The U.S. Securities and Exchange Commission (SEC) has proposed rules that would amend the definition of a “smaller reporting company” by significantly increasing the applicable financial thresholds. In an effort to promote capital formation and reduce compliance costs for smaller companies while maintaining important investor protections, the proposal to update the definition would expand the number of companies that qualify as smaller reporting companies, thus qualifying for lower levels of required disclosures in prospectuses and periodic filings (such as requiring disclosures for a reduced number of annual periods and the elimination of the need to include risk factor disclosures and certain financial data).
Smaller reporting companies may provide scaled disclosures under the SEC’s rules and regulations. Currently, smaller reporting companies are generally defined as companies that have less than $75 million worth of company shares that are held by the general public (i.e. public float), or companies that have zero public float and annual revenues less than $50 million.
The proposed rules would revise the definition of smaller reporting company to qualify a company with:
- less than $250 million of public float, or
- no public float and less than $100 million in annual revenues.
In addition, as in the current rules, once a company exceeds either of the thresholds, it will not qualify as a smaller reporting company again until public float or revenues decrease below a lower threshold. Under the proposed rules, a company would re-qualify as a smaller reporting company again once its public float is less than $200 million (instead of $50 million under the prior rules) or, if it has no public float, once its annual revenues are less than $80 million (instead of $40 million under the prior rules).
However, we should note that the SEC is not proposing to increase the $75 million threshold in the “accelerated filer” definition. Therefore, companies with public float between $75 million and $250 million may qualify as smaller reporting companies, but still be subject to the requirements that apply currently 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 (unless a company is an “emerging growth company” under the JOBS Act).
Many smaller companies are challenged to meet the excessive reporting and compliance costs that come with being a public company, which the SEC has estimated to be about $2.5 million for initial compliance costs in the case of an IPO and $1.5 million annually for ongoing compliance. The proposed rules, however, would offer substantial compliance and regulatory cost savings to an expanded number of companies (for example by reducing certain financial and executive compensation disclosures in periodic reports and proxy statements).
This may lead to mid-size companies who are currently reluctant to go public to more readily consider that option. However, companies may remain reluctant to go public due to continuing concerns of an increased potential for claims made by investors and related liability.
Public comment on the proposed rules should be received by the SEC no later than 60 days after publication in the Federal Register.