Thursday, August 02, 2012

House Panel Approves Legislation Raising Accelerated Filer Public Float Trigger and Adding Revenue Component

The House Capital Markets Subcommittee has approved the Fostering Innovation Act, HR 6161, by a partisan vote of 18-15. Sponsored by Rep. Mike Fitzgerald (R-PA), the measure would amend the filing status classifications in SEC Rule 12b-20 to increase to $250 million the public float requirement for accelerated filer status and add a revenue component of $100 million to the definition of accelerated filer.

Rule 12b-2 establishes three classifications by which public companies determine their filing status. A company’s filing status carries with it a designation of its regulatory obligations, designed to increase as a company gets larger and more complex. The filing status classifications are defined in terms of a company’s public float. Large accelerated filers are companies with a public float of more than $700 million; accelerated filers are those with a public float of more than $75 million but less than $700 million; and non-accelerated filers are companies with a public float of less than $75 million. 

According to earlier testimony of Jeffrey Hatfield, for the Biotechnology Industry Organization, the measure would raise the minimum public float requirement for accelerated filers to $250 million, classifying companies with public floats below that level as non-accelerated filers. He said that this increase from $75 million to $250 million would allow start-ups to expand and change without fear of impeding their growth with costly regulations. Many biotechs have public floats in or near that range, he noted, and the flexibility provided by HR 6161 would allow them to focus on their innovative research rather than shifting funds to compliance costs. The Fostering Innovation Act would also add a revenue component to the accelerated filer definition. Under the bill, accelerated filers would be described as those with revenues in excess of $100 million. Thus, noted Mr. Hatfield, any company with revenues below $100 million, regardless of public float, would be considered a non-accelerated filer. He noted that complying with non-accelerated filer standards rather than those required of accelerated filers would provide significant relief for growing companies, adding that the exemption from Section 404(b) of Sarbanes-Oxley alone would save innovative start-up companies millions of dollars.

The regulatory allowances in HR 6161 would not extend to accelerated or large accelerated filers. According to Mr. Hatfield, HR 6161 thus maintains the important investor protections required of these large companies, while recognizing the simpler corporate structure of non-accelerated filers. Updating the filing status definitions in Rule 12b-2 would reflect the true nature of small public companies, he emphasized, while maintaining important requirements for larger corporations. New definitions would group companies with common characteristics together, giving the SEC more accurate classifications and providing important regulator

In the view of Columbia University Law Professor John Coffee, HR 6161 would essentially change the definition of accelerated filer in SEC Rule 12b-2 so that companies that are neither emerging nor growth companies can also escape Section 404(b). Specifically, Professor Coffee has three basic criticisms of HR 6161.

First, it goes further than the emerging growth company concept of the JOBS Act, because the JOBS Act confers typically only a five year compliance postponement after the date of an issuer’s IPO. The JOBS Act’s provision can thus be justified as a transitional provision for young companies. In contrast, HR 6161 would extend permanent immunity from Section 404(b) to firms that stayed below $250 million in their public float.

Second, HR 6161 goes well beyond what was contemplated in the study mandated by Section 989G of the Dodd-Frank Act because it redefines the term accelerated file in SEC Rule 12b-2 to require that an accelerated filer must have revenues in excess of $100,000,000 during its most recent fiscal year. Section 989G had contemplated only the possibility of eliminating companies with a modest public float in the $75 million to $250 million range.

Under this revised definition in H.R. 6161, reasoned Professor Coffee, a company could have revenues of $90 million and yet have a public float of $600 million, because it had a relatively high price/earnings ratio, and it would not be deemed an accelerated filer. Professor Coffee observed that such high p/e companies are probably those most needing oversight over the adequacy of their audit controls.

Third, unlike the emerging growth companies exemption, HR 6161 confers immunity on mature companies that may have a dubious regulatory history. For example, Professor Coffee posited that a company with a public float of $200 million that had recently experienced a major accounting restatement within the past two years would be the type of company that needs the oversight of Section 404(b). But it would be exempted because it did not qualify as an accelerated filer under HR 6161’s definition.