Other
Amendments to the Smaller Reporting Company Definition
Aug. 9, 2018
A Small Entity Compliance Guide for Issuers[1]
August 10, 2018
Table of Contents
This compliance guide is divided into the following parts:
3. Guidance on Transitioning to the Amended SRC Definition
4. Chart of Scaled Disclosure Requirements Available to SRCs
5. Amendments to Rule 3-05 of Regulation S-X
6. Amendments to the Accelerated Filer and Large Accelerated Filer Definitions
1. Summary of Amendments
On June 28, 2018, the Commission adopted amendments that raise the thresholds in the smaller reporting company (“SRC”) definition, thereby expanding the number of smaller companies eligible to comply with the scaled disclosure requirements in several Regulation S-K and Regulation S-X items.[2] The amendments to the SRC definition and other amendments are effective on September 10, 2018.
Under the new SRC definition, a company with less than $250 million of public float will be eligible to provide scaled disclosures. Companies with less than $100 million in annual revenues and either no public float or a public float that is less than $700 million will also be eligible to provide scaled disclosures.
The Commission also approved amendments to:
- Rule 3-05(b)(2)(iv) of Regulation S-X to increase the net revenue threshold in that rule from $50 million to $100 million. As a result, a company may omit financial statements of a business acquired or to be acquired for the earliest of the three required fiscal years if the net revenues of that business are less than $100 million; and
- The definitions of “accelerated filer” and “large accelerated filer” to preserve the existing thresholds in those definitions.
2. Qualifying as a SRC
The following table summarizes the SRC thresholds. Once a company determines that it is a SRC, it will remain a SRC until it exceeds these initial qualification thresholds.
| Criteria | Historical SRC Definition (prior to September 10, 2018) |
Amended SRC Definition (effective September 10, 2018) |
|---|---|---|
| Public Float | Public float of less than $75 million | Public float of less than $250 million |
| Revenues | Less than $50 million of annual revenues and no public float | Less than $100 million of annual revenues and
|
When does a company determine whether it qualifies as a SRC?
Reporting Companies. A reporting company will determine whether it qualifies as a SRC annually as of the last business day of its second fiscal quarter. If it qualifies as a SRC on that date, it may elect to reflect that determination and use the SRC scaled disclosure accommodations in its subsequent filings, beginning with its second quarter Form 10-Q. A company must reflect its SRC status in its Form 10-Q for the first fiscal quarter of the next year.
- Public Float. All reporting companies calculate their public float annually as of the last business day of their second fiscal quarter. A company calculates its public float by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity.
- Revenues. A reporting company that does not qualify under the “public float” test would determine whether it qualifies as a SRC based on its annual revenues in its most recent fiscal year completed before the last business day of the second fiscal quarter.
Companies Filing an Initial Registration Statement. A company filing its initial registration statement for shares of common equity will make its initial determination in connection with the filing of its registration statement.
- Public Float.
- Initial Calculation. Public float is measured as of a date within 30 days of the date of the filing of the registration statement and is computed by multiplying the aggregate worldwide number of shares of voting and non-voting common equity held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of shares of voting and non-voting common equity included in the registration statement by the estimated public offering price of the shares.
- Option to Re-determine. In the case of a determination based on an initial Securities Act registration statement, a company that determined it was not a SRC has the option to re-determine its status under the “public float” test at the conclusion of the offering covered by the registration statement based on the actual offering price and number of shares sold.
- Revenues. A company filing its initial registration statement for common equity that does not qualify under the “public float” test would determine whether it qualifies as a SRC based on its annual revenues in its most recent audited financial statements available on the initial public float calculation date.
What if a company’s public float or revenue decreases in the future?
Consistent with the previous definition, under the amendments, a company that determines that it does not qualify as a SRC under the initial qualification thresholds will remain unqualified until it determines that it falls below a specified lower threshold for the criteria on which it previously failed to qualify and continues to meet any other threshold it previously satisfied. The subsequent qualification thresholds are set at 80% of the initial qualification thresholds. Specifically, once a company determines that it does not qualify for SRC status, it will remain unqualified unless when making a subsequent annual determination either:
- It determines that its public float is less than $200 million; or
- It determines that its public float and its annual revenues meet the requirements for subsequent qualification included in the following chart:
| Prior Annual Revenues (for the fiscal year before the most recently completed fiscal year)[3] |
Prior Public Float (as of the second quarter of the fiscal year before the most recently completed second fiscal quarter)[4] |
|||
|---|---|---|---|---|
| None or less than $700 million | $700 million or more | |||
| Less than $100 million | Neither threshold exceeded; company remains a SRC. | Public float required: (as of the most recent second fiscal quarter)[5] |
Less than $560 million; and | |
| Revenues required: (for the most recently completed fiscal year)[6] |
Less than $100 million. | |||
| $100 million or more | Public float required: (as of the most recent second fiscal quarter) |
None or less than $700 million; and | Public float required: (as of the most recent second fiscal quarter) |
Less than $560 million; and |
| Revenues required: (for the most recently completed fiscal year) |
Less than $80 million. | Revenues required: (for the most recently completed fiscal year) |
Less than $80 million. | |
Example: A company has a December 31 fiscal year end. Its public float as of June 28, 2019 was $710 million and its annual revenues for the fiscal year ended December 31, 2018 were $90 million. It therefore does not qualify as a SRC. At the next determination date (June 30, 2020), it will remain unqualified for SRC status unless it determines that its public float as of June 30, 2020 was less than $560 million and its annual revenues for the fiscal year ended December 31, 2019 remained less than $100 million.
When does a company have “no public float”?
A company may have no public float because it has no public common equity outstanding or no market price for its common equity exists.
Can a foreign company use the SRC disclosure accommodations?
Yes. The rules permit a foreign company that meets the thresholds in the SRC definition to qualify as a SRC and use the SRC disclosure accommodations if it uses domestic forms (instead of the special “F” forms for foreign private issuers) and if it prepares its financial statements in accordance with United States Generally Accepted Accounting Principles (U.S. GAAP).
What types of companies are excluded from qualifying as SRCs?
Certain companies are not eligible for SRC status. These include: investment companies (including business development companies), asset-backed issuers, and majority-owned subsidiaries of a parent that is not a SRC.
3. Guidance on Transitioning to the Amended SRC Definition
For purposes of the first determination of SRC status on or after September 10, 2018, a company will qualify as a SRC if it meets the initial qualification thresholds in the revised definition as of the date it is required to measure its public float and, if applicable, had annual revenues of less than $100 million in its most recently completed fiscal year, even if such company previously did not qualify as a SRC. A company that completed its initial public offering since the end of its most recent second fiscal quarter may elect to determine whether it qualifies as a SRC based on its public float as of the date it estimated its public float prior to filing or as of the conclusion of the offering based on the actual offering price and number of shares sold.
A company newly qualifying as a SRC under the amended definition on or after September 10, 2018, regardless of whether it qualified under the previous definition, has the option to use the SRC scaled disclosure accommodations:
- in its next periodic or current report due on or after September 10, 2018[7] or
- for transactional filings without a due date, in filings or amended filings made on or after September 10, 2018.
The following chart provides a few examples of the potential application of the amendments to the first periodic filings after effectiveness of the amendments.
| Fiscal Year End | Public Float Calculation Date |
Public Float | Annual Revenues | First Periodic Filing Eligible to Rely on SRC Accommodations[8] |
|---|---|---|---|---|
| June 30 | Dec. 29, 2017 | $220 million | No need to calculate; company qualifies under “public float” test | Form 10-K due Sep. 13, 2018 |
| Sep. 30 | March 30, 2018 | $600 million | $90 million for FYE Sep. 30, 2017 | Form 10-K due Dec. 14, 2018 |
| Dec. 31 | June 29, 2018 | None | $85 million for FYE Dec. 31, 2017 | Form 10-Q for the quarter ending Sep. 30, 2018 due Nov. 9, 2018 |
4. Chart of Scaled Disclosure Requirements Available to SRCs
The Commission established the SRC category of companies in 2008 in an effort to provide general regulatory relief for smaller companies. SRCs may provide scaled disclosures under Regulation S-K and Regulation S-X.
SRCs may choose to comply with scaled or non-scaled financial and non-financial item requirements on an item-by-item basis.[9] Where the SRC requirement is more rigorous, however, the company must meet the more rigorous standard. The following table summarizes these scaled disclosure accommodations.[10]
| Regulation S-K | |
|---|---|
| Item | Scaled Disclosure Accommodation |
| 101 - Description of Business | May satisfy disclosure obligations by describing the development of the company’s business during the last three years rather than five years. Business development description requirements are less detailed than disclosure requirements for non-SRCs. |
| 201 - Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters | Stock performance graph not required. |
| 301 – Selected Financial Data | Not required. |
| 302 – Supplementary Financial Information | Not required. |
| 303 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) | Two-year MD&A comparison rather than three-year comparison. Two year discussion of impact of inflation and changes in prices rather than three years. Tabular disclosure of contractual obligations not required. |
| 305 – Quantitative and Qualitative Disclosures About Market Risk | Not required. |
| 402 – Executive Compensation | Three named executive officers rather than five. Two years of summary compensation table information rather than three. Not required:
|
| 404 – Transactions With Related Persons, Promoters and Certain Control Persons[11] | Description of policies/procedures for the review, approval or ratification of related party transactions not required. |
| 407 – Corporate Governance | Audit committee financial expert disclosure not required in first annual report. Compensation committee interlocks and insider participation disclosure not required. Compensation committee report not required. |
| 503 – Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges | No ratio of earnings to fixed charges disclosure required. No risk factors required in Exchange Act filings. |
| 601 – Exhibits | Statements regarding computation of ratios not required. |
| Regulation S-X | |
|---|---|
| Rule | Scaled Disclosure |
| 8-02 – Annual Financial Statements | Two years of income statements rather than three years. Two years of cash flow statements rather than three years. Two years of changes in stockholders’ equity statements rather than three years. |
| 8-03 – Interim Financial Statements | Permits certain historical financial data in lieu of separate historical financial statements of equity investees. |
| 8-04 – Financial Statements of Businesses Acquired or to Be Acquired | Maximum of two years of acquiree financial statements rather than three years. |
| 8-05 – Pro forma Financial Information | Fewer circumstances under which pro forma financial statements are required. |
| 8-06 – Real Estate Operations Acquired or to Be Acquired | Maximum of two years of financial statements for acquisition of properties from related parties rather than three years. |
| 8-08 – Age of Financial Statements | Less stringent age of financial statements requirements. |
5. Amendments to Rule 3-05 of Regulation S-X
The amendments to Rule 3-05(b)(2)(iv) of Regulation S-X increase the net revenue threshold in that rule from $50 million to $100 million. As a result, a company may omit financial statements of businesses acquired or to be acquired for the earliest of the three fiscal years otherwise required by Rule 3-05 if the net revenues of that business are less than $100 million in its most recently completed fiscal year.
A company that is required to file financial statements pursuant to Rule 3-05(b)(2)(iv) may apply the amended threshold in that rule in periodic or current reports due on or after September 10, 2018 or, for transactional filings without a due date, in filings made on or after September 10, 2018. For example, if financial statements of a business acquired are required to be filed on Form 8-K and the due date of either the initial Form 8-K or the amended Form 8-K per Item 9.01 is on or after September 10, 2018, then the company may apply the amended threshold in Rule 3-05(b)(2)(iv) in the Form 8-K.
6. Amendments to the Accelerated Filer and Large Accelerated Filer Definitions
The amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2. As a result, a company with $75 million or more of public float that qualifies as a SRC will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.
7. Other Resources
The SRC adopting release is available at https://www.sec.gov/rules/final/2018/33-10513.pdf.
After the rules are effective on September 10, 2018, the text of the rules can be accessed through the following links:
- SRC Definition:
- Item 10(f) of Regulation S-K [17 CFR 229.10(f)]
- Securities Act Rule 405 [17 CFR 230.405]
- Exchange Act Rule 12b-2 [17 CFR 240.12b-2]
- Rule 3-05 of Regulation S-X [17 CFR 210.3-05]
- Accelerated Filer and Large Accelerated Filer Definitions: Exchange Act Rule 12b-2 [17 CFR 240.12b-2]
Additional SRC materials are available at https://www.sec.gov/smallbusiness/goingpublic/SRC.
8. Contacting the SEC Staff
The SEC staff is happy to assist with questions regarding these amendments. You may contact the Division of Corporation Finance’s Office of Small Business Policy online or by telephone at (202) 551-3460.
[1] This guide was prepared by the staff of the U.S. Securities and Exchange Commission (the “Commission”) as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains the rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.
[2] Section 4 of this guide includes a chart summarizing the scaled disclosure requirements for SRCs.
[3] For example, for a company with a December 31 fiscal year making a determination on June 30, 2020, “prior annual revenues” would be its annual revenues for the fiscal year ended December 31, 2018.
[4] For example, for a company with a December 31 fiscal year making a determination on June 30, 2020, “prior public float” would be its public float as of June 28, 2019.
[5] For example, for a company with a December 31 fiscal year making a determination on June 30, 2020, “public float required” would be as of June 30, 2020.
[6] For example, for a company with a December 31 fiscal year making a determination on June 30, 2020, “revenues required” would be for the fiscal year ended December 31, 2019.
[7] All Forms 10-Q for the quarter ended June 30, 2018 are due before September 10, 2018, so companies may not rely on the amended definitions for purposes of those filings.
[8] This chart assumes that the filer is an accelerated filer. See Exchange Act Rule 12b-2 for the definition of an accelerated filer; see also Forms 10-K and 10-Q for the due dates of those respective forms.
A company that qualifies as an accelerated filer and a SRC will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002. See Division of Corporation Finance’s Compliance & Disclosure Interpretations for Regulation S-K, Question 102.01, and Exchange Act Rules, Question 130.04.
[9] Several of these scaled disclosure accommodations are similar to the disclosure accommodations available to an emerging growth company (“EGC”). See Securities Act Rule 405 and Exchange Act Rule 12b-2. For a discussion of scaled disclosure accommodations available to EGCs, see Business and Financial Disclosure Required by Regulation S-K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (April 22, 2016)].
[10] In addition to the accommodations itemized in the table, SRCs using Form S-1 may incorporate by reference information filed prior and subsequent to the effectiveness of the registration statement if they meet the eligibility requirements in General Instruction VII of Form S-1. See Item 12(b) of Form S-1; see also Simplification of Disclosure Requirements for Emerging Growth Companies and Forward Incorporation by Reference on Form S-1 for Smaller Reporting Companies, Release No. 33-10003 (Jan. 19, 2016) [81 FR 2743 (Jan. 19, 2016)].
[11] Item 404 of Regulation S-K also contains the following expanded disclosure requirements applicable to SRCs: (1) rather than a flat $120,000 disclosure threshold, the threshold is the lesser of $120,000 or 1% of total assets, (2) disclosures are required about underwriting discounts and commissions where a related person is a principal underwriter or a controlling person or member of a firm that was or is going to be a principal underwriter, (3) disclosures are required about the company’s parent(s) and their basis of control, and (4) an additional year of Item 404 disclosure is required in filings other than registration statements.