The SEC Recently Amended the Definition of “Smaller Reporting Company” as Used in Federal Securities Regulations
The Securities and Exchange Commission (SEC) recently amended the definition of “smaller reporting company” as used in federal securities regulations. The expanded definition is intended to encourage more businesses to take advantage of scaled securities disclosure obligations.
First established in 2008, the category of smaller reporting company (SRC) aims to provide general regulatory relief for smaller companies. SRCs may provide scaled disclosures under Regulation S-K and Regulation S-X. Most notably, smaller reporting companies are allowed to include less extensive narrative disclosure than required of other reporting companies, particularly in the description of executive compensation. They are also permitted to provide audited financial statements for two fiscal years, in contrast to other reporting companies, which must provide audited financial statements for three fiscal years.
Amendments to Smaller Reporting Company Definition
Under the previous definition, smaller reporting companies generally were companies with less than $75 million in public float. Companies with no public float were considered SRCs if they had less than $50 million in annual revenues.
Under the SEC’s new definition, generally, a company qualifies as a “smaller reporting company” if:
it has public float of less than $250 million or
it has less than $100 million in annual revenues and
no public float or
public float of less than $700 million
Public float is calculated by multiplying the number of the company’s common shares held by non-affiliates by the market price and, in the case of an IPO, adding to that number the product obtained by multiplying the common shares covered by the registration statement by their estimated public offering price. In some cases, a company may have no public float because it has no public common shares outstanding or because there is no market price for its common shares.
According to SEC estimates, 966 additional companies would be expected to be eligible for SRC status in the first year under the new definition. These include: 779 companies with a public float of $75 million or more and less than $250 million; 161 companies with a public float of $250 million or more and less than $700 million and revenues of less than $100 million; and 26 companies with no public float and revenues of $50 million or more and less than $100 million.
“Expanding the smaller reporting company definition recognizes that a one size regulatory structure for public companies does not fit all,” said SEC Chairman Jay Clayton. “These amendments to the existing SRC compliance structure bring that structure more in line with the size and scope of smaller companies while maintaining our long-standing approach to investor protection in our public capital markets. Both smaller companies — where the option to join our public markets will be more attractive — and Main Street investors — who will have more investment options — should benefit.”
New Definition of Non-Accelerated Filer
The SEC also amended the definition of the non-accelerated filer to preserve the existing public float thresholds. A company with no public float or a public float of less than $75 million will still be considered a non-accelerated filer. Accordingly, qualifying as a “smaller reporting company” will no longer automatically make a registrant a non-accelerated filer.
However, according to the SEC, Chairman Clayton has directed agency staff to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition to reduce the number of companies that qualify as accelerated filers in order to further reduce compliance costs for those companies.
If you have any questions or if you would like to discuss the matter further, please contact me, Jeffrey Cassin, or the Scarinci Hollenbeck attorney with whom you work at 201-806-3364.
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