Smaller Reporting Companies In Going Public Transactions

Securities Lawyer 101 --- Smaller Reporting Companies

Securities Lawyer 101 Blog

The Securities Act of 1933, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”), establish different levels of disclosure and reporting requirements based upon the size of the issuer.  Issuers who qualify as a smaller reporting company enjoy numerous benefitsin going public transactions including reduced disclosure and reporting obligations.

By streamlining their disclosures small businesses are able to focus their efforts on capital raising activities.

An issuer with Smaller Reporting Company status during its going public transaction may apply the Smaller Reporting Company disclosure rules to its registration statement on Form S-1. This reduces an issuer’s financial statement obligations to two years instead of the three years required for larger reporting companies.

If a company does not qualify as a Smaller Reporting Company at the time of its initial Form S-1 registration statement, it must provide three years of audited financial statements.

Qualifying for Smaller Reporting Company Status

The federal securities laws set forth the requirements for smaller reporting company status.  These requirements included that the company is not an excluded issuer and has either:

♦ Less than $75 million in its public float as of the end of its most recently completed second fiscal quarter; or

♦ For companies with no public common equity float, less than $50 million in revenue during its previous fiscal year.

Foreign Issuer Eligibility

A foreign issuer can qualify as a Smaller Reporting Company if it uses domestic issuer registration statements and forms such as Forms 10-K, 10-Q and 8-K; and provides financial statements prepared in accordance with U.S. GAAP.

Issuers Excluded from Smaller Reporting Company Status

The following companies are excluded from electing Smaller Reporting Company status:

♦ Investment companies, including business development companies;

♦ Asset-backed issuers; and

♦ Majority-owned subsidiaries of a parent company that is not a Smaller Reporting Company.

Benefits Of Smaller Reporting Company Status

The benefits of smaller reporting company status when filing a registration statement under the Securities Act in connection with a going public transaction include:

♦ Two years of audited financial statements and comparative data are required in annual reports and registration statements filed with the SEC, rather than the three years of financial information required for larger reporting companies;

♦ Sixty day deadline for filing annual reports on Form 10-K, rather than 90 days for large accelerated filers or 75 days for accelerated filers;

♦ Smaller Reporting Companies are not required to obtain an independent auditor’s attestation report on its internal control over financial reporting; and

♦ Reduced disclosures in annual and quarterly reports, proxy statements and registration statements.

Eligibility for Smaller Reporting Company Status

A company going public should determine its eligibility as a Smaller Reporting Company prior to its filing an initial registration statement on Form S-1 to take advantage of the benefits of such status. The company must choose a date within 30 days of its registration statement filing to determine eligibility as a Smaller Reporting Company. A company can determine its public common equity float by multiplying its estimated offering price per share at the time of its initial filing of the registration statement by the total number of shares held by non-affiliates before the offering and the number of shares being offered for sale in the initial public offering.

Alternative Test for Smaller Reporting Company Status

A company may be unable to calculate its public common equity float because it has no public common equity outstanding or there is no market price for its common shares. If a company is unable to determine its public common equity float or has a public common equity float of zero, it can qualify as an Smaller Reporting Company if its annual revenues were less than $50 million during the most recently completed fiscal year for which it had audited financial statements.

Changes in Smaller Reporting Company Status

An issuer may calculate its status as a Smaller Reporting Company in going public transactions when it files its initial registration statement. If it is disqualified by the success of its offering it is permitted to continue to qualify as a Smaller Reporting Company until the end of its second fiscal quarter assuming the company made a bona fide eligibility determination at the time it initially filed its initial registration statement under the Securities Act.   If a company files a registration statement under the Securities Act using the larger company reporting requirements and later determines  that its public common equity float is less than $75 million, the company is considered a Smaller Reporting Company and is immediately eligible for Smaller Reporting Company status. The company can provide reduced disclosure beginning with the first periodic report due after the effective date of its Securities Act registration statement.

If a company is unable to calculate its public common equity float or has a public common equity float of zero, it can still qualify as an Smaller Reporting Company if it had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available. Once the company’s annual revenue exceeds $50 million, the company loses its Smaller Reporting Company status. It cannot regain Smaller Reporting Company status unless its annual revenues for the preceding fiscal year fall below $40 million.

In going public transactions, issuers who qualify as Smaller Reporting Companies should take advantage of the benefits of such status. The disclosures required to be included in a company’s initial registration statement, Form 10-K and/or proxy statement, and the cost as well as amount of time involved in preparing these SEC filings, can be significantly reduced as a result of electing Smaller Reporting Company status. In order to have Smaller Reporting Company status during its going public transaction, the company must check the “smaller reporting company” box on the cover page of its registration statement on Form S-1.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at info@securitieslawyer101.com or visit  www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com