On June 28, 2018, the Securities and Exchange Commission ("SEC") adopted amendments to the definition of "smaller reporting company" to expand the number of public companies that are eligible to provide scaled disclosure and avoid situations where a company's smaller reporting company status frequently changes due to small fluctuations in public float or revenues. The key provisions of the amendments are summarized below. For a summary of scaled disclosure accommodations available to smaller reporting companies, please see Appendix A.
1. Higher initial and annual thresholds for determining smaller reporting company status
The below table summarizes the changes to the definition of "smaller reporting company" that must be used by (a) companies making an initial determination of smaller reporting company status or (b) current smaller reporting companies who are seeking to continue to qualify.
|Criteria||Current Definition||Revised Definition|
|Public float||Public float of less than $75 million||Public float of less than $250 million|
|Revenues||Less than $50 million of annual revenues and no public float||
Less than $100 million of annual revenues and
2. Higher subsequent thresholds for determining smaller reporting company status
The below table summarizes the changes to the definition of "smaller reporting company" that must be used by companies who previously determined that they do not qualify as smaller reporting companies.
|Criteria||Current Definition||Revised Definition|
|Public float||Public float of less than $50 million||Public float of less than $200 million, if it previously had $250 million or more of public float|
|Revenues||Less than $40 million of annual revenues and no public float||Less 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.
3. The SEC preserved existing thresholds for accelerated filers and large accelerated filers
Amendments were also made to the definitions of "accelerated filer" and "large accelerated filer" to preserve the existing public float thresholds. As a result, some public companies will qualify as both smaller reporting companies and accelerated filers. A public company that qualifies as both a smaller reporting company and an accelerated filer will be required to comply with the accelerated filing deadlines for annual and quarterly reports and the auditor internal control attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. However, as a smaller reporting company, such company can also elect to provide scaled disclosure. The graph below illustrates how some public companies may qualify as both smaller reporting companies and accelerated filers.
The SEC Chairman, however, has directed the SEC staff to formulate recommendations for possible additional changes to the "accelerated filer" definition that, if adopted, would have the effect of reducing the number of public companies that qualify as accelerated filers.
4. Increased threshold for omitting financial statements of acquired businesses
Previously, public companies could omit the financial statements of an acquired business for the earliest of the three fiscal years otherwise required by Rule 3-05 of Regulation S-X if the net revenues of that acquired business are less than $50 million. This allowed public companies to provide two rather than three years of historical audited financial statements for acquired businesses with net revenues below $50 million. Consistent with the new revenue threshold in the revised "smaller reporting company" definition, such net revenue threshold has been increased from $50 million to $100 million.
5. Conforming changes to SEC periodic reports and registration statements
Conforming changes were made to the covers for periodic reports and registration statements to delete the parenthetical regarding smaller reporting companies that followed the non-accelerated filer checkbox.
6. New rules will apply to first fiscal year ending after the effectiveness of final rules
The final rules will become effective on September 8, 2018. A public company will qualify as a smaller reporting company for the first fiscal year ending after effectiveness of the amendments if it meets one of the initial qualification thresholds in the revised definition as of the date it is required to measure its public float or revenues, even if it did not previously qualify as a smaller reporting company. For example, a public company with a December 31 fiscal year end that previously was not a smaller reporting company with a public float of $220 million as of June 29, 2018 (the last business day of its most recently completed second quarter) will qualify as a smaller reporting company for the fiscal year ending December 31, 2018.
|Item||Scaled Disclosure Accommodation|
|301 – Selected Financial Data||Not required.|
|302 – Supplementary Financial Information||Not required.|
|303 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)||Two-year MD&A comparison rather than three-year comparison.
Two year discussion of impact of inflation and changes in prices rather than three years.
Tabular disclosure of contractual obligations not required.
|305 – Quantitative and Qualitative Disclosures About Market Risk||Not required.|
|402 – Executive Compensation||
Three named executive officers rather than five.
Two years of summary compensation table information rather than three.
|404 – Transactions With Related Persons, Promoters and Certain Control Persons [i]||Description of policies/procedures for the review, approval or ratification of related party transactions not required.|
|407 – Corporate Governance||Audit committee financial expert disclosure not required in first annual report
Compensation committee interlocks and insider participation disclosure not required.
Compensation committee report not required.
|503 – Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges||No ratio of earnings to fixed charges disclosure required.
No risk factors required in Exchange Act filings.
|601 – Exhibits||Statements regarding computation of ratios not required.|
|8-02 – Annual Financial Statements||Two years of income statements rather than three years.
Two years of cash flow statements rather than three years.
Two years of changes in stockholders’ equity statements rather than three years.
|8-03 – Interim Financial Statements||Permits certain historical financial data in lieu of separate historical financial statements of equity investees.|
|8-04 – Financial Statements of Businesses Acquired or to Be Acquired||Maximum of two years of acquiree financial statements rather than three years.|
|8-05 – Pro forma Financial Information||Fewer circumstances under which pro forma financial statements are required.|
|8-06 – Real Estate Operations Acquired or to Be Acquired||Maximum of two years of financial statements for acquisition of properties from related parties rather than three years.|
|8-08 – Age of Financial Statements||Less stringent age of financial statements requirements.|