The US Securities and Exchange Commission announced that it voted on March 12 to adopt amendments to the definitions of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. The amendments are intended to reduce the number of issuers included in the definitions, thus lowering compliance costs and burdens for certain smaller issuers.
The Securities and Exchange Commission (SEC) had first proposed amendments to the definitions in May 2019. The recently announced amendments do the following, among other things:
To qualify as an accelerated filer under the amended definition, an issuer must have had annual revenues of $100 million or more in its last fiscal year, in addition to the existing requirements of (1) having a public float greater than $75 million but less than $700 million as of the last business day of the issuer’s most recently completed second fiscal quarter; (2) having been subject to the reporting requirements of Section 13(a) or Section 15(d) of the Exchange Act for a period of at least 12 months; and (3) having filed at least one annual report with the SEC.
The requirement of having had annual revenues of $100 million or more in the last fiscal year also applies to the amended definition of large accelerated filer. The new definition means that many issuers with a public float greater than $75 million will no longer qualify as accelerated filers because of the addition of the annual revenue test.
In June 2018, the SEC adopted amendments to the definition of SRC to raise the threshold public float level for inclusion in the category to $250 million, as compared to the $75 million threshold under the prior definition. Because the threshold public float level for inclusion in the accelerated filer category remained at $75 million, issuers with a public float between $75 million and $250 million qualified as both SRCs and accelerated filers. Such issuers were able to avail themselves of the scaled disclosure requirements applicable to SRCs, but remained subject to the accelerated timeframe for the filing of periodic reports applicable to accelerated filers, and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of ICFR required by Section 404(b) of the Sarbanes-Oxley Act of 2002.
Under the March 2020 amendments, fewer issuers are expected to qualify as both an SRC and accelerated filer. Perhaps the most significant effect of the amended definitions of accelerated and large accelerated filers is that low-revenue issuers that qualify as SRCs, and no longer qualify as accelerated filers, will no longer be subject to the added expense of providing an auditor’s attestation of management’s assessment of ICFR.
In proposing and adopting the amendments, the SEC noted that the number of listed issuers with a market capitalization below $700 million had decreased by about 65% between 1998 and 2018, during which period the auditor attestation requirement for ICFR was adopted. Similarly, the number of issuers with less than $100 million in revenue decreased by about 60% during that same 20-year period. The SEC believes that reducing the costs of smaller public companies may encourage more companies to go public, providing increased transparency and protections to investors in those companies.
The amended definitions do not fully align the SRC and non-accelerated filer definitions. An issuer with annual revenues greater than $100 million and a public float between $75 million and $250 million will still qualify as both an SRC and accelerated filer.
The following table outlines the relationships between SRC and non-accelerated, accelerated, and large accelerated filer statuses under the new rules:
|
Status |
Public Float |
Annual Revenues |
|
SRC and non-accelerated filer |
Less than $75 million |
N/A |
|
$75 million to less than $700 million |
Less than $100 million |
|
|
SRC and accelerated filer |
$75 million to less than $250 million |
$100 million or more |
|
Accelerated filer (not SRC) |
$250 million to less than $700 million |
$100 million or more |
|
Large accelerated filer (not SRC) |
$700 million or more |
N/A |
The amendments increase the public float transition thresholds for determining filer status. The SEC noted its belief that the current public float threshold amounts to transition from an accelerated or large accelerated filer to being a non-accelerated filer, or from a large accelerated filer to an accelerated filer, are too low and result in more issuers than intended being classified as an accelerated or large accelerated filer. Thus, the threshold to transition from an accelerated or large accelerated filer to being a non-accelerated filer has been increased from $50 million to $60 million, and the threshold to transition from a large accelerated filer to an accelerated filer has been raised from $500 million to $560 million.
The increased amounts represent 80% of the original thresholds that an issuer must meet to enter accelerated and large accelerated filer status of $75 million and $700 million, respectively. According to the SEC, this approach is consistent with the percentage used in the transition thresholds for SRC eligibility.
The following table reflects the amendments to the public float transition thresholds:
|
Initial Public Float Determination |
Resulting Filer Status |
Subsequent Public Float Determination |
Resulting Filer Status |
|
$700 million or more |
Large accelerated filer |
$560 million or more |
Large accelerated filer |
|
Less than $560 million but $60 million or more |
Accelerated filer |
||
|
Less than $60 million |
Non-accelerated filer |
||
|
Less than $700 million but $75 million or more |
Accelerated filer |
Less than $700 million but $60 million or more |
Accelerated filer |
|
Less than $60 million |
Non-accelerated filer |
We expect the amended definitions to generally reduce burdens and costs for registrants with annual revenues of less than $100 million that would otherwise qualify as accelerated filers or large accelerated filers. Meanwhile, the increased transition thresholds are expected to decrease the number of issuers that remain as accelerated or large accelerated filers after a decrease in their public float.
The amendments will become effective 30 days after publication in the Federal Register, and will apply to annual report filings due on or after the effective date.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Boston
Laurie Cerveny
Michael Conza
Bryan Keighery
Carl Valenstein
Julio Vega
Frankfurt
Torsten Schwarze
Hong Kong
June Chan
Eli Gao
Louise Liu
Edwin Luk
Billy Wong
London
Timothy J. Corbett
Iain Wright
Moscow/London
Carter Brod
New York
Thomas P. Giblin, Jr.
Howard A. Kenny
Christina Melendi
Kimberly M. Reisler
Palo Alto
Albert Lung
Philadelphia
Justin W. Chairman
James W. McKenzie
Joanne R. Soslow
Pittsburgh
Celia Soehner
Princeton
David C. Schwartz
Singapore
Bernard Lui
Joo Khin Ng