SEC Proposes Amendments to Smaller Reporting Company Definition

7월 8, 2016

On June 27, 2016, the Securities and Exchange Commission proposed amendments to the “smaller reporting company” (“SRC”) definition, substantially increasing the relevant financial thresholds and thus expanding eligibility for the beneficial scaled disclosures afforded to SRCs. The Proposing Release is available here, and the SEC is seeking public comment on the proposed amendments through August 30, 2016.

I.  Proposed Increases to SRC Thresholds

The proposed rules increase the financial thresholds for determining SRC status. In the context of current filers, the proposed rules would permit reporting companies with a public float1 of less than $250 million (compared to the current threshold of $75 million) at the end of the company’s most recently completed second fiscal quarter to provide the scaled disclosures afforded to SRCs. Reporting companies without a public float would be permitted to provide the scaled disclosures if annual revenues during the most recently completed fiscal year do not exceed $100 million (compared to the current threshold of $50 million). The thresholds are identical for new filers, except that the thresholds must be satisfied within 30 days of the filing of the initial registration statement. Companies that already exceed the relevant thresholds (i.e., non-SRCs) may only qualify for SRC status once their public float falls below $200 million (or, in the absence of a public float, if annual revenues fall below $80 million).

The proposal does not, however, increase the $75 million threshold in the SEC’s “accelerated filer” definition. Accordingly, companies with a public float of $75 million or more that qualify as a SRC remain subject to requirements applicable to accelerated filers, including the timing of the filing of periodic reports and 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.

II.  Benefits of SRC Status

If the proposed rules are adopted, existing scaled disclosure accommodations would become available to an expanded number of reporting companies. These scaled disclosure accommodations are summarized in Appendix A. These disclosure accommodations reduce or eliminate certain disclosure requirements in periodic reports on Form 10-K and Form 10-Q, registration statements and proxy statements, including significant executive compensation disclosures such as eliminating the requirement for a Compensation Discussion and Analysis. The disclosure accommodations also permit reduced financial statement requirements in certain circumstances with respect to the company and its acquirees and equity investees.

III.  Request for Comment

The SEC proposal includes 18 specific requests for comment, including the following:

  • Whether the SRC definition should continue to be based primarily on public float or revenue, and whether the proposed thresholds should be higher or lower.
  • Whether the SRC definition should be based on both public float and revenue, for all filers.
  • Whether the public float test should be eliminated in favor of a pure revenue test.
  • Whether any changes to the methodology for calculation of public float are warranted.
  • Whether relevant thresholds should be indexed to adjust for inflation.
  • Whether the accelerated filer thresholds should also be raised.

Because the proposal raises the possibility of impactful rule changes to public company disclosure requirements, we encourage companies to review the release and to consider submission of responses to the SEC’s requests for comments. If you have any questions regarding the proposed amendments discussed in this alert or would like to discuss the submission of responses to the SEC’s requests for comments, please contact the authors of this alert or your OMM advisor.

APPENDIX A

The following table summarizes the scaled disclosure accommodations available to reporting companies qualifying as SRCs:

Regulation S-K

Item

Scaled Disclosure Accommodation

101  ̶  Description of Business

A company may satisfy disclosure obligations by describing the development of its business during the last three years rather than five years. Business development description requirements are less detailed than disclosure requirements for non-smaller reporting companies.

201  ̶  Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters

Stock performance graph not required.

301  ̶  Selected Financial Data

Not required.

302  ̶  Supplementary Financial Information

Not required.

303  ̶  Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)

Two-year MD&A comparison rather than three-year comparison.

Two year discussion of impact of inflation and changes in prices rather than three years.

Tabular disclosure of contractual obligations not required.

305  ̶  Quantitative and Qualitative Disclosures About Market Risk

Not required.

402  ̶  Executive Compensation 

Three named executive officers rather than five.

Two years of summary compensation table information rather than three.

Not required:

  • 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

404  ̶  Transactions With Related Persons, Promoters and Certain Control Persons2

Description of policies/procedures for the review, approval or ratification of related party transactions not required.

407  ̶  Corporate Governance

Audit committee financial expert disclosure not required in first year.

Compensation committee interlocks and insider participation disclosure not required.

Compensation committee report not required.

503  ̶  Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges

No ratio of earnings to fixed charges disclosure required.

No risk factors required in Exchange Act filings.

601  ̶  Exhibits

Statements regarding computation of ratios not required.

Regulation S-X

Rule

Scaled Disclosure Accommodation

8-02  ̶  Annual Financial Statements

Two years of income statements rather than three years.

Two years of cash flow statements rather than three years.

Two years of changes in stockholders’ equity statements rather than three years.

8-03  ̶  Interim Financial Statements

Permits certain historical financial data in lieu of separate historical financial statements of equity investees.

8-04  ̶  Financial Statements of Businesses Acquired or to Be Acquired

Maximum of two years of acquiree financial statements rather than three years.

8-05  ̶  Pro forma Financial Information

Fewer circumstances under which pro forma financial statements are required.

8-06  ̶  Real Estate Operations Acquired or to Be Acquired

Maximum of two years of financial statements for acquisition of properties from related parties rather than three years.

8-08  ̶  Age of Financial Statements

Less stringent age of financial statements requirements.
1 “Public float” refers to the aggregate worldwide market value of the reporting company’s voting and non-voting common equity held by its non-affiliates (i.e., the company’s market capitalization adjusted to exclude shares held by affiliates). 2 Item 404 also contains the following expanded disclosure requirements applicable to smaller reporting companies:

(1) rather than a flat $120,000 disclosure threshold, the threshold is the lesser of $120,000 or 1% of total assets,

(2) disclosures are required about each parent company and the basis of the parent’s control as well as underwriting discounts and commissions where a related person is a principal underwriter or a controlling person or member of a firm that was or is going to be a principal underwriter, and (3) an additional year of Item 404 disclosure is required in filings other than registration statements.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Rob Plesnarski, an O'Melveny partner licensed to practice law in the District of Columbia and Pennsylvania, Shelly Heyduk, an O’Melveny partner licensed to practice law in California, Su Lian Lu, an O’Melveny counsel licensed to practice law in California, and James M. Harrigan, an O'Melveny associate licensed to practice law in the District of Columbia and Maryland, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted. 

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