SEC Expands Smaller Reporting Company Status – Securities Lawyers

On June 28, 2018,  the Securities and Exchange Commission voted to adopt amendments to the “smaller reporting company” (SRC) definition to expand the number of companies that qualify for certain existing scaled disclosure accommodations. The SEC's new smaller reporting company definition enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition.  The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million.  This reflects a change from the revenue test in the prior definition, which allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues.  The rules will become effective 60 days after publication in the Federal Register. The SEC's fact sheet on the amendments is below.

On June 28, 2018,  the Securities and Exchange Commission voted to adopt amendments to the “smaller reporting company” (SRC) definition to expand the number of companies that qualify for certain existing scaled disclosure accommodations. The SEC’s new smaller reporting company definition enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition.  The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million.  This reflects a change from the revenue test in the prior definition, which allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues.  The rules will become effective 60 days after publication in the Federal Register. The SEC’s fact sheet on the amendments is below.

Background

The Commission approved amendments to raise the thresholds in the smaller reporting company definition, thereby expanding the number of smaller companies eligible to comply with our current scaled disclosure requirements.  These amendments are intended to promote capital formation and reduce compliance costs for smaller companies while maintaining appropriate investor protections.

The Commission established the smaller reporting company (“SRC”) category of companies in 2008 in an effort to provide general regulatory relief for smaller companies.  SRCs may provide scaled disclosures under Regulation S-K and Regulation S-X.  Under the previous definition, SRCs generally were companies with less than $75 million in public float.  Companies with no public float − because they have no public equity outstanding or no market price for their public equity − were considered SRCs if they had less than $50 million in annual revenues.

Amendments to the Smaller Reporting Company Definition

Under the amendments, companies with a public float of less than $250 million will qualify as SRCs.  A company with no public float or with a public float of less than $700 million will qualify as a SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year.

The following table summarizes the amendments to the SRC definition.

CriteriaPrevious SRC DefinitionRevised SRC Definition
Public FloatPublic float of less than $75 millionPublic float of less than $250 million
RevenuesLess than $50 million of annual revenues and no public floatLess than $100 million of annual revenues and

  • no public float, or
  • public float of less than $700 million

Consistent with the previous definition, under the amendments, a company that determines that it does not qualify as a SRC under the above thresholds will remain unqualified until it determines that it meets one or more lower qualification thresholds.  The subsequent qualification thresholds, set forth in the table below, are set at 80% of the initial qualification thresholds.

CriteriaPrevious SRC DefinitionRevised SRC Definition
Public FloatPublic float of less than $50 millionPublic float of less than $200 million, if it previously had $250 million or more of public float
RevenuesLess than $40 million of annual revenues and no public floatLess than $80 million of annual revenues, if it previously had $100 million or more of annual revenues; and

Less than $560 million of public float, if it previously had $700 million or more of public float.

Commission staff estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition.  These include: 779 companies with a public float of $75 million or more and less than $250 million; 161 companies with a public float of $250 million or more and less than $700 million and revenues of less than $100 million; and 26 companies with no public float and revenues of $50 million or more and less than $100 million.

Amendments to Rule 3-05 of Regulation S-X

The amendments to Rule 3-05(b)(2)(iv) of Regulation S-X increase the net revenue threshold in that 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.

Amendments to the Accelerated Filer and Large Accelerated Filer Definitions

The final amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2.  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 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 of 2002.  However, the Chairman has directed the staff, and the staff has begun, to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition that, if adopted, would have the effect of reducing the number of companies that qualify as accelerated filers in order to promote capital formation by reducing compliance costs for those companies, while maintaining appropriate investor protections.

Hamilton & Associates has extensive experience in all aspects of securities law and going public transactions including SEC registration statements on Form S-1, direct public offerings, domestic and international stock exchange listings and quotation on the OTC Markets.

For further information about  going public and 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 [email protected] 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 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