Bigger Is the New ‘Smaller’

SEC proposes amendments to definition of “smaller reporting company.”

In proposed rules issued on June 27,[1] the US Securities and Exchange Commission (SEC) proposed amendments to the definition of “smaller reporting company” (SRC) that will substantially expand the number of companies that qualify as SRCs.

Under the existing rule, an SRC is defined as a company that has

• less than $75 million in public float as of the last business day of its most recently completed second fiscal quarter, or
• zero public float and annual revenue of less than $50 million during the most recently completed fiscal year.

The proposed rules would revise the definition to increase the $75 million public float threshold to $250 million and increase the $50 million annual revenue threshold to $100 million for companies without public float, while maintaining the existing testing date and period. If adopted, the revised definition will make the scaled disclosure accommodation for SRCs available to a larger number of companies, including reduced disclosure requirements relating to financial information and executive compensation matters.

In addition, the proposed rules would raise the thresholds under which a company that loses its SRC status may requalify as an SRC. Under the proposed rules, once a company exceeds the applicable public float ($250 million) or revenue ($80 million) threshold, it cannot again qualify as an SRC until its public float or revenue, as the case may be, decreases below $200 million (public float) or $80 million (annual revenue).

Of note, the SEC is not proposing to change the $75 million threshold used to determine whether a registrant is an accelerated filer. As such, many companies with public floats between $75 million and $250 million may qualify both as an SRC and an accelerated filer. This means that such SRCs may need to comply with the auditor attestation reports required by Section 404(b) of the Sarbanes-Oxley Act if they are not otherwise qualified as “emerging growth companies” under the Jumpstart Our Business Startups (JOBS) Act.

It remains to be seen to what extent existing accelerated filers that qualify as SRCs under the proposed rules will take advantage of the scaled disclosure accommodation. For example, while it may be a welcomed relief to reduce certain financial and executive compensation disclosures in periodic reports and proxy statements, some companies may be reluctant to eliminate the risk factor disclosures (which are not required for SRCs) due to concern over potential claims and securities lawsuits by investors.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the authors Justin Chairman and Albert Lung, or any of the following Morgan Lewis lawyers:

London
Carter Brod

New York
Stephen Farrell
Chris Jensen
Howard Kenny
Finnbarr Murphy
David Pollak 

Philadelphia
Justin Chairman
James McKenzie
Joanne Soslow

Pittsburgh
Amy Pandit

Princeton
Emilio Ragosa

San Francisco
Scott Karchmer

Silicon Valley
Thomas Kellerman
Albert Lung

Singapore
Bernard Lui
Kim Seng Lo

Washington
Rani Doyle
David Sirignano
George Yearsich