The Securities and Exchange Commission recently published proposed amendments to the definition of “smaller reporting company” that would substantially increase the number of companies that have this status. The Proposed Rules will not become effective unless and until the SEC adopts final rules.
Background
In 1992, the SEC created Regulation S-B, a small business integrated registration and reporting system, which included the “small business issuer” definition. In 2007, the SEC established the smaller reporting company category of registrants, replacing the small business issuer definition. Smaller reporting companies benefit from relief from certain SEC compliance through “scaled disclosure”, which reduces the compliance burden for such companies.
Smaller reporting companies are defined as registrants with:
- less than $75 million in public float as of the last business day of their most recently completed second fiscal quarter; or
- zero public float and annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available.
During 2015, approximately 42% of all public companies satisfied the definition of smaller reporting company.
Proposed Changes to Smaller Reporting Company Definition
Under the Proposed Rules, the definition of smaller reporting company would be amended as follows:
- Public float threshold would increase from $75 million to $250 million;
- Annual revenues threshold would increase from $50 million to $100 million for companies that do not have a public float; and
- Once a company exceeds either threshold, it will not qualify as a smaller reporting company again until public float is less than $200 million or annual revenues decrease below $80 million.
The SEC expects that there will be approximately 750 additional companies that would become eligible for smaller reporting company status because of the Proposed Rules.
Accelerated Filer Definition
The SEC is not proposing to amend the $75 million public _oat threshold used to determine whether a registrant is an “accelerated filer”. If the Proposed Rules are adopted, then companies with public floats between $75 million and $250 million will qualify as both a smaller reporting company and accelerated filer. This will result in smaller reporting companies having to comply with accelerated periodic reporting filing deadlines and the auditor attestation report required by the Sarbanes Oxley Act unless the company satisfies the definition of “emerging growing company” under the Jumpstart Our Business Startups (JOBS) Act.
The SEC is also proposing to amend the definition of accelerated filer to eliminate a provision that specifically excludes smaller reporting companies from the definition of accelerated filer.
Conclusion
If the Proposed Rules are adopted, it would be a welcome relief to companies with public floats between $75 million and $250 million. Microcap companies in many instances have thinly traded stocks and the lack of research coverage makes it difficult for them to raise capital and attract institutional investor following. While not solving all of the problems facing microcap companies, the Proposed Rules are a helpful step towards improving the environment for microcap companies.