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TOPIC 5 - Smaller Reporting Companies

Title I of the JOBS Act, which was effective as of April 5, 2012, created a category of issuers called “emerging growth companies,” whose financial reporting and disclosure requirements in certain areas differ from other categories of issuers. A Smaller Reporting Company (“SRC”) can also be eligible to be an EGC. See Topic 10. (Last updated: 6/30/2013)

5100Definition and Eligibility

(Last updated: 10/30/2020)

5110Eligibility as a Smaller Reporting Company [S-K 10(f)(1)]

5110.1 An entity that is not an investment company, asset-backed issuer or majority-owned subsidiary of a parent that is not a smaller reporting company qualifies as a smaller reporting company based on the following criteria:

1. Public float of less than $250 million.  An entity is a smaller reporting company if it has a public float (the aggregate market value of the issuer’s outstanding voting and non-voting common equity held by non-affiliates) of less than $250 million; or
2. Annual revenues of less than $100 million and either no public float or a public float of less than $700 million.  An entity is a smaller reporting company if it has annual revenues of less than $100 million and either (1) no public float (because it has no public equity outstanding or no public trading market for its equity exists) or (2) a public float of less than $700 million

For additional information, see the Small Entity Compliance Guide for Issuers.

5110.2 Apply the public float test as follows:

1. Reporting company [S-K 10(f)(1)(i)]
   The public float test of a reporting company is computed as of the last business day of its most recently completed second fiscal quarter by multiplying the aggregate worldwide number of shares of 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 the common equity, in the principal market for the common equity.
2. Initial Registration Statement - Securities Act and Exchange Act [S-K 10(f)(1)(ii)]
   The public float of a company filing an initial registration statement for shares of its common equity shall be determined as of a date within 30 days of the date the registration statement is filed. Public float shall be computed by multiplying the (A) aggregate worldwide number of shares voting and non-voting common equity held by non-affiliates prior to the filing of the registration statement plus, in the case of a Securities Act registration statement, (B) the number of such shares included in the registration statement by the estimated public offering price of the shares.

5110.3 Annual revenue is determined as follows:

1. Reporting company
   Revenue in its annual audited financial statements as originally filed with the Commission (not restated for subsequent discontinued operations) for its most recent fiscal year completed before the last business day of the second fiscal quarter (i.e., public float test date).
2. Initial Registration Statement - Securities Act and Exchange Act
   Annual revenue in its most recent audited financial statements available on the initial public float calculation date (as described above in 5110.2b), which would be the most recent fiscal year for which audited financial statements are included in the initial registration statement. However, if, consideration of the pro forma effect of (1) businesses acquired during the latest fiscal year and (2) consummation of business combinations identified as probable at the time of filing the initial registration statement would result in the issuer exceeding the revenue limit, the issuer would not qualify as a smaller reporting company.
3. Banks and similar financial institutions
   For purposes of the test, a bank must include all gross revenues from traditional banking activities. Banking activity revenues may include interest on loans and investments, dividends on investments, fees from loan origination, fees from trust and investment services, commissions, brokerage fees, mortgage servicing revenues, and any other fees or income from banking or related services.

5110.4 If the issuer is a majority-owned subsidiary, the parent entity also must be a smaller reporting company. An entity that is to be spun off from its parent coincident with or prior to its initial registration may register as a smaller reporting company if it will otherwise qualify as a smaller reporting company upon consummation of the spin-off.

5110.5 Foreign companies are eligible to qualify as smaller reporting companies and use the scaled disclosure if they file on domestic forms and provide financial statements in accordance with U.S. GAAP. [Instruction 2 to definition of “smaller reporting company.”]

5110.6 An issuer that becomes an investment company or qualifies as an asset-backed issuer is disqualified from being considered a smaller reporting company for its next filing.

5120Determination

5120.1 Status as a smaller reporting company is determined on an annual basis based upon the definitions above for reporting companies.

1. New issuers must make the determination at the time the initial registration statement is filed. In the case of a determination based on an initial Securities Act registration statement, an issuer that was not determined to be a smaller reporting company at that time has the option to redetermine its status based on the actual offering price and the number of shares included in the registration statement at the conclusion of the offering. [S-K 10(f)(2)(ii)]
2. Once an issuer fails to qualify for smaller reporting company status, it remains unqualified until it falls below a specified lower threshold for the criterion (i.e. 80% of the initial qualification thresholds). The issuer remains unqualified unless when making a subsequent annual determination either:
   • Its public float falls below $200 million as of the last business day of its most recently completed second fiscal quarter; or
   • Its public float and its annual revenues meet the requirements for subsequent qualification included in the following chart:

3. An issuer that no longer qualifies as a smaller reporting company at the determination date may continue to use the scaled disclosures permitted for a smaller reporting company through its annual report on Form 10-K and begin providing non-scaled larger company disclosure in the first Form 10-Q of the next fiscal year.

   NOTE:

   Although the annual report may continue to include scaled smaller reporting company disclosure, the due date for the annual report will be based on the registrant’s filing status as of the last day of the fiscal year. Division of Corporation Finance’s C&DIs for Regulation S-K, Question 102.01, clarifies that a company can be both an accelerated filer and a smaller reporting company at the same time.

4. An issuer newly qualifying as a smaller reporting company as of the last business day of the second quarter may choose to reflect this change in status in its quarterly report for that second quarter. An issuer must reflect its SRC status no later than in its Form 10-Q for the first fiscal quarter of the next year.

5130Shell Company

5130.1 A reporting company that meets the definition of a shell company as defined in Rule 12b-2 of the Exchange Act and Regulation C, Rule 405 also will generally qualify as a smaller reporting company and be eligible to use the scaled disclosure. Upon a transaction that causes the reporting entity to lose its shell company status (typically a reverse merger), the surviving entity must file a Form 8-K. The information that must be provided is what would be required if the registrant were filing a general form for registration of securities under Form 10. Scaled disclosure would be appropriate only if the surviving entity qualifies as a smaller reporting company. This Form 8-K, including the financial statements of the accounting acquirer, is due within four business days of the completion of the transaction. Exchange Act Rule 12b-25 does not permit an extension of the due date for filing this Form 8-K.

5130.2 Shell companies are not eligible to use Form S-8 to register offerings of securities in connection with employee benefit plans. A shell company that ceases to be a shell is eligible to use Form S-8 sixty (60) days after it ceases to be a shell company and files the information that is equivalent to the information contained in an Exchange Act registration statement on Form 10. See General Instruction A. to Form S-8.

5200OTHER ELIGIBILITY ISSUES

(Last updated: 7/1/2019)

5210Financial Statements Required Pursuant to S-X 3-05 or 3-09

(Last updated: 9/30/2009)

5210.1 A non-SRC reporting company registrant who is required to present financial statements under S-X 3-05 or S-X 3-09 may not rely on accommodations available to smaller reporting companies with respect to the acquired business or investee even though that business would satisfy the tests as a smaller reporting company (or is currently a reporting SRC) or investee.

5210.2 Financial statements of a non-reporting target company that meets the conditions to be a smaller reporting company, or of a currently reporting SRC target, may be filed in accordance with S-X Article 8 in a registration statement on Form S-4 and in proxy statements. Nevertheless, the financial statements must comply with the other S-X reporting requirements in a subsequent Form 8-K reporting the business acquisition unless the acquirer is a currently reporting SRC. For example, the Form 8-K could potentially require three years of financial statements for the target company if revenues at the target company are greater than $100 million in order to comply with other S-X reporting requirements. (Last updated: 10/30/2020)

5220Business Acquisitions

5220.1 A smaller reporting company continues to qualify for smaller reporting requirements after the acquisition in a merger accounted for as a purchase of another company that is not a smaller reporting company until the next determination date.

5220.2 If a registrant/acquirer is subject to S-X 8-04, the financial statements of a non-reporting business acquired or to be acquired may comply with scaled reporting requirements for a smaller reporting company. There are different requirements for filing financial statements of a non-reporting target in an S-4 registration statement (see Section 2200.2). (Last updated: 12/31/2011)

5230Reverse Acquisitions

5230.1  In SEC Release No. 33-8587, the SEC determined that investors in operating businesses newly merged with shell companies should obtain the same level of information as provided for reporting companies that did not originate as shell companies. Therefore, they are required to include equivalent information as if they were registering under the Exchange Act. Accordingly, the staff looks to the accounting acquirer's eligibility as a smaller reporting company at the time of the reverse acquisition for purposes of the disclosures to be provided in the Form 8-K.

5230.2  If a reverse acquisition occurs in which a non-public operating company is the accounting acquirer of a smaller reporting operating company (registrant), the registrant (the legal acquirer) would continue to qualify as a smaller reporting company until the next determination date. (Last updated: 6/30/2011)

5230.3  In a reverse acquisition in which the registrant (legal acquirer) is a smaller reporting shell company, the registrant would continue to qualify as a smaller reporting company until the next determination date even if the Form 8-K disclosure was not scaled because the non-public accounting acquirer was not eligible at the time of the transaction as described in Section 5230.1. (Last updated: 6/30/2011)

5230.4 If the accounting acquirer is a public operating company that is not a smaller reporting company, the registrant will no longer be a smaller reporting company upon consummation of the transaction. Also, scaled disclosure is not permitted in the Form 8-K reporting the transaction because the accounting acquirer was not eligible at the time of the transaction. (Last updated: 12/31/2011)

5300FORM AND CONTENT DISCLOSURE REQUIRED BY REGULATION S-X ARE NOT APPLICABLE

(Last updated: 9/30/2008)

5310General

5310.1  Smaller reporting companies typically need not comply with the disclosure requirements of Regulation S-X in its entirety, except as indicated under the Notes to S-X Article 8. The “Notes” require that:

1. The report and qualifications of the independent accountant must comply with S-X Article 2
2. The description of accounting policies must comply with S-X 4-08(n).
3. Issuers engaged in oil and gas producing activities must follow the financial accounting and reporting standards of S-X 4-10.
4. Financial statements for a subsidiary of a smaller reporting company that issues securities guaranteed by the smaller reporting company must be presented as required by S-X 3-10, except the periods presented are based on S-X 8-02.
5. Financial statements for a smaller reporting company’s affiliate whose securities constitute a substantial portion of the collateral for any class of securities registered must be presented as required by S-X 3-16, except the periods presented are based on S-X 8-02.

5310.2 Smaller reporting companies should provide all information required by the Industry Guides, and real estate companies should also refer to Item 13 [Investment Policies of Registrant], Item 14 [Description of Real Estate], and Item 15 [Operating Data] of Form S-11.

5320Pro Forma Information

(Last updated: 3/31/2009)

Pro forma financial statements are required in transactional filings whenever a significant business combination has occurred or is probable, and the transaction has not been reflected in the historical audited financial statements of the issuer for the most recent full fiscal year. In addition, pro forma financial information should be presented whenever consummation of an event or transaction has occurred or is probable for which disclosure of pro forma information would be material to investors. Smaller reporting companies should consider the guidance in S-X Article 11.

5330Significant Equity Investees

5330.1 The disclosure about significant equity investees cited under S-X 8-03(b)(3) is required in both interim and annual financial statements.

5330.2 There is no equivalent to S-X 3-09 in S-X Article 8 for the provision of separate financial statements for significant equity investees. However, when material to investors, equity method investee financial statements should be provided.

5340A la Carte Approach to Disclosure

5340.1 Smaller reporting companies may choose compliance with either the smaller reporting company scaled disclosure requirements or the larger company disclosure requirements on an item-by-item or “a la carte” basis for each filing. Disclosures should be provided consistently and should be consistent with the legal requirements under the federal securities laws, including Regulation C, Rule 408 and Exchange Act Rule 12b-20. It is also important that disclosures permit investors to make period-to-period comparisons.

5340.2  To the extent the smaller reporting company scaled item requirement is more rigorous than the same larger company item requirement, smaller reporting companies are required to comply with the more rigorous, smaller reporting company disclosure.

5350Restricted Net Assets

(Last updated: 10/30/2020)

Companies that qualify as smaller reporting companies are not subject to S-X 5-04 or 4-08(e), even when the disclosure thresholds are triggered. However, when the restricted net assets of a smaller reporting company’s consolidated subsidiaries are a significant proportion of consolidated net assets as of the most recently completed fiscal year end, the amount and nature of those restrictions may be important to understanding the smaller reporting company’s liquidity and its ability to pay interest and principal on debt or dividends. In these circumstances, the smaller reporting company should fully discuss, in MD&A, the nature of the restrictions on its subsidiaries net assets, the amount of those net assets, and the potential impact on the company’s liquidity (see S-K 303(a) and Instruction 5). Disclosures within MD&A similar to the parent company condensed financial information specified by S-X 5-04 and 4-08(e) may be necessary to facilitate this discussion.

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