The Securities and Exchange Commission (SEC) on June 28, 2018, adopted amendments to the definition of "smaller reporting company" (SRC) in Rule 405 under the Securities Act of 1933 (Securities Act), Rule 12b-2 under the Securities Exchange Act of 1934 (Exchange Act), and Item 10(f) of Regulation S-K, which will increase the number of companies eligible to provide reduced or scaled disclosures.

According to the SEC, these amendments are designed to promote capital formation and reduce compliance costs for smaller companies while maintaining appropriate investor protections. The SEC estimates that about 1,000 additional companies will qualify for SRC status in the first year after the amendments become effective. The amendments will be effective 60 days after the final rules were published in the Federal Register, which occurred on July 10, 2018. Accordingly, the expected effective date is September 10, 2018.

In addition, the SEC amended Rule 12b-2 to eliminate the exclusion of SRCs from the definitions of "accelerated filer" and "large accelerated filer."

Benefits of Qualifying as an SRC

In 2008, the SEC established the SRC category of filers to provide regulatory relief to smaller reporting companies. SRCs have the option to comply, on an item-by-item basis, with the scaled disclosures available to SRCs in their SEC filings rather than complying with the more extensive disclosure requirements that apply to larger SEC reporting companies. For instance, an SRC may elect to have its Financial Statements and Management's Discussion & Analysis cover two rather than three years. An SRC may also elect in its proxy statement to disclose executive compensation information for three—rather than five—named executive officers and may omit the Compensation Discussion & Analysis section, several executive compensation tables and a compensation committee report. An SRC is also not required to comply with selected Form 10-K items—including, for example, Item 1A, "Risk Factors."

Amendments to the Definition of SRC

Before the amendments, a reporting company would qualify as an SRC either by having a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter (the Public Float test) or, if the company has no public float, by having less than $50 million in annual revenues (the Revenues test). A reporting company's public float is computed by multiplying the aggregate worldwide number of voting and non-voting common shares held by non-affiliates as of the last business day of the company's most recently completed second fiscal quarter by the price per share.

Under the amended definition, the threshold under the Public Float test increased from $75 million to $250 million, and the threshold under the Revenues test increased from $50 million to $100 million if the company has no public float or a public float of less than $700 million. The table below summarizes and compares the pre-amendment definition to the amended definition:

Interplay and Overlap Between SRC and Accelerated Filer Status

The SEC did not adopt conforming changes to the thresholds in the definitions of "accelerated filer" and "large accelerated filer." Rather, the SEC eliminated the automatic exclusion of SRCs that had been built into these definitions. As a result, some reporting companies that will now qualify as SRCs will also remain accelerated filers under the Public Float test. These companies would continue to be subject to the accelerated filer requirement to provide an auditor's attestation report and the shorter filing deadlines. The following graphic demonstrates the interplay between SRC and accelerated filer status following the effectiveness of the amendments:

The SEC has acknowledged the regulatory inconsistency created by the overlap between the "smaller reporting company" and "accelerated filer" definitions. SEC Chairman Jay Clayton has directed SEC staff to develop recommendations for possible additional changes to the accelerated filer definition, with the focus on potentially reducing the number of reporting companies subject to the auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act of 2002.

Changes to SEC Forms

In conjunction with the amendments to the SRC definition, the SEC also adopted technical revisions to the cover pages of specific Securities Act and Exchange Act forms to account for the overlapping category of filers. After the effective date of the amendments, a reporting company will need to check all the boxes applicable to it on the cover page of a relevant form, related to non-accelerated, accelerated, and large accelerated filer status, SRC status, and emerging growth company status. If a reporting company qualifies as both an SRC and as an accelerated filer, it must therefore check both boxes.

Practical Implications

An SRC has the flexibility to rely on the scaled disclosures available to SRCs on an item-by-item basis. Where a scaled disclosure is more stringent than the corresponding requirement for non-SRCs, however, the SRC must comply with the more stringent standard (e.g., Item 404 of Regulation S-K).

Although scaled disclosures may lead to a reduction in compliance costs and lower disclosure burdens, a reporting company should consider the investor reaction that could result from relying on scaled disclosures and seek input from its executive management, accountants, outside counsel, shareholder relations consultants and investment bankers, and insofar as practical, institutional investors and large shareholders. A reporting company will also want to review its material contracts, for example, indenture covenants, to ensure that it is not obligated to comply with the more detailed Regulation S-K or S-X requirements under these contracts.