In September, the Securities and Exchange Commission’s (SEC) amendments to the definition of “smaller reporting company” took effect.
Adopted in June 2018, the amendments expanded significantly the number of companies that will qualify as smaller reporting companies (SRCs) and may, as a result, voluntarily elect to avail themselves on an item-by-item basis of scaled disclosure accommodations.
An SRC now includes an issuer that has a public float of less than $250 million, or that has less than $100 million in annual revenue and either no public float or a public float of less than $700 million.
This new revenue test is particularly helpful for life-sciences companies that often have no significant revenues, as well as for other research and development-based companies with limited revenue.
(In June, the SEC staff estimated that 966 additional companies would be eligible for SRC status in the first year under the new definition. That included 779 companies with a public float of more than $75 million but less than $250 million.)
Following initial qualification as an SRC in the issuer’s first fiscal year-end following the amendments taking effect, the issuer would then test its status annually. If a an issuer fails to qualify as an SRC one year, it could requalify the following year. However, it would have to meet lower caps that are set at 80% of the initial thresholds set above.
Issuers that may now be eligible to qualify as SRCs should evaluate the item-by-item scaled disclosures and consider which of these to adopt.
For many companies, this analysis will require considering the kind of information that the company has historically reported. Other questions to ask are whether this information is useful to investors and financial professionals, and whether the company anticipates that market participants would expect the company to continue to publish the information.
At the same time that companies are undertaking this SRC-related disclosure review, those responsible for securities and financial reporting also should take into account the recently adopted changes to Securities and Exchange Act reports.
Those changes resulted from the SEC’s disclosure effectiveness initiative aimed at eliminating disclosures that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements and financial statement requirements. Taken together, these reviews may require substantial time and effort this annual reporting season.
Unfortunately, when the SEC acted to revise the SRC definition, it did not make corresponding changes to other definitions, like the definition of “accelerated filer,” which had been the focus of many of the comment letters on the original SRC proposals.
That means even if a company now qualifies as an SRC, to the extent it has $75 million or more of public float, it would remain subject to the accelerated filer requirements.
Commenters advocated changes to the accelerated filer definition to allow SRCs additional time to file Exchange Act reports as well as to provide relief from the Sarbanes-Oxley Section 404(b) auditor internal control attestation. It became clear during the open meeting at which the SEC voted on the SRC amendments that changes to Section 404(b) have become a lightning rod.
While the SEC chair discussed a study to evaluate the definition of “accelerated filer,” and other commissioners requested more quantitative evidence regarding the actual costs associated with Section 404(b) compliance, it seems clear that change to this requirement is likely only to result from legislative action.
For now, though, many companies will be able to benefit from qualifying as smaller reporting companies and scaling disclosures that may not be significant to their investors.
Anna Pinedo is a partner in Mayer Brown’s New York office and a member of its corporate and securities practice.