Securities Law Blog

On June 27, 2016, the SEC proposed amendments to enable a company with less than $250 million of public float to provide scaled disclosures as a “smaller reporting company,” as compared to the $75 million threshold under the current definition. Public float is computed by multiplying the aggregate worldwide number of shares of a registrant’s 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, as of the last business day of its most recently completed second fiscal quarter (or within 30 days of the filing date of an initial registration statement). If a company does not have a public float – either because it has no public equity outstanding or no market price for its equity exists – it would be permitted to provide scaled disclosures if its annual revenues are less than $100 million, as compared to the current threshold of less than $50 million in annual revenues. See the proposing release here.

In addition, as in the current rules, once a company exceeds either of the definitional thresholds, it will not qualify as a smaller reporting company again until public float or revenues decrease below a lower threshold. Under the proposed amendments, a company that once exceeded the applicable threshold above would qualify only if its public float is less than $200 million or, if it has no public float, its annual revenues are less than $80 million.

If adopted as proposed, increasing the public float threshold to $250 million would result in approximately 42% of registrants qualifying as smaller reporting companies based on public float. By comparison, in 2015, approximately 32% of registrants had less than $75 million in public float. In real terms, an additional 782 registrants would qualify as smaller reporting companies under the amended thresholds, according to analysis in the SEC release. It is expected that the new smaller reporting companies will immediately experience audit, compliance and regulatory cost savings.

The SEC is not proposing to increase the $75 million threshold in the “accelerated filer” definition. As a result, companies with $75 million or more of public float that would qualify as smaller reporting companies would be subject to the requirements that apply currently to accelerated filers, including the timing of the filing of periodic reports (i.e., within 75 days of year end for Form 10-Ks and 40 days of quarter end for Form 10-Qs) and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal controls over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.

Public comment on the proposed amendment to the smaller reporting company definition is due no later than 60 days after publication in the Federal Register.