SEC Expands Qualifications for Nonaccelerated Filer Status
Introduction
On March 12, 2020, the SEC issued a final
rule1 that amends the eligibility criteria for nonaccelerated filer status to
include issuers that qualify as smaller reporting companies (SRCs) with annual
revenues of less than $100 million and public float of less than $700 million.
The final rule is intended to promote capital formation while maintaining
investor protection by expanding the number of issuers that are eligible to take
advantage of certain reporting accommodations offered to nonaccelerated filers.
The most significant of these accommodations is that nonaccelerated filers are
not subject to the requirement under Section 404(b) of the Sarbanes-Oxley Act of
2002 (SOX) that an issuer obtain an audit report on internal control over
financial reporting (ICFR) from its independent auditor.
In developing the final rule, the SEC considered feedback from
constituents on its May 2019 proposed
rule.2 The final rule is effective April 27, 2020, and may be applied to filings
that are due on or after that effective date.
Background
Before the SEC’s expansion3 of the definition of an SRC in September 2018, an issuer would not have
been able to meet the SRC definition and also qualify as an accelerated filer.
In response to suggestions from stakeholders, SEC Chairman Jay Clayton directed
the staff to consider whether the accelerated filer definition also should be
changed to more closely align the two definitions. The final rule addresses
those suggestions and more closely, although not completely, aligns an issuer’s
filing status determination with the amended SRC definition.
Key Provisions of the Final Rule
The final rule amends the definitions of accelerated filer and large
accelerated filer (under Rule 12b-2 of the Securities and Exchange Act of 1934) to
exclude issuers that qualify as SRCs on the basis of a revenue test. Therefore,
under the final rule, an issuer that qualifies as an SRC will also qualify as a
nonaccelerated filer if it has (1) annual revenues of less than $100 million in the
most recent fiscal year for which audited financial statements are available and (2)
a public float4 of less than $700 million as of the last business day of its second fiscal
quarter (the “revenue test”).
However, issuers that qualify as SRCs solely on the basis of a public float test
(i.e., issuers with $100 million or more of revenue but less than $250 million
of public float) will need to continue to separately evaluate the accelerated
filer criteria5 to determine their filing status, including the applicable public float
thresholds (i.e., $75 million or more to be considered an accelerated filer).
While the final rule does not completely eliminate the overlap between SRCs and
accelerated filers, it aligns the initial float assessment criteria for issuers
with annual revenues under $100 million. The chart6 below illustrates the intersection between the revenue and public float
requirements for an SRC and an accelerated filer under the existing and amended
requirements.
The following table further summarizes the amended initial assessment criteria on
the basis of public float and revenue levels in the context of the SOX Section
404(b) requirements:
|
Amended Definition
|
Requirement
| ||
|---|---|---|---|
|
Status
|
Public Float
|
Annual Revenues
|
SOX Section 404(b)
|
|
SRC and nonaccelerated filer
|
Less than $75 million
|
No limit
|
No
|
|
$75 million to less than $700 million
|
Less than $100 million
|
No
| |
|
SRC and accelerated filer
|
$75 million to less than $250 million
|
$100 million or more
|
Yes
|
Example 1
Under the amended definition, an issuer with a December
31, 2020, fiscal year-end that has $400 million of
public float as of June 30, 2020, and $95 million in
annual revenues for the fiscal year ended December 31,
2019, will qualify as an SRC and will also be a
nonaccelerated filer for the fiscal year ending December
31, 2020.
Example 2
If the issuer’s public float as of June 30, 2021, remains
at $400 million and its annual revenues for the fiscal
year ending December 31, 2020, are $105 million, the
issuer will no longer qualify as an SRC or
nonaccelerated filer because its public float exceeds
$75 million and it no longer has revenue less than $100
million. Accordingly, when filing its annual report for
the year ending December 31, 2021, the issuer must
provide its independent auditor’s report on the
effectiveness of its ICFR and comply with the deadlines
applicable to accelerated filers.
As a result of the final rule, certain SRCs will now qualify as nonaccelerated
filers and will no longer be subject to auditor attestation of ICFR under SOX
Section 404(b). However, the final rule does not relieve management of its
obligation to assess ICFR nor does it relieve an independent auditor of its
obligation to consider ICFR in the performance of its financial statement audit
of an issuer. For example, in a financial statement audit, the auditor is
required to identify and assess the risks of material misstatement. Thus, the
auditor is required, in accordance with PCAOB AS 2110,7 to “obtain a sufficient understanding of each component [of ICFR] to (a)
identify the types of potential misstatements, (b) assess the factors that
affect the risks of material misstatement, and (c) design further audit
procedures.” Obtaining such an understanding includes evaluating the design of
the controls relevant to the audit and determining whether the controls have
been implemented, but it does not include testing the operating effectiveness of
those controls. In addition, the final rule does not affect other key SOX
protections that do not depend on filer status, such as independent audit
committee requirements, CEO and CFO certifications of financial reports, or the
requirement that issuers continue to establish, maintain, and assess the
effectiveness of their ICFR.
Other Considerations
Effective Date
As noted above, the final rule is effective April 27, 2020,
and may be applied to annual reports due on or after that effective date.
For example, if an issuer has a March 31, 2020, fiscal year-end and the due
date for its annual report is after the final rule’s effective date, the
issuer may determine its filing status in accordance with the final rule. If
the issuer qualifies as a nonaccelerated filer, it would not be required to
provide an independent auditor’s report on the effectiveness of ICFR, and it
may use the reporting deadline applicable to nonaccelerated filers.
Transition Thresholds
The final rule changes the public float criteria used to determine when an
issuer will exit a filer status. To reduce the likelihood that issuers
frequently change filer status, the SEC established lower criteria for exit
than entry. Before the final rule’s amendments, once an issuer became an
accelerated filer or a large accelerated filer, it maintained that status
until its public float fell below $50 million or $500 million, respectively.
The final rule increases the public float transition threshold for a large
accelerated filer or an accelerated filer to become a nonaccelerated filer
from $50 million to $60 million, and for a large accelerated filer to become
an accelerated filer from $500 million to $560 million (i.e., 80 percent of
the initial qualification thresholds). In addition, the final rule allows an
issuer to exit accelerated filer or large accelerated filer status to become
a nonaccelerated filer if it becomes eligible for SRC status under the
revenue test at a revenue threshold of $80 million (i.e., 80 percent of the
initial qualification threshold).
Cover Page Update
The final rule adds a checkbox to the cover pages of Forms 10-K, 20-F, and
40-F that all issuers must use to indicate whether the filing includes
auditor attestation of ICFR.
Business Development Companies
Business development companies8 are excluded from the definitions of accelerated and large accelerated
filer under an analogous revenue test in the final rule. Accordingly, while
such companies are prohibited from being SRCs, they will be exempt from
accelerated and large accelerated filer status if they have (1) a public
float of less than $700 million and (2) investment income (which includes
income from dividends, interest on securities, and other income) of less
than $100 million. Business development companies with less than $75 million
in public float will continue to be nonaccelerated filers regardless of
their investment income.
Foreign Private Issuers
The final rule clarifies that the amendments apply to foreign private issuers
(FPIs) that apply U.S. GAAP and file on domestic forms (i.e., Form 10-K and
Form 10-Q). Issuers that qualify as FPIs and elect to use the FPI reporting
regime (i.e., Form 20-F), however, are not eligible to be SRCs and therefore
a revenue test would not be applicable for determining nonaccelerated filer
status.
Footnotes
1
SEC Final Rule Release No. 34-88365, Amendments to the Accelerated
Filer and Large Accelerated Filer Definitions.
2
SEC Proposed Rule Release No. 34-85814, Amendments to
the Accelerated Filer and Large Accelerated Filer
Definitions.
3
SEC Final Rule Release No. 33-10513, Smaller
Reporting Company Definition.
4
Public float is the aggregate market value of the issuer’s
outstanding voting and nonvoting common stock held by nonaffiliates. It is
calculated by multiplying the number of the company’s voting and nonvoting
common shares held by nonaffiliates by the market price.
5
See paragraphs 1340.1 and 1340.2 of the SEC Financial
Reporting Manual for a full list of the criteria an issuer must meet, as
assessed at the end of its fiscal year, to qualify as an accelerated
filer or a large accelerated filer.
6
The chart illustrates the amended definitions on the
basis of public float. It is assumed in the chart that all other
criteria under Rule 12b-2 have been met for an issuer to qualify as an
accelerated filer or a large accelerated filer. The chart does not
reflect requirements applicable to business development companies; for
those requirements, see the discussion under Business Development
Companies.
7
Paragraph 18 of PCAOB Auditing Standard No. 2110, Identifying and
Assessing Risks of Material Misstatement.
8
The AICPA Audit and Accounting Guide Investment
Companies defines a business development company as “a U.S.
closed-end company that (1) operates for the purpose of making
investments in certain securities specified in Section 55(a) of the
1940 Act and, with limited exceptions, makes available
significant managerial assistance with respect to the
issuers of such securities, and (2) has elected business development
company status” in accordance with the 1940 Act.