SEC Proposes Changes to Smaller Reporting Company Definition

by Akin Gump Strauss Hauer & Feld LLP
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On June 27, 2016, the SEC Staff proposed changes to the definition of “smaller reporting company” to expand the number of registrants that would qualify as smaller reporting companies (SRC). The term “smaller reporting company” is defined in Securities Act Rule 405, Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K, and all three definitions are substantively the same. Under the current definition, a registrant qualifies as an SRC if (1) it has less than $75 million in public float as of the last business day of its most recently completed second fiscal quarter (the Public Float Test) or (2) it has zero public float and annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available (the Revenue Test).

Public Float Test

Under the proposed amendment, a registrant with a public float of less than $250 million would qualify as an SRC. As is the case now, a registrant that is a reporting company would determine its SRC eligibility by calculating its public float as of the last business day of its most recently completed second fiscal quarter. A registrant filing its initial registration statement under the Securities Act or the Exchange Act would calculate its public float as of a date within 30 days of filing the registration statement.

Revenue Test

Under the proposed amendment, a registrant with a public float of zero would qualify as an SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year.

Redetermination of Non-SRC Status

Once a registrant determines that it no longer qualifies as a SRC under either the public float test or the revenue test, then such non-SRC would remain unqualified until (1) it has a public float of less than $200 million as of the last business day of its most recently completed second fiscal quarter, or (2) if such registrant’s public float is zero, it has revenues of less than $80 million during its most recently completed fiscal year.

Policy Considerations

The SEC established the SRC category of registrants in 2007 to provide scaled disclosure accommodations to smaller registrants in Regulation S-K and Regulation S-X. This scaled disclosure includes reducing and, in some cases, eliminating the business and financial information required to be included in SEC filings. A summary of these accommodations are included below.

These accommodations are intended to reduce compliance costs and promote capital formation for smaller registrants. Raising the financial thresholds in the definition of “smaller reporting company” is expected to expand the number of registrants that will qualify as an SRC. Indeed, the SEC Staff estimates that approximately 42 percent of all registrants would qualify as an SRC based on their public float if the proposed amendments are adopted. This compares to approximately 32 percent of registrants in 2015 under the current definition. At the same time, increasing the revenue threshold is not expected to have a substantial impact on the number of registrants qualifying as an SRC. However, the SEC Staff pointed out that this is consistent with thresholds recommended by the Advisory Committee on Small and Emerging Companies and the Small Business Forum on Small Business Capital Formation.

Submission of Comments

Comments to the proposed amendment can be submitted to the SEC Staff on the SEC’s website.

Click here to view the Overview of SRC Disclosure Accommodations.

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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