal year-end.