August 19, 2018

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SEC Amends the Definition of “Smaller Reporting Company”

On June 28, the Securities and Exchange Commission announced that it adopted amendments to the definition of “smaller reporting company,” which will allow more companies to take advantage of accommodations such as scaled disclosure. The amendments were adopted generally as proposed on June 27, 2016, with a few significant changes. The proposed amendments were previously covered in the July 8, 2016 post.

The amended smaller reporting company definition:

  • increases the public float threshold from $75 million to $250 million;

  • increases the annual revenues threshold from $50 million to $100 million for companies with no public float; and

  • provides that the annual revenues threshold will now apply to companies with less than a $700 million public float (rather than only to companies with no public float, as provided prior to the amendments).

The determination of whether a company qualifies as a smaller reporting company occurs in connection with the filing of its initial registration statement and annually, based upon the company’s public float as of the last business day of the company’s most recently completed second fiscal quarter. Consistent with the definition of a smaller reporting company before the amendments, a company that does not qualify as a smaller reporting company (either at the time of its initial registration or its annual determination) under the initial qualification thresholds will remain unqualified until it meets one of the lower qualification thresholds. Pursuant to the amendments, however, the lower qualification thresholds were amended and set at 80% of the amended initial public float and revenues thresholds. For example, a company that does not initially qualify because its public float exceeds the $250 million threshold would subsequently qualify if it has a public float of less than $200 million as of the subsequent measurement date. Once qualified, that company would then remain a smaller reporting company until its public float exceeds $250 million as of a subsequent measurement date.

In order to preserve the existing thresholds for “accelerated filers” and “large accelerated filers,” the definitions of these terms were amended so that qualifying as a smaller reporting company no longer automatically results in the company being regarded as a non-accelerated filer. Thus, as a consequence of the increased smaller reporting company definition thresholds, some smaller reporting companies also may qualify as accelerated filers or, under very limited circumstances, large accelerated filers.

As highlighted in the SEC’s announcement, the final rules do not change the accelerated filer or large accelerated filer thresholds. Accordingly, a smaller reporting company with a public float of $75 million or greater will continue to be subject to the accelerated filer requirements, such as providing an auditor’s attestation report on internal control over financial reporting and applicable deadlines for filing of periodic reports. The SEC noted, however, that at the direction of SEC Chairman Jay Clayton, the Commission staff has begun formulating recommendations for amendments to the accelerated filer definition to reduce the number of companies that would qualify as accelerated filers in order to promote capital formation and reduce compliance costs for those companies while maintaining investor protections.

In addition to the amendments to the smaller reporting company definition, the SEC also amended Rule 3-05 of Regulation S-X in order to maintain the alignment between Rule 3-05 and the definition of smaller reporting company. Under Rule 3-05, where a business that is acquired or to be acquired is significant at the 50% level (i.e., any of the significant subsidiary tests for the acquired business exceed 50%), the registrant is generally required to file three years of historical financial statements of such business that is acquired or to be acquired. However, financial statements for the earliest of the three fiscal years may be omitted if the net revenues of the business acquired or to be acquired are less than $100 million (as compared to $50 million prior to the amendments).

The final rules will go into effect on September 10.

The SEC’s final rule is available here.

The SEC’s press release is available here.

©2018 Katten Muchin Rosenman LLP

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About this Author

Mark D. Wood, corporate securities lawyer Katten Muchin Chicago Law firm
Partner

Mark D. Wood is head of Katten's Securities practice and concentrates in corporate and securities law. Mark represents public companies, issuers and investment banks in initial public offerings (IPOs) and other public offerings, private investment in public equity (PIPE) transactions, debt securities and other securities matters.

Mark also represents clients in complex corporate transactions, including tender offers, mergers, acquisitions, dispositions, going-private transactions, private equity investments, joint ventures and...

312-902-5493
Mark Reyes, corporate securities lawyer, Katten Muchin law firm, Chicago office
Partner

Mark J. Reyes concentrates his practice in corporate and securities matters, including representing issuers and investors in public offerings and private placements of equity and debt securities and advising clients in complex corporate transactions such as mergers, acquisitions, private investments in public equity (PIPEs), private equity investments and joint ventures. He also counsels public companies on securities law compliance, disclosures and corporate governance matters.

312-902-5612
Associate

Irina Nica is an associate in the Corporate practice.

212-940-6344