Overview
On March 12, 2020, the Securities and Exchange Commission (SEC) adopted amendments to the accelerated filer and large accelerated filer definitions. The amendments provide a carve-out for smaller reporting companies (SRC)1 and business development companies (BDCs) in complying with the auditor attestation report on internal control over financial reporting (ICFR).2 The amendments also increase the transition thresholds for becoming a non-accelerated filer and large accelerated filer. 3
Background on Accelerated and Large Accelerated Filers
An issuer that is classified as an accelerated filer4 or large accelerated filer,5 as defined in Rule 12b-2 of the Securities Exchange Act of 1934 (the Exchange Act), is subject to a number of reporting requirements, including the requirement that its outside auditor attest to, and report on, management’s assessment of the effectiveness of the issuer’s ICFR.6 Although the Jumpstart Our Business Startups (JOBS) Act of 2012 exempted many new public issuers (e.g., emerging growth companies) from this requirement for up to five years after going public, there was no similar exemption for SRCs, which were classified as accelerated filers or large accelerated filers.
The Amendments to Carve Out Certain SRCs from Auditor Attestation Requirements
The amendments revise the definitions of accelerated filers and large accelerated filers by creating a new condition that excludes an issuer from the definition of accelerated filer or large accelerated filer if it is eligible to be an SRC and had annual revenues of less than $100 million in the most recent fiscal year for which audited statements are available.7 Issuers that meet these criteria will no longer need to have an independent auditor attestation report on ICFR in their annual report.
Importantly, the SEC emphasized that these qualifying issuers must still have their principal officers certify their responsibilities regarding ICFR and are still subject to a financial statement audit by an independent auditor who is required to consider ICFR therein.
Amendments to Increase Transition Thresholds
Furthermore, the amendments alter the transition thresholds and requirements for accelerated and large accelerated filers. First, the amendments increase the transition thresholds for exiting accelerated filer status and becoming a non-accelerated filer from $50 million to $60 million. Second, the amendments increase the transition thresholds for exiting large accelerated filer status from $500 million to $560 million.8 Finally, the SEC added a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.
The amendments also add a check box to the cover pages of annual reports (e.g., on form 10-K) to indicate whether an ICFR auditor attestation report is included in the filing.
Application to Business Development Companies
Although BDCs are ineligible to qualify as SRCs9, the amendments equally apply to BDCs. BDCs can meet the requirements of the SRC revenue test using annual investment income instead of annual revenue. Therefore, BDCs that would otherwise be eligible to be SRCs and had annual investment income of less than $100 million in the most recent fiscal year for which audited statements are available will no longer need their independent auditor to separately report on their ICFR. BDCs are also subject to the revised thresholds and the new revenue test for exiting accelerated filer and large accelerated filer status. Finally, BDCs must use the revised cover page with the new check box for their annual reports on Form 10-K.
The final amendments will become effective 30 days after publication in the Federal Register and apply to an annual report filing due on or after the effective date.
SEC Press Release: SEC Adopts Amendments to Reduce Unnecessary Burdens on Smaller Issuers by More Appropriately Tailoring the Accelerated and Large Accelerated Filer Definitions
Final Rule: Amendments to the Accelerated Filer and Large Accelerated Filer Definitions
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1SRCs are defined in Rule 12b-2 of the Exchange Act, in part, as: an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that: (1) had a public float of less than $250 million; or (2) had annual revenues of less than $100 million and either: (i) no public float; or (ii) a public float of less than $700 million. BDCs are not eligible to be SRCs.
2SEC Press Release: SEC Adopts Amendments to Reduce Unnecessary Burdens on Smaller Issuers by More Appropriately Tailoring the Accelerated and Large Accelerated Filer Definitions.
3See Press Release.
4The term accelerated filer means an issuer after it first meets the following conditions as of the end of its fiscal year: (i) the issuer had an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $75 million or more, but less than $700 million, as of the last business day of the issuer's most recently completed second fiscal quarter; (ii) the issuer has been subject to the requirements of section 13(a) or 15(d) of the Securities Act of 1933, as amended (the “Securities Act”), for a period of at least twelve calendar months; and (iii) the issuer has filed at least one annual report pursuant to section 13(a) or 15(d) of the Securities Act.
5The term large accelerated filer means an issuer after it first meets the following conditions as of the end of its fiscal year: (i) the issuer had an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $700 million or more, as of the last business day of the issuer's most recently completed second fiscal quarter; (ii) the issuer has been subject to the requirements of section 13(a) or 15(d) of the Securities Act for a period of at least twelve calendar months; and (iii) the issuer has filed at least one annual report pursuant to section 13(a) or 15(d) of the Securities Act.
6Section 404(b) of the Sarbanes-Oxley Act, 15 U.S.C. 7262(b).
7Final Rule: Amendments to the Accelerated Filer and Large Accelerated Filer Definitions.
8Exchange Act Rule 12b-2. Accelerated Filer and Large Accelerated Filer – (3) Entering and exiting accelerated filer and large accelerated filer status.
9The amendments state that BDCs will continue to be ineligible to be SRCs. E.g., Final Rule p.27.
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