SEC Expands Eligibility for “Smaller Reporting Company” Classification
On June 28, 2018, the SEC issued a final rule1 that amends the definition of a “smaller reporting company” (SRC) to expand the number of companies that qualify for this classification and are therefore able to take advantage of the scaled disclosure requirements that apply to such entities. The final rule is effective 60 days after its publication in the Federal Register and incorporates feedback from the SEC Advisory Committee on Small and Emerging Companies, the SEC Government-Business Forum on Small Business Capital Formation, registrants, and others.
The final rule also amends the definition of an accelerated filer and large accelerated filer so that companies that qualify as SRCs do not automatically qualify as nonaccelerated filers. The $75 million public float threshold in the SEC’s definition of an accelerated filer is not changed and the final rule does not modify the requirement to provide the auditor’s attestation report on internal control over financial reporting. Therefore, a company could qualify as an SRC and be eligible for the scaled disclosures available to such companies. But it may also be an accelerated filer and subject to those requirements, including the shorter deadlines for periodic filings and the requirement to include in its filings an auditor’s attestation report on internal control over financial reporting, as required under Section 404(b) of the Sarbanes-Oxley Act of 2002.
In comments received during the final rule’s proposal period, stakeholders asked the SEC to consider raising the threshold in the SEC’s definition of an accelerated filer to provide relief from the requirement to provide the auditor’s attestation report on internal control over financial reporting. SEC Chairman Jay Clayton has directed the staff to study, and the staff has begun to formulate, recommendations to the Commission for possible additional changes to the accelerated filer definition.
Changes to the SRC Definition
A registrant may qualify as an SRC on the basis of either a public float test or a revenue test. The final rule raises the thresholds for qualification as an SRC as follows:
Less than $250 million of public float as of the last business day of the registrant’s second fiscal quarter
Less than $75 million of public float as of the last business day of the registrant’s second fiscal quarter
Less than $100 million of revenue as of the most recently completed fiscal year for which audited financial statements are available and either of the following:
Less than $50 million of revenue as of the most recently completed fiscal year for which audited financial statements are available and no public float
For initial Securities Act2 or Exchange Act3 registration statements, public float is measured as of a date within 30 days of the filing. Foreign companies can qualify as SRCs if they file U.S. GAAP financial statements on the forms used for domestic issuers. A company may qualify as both an SRC and an emerging growth company (EGC);4 however, unlike the scaled disclosures available for an EGC, there is no time limit for qualifying as an SRC.5 Investment companies, asset-backed issuers, and subsidiaries that are majority-owned by non-SRC registrants cannot qualify as SRCs. Registrants should consider consulting with their legal counsel when determining whether they qualify as SRCs.
Transition Upon Effectiveness of the Final Rule
Current registrants can apply the new definition of an SRC in determining their status for fiscal years ending after the final rule is effective. For the first fiscal year ending after the final rule is effective, existing registrants may qualify by applying the initial qualification thresholds for public float or revenue rather than the subsequent qualification thresholds discussed below. Calendar-year-end companies would apply the new initial qualification thresholds when making their assessments for the year ending December 31, 2018. The public float test would be performed as of the last day of the registrant’s second fiscal quarter, and the revenue test would be performed by using the most recent audited financial statements available.
Once a company qualifies as an SRC, it may apply the scaled disclosure requirements in its next periodic filing. On the basis of the final rule’s expected effective date, we believe that a newly eligible calendar-year-end company may apply the scaled disclosure requirements in its September 30, 2018, Form 10-Q and subsequent periodic filings.
A calendar-year-end company with public float on June 30, 2018 (the last day of its second fiscal quarter), of $225 million (i.e., less than the $250 million initial qualification threshold) may qualify as an SRC for the year ending December 31, 2018 and begin using scaled disclosures in its September 30, 2018, Form 10-Q.
A calendar-year-end company with revenue for the year ended December 31, 2017, of $90 million (i.e., less than the $100 million initial qualification threshold) and public float on June 30, 2018 (the last day of its second fiscal quarter), of $600 million (i.e., less than the $700 million initial qualification threshold) may qualify as an SRC for the year ending December 31, 2018, and begin using scaled disclosures in its September 30, 2018, Form 10-Q.
When a company ceases to qualify as an SRC, it may continue to apply the scaled disclosure requirements through its next annual report on Form 10-K; however, it must file such annual report in accordance with the timeframes required for its reporting status6 and would no longer be eligible to apply the scaled disclosure requirements in its Form 10-Q for the first quarter of the following year. For example, if a calendar-year-end company determines that it no longer qualifies as an SRC on June 30, 2019, it may still apply the scaled disclosure requirements through its December 31, 2019, Form 10-K, but it will no longer be permitted to apply the scaled disclosure requirements in its March 31, 2020, Form 10-Q and subsequent periodic filings.
If a registrant determines that it does not qualify as an SRC under the initial qualification thresholds, it will remain a non-SRC until it reaches one of the following lower subsequent qualification thresholds set at 80 percent of the initial qualification thresholds:
Less than $200 million of public float as of the last business day of the registrant’s second fiscal quarter if it previously had $250 million or more of public float
Less than $50 million of public float as of the last business day of the registrant’s second fiscal quarter
Less than $80 million of revenue as of the most recently completed fiscal year for which audited financial statements are available if it previously had $100 million or more of annual revenues, and less than $560 million of public float if it previously had $700 million or more of public float
Less than $40 million of revenue as of the most recently completed fiscal year for which audited financial statements are available and no public float
The subsequent qualification provisions do not apply in the determination of status for the first fiscal year after the effective date of the final rule. Once a company qualifies as an SRC, it may apply the scaled disclosure requirements in its next Form 10-Q. For example, if a calendar-year-end company determines that it qualifies as an SRC on the basis of its public float on June 30, 2020 (the last day of its second fiscal quarter), it may apply the scaled disclosure requirements in its June 30, 2020, Form 10-Q and subsequent periodic filings.
Connecting the Dots
The thresholds for subsequent qualification ($200 million for the public float test and $80 million for the revenue test) are lower than those for initial qualification ($250 million for the public float test and $100 million for the revenue test) to prevent companies with a public float near $250 million or revenue near $100 million from alternating between SRC and non-SRC status each year.
Scaled Disclosure Requirements
SRCs may be eligible to apply Regulation S-K’s and Regulation S-X’s scaled disclosure requirements in certain registration statement forms and periodic reports. Under those requirements, SRCs do not have to disclose as many years of audited financial statements and MD&A as non-SRCs. In addition, SRCs are not required to disclose selected financial data, unaudited quarterly financial information, contractual obligations, or qualitative and quantitative information about market risk. For a more detailed analysis of the scaled disclosure requirements, see the appendix below.
Companies that qualify as SRCs may choose to apply the scaled disclosures on an item-by-item (or an “a la carte”) basis. However, their disclosures should be consistent from year to year and must comply with federal securities laws, including those requiring disclosures not to be misleading.
Connecting the Dots
In determining which scaled disclosure requirements to apply, newly eligible companies may wish to conduct outreach and consider the information needs of their investors and other financial statement users. Thus, newly eligible companies may consider weighing any potential cost savings associated with the scaled disclosure requirements against not disclosing information that investors may consider valuable.
Disclosure Requirements for Acquired or to Be Acquired Businesses That Apply to All Registrants
The final rule also amends the net revenue threshold in Regulation S-X, Rule 3-05, that permits a registrant to omit the earliest year required for the financial statements of certain acquired or to be acquired businesses that exceed the 50 percent significance threshold. In accordance with the final rule, if an acquired or to be acquired business exceeds the 50 percent significance threshold, but the acquired or to be acquired business reported net revenue of less than $100 million in its most recent fiscal year, a registrant could provide two rather than three years of financial statements for the acquired or to be acquired business. Before the final rule, the threshold was $50 million.
Disclosure Effectiveness Initiative
Issuance of the final rule is part of the SEC’s ongoing disclosure effectiveness initiative, a broad-based review of the Commission’s disclosure, presentation, and delivery requirements for public companies. See the appendix of Deloitte’s December 10, 2017, Heads Up for (1) summaries of initiative activities and (2) Deloitte resources that provide additional information about each project.
The same day the SEC issued the final rule, it also issued requirements related to the use of the Inline eXtensible Business Reporting Language (iXBRL) format for the submission of operating company financial statement information and fund risk/return summary information and related changes. See Deloitte’s upcoming Heads Up for an overview of the iXBRL requirements.
Further, in recent testimony before the House Committee on Financial Services, Chairman Clayton discussed the Commission’s commitment to advancing its disclosure effectiveness initiative, reporting that the SEC has made significant progress over the past year on projects related to the initiative, and stated that the SEC is developing recommendations to finalize rule amendments that would eliminate redundant, overlapping, outdated, or superseded disclosure requirements. He also discussed the SEC’s ongoing projects on (1) changes to Regulation S-X related to requirements for financial statements of entities other than the registrant (e.g., acquired or to be acquired businesses) and (2) industry-specific disclosure requirements in the Commission’s industry guides applicable to mining and bank holding companies. Stay tuned for future developments on these efforts.
Appendix — Summary of Scaled Disclosure Requirements Available to SRCs
The tables below compare certain requirements under Regulations S-K and S-X for SEC registrants7 and the related SRC scaled disclosures.
Disclosure Requirements Under Regulation S-K
Regulation S-K Item
Summary of Disclosure
SRC Scaled Disclosure
Registrants Other Than SRCs
Item 101, “Description of Business”
Description of business developments, including principle products and services rendered
Last three years, and certain description requirements may be less detailed
Last five years
Item 201, “Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters”
A graph depicting share performance over the past five years against market indexes
Item 301, “Selected Financial Data”
A table disclosing key financial results for the past five years
Item 302, “Supplementary Financial Information”
Unaudited quarterly information for the most recent eight fiscal quarters
Item 303, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
Discussion of results of operations
Discuss prior two years
Discuss prior three years
Tabular disclosure of contractual obligations
Item 305, “Quantitative and Qualitative Disclosures About Market Risk”
Disclosure of information about market sensitive instruments and related exposure, including sensitivity analysis
Item 402, “Executive Compensation”
Number of named executive officers
Scope of summary compensation table
Compensation discussion and analysis, grants of plan-based awards table, option exercises and stock vested table, pension benefits table, nonqualified deferred compensation table, disclosure of compensation policies and practices related to risk management, pay ratio disclosure
Item 404, “Transactions With Related Persons, Promoters and Certain Control Persons”
Description of policies/procedures for the review, approval, or ratification of related-party transactions
Item 407, “Corporate Governance”
Disclosure of audit committee financial expert
Not required in first annual report
Disclosure of compensation committee interlocks and insider participation
Compensation committee report
Item 503, “Prospectus Summary, Risk Factors, and Ratio of Earnings to Fixed Charges”
Discussion of the most significant risk factors facing the company
Not required in Exchange Act filings (e.g., annual or interim reports), required in a registration statement
Statement of ratio of earnings to fixed charges
Item 601, “Exhibits”
Statement regarding computation of ratios
Financial Statement Requirements Under Regulation S-X
Financial Statement Requirements8
Summary of Disclosure
SRC Scaled Disclosure
Registrants Other Than SRCs
Annual financial statements
Annual audited financial statements
Two years balance sheet, income statement, cash flow, and shareholders’ equity
Three years income statement, cash flow, and shareholders’ equity, two years balance sheet
Footnote and other disclosures
Compliance with presentation and disclosure requirements of Regulation S-X, including, but not limited to, separate disclosure of revenue and costs from products and services, and separate presentation of related-party transactions
Generally not required
Disclosure of accounting policy related to certain derivative instruments (Rule 4-08(n)9)
Compliance with auditor independence requirements (Article 212)
Financial statements of businesses acquired or to be acquired
Audited historical financial statements for acquired or to be acquired businesses
No more than two years are required13
Up to three years may be required depending on significance
Pro forma financial information
Pro forma financial information should be provided in certain filings (Article 1114)
Required in fewer circumstances
Real estate operations acquired or to be acquired
Audited historical financial statements for acquired or to be acquired real estate operations
No more than two years are required
Up to three years may be required depending on significance
Financial information of equity method investees (EMIs)
Summarized financial data of the EMI disclosed in the registrant’s financial statements
Required if the EMI exceeds 20 percent significance in both interim and annual periods15
Required if the EMI exceeds 20 percent significance at interim periods, or 10 percent significance for the annual period16
Audited historical financial statements of the EMI
Only required if EMI financial statements would be “material to investors”17
Required if the EMI exceeds 20 percent significance18
SEC Final Rule Release No. 33-10513, Amendments to Smaller Reporting Company Definition.
Securities Act of 1933.
Securities Exchange Act of 1934.
EGCs are a category of registrants created by the Jumpstart Our Business Startups Act that benefit from certain scaled disclosure requirements that are different than the scaled disclosures for an SRC. See Topic 10 of the SEC’s Financial Reporting Manual (FRM) for guidance on EGC eligibility and the scaled disclosure provisions that apply to EGCs.
A registrant no longer qualifies as an EGC five years after its initial public offering, or sooner if it reaches certain revenue, debt, or public float thresholds. See paragraph 10110.4 of the FRM for more information about EGC disqualifying provisions.
The timeframes are 60 days after year-end for large accelerated filers, 75 days after year-end for accelerated filers, and 90 days after year-end for nonaccelerated filers. See paragraph 1330 of the FRM for more information about Exchange Act report due dates.
The disclosures identified in the “Registrants Other Than SRCs” column do not contemplate certain scaled disclosure requirements available to EGCs. See Footnote 4.
RCs apply the requirements in Regulation S-X, Article 8, “Financial Statements of Smaller Reporting Companies,” when preparing their financial statements. SRCs typically are not required to apply the disclosure provisions of Regulation S-X in their entirety unless indicated by Article 8. Registrants other than SRCs should apply Regulation S-X in its entirety, as applicable.
Regulation S-X, Rule 4-08(n), “Accounting Policies for Certain Derivative Instruments.”
Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”
Regulation S-X, Rule 3-16, “Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered.”
Regulation S-X, Article 2, “Qualifications and Reports of Accountants.”
If an SRC acquires a non-SRC company that reports under the Exchange Act, the SEC may require three years of audited financial statements for the acquired entity.
Regulation S-X, Article 11, “Pro Forma Financial Information.”
Sales, gross profit, net income (loss) from continuing operations, net income, and net income attributable to the investee must be disclosed for equity investees that constitute 20 percent or more of a registrant’s consolidated assets, equity, or income from continuing operations attributable to the registrant.
Regulation S-X, Rule 4-08(g), “Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons,” and Rule 10-01(b)(1), “Other Instructions as to Content,” prescribe the annual requirements for summarized financial information and the interim requirements for summarized income statement information, respectively.
See paragraph 5330.2 of the FRM.
Regulation S-X, Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons,” prescribes the annual requirements for financial statements of an EMI. See Deloitte’s A Roadmap to SEC Reporting Considerations for Equity Method Investees for further guidance on evaluating the significance of EMIs.