SEC Amends Definition of “A Smaller Reporting Company” - YouTube

I’m attorney Laura Anthony founding partner of Legal & Compliance, a full service corporate,

securities, and business transactions law firm.

Today is the first in a LawCast series talking about the new amendment to the SEC definition

of a smaller reporting company.

On June 28, 2018, the SEC adopted the much anticipated amendments to the definition of

a smaller reporting company as contained in Securities Act Rule 405, Exchange Act Rule

12b-2 and Item 10(f) of Regulation S-K.

The amendments come almost two years to the day since the initial publication of proposed

rule changes.

Among other benefits, it is hoped that the change will help encourage smaller companies

to access US public markets and go public via IPO.

The amendment expands the number of companies that qualify as a smaller reporting company

and thus qualify for the scaled disclosure requirements in Regulation S-K and Regulation

S-X.

The SEC estimates that an additional 966 companies will be eligible for SRC status in the first

year under the new definition.

As proposed, and as recommended by various market participants, the new definition of

a smaller reporting company will now include companies with less than a $250 million public

float as compared to the $75 million threshold in the prior definition.

In addition, if a company does not have an ascertainable public float or has a public

float of less than $700 million, a smaller reporting company will be one with less than

$100 million in annual revenues during its most recently completed fiscal year.

The prior revenue threshold was $50 million and only included companies with no ascertainable

public float, and not a revenue figure.

Once considered a smaller reporting company, a company would maintain that status unless

its float drops below $200 million if it previously had a public float of $250 million or more.

The revenue thresholds have been increased for weak requalification, such that a company

can re-qualify if it has less than $80 of annual revenues if it previously had a $100

million of revenues or more and less than $560 million of public float if it previously

had $700 million of public float or more.

The SEC also made related rule changes to flow through the increased threshold concept.

In particular, rule 3-05 of regulation SX has been amended to increase the net revenue

threshold in the rule from $50 million to $100.

As a result, companies may omit financial statements of businesses acquired, or to be

acquired from the earliest of the three fiscal years otherwise required by rule 3-05 if the

net revenues of that business are less than … furthermore, the conforming changes include

changes to the cover page for most SEC registration statements and reports, including forms S-1,

S-3, S-4, S-11, 10-Q and 10-K.

The new rules did not change the definition of either accelerated filer or large accelerated

filer.

As a result, companies with $75 million or more of public float that qualify as a smaller

reporting company will remain subject to the requirements that apply to accelerated filers,

including the accelerated timing of the filing of periodic reports and the requirements that

accelerated filers provide the auditors attestation of management’s assessment of internal controls

over financial reporting as required by Section 404-B of the smaller reporting company Sarbanes-Oxley

Act.

However, chair Clayton has directed the SEC staff to make recommendations for additional

changes to the definitions to reduce the number of companies that would qualify as accelerated

filers and thus have to comply with Sarbanes-Oxley’s section 404B.

I’m securities attorney Laura Anthony, founding partner of Legal & Compliance, and producer

of LawCast.

Should you have any questions about today’s topic, please visit SecuritiesLawBlog.com

and LawCast.com, or contact me directly.

Inquiries of a technical nature are always encouraged.