SEC Chairman Clayton Expects New Rules on Smaller Reporting Company Definition Soon

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We thought you may find of interest prepared remarks by SEC Chairman Jay Clayton at the annual Government-Business Forum on Small Business Capital Formation held on November 30, 2017, where he stated, “In the coming months I anticipate that the Commission will consider adopting rules to expand the definition of ‘smaller reporting company’ to permit additional companies to avail themselves of scaled disclosure requirements.” A full transcript of the speech is available at the SEC’s website.

Proposed Rules Would Change Qualifications for Smaller Reporting Companies

As you may recall, in July 2016 the SEC voted to propose amendments that would increase the financial thresholds in the “smaller reporting company” definition. The proposed rules would enable a company with less than $250 million of public float to provide scaled disclosures as a smaller reporting company, as compared to the $75 million threshold under the current definition. The SEC did not, however, propose to increase the $75 million threshold in the “accelerated filer” definition.

As a result, under the proposed rules, a company with a public float between $75 million and $250 million would qualify as a smaller reporting company for scaled disclosure purposes but would be subject to other filing requirements that currently apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal controls over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.

Recall also that, exclusive of any scaled disclosure permitted due to a company’s classification as a smaller reporting company, a company may also be classified as an “emerging growth company” and take advantage of certain reduced disclosure requirements pursuant to the Jumpstart Our Business Startups Act of 2012 (JOBS Act), some of which overlap with smaller reporting companies and others that offer additional disclosure relief.

Disclosure Requirement Breakdown

As a refresher, a non-exhaustive comparison of the disclosure requirements for smaller reporting companies, emerging growth companies (EGCs) and non-EGCs is included below:

Reg. S-K Item Smaller Reporting Company Scaled Disclosure Emerging Growth Company Scaled Disclosure Non-EGC Disclosure
Item 101
Description of business

Same requirements as non-EGC disclosure; however three-year description of development of business required.

Same requirements as non-EGC disclosure. Five-year description of developmentof business required.
Item 201
Market price of and dividends on registrant’s common equity and related stockholder matters
Same requirements as non-EGC disclosure; however, no performance graph required. Same requirements as non-EGC disclosure. Performance graph required.
Item 301
Selected financial data
Not required.

Not required to present selected financial data for any period prior to the earliest audited period presented in initial registration statement.

Required.
Item 302
Supplementary financial information
Not required.

Not required until after the company’s initial public offering.

Required.
Item 303
MD&A
Same requirements as non-EGC disclosure; however, two-year comparison required and five-year contractual obligations table not required.

Same requirements as non-EGC disclosure; however, a company may limit discussion to those years for which audited financial statements are included.

Three-year comparison and five-year contractual obligations table required.
Item 305
Quantitative and qualitative disclosures about market risk
Not required. Same requirements as non-EGC disclosure. Required.
Item 308
Internal control over financial reporting
Not required to provide an attestation report of the registered public accounting firm.

Same requirements as smaller reporting company scaled disclosure.

Required.
Item 402
Executive compensation

No compensation discussion and analysis (CD&A) is required.

Fewer named executive officers (NEOs) (Principal executive officer (PEO), two next most highly compensated executive officers and up to two former executive officers).

Two years of information included in summary compensation table.

Certain compensation tables not required (Grants of Plan-Based Awards, Option Exercises and Stock Vested, Pension Benefits, Nonqualified Deferred Compensation).

Other reduced narrative disclosure permitted.

Same requirements as smaller reporting company scaled disclosure.

CD&A is required.

More NEOs (PEO, principal financial officer, three next most highly compensated executive officers and up to two former executive officers).

Three years of information included in summary compensation table.

All compensation tables required.

Fulsome narrative disclosure required.

Item 404
Transactions with related persons, promoters and certain control persons

Disclosure required for transactions exceeding the lesser of $120,000 or 1% of the registrant’s average total assets at year-end for the last two completed fiscal years.

Two years of disclosure required.

Disclosure regarding review, approval or ratification of transactions with related persons not required.

Required to disclose a list of all parents of registrant, disclosing the basis of control and the ownership percentage.

Same requirements as non-EGC disclosure.

Disclosure required for transactions exceeding $120,000.

One year of disclosure required.

Disclosure regarding review, approval or ratification of transactions with related persons required.

Parent control and ownership information not required.

Item 407
Corporate governance
Same requirements as non-EGC disclosure; however, Item 407(e)(4) and (5) (Compensation Committee interlocks, Compensation Committee report, respectively) not required.

Same requirements as non-EGC disclosure.

Required.
Item 503
Prospectus summary, risk factors and ratio of earnings to fixed charges
Same requirements as non-EGC disclosure; however, Item 503(c) (Risk factors) not required in periodic reports and Item 503(d) (Ratio of earnings to fixed charges) not required.

Same requirements as non-EGC disclosure; however, Item 503(d) (Ratio of earnings to fixed charges) only required for the same number of years which a company provides selected financial data disclosures.

Required.
Item 504
Use of proceeds

Same requirements as non-EGC disclosure; however, reduced disclosure regarding business acquisitions is permitted in some instances.

Same requirements as non-EGC disclosure. Required.
Item 601
Exhibits

Same requirements as non-EGC disclosure; however, Item 601(b)(12) (Statements re computation of ratios) not required.

Same requirements as non-EGC disclosure.

Required.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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