Becoming a Smaller Reporting Company: SEC Issues Compliance Guide on Expanded Smaller Reporting Company Definition
On August 10, 2018, the U.S. Securities and Exchange Commission (SEC) issued a Small Entity Compliance Guide for Issuers (the Guide) on the recently amended smaller reporting company (SRC) definition. On June 28, 2018, the SEC adopted amendments to the definition of SRC which expand the number of companies that qualify as SRCs and can thereby take advantage of the scaled disclosure requirements applicable to such companies. The expanded definition of SRC will be effective on September 10, 2018.
Under the new SRC definition, a company with less than $250 million of public float will qualify as a SRC. Additionally, companies with less than $100 million in annual revenues and either no public float or a public float less than $700 million will also qualify as a SRC.
As the effective date of the expanded SRC definition is fast approaching, the SEC Guide offers important information to companies that are transitioning into SRC status.
A reporting company determines whether it qualifies as a SRC annually as of the last business day of its second fiscal quarter. However, for purposes of the new SRC definition, a reporting company should make its first determination of whether it qualifies as a SRC on or after September 10, 2018. For this purpose, a reporting company should measure its public float as of the last business day of its most recently completed second fiscal quarter, and if applicable, consider its annual revenues in the most recently completed fiscal year. The public float is calculated by multiplying the aggregate worldwide number of shares of its common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity.
Based on the calculation, for purposes of the first determination of SRC status on or after September 10, 2018, a reporting company that has a public float of less than $250 million as of the last business day of its most recently completed second fiscal quarter qualifies as a SRC. For the same purpose, a reporting company that has no public float or a public float of $250 million or more but less than $700 million should further consider whether its annual revenues were less than $100 million in its most recently completed fiscal year and therefore qualifies as a SRC.
A company newly qualifying as a SRC under the expanded definition on or after September 10, 2018 (regardless of whether it qualified under the previous definition) has the option to use the SRC scaled disclosure accommodations in its next periodic or current report due on or after September 10, 2018, or for transactional filings without a due date, in filings or amended filings made on or after September 10, 2018.
The Guide provides examples of the transitioning of companies with a common fiscal year end:
Fiscal Year End
|Public Float||Annual Revenues||
First Periodic Filing Eligible to Rely on SRC Accommodations (assuming accelerated filer status)
|June 30||Dec. 29, 2017||$220 million||No need to calculate; company qualifies under “public float” test||Form 10-K due Sep. 13, 2018|
|Sep. 30||March 30, 2018||$600 million||$90 million for FYE Sep. 30, 2017||Form 10-K due Dec. 14, 2018|
|Dec. 31||June 29, 2018||None||$85 million for FYE Dec. 31, 2017||Form 10-Q for the quarter ending Sep. 30, 2018 due Nov. 9, 2018|
Companies Filing Initial Registration Statements
A company filing its initial registration statement for shares of common equity will make its initial determination at the time of the filing of the registration statement. In this case, public float is measured as of a date within 30 days of the date of the filing of the registration statement and is computed by multiplying the aggregate worldwide number of shares of common equity held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of shares of common equity included in the registration statement by the estimated public offering price of the shares. If the public float is calculated as $250 million or more but less than $700 million, a company filing its initial registration statement for common equity should further consider whether it qualifies as a SRC based on its annual revenues in its most recent audited financial statements available on the public float calculation date, which typically are the financial statements included in the initial registration statement.
In the case of a determination based on an initial Securities Act registration statement, if the actual offering price or the number of shares sold decreases after the initial public float calculation date, a company that determined it was not a SRC may re-determine its status under the “public float” test at the conclusion of the offering covered by the registration statement based on such actual offering price and number of shares sold.
A company that completed its initial public offering since the end of its most recent second fiscal quarter may elect to determine whether it qualifies as a SRC based on its public float as of the date it previously measured its public float prior the filing of the registration statement for the offering, or as of the conclusion of the offering based on the actual offering price and number of shares sold.
Important Note on SRCs and Accelerated Filers
Prior to the amendment to the SRC definition, SRCs were excluded from being an “accelerated filer” or a “large accelerated filer.” The SRC definition amendment eliminated such exclusion and preserved the public float thresholds for the accelerated filer and large accelerated filer status. As a result, a company with $75 million or more of public float that qualifies as a SRC will be an accelerated filer at the same time and subject to certain requirements, including accelerated timing for the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002. Having to comply with these two requirements significantly discounts the benefits of the SRC status for companies that are both a SRC and an accelerated filer.
Notably, the SEC is evaluating possible changes to the “accelerated filer” definition that, if adopted, would have the effect of reducing the number of companies that qualify as accelerated filers and therefore, among other things, restoring benefits of the relaxed filing timing and wavier from auditor’s attestation to some SRCs.