SEC Takes Steps to Reduce Burden of Being Public on Smaller Companies

July 3, 2018

On June 28, the Securities and Exchange Commission (SEC) acted to reduce the burden of being public on smaller companies by voting to expand its definition of “smaller reporting company” to increase the number of public companies that qualify to use less-extensive reporting rules. Previously, only companies with a public float under $75 million were able to take advantage of the scaled disclosure rules available to smaller reporting companies. 

Under the newly adopted amendments, a company will qualify as a smaller reporting company if:

  • the company has a public float of less than $250 million; or
  • the company has less than $100 million in annual revenues and either no public float or a public float of less than $700 million.

Under the rules, a company measures its public float as of the last business day of its most recently completed second fiscal quarter, which will be June 30, 2018, for companies with a fiscal year ending Dec. 31, 2018. A company that does not qualify as a smaller reporting company under the above thresholds as of its first measurement date will qualify as a smaller reporting company at a later time only if its meets a set of lower thresholds, which are set at 80 percent of the initial qualification standards.

The purpose of the new amendments is to reduce compliance costs for smaller companies and promote capital formation — a key goal of SEC Chair Jay Clayton — while maintaining investor protection. The simpler reports may also promote greater readership by retail investors, another group on which Clayton has focused. The rules permit a smaller reporting company to, among other things:

  • provide less detail in its Form 10-K and Form S-1 business description;
  • omit a stock performance graph;
  • omit selected and supplementary financial data;
  • provide only two-year comparisons of its financial condition and results of operation in its MD&A;
  • omit quantitative and qualitative disclosures about market risk; and
  • omit compensation discussion and analysis and pay ratio disclosure.

As a result of the amendments, the SEC estimates that an additional 966 public companies will be eligible for smaller reporting company status in the first year. The change in the public float requirements alone would bring the percentage of public companies that qualify as smaller reporting companies to 38.6 percent of all public companies, and an additional 8 percent will qualify under the revised revenue standards. This will bring the total percentage of public companies eligible to take advantage of the smaller reporting company exemptions closer to the percentage that qualified under the public float threshold in effect when the SEC first passed the smaller reporting company rules.

Interestingly, the SEC decided to maintain the existing thresholds for the definitions of “accelerated filer” and “large accelerated filer” by eliminating exclusions for companies that qualify as smaller reporting companies. This means some companies will be able to take advantage of the scaled disclosure rules as smaller reporting companies, but also be accelerated filers. An accelerated filer has shorter filing deadlines and is required under Section 404(b) of the Sarbanes-Oxley Act to have its auditors provide an attestation report on its internal controls over financial reporting, considered by many to be a significant expense. However, Clayton has directed the SEC staff to prepare recommendations to the full commission for possible changes to reduce the number of registrants defined as accelerated filers, so additional changes may be forthcoming.

For additional information, please contact any of the members of the McGuireWoods securities compliance team.