Released June 28, 2018 (initially proposed on June 27, 2016), and effective 60 days after publication in the Federal Register, U.S. Securities and Exchange Commission (SEC) Final Rule Release No. 33-10513, Amendments to Smaller Reporting Company Definition, is expected to expand the number of registrants that qualify as smaller reporting companies (SRC). The SRC qualification continues to be based on a public float test or revenues test. The amendment expands SRC eligibility by increasing the public float threshold from $75 million to $250 million and increasing the annual revenue threshold to $100 million. The SRC qualification provides scaled disclosures under regulations S-X and S-K.
The SEC’s stated intention of the amendment is to reduce compliance costs for qualifying registrants and promote capital formation. In generating the amendment, the SEC has considered the views of the SEC Government-Business Forum on Small Business Capital Formation, the SEC Advisory Committee on Small and Emerging Companies, registrants and stakeholders.
The determination as to whether an issuer is an SRC is made annually. Existing registrants would be eligible to apply the final rule for fiscal years ending after the effective date using the initial qualification threshold noted below. Public float is measured based on the last business day of a registrant’s most recent second fiscal quarter, and annual revenues are as of the most recently completed fiscal year for which audited financial statements are available.
If a determination made based on public float indicates the registrant is newly eligible to be an SRC, the registrant may choose to reflect this determination beginning with its first quarterly report on Form 10-Q following the determination, rather than waiting until the first fiscal quarter of the next year. This would imply that a registrant with second quarter (Q2) 2018 public float or qualifying December 31, 2017, revenues could apply the final rule on its September 30, 2018, Form 10-Q.
The following tables provide a comparison of the SRC qualification thresholds under the current and revised definitions:
A registrant that hasn’t qualified as an SRC under the initial qualification thresholds won’t qualify unless the lower qualification threshold—set at 80 percent of the initial qualification threshold—is met.
* As of the last business day of its most recently completed second fiscal quarter, computed by multiplying the aggregate worldwide number of shares of its voting and nonvoting common equity held by nonaffiliates 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
The scaled disclosures provide for a reduction in details required for development of business and full removal of selected financial data disclosures. The scaling also reduces Management’s Discussion and Analysis (MD&A) presentation and annual financial statement presentation to two years rather than three years. The following tables provide a summary of the SRC scaled disclosures under Regulation S-K and S-X:
It’s important to note the amended (and existing) SRC definition establishes eligibility (but doesn’t require) for all the scaled disclosures be applied. The registrant may elect to apply the scaled disclosures on a case-by-case basis.
This amendment didn’t change the definition of an “accelerated filer” (Exchange Act Rule 12b-2) and “large accelerated filer.” The amendments would now create a scenario where a registrant meeting the definition of an SRC also could meet the definition of an accelerated filer and be subject to the reporting requirements of Sarbanes-Oxley Act of 2002 Section 404(b) (auditor’s attestation reporting on internal controls over financial reporting) while applying the previously listed scaled disclosures of S-X and S-K. Registrants that fit in this overlap zone will be allowed to apply SRC requirements until their public float exceeds the stated $250-million SRC threshold. The guidance didn’t change the public float threshold of an accelerated filer ($75 million) nor was the large accelerated filer public float of $700 million modified.
Commenters on the proposed amendment pushed the SEC to modify the §404(b) requirements for registrants with a public float exceeding $75 million (accelerated filers), thereby providing relief from the requirement for the auditor’s attestation report on internal control over financial reporting. Though the commission hasn’t provided for a modification to the §404(b) requirements of accelerated filers in this release, the chairman of the SEC has requested the staff provide recommendations on possible modifications, which would reduce the number of registrants that qualify as accelerated filers (and are therefore required to comply with §404(b)).
The Banking Registrant Effect
Based on 2016 registrant data, the SEC expects an additional 966 registrants will be eligible for SRC requirements under the amended definition. Approximately 15.2 percent of these eligible registrants are noted to be in the “banking” industry. This concentration is second only to that held by the “pharmaceutical products” industry at 17.3 percent. In 2016, 187 banking industry registrants filed as SRCs, representing 7.1 percent of the SRC population.
It should be further noted that the scaled application of Rule 3-05(b)(2)(iv) of Regulation S-X reduces the number of years required to be reported for acquired companies by one year. Since we’ve witnessed a highly acquisitive banking environment, this may be a transactional consideration as the financial reporting team manages its role in a potential or current acquisition.
The SEC’s conclusion indicated “the scaled disclosures may generate a modest, but statistically significant, amount of cost savings in terms of the reduction in compliance costs.” For those registrants currently balancing the cost of compliance and those institutions considering a possible initial public offering, the matters provided in this amendment and the tone of the SEC related to market entrants is a valuable consideration.
If you’re interested in learning more about how the SRC classification can affect your company, contact Geron or your trusted BKD advisor to find out how we can help.