1.6 Reviews by Filing Status and Revenue

It is interesting to consider the filing status of registrants in the evaluation of comment letter trends and statistics. That information, however, is more meaningful when considered in relation to the percentage of registrants within each filing status classification. For example, large accelerated filers continue to be subject to a disproportionately higher number of reviews, whereas nonaccelerated filers are subject to disproportionately fewer reviews. More specifically, in review year 2023, 50 percent of the reviews with comment letters were for large accelerated filers, down from 61 percent in review year 2022. However, large accelerated filers accounted for a comparatively lower percentage of the Forms 10-K filed in each of those review years (30 percent in review year 2023 and 31 percent in review year 2022). Conversely, whereas 40 percent of the reviews with comment letters were for nonaccelerated filers in review year 2023 (up from 26 percent in 2022), nonaccelerated filers accounted for a comparatively higher percentage of the Forms 10-K filed in each of those review years (59 percent in review year 2023 and 60 percent in review year 2022).

One factor that may be contributing to the trend of subjecting large accelerated filers to a disproportionately high number of reviews is that while the SEC is required under the Sarbanes-Oxley Act to review registrants at least once every three years, it is also required under that Act to consider “issuers with the largest market capitalization” in scheduling its reviews. Since registrants that have larger market caps make up a larger share of the capital markets than smaller companies, the SEC may take a risk-based approach and select larger companies for a filing review more frequently than smaller companies, in a manner consistent with the factors identified in the Act. When review resources were limited because of high levels of IPO and SPAC activity in review years 2020 and 2021, the SEC staff was more likely to prioritize high market cap companies for review. However, with the slowdown in IPO and SPAC activity over the past 18 months, the staff may have increased its allocation of review resources to nonaccelerated filers to ensure that the statutory mandate of reviewing each filer at least once every three years is met.

As discussed in Section 1.6.1, the SEC is required under the Sarbanes-Oxley Act to consider “issuers with the largest market capitalization” in scheduling its reviews. Since such issuers (i.e., companies with larger public floats) generally produce more revenue, it is no surprise that companies that generate more revenue have historically been subject to a disproportionately higher number of reviews with comment letters than companies that generate less revenue. This historical trend has begun to soften. In review year 2023, registrants generating $1 billion or more in revenue accounted for 39 percent of the reviews with comment letters (as compared with 50 percent in review year 2022) and 25 percent of the Form 10-K filings (as compared with 22 percent in review year 2022). Conversely, a higher percentage of reviews with comment letters was attributable to smaller companies in the current year than in prior years. Specifically, in review year 2023, registrants generating less than $500 million in revenue accounted for 50 percent of the reviews with comment letters (as compared with 39 percent in review year 2022) and 68 percent of the Form 10-K filings (as compared with 71 percent in review year 2022). The uptick in reviews with comment letters associated with registrants generating less than $500 million in revenue is consistent with the trend we saw in reviews of nonaccelerated filers described in Section 1.6.1 and may similarly be attributed to the SEC staff’s shift in focus to smaller companies as IPO and SPAC market activity slowed. Moreover, the increase in reviews of companies with no revenue is driven largely by reviews of (1) early-stage, research-focused biotechnology companies that do not currently generate revenues and (2) SPACs before a de-SPAC transaction.