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Smaller Reporting Company Regulatory Relief and Simplification
The SEC recently amended its rules for smaller companies to simplify its reporting requirements for smaller companies by replacing its current “small business issuer” category with a new broader category of “smaller reporting companies.” Companies with less than $75 million in public equity float or, if the float cannot be calculated, having revenues less than $50 million, now qualify for the simplified disclosure. Smaller reporting companies are now also given disclosure options for various disclosure categories, and can choose to be less or more expansive as they wish. All foreign companies who fit the new definition, use a US issuer reporting form and elect U.S. GAAP can also take advantage of the new regime.
These rules (1) expand the number of smaller companies that qualify to use scaled disclosure requirements by creating a new definition in Regulation S-K for “smaller reporting company”; (2) streamline the scaled disclosure process for smaller companies by integrating the majority of the Regulation S-B item requirements into Regulation S-K and Regulation S-X and eliminate the forms for Regulation S-B; and (3) combine the category of “small business issuers” with the category of “non-accelerated filers” to reduce unnecessary complexity in the SEC’s regulations.
Last, the amendments eliminate the transitional small business issuer format.
I. New Definition of “Smaller Reporting Company”
These amendments are intended to expand the group of companies that qualify to use the scaled disclosure requirements. The SEC has stated that the new definition of smaller reporting company will allow approximately 1,500 additional companies to qualify for the scaled disclosure requirements. The amendments create a new definition for “smaller reporting companies” that are eligible to use the scaled disclosure requirements, which combines the definition of “small business issuer” under Regulation S-B with the category of “non-accelerated filer.” Formerly, a company qualified as a small business issuer if both its public private equity float and annual revenues were less than $25 million.
A smaller reporting company is defined in Rule 405 under the Securities Act as a company that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company, and that:
- had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter, or
- in the case of an initial registration statement under the Securities Act or Exchange Act for shares of its common equity, had a public float of less than $75 million as of a date within 30 days of the date of the filing of the registration statement, or
- in the case of an issuer whose public float was zero, had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available.
The determination dates and calculations for whether a company qualifies as a smaller reporting company depend on whether the company is a reporting company, a non-reporting company that is filing an initial registration statement, or a company that is unable to calculate its public float. A reporting company will determine its public float by using the price at which the shares of its equity were last sold or the average of the bid and asked prices of the shares in the principal market for the shares as of the last business day of the company’s second fiscal quarter and multiplying that price by the number of outstanding shares held by non-affiliates. A non-reporting company that is filing an initial registration statement will determine if its public float is less that $75 million by adding the number of shares of common stock outstanding that are held by non-affiliates before the offering to the number of shares of common stock to be sold at the estimated offering price and multiplying this sum by the estimated offering price per share when the registration statement is filed. A company that is unable to calculate its public float will simply have to show that it has annual revenues less than $50 million during the last fiscal year before filing the registration statement.
Non-U.S. companies in addition to Canadian companies will now also be able to qualify as smaller reporting companies. The new definition of smaller reporting company will be expanded to include non-U.S. companies that are eligible to file on U.S. company forms that permit disclosure based on smaller reporting company standards, like Forms S-1, S-3, S-4, 10-Q, and 10-K. However, to qualify for scaled disclosure, the non-U.S. companies must provide the financial data on their forms in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Formerly, Canadian companies were the only non-U.S. companies eligible for scaled disclosure and the eligible Canadian companies were able to provide Canadian GAAP data that was reconciled to U.S. GAAP. However, now, they can only use U.S. GAAP for scaled disclosure.
II. Integrating Regulation S-B into Regulations S-K and S-X
The amendments move 12 non-financial scaled disclosure item requirements from Regulation S-B into Regulation S-K and the scaled requirements will be available only for smaller reporting companies. The other 24 item requirements in Regulation S-B are substantially similar to the corresponding item requirements in Regulation S-K, and therefore, will not be amended in Regulation S-K. Item 310 of Regulation S-B (concerning financial statements) will be added as a new Article 8 in Regulation S-X. By moving the financial statement rules for smaller reporting companies into a new Article 8 in Regulation S-X, the amendments will require the smaller reporting companies to provide two years of balance sheet data instead of one year as was required under Regulation S-B. Under the amendments, smaller reporting companies are permitted to elect on a quarterly basis to comply with scaled financial and non-financial disclosure or provide the larger company financial statement presentation on an item-by-item or “a la carte” basis. Therefore, smaller reporting companies can choose to provide the scaled financial statement requirements or the larger company financial statement requirements on a item by item basis. The amendments also eliminate the SEC’s “SB” forms, but allow a phase-out period for small business issuers transitioning to smaller reporting company status.
The amendments also make other minor adjustments, such as making technical and language changes to the rules concerning the form and content of financial statements for smaller public companies. To help smaller companies, an index will be added to the beginning of Regulation S-K, which will outline the scaled disclosure requirements that are available to smaller companies.
III. Effective Dates
Companies that were small business issuers as of February 4, 2008, can use Form 10-KSB or Form 10-B when filing their next annual report for a fiscal year ending on or after December 15, 2007. However, after the small business issuer files their next annual report, the company’s later periodic reports cannot be filed on forms with the “SB” designation. While most of the amendments were effective as of February 4, 2008, Form 10-QSB will be phased out as of October 31, 2008, and Regulation S-B and Form 10-KSB will be phased out as of March 15, 2009.
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 A company’s public float is the aggregate market value of its voting and non-voting common equity held by non-affiliates of the company. An affiliate of, or person “affiliated” with a specified person, is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.
 The 12 scaled item requirements are: (1) Description of Business (Item 101); (2) Market Price of and Dividends on Registrant’s Common Equity and Related Stockholder Matters (Item 201); (3) Selected Financial Data (Item 301); (4) Supplementary Financial Information (Item 302); (5) Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 303); (6) Quantitative and Qualitative Disclosures about Market Risk (Item 305); (7) Executive Compensation (Item 402); (8) Transactions with Related Persons, Promoters and Certain Control Persons (Item 404); (9) Corporate Governance (Item 407); (10) Prospectus Summary, Risk Factors, and Ratio of Earnings to Fixed Charges (Item 503); (11) Use of Proceeds (Item 504); and (12) Exhibits (Item 601).
Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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