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SEC Proposes New Rules That Would Make Available Scaled Disclosure to More Companies

Summary

On June 27, 2016, the SEC proposed amendments to its rules and regulations that would expand the number of companies that qualify as “smaller reporting companies” by revising the thresholds for qualification that would largely impact companies with a public float of between $75 million and $250 million. Smaller reporting companies benefit from important relief from SEC compliance through so-called “scaled disclosure” which results in reduced public company compliance costs. The SEC expects that as a result of the proposed changes, there will be approximately 750 additional companies that would become eligible for smaller reporting company status.  While this proposal is still in the rule-making phase, if adopted as proposed, companies with public floats of between $75 million and $250 million could potentially benefit from significant public company compliance cost savings. 

In Depth

On June 27, 2016, the Securities and Exchange Commission (SEC) proposed amendments to its rules and regulations that would expand the number of companies that qualify as “smaller reporting companies” by revising the thresholds for qualification. Smaller reporting companies benefit from important relief from SEC compliance through so-called “scaled disclosure” which results in reduced public company compliance costs. Scaled disclosure accommodations available to smaller reporting companies include, among other things:

  • Stock performance graph not required;

  • Two-year MD&A comparison rather than three-year comparison;

  • Reduced executive compensation disclosure, including compensation discussion and analysis not required;

  • Compensation committee report not required; and

  • Two years of income statements, cash flow statements and changes in stockholders’ equity rather than three years.

Under the current rules, companies subject to periodic and current reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 may qualify as smaller reporting companies if they (1) have a public float of less than $75 million as of the last business day of their most recently completed second fiscal quarter, or (2) have zero public float with less than $50 million in annual revenues during the most recently completed fiscal year for which audited financial statements are available. The proposed amendments would increase the thresholds so that reporting companies with (1) a public float of less than $250 million or (2) zero public float with less than $100 million in annual revenues will qualify for smaller reporting company status. For companies filing a registration statement for the first time, the proposed amendments would similarly increase the public float threshold from $75 million to $250 million, calculated within 30 days of the filing of the registration statement.

Under the current rules, if a company does not qualify as a smaller reporting company, it cannot qualify as a smaller reporting company until it has less than $50 million of public float at the end of the second fiscal quarter, and if such company has zero public float then it would remain unqualified until it had annual revenues of less than $40 million in the prior fiscal year.  These separate thresholds prevent situations where companies enter and exit smaller reporting company status due to small fluctuations in public float or revenue. Under the proposed changes, the $50 million public float threshold would be increased to $200 million and the $40 annual revenue threshold would be increased to $80 million.

The proposed amendments can be summarized as follows:

Category

Current Definition

Proposed Definition

Reporting company

Less than $75 million of public float at end of second fiscal quarter

Less than $250 million of public float at end of second fiscal quarter

Company filing initial registration statement

Less than $75 million of public float within 30 days of filing

Less than $250 million of public float within 30 days of filing

Company with zero public float

Less than $50 million of revenues in most recent fiscal year

Less than $100 million of revenues in most recent fiscal year

Non-smaller reporting company that seeks to qualify as a smaller reporting company based on public float

Less than $50 million of public float at end of second fiscal quarter

Less than $200 million of public float at end of second fiscal quarter

Non-smaller reporting company with zero public float that seeks to qualify as a smaller reporting company

Less than $40 million of revenues in most recent fiscal year

Less than $80 million of revenues in most recent fiscal year

The proposal also includes a proposed amendment to the definition of “accelerated filer”. Under the current definition, all smaller reporting companies are exempt from “accelerated filer” status. Accelerated filers are subject, among other things, to accelerated periodic reporting deadlines (e.g. 10-Q is due 40 days after end of fiscal quarter rather than 45 days) and in the case of non-EGC filers, accelerated filers are required to provide an auditor attestation report in their 10-K. The proposal proposes to eliminate the smaller reporting company exemption, and as such, a company with a public float of $75 million or more that would qualify as a smaller reporting company under the proposed amendments would nevertheless continue to be subject to accelerated filer status.

The SEC estimates that in 2015, approximately 32 percent of filers had public floats of less than $75 million and that if the threshold is increased to $250 million, then the number of filers will increase to 42 percent of filers. As a result, the SEC expects that there will be 751 additional companies with a public float of between $75 million and $250 million that would become eligible for smaller reporting company status if the amendments are made. 

While this proposal is still in the rule-making phase, if adopted as proposed, companies with public floats of between $75 million and $250 million could potentially benefit from significant public company compliance cost savings.

© 2019 McDermott Will & Emery

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About this Author

David A. Cifrino, McDermott Will Emery Law Firm, Corporate Attorney
Partner

David Cifrino is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Boston office.  He is co-head of its Public Companies group.  David represents financial services, industrial, high technology, consumer products and other companies, public and private (from start-ups to Fortune 50), in securities, merger, acquisition, disposition, commercial, strategic, governance and executive compensation matters.  He represents clients in both public and privately placed equity and debt financings under the Securities Act of 1933 and...

617-535-4034
Robert H. Cohen, Corporate Attorney with McDermott Will law firm
Partner

Robert H. Cohen is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s New York office.  He focuses his practice on transactional and securities work for a broad range of clients, including initial and follow-on public offerings, registered direct and PIPE financings, private placements, bridge financings, equity line and reverse mergers.

Bob has extensive experience in the areas of mergers and acquisitions, joint ventures, 1933 & 1944 Act representation and licensing and distribution arrangements.

From his years of experience, Bob has developed industry-specific knowledge across numerous markets, particularly in the life sciences industry having represented the financing and mergers & acquisitions activity for  pharmaceutical and medical device companies.

He is admitted to practice in New York and before the U.S. District Court for the Eastern District of New York and U.S. District Court for the Southern District of New York.

212-547 5885
Thomas P. Conaghan, Mcdermott Will Emery law Firm,  (M&A), joint ventures, strategic investments, spin-offs,
Partner

Thomas P. Conaghan is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s Washington, D.C., office.  Tom represents both publicly held and closely held businesses, underwriters and other sources of capital, corporate boards and board committees and corporate executives.  He advises both U.S. and foreign-based public companies on issues relating to public and private offerings of securities, disclosure, periodic reporting, corporate governance, executive compensation, the rules of the New York Stock Exchange and the Nasdaq Stock Market and compliance with the...

202-756-8161
Partner

Gary Emmanuel is a partner in the law firm of McDermott Will & Emery and is based in the Firm’s New York office. He focuses his practice on corporate securities matters.

With over 15 years of experience, Gary represents both domestic and foreign companies that are navigating the process of capital raising including initial public offerings, registered direct offerings, follow-on offerings, private placements, PIPEs and bridge financings. Gary has worked extensively with biotechnology and other life science companies, both as company counsel...

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Mark J. Mihanovic, McDermott Will Emery, Corporate Finance Attorney, Mergers Acquisitions Lawyer,
Partner

Mark J. Mihanovic is a partner in the law firm of McDermott Will & Emery LLP.  Mark heads our Firm’s California corporate practice and serves as corporate liaison partner in the Firm’s strategic alliance with MWE China Law Offices based in Shanghai.  His practice is primarily focused in the areas of corporate finance and mergers and acquisitions involving companies in a broad range of industries, with a particular emphasis on technology, life science and health care companies.  Mark has served as lead counsel on behalf of issuers and underwriters in numerous public...

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