The Securities and Exchange Commission (SEC) voted unanimously on June 28, 2018, to issue the final rule in Release No. 33-10513, Amendments to Smaller Reporting Company Definition, and let nearly 1,000 more companies qualify for the lighter set of disclosure rules available to smaller reporting companies.
The rule change lifts the threshold of the public float, which is the value of a company’s stock that is publicly traded, for a smaller reporting company to $250 million from $75 million, according to the revisions to Rule 405 of the Securities Act of 1933, Rule 12b-2 of the Securities Exchange Act of 1934, and Item 10(f) of Regulation S-K. A company with no public float or with a public float of less than $700 million will also qualify as a smaller reporting company if it had annual revenues of less than $100 million during its most recently completed fiscal year. Previously companies could provide scaled disclosure if they had no public float and less than $50 million in annual revenues, the SEC said.
The SEC said 966 additional companies will be eligible for smaller company status in the first year of the new threshold.
The rules in Release No. 33-10513 become effective 60 days after publication in the Federal Register, which normally occurs a few weeks after a rule is posted on the SEC’s website.
“Expanding the smaller reporting company definition recognizes that a one size regulatory structure for public companies does not fit all,” SEC Chairman Jay Clayton said. “These amendments to the existing [smaller reporting company] compliance structure bring that structure more in line with the size and scope of smaller companies, while maintaining our long-standing approach to investor protection in our public capital markets.”
Qualifying as a smaller reporting companies provides several disclosure exemptions from Regulation S-K and Regulation S-X, which sets out the form and content of financial reports.
Smaller reporting companies are exempt from Regulation S-K’s requirement to prepare stock performance graphs, ratios of earnings to fixed charges and compensation committee reports. Small companies can provide executive compensation data for three named executive officers instead of the five executives that large companies have to report. They also need to include two years of comparison information in the management’s discussion and analysis (MD&A) section of a regulatory filing instead of three. Small companies need to provide only two years of income and cash flow statements, instead of three, according to Regulation S-X
The final rules are based on a proposal the SEC issued in June 2016 in Release No. 33-10107, Amendments to Smaller Reporting Company Definition.
In issuing Release No. 33-10513, the SEC decided not to raise the public float thresholds for when a company qualifies as an accelerated filer, which is currently set at $75 million to $700 million. Raising the threshold to $250 million would have expanded the number of companies that would be exempt from the auditor attestation of a company’s internal control over financial reporting as required by Section 404(b) of the Sarbanes-Oxley Act of 2002.
Today, only nonaccelerated filers with less than $75 million in public float are exempted.
The SEC in 2016 asked for public comments about changing the threshold. As the SEC approved the final revisions to the small company definition, Clayton said he was not ready to change the threshold but directed the staff to develop a recommendation for changing the definition of accelerated filer.
SEC Commissioners Michael Piwowar and Hester Peirce said they were disappointed that relief was not provided today to more companies from the Section 404(b) requirement. The auditor attestation provision is the most cited requirement as being burdensome by smaller companies.
Investor protection advocates and auditors prefer to leave the threshold intact because they say it provides more confidence to investors about the integrity of financial reporting. Most of the credible data that has been publicized since Sarbanes-Oxley was enacted support the assessment that strict application of the law’s internal control rules reduces the frequency of restatements and accounting fraud.
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