The SEC has proposed amendments that would increase the financial thresholds in the “smaller reporting company” definition. This would expand the number of companies that qualify for this category, which would make more companies eligible for certain existing scaled disclosures as provided in Regulation S-K and Regulation S-X. The intention is to promote capital formation and reduce compliance costs for smaller registrants while maintaining investor protections. Under the new definition, registrants with less than $250 million in public float and registrants with zero public float if their revenues were below $100 million in the previous year would both qualify as smaller reporting companies.
In 2007, the SEC established the smaller reporting company category of registrants in an effort to provide regulatory relief for smaller registrants. The definition of smaller reporting company appears in Securities Act Rule 105, Exchange Act Rule 12b-2, and Item 10(f) of Regulation S-K. These definitions replaced the “small business issuer” definition in former Regulation S-B. However, there have been numerous suggestions by the SEC’s Advisory Committee on Small and Emerging Companies, by the Small Business Forum, and through review as part of the JOBS Act that the regulations be revised to include a wider breadth of small businesses for scaled disclosure. Raising financial thresholds that define smaller reporting companies furthers the goals of promoting capital formation while reducing compliance costs. In addition, the SEC is proposing amendments for the “accelerated filer” and “large accelerated filer” definitions to preserve the application of current thresholds contained in those definitions.
The following summarizes the proposed changes:
| Registrant Category | Current Definition | Proposed Definition |
| Reporting Registrant | Less than $75 million of public float at the end of second fiscal quarter | Less than $250 million of public float at the end of second fiscal quarter |
| Registrant Filing Initial Registration Statement | Less than $75 million of public float within 30 days of filing | Less than $250 million of public float within 30 days of filing |
| Registrant with Zero Public Float | Less than $50 million of revenues in most recent fiscal year | Less than $100 of revenues in most recent fiscal year |
| Non-Smaller Reporting Company that Seeks to Qualify as a Smaller Reporting Company Based on Public Float | Less than $50 million of public float at end of second fiscal quarter | Less than $200 million of public float at end of second fiscal quarter |
| Non-Smaller Reporting Company with Zero Public Float that Seeks to Qualify as a Smaller Reporting Company | Less than $40 million of revenues in most recent fiscal year | Less than $80 million of revenues in most recent fiscal year |
With regard these and other proposed changes, the SEC is soliciting comments, including:
| 1. | Thresholds for defining a smaller reporting company. This includes comments on the proposed new thresholds and whether or not these proposed thresholds should be changed simply to adjust for inflation. In addition, the SEC seeks input on how these thresholds should be determined: on public float, revenues, or a combination of both factors. Also, comments concerning whether or not these adjustments promote capital formation are requested. |
| 2. | Economic impact. The SEC’s cost-benefit analysis suggests that, for most of the newly eligible smaller reporting companies under the new proposed amendments, scaled disclosure may generate a modest yet statistically significant amount of cost savings in terms of the reduction in compliance costs. There would also be a modest yet statistically significant deterioration in some of the proxies used to assess the overall quality of information and a muted effect on the growth of the registrant’s capital investments and assets. In addition, the new amendments could create a competitive disadvantage for registrants that just miss eligibility relative to newly eligible registrants. However, this potentially negative effect would again be modest. |
| 3. | Possible alternatives. Numerous alternative metrics could be used to define smaller reporting companies, including equity market value and using either a public float threshold or a revenue threshold. Also, the number of registrants eligible for the Sarbanes-Oxley Act Section 404(b) could be expanded. |
The SEC is interested in public comments on any and all of these topics. The complete set of comment solicitations can be read in the full release concerning this Proposed Rule. The public comment period is open through August 30th, 2016. You can submit comments using the form available on the SEC’s website or by e-mailing rule-comments@sec.gov with File Number S7-12-16 in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. Again, be sure to reference File Number S7-12-16.
Comments that have already been submitted can be read here.
Sources:
SEC Release No. 33-10107: Amendments to Smaller Reporting Company Definition
SEC Proposes Amendments to Smaller Reporting Company Definition
