SEC Expands “Smaller Reporting Company” Definition
Hinckley Allen Securities
July 17, 2018
By: Margaret D. Farrell, Matthew E. Waters
On June 28, 2018, the Securities and Exchange Commission (“SEC”) amended the definition of “smaller reporting company” so that more companies qualify and thereby enjoy reduced disclosure obligations. The change might also affect company status under SEC rules as an “accelerated filer” and affect certain reporting obligations related to business acquisitions. The new definition will take effect on September 10, 2018.
Qualifying as a Smaller Reporting Company
A smaller reporting company (“SRC”) benefits from a defined list of “scaled disclosure accommodations” set forth in Regulation S-K, which subject SRCs to less burdensome disclosure than larger companies. It has traditionally been possible to qualify as an SRC by meeting either a “public float” test or a “revenue” test. The public float test measures the market value of the company’s equity securities held by non-affiliates. The revenue test focuses on a company’s annual revenues but considers “public float” as well.
Under the previous definition, a company qualified as an SRC either by having public float of less than $75 million, or by having annual revenues of less than $50 million and no public float. Under the new definition, a company qualifies as an SRC if either its public float is less than $250 million, or its annual revenues are less than $100 million and it has public float of less than $700 million. The SEC estimates that the new definition will increase the number of companies eligible to qualify as an SRC based on public float by about 11%.
The new SRC definition also changes the more stringent qualification thresholds applicable to companies whose levels of public float and revenue have fluctuated so as to cause them to move in and out of SRC qualification from year to year. For such companies, the previous definition required either a public float of less than $50 million, or annual revenues of less than $40 million and no public float. Under the new definition, companies seeking SRC status under the public float test after initially failing to qualify may later do so by having a public float of less than $200 million. For companies that would not have previously qualified as an SRC under the new revenue test, subsequent qualification depends on the circumstances, but generally requires meeting thresholds 20% lower than would ordinarily apply. If the reason for disqualification under the revenue test was a failure to show annual revenues of less than $100 million, then the company must show current annual revenues of less than $80 million. If the reason for disqualification was public float greater than $700 million, then the company must demonstrate that public float does not exceed $560 million. If the company was previously disqualified because neither threshold was satisfied, then the company must show both current annual revenues of less than $80 million and a public float of less than $560 million.
Other Impacts of the New Definition
Under the SEC’s prior framework, SRCs were automatically excluded from the definition of “accelerated filer.” However, the new public float and revenue thresholds make it possible for some SRCs to be considered accelerated filers.
In addition, for companies that acquire a business with revenues less than $100 million, the amended SRC definition will allow certain financial disclosures regarding those businesses to be omitted from registration statements.
To discuss whether your company may qualify, please contact Matthew, Margaret D. Farrell, the Hinckley Allen attorney with whom you regularly work, or another of our Securities attorneys. This article has been prepared by Matthew E. Waters, an attorney in our Corporate & Business Practice Group.