SEC posts small entity compliance guide on scaled disclosure changes

By Amy Leisinger, J.D.

In anticipation of the changes to its definition of “smaller reporting company” (SRC) set to take effect on September 10, 2018, the SEC has issued a compliance guide for small entities explaining the modifications to reporting thresholds and filing requirements. The guide also provides examples concerning the potential application of the changes to the first periodic filings following effectiveness of the amendments and a chart of the specific scaled disclosure requirements available to SRCs.

Key provisions. Under the expanded smaller reporting company definition, a company with a public float of less than $250 million may provide scaled disclosures, up from the previous threshold of $75 million. A company with less than $100 million in annual revenues and either no public float or a public float of less than $700 million also may provide scaled disclosures; the definition previously restricted scaled disclosures to companies with less than $50 million in annual revenues and no public float.

A company that determines that it does not qualify as a SRC under either of these standards will remain unqualified until it determines that it meets one of two lower thresholds, set at 80 percent of the above initial thresholds: 

• public float of less than $250 million (up from less than $50 million); and 
• annual revenues of less than $80 million, if the company previously had at least $100 million in annual revenues; and less than $560 million of public float, if the company had at least $700 million of public float (up from less than $40 million in annual revenues and no public float). 

The Commission also amended Rule 3-05 of Regulation S-X to increase the net revenue threshold in that rule from $50 million to $100 million so that a company may omit financial statements of a business acquired or to be acquired for the earliest of the three required fiscal years if its net revenues are less than $100 million. A company required to file financial statements pursuant to the rule may apply the amended threshold in reports due after September 10, 2018.

Guidance for small entities. The guide notes that a reporting company will determine whether it qualifies as a SRC annually as of the last business day of its second fiscal quarter. A company calculates its public float by multiplying the aggregate number of shares 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. A 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. If qualified, the company may elect to reflect its SRC status and use the scaled disclosure accommodations beginning with its second quarter Form 10-Q, and it must reflect its SRC status in its Form 10-Q for the first fiscal quarter of the next year, the staff explains.

A company that completed its initial public offering since the end of its most recent second fiscal quarter may elect to determine SRC qualification based on public float as of the date it estimated its public float before filing or as of the end of the offering based on offering price and shares sold, according to the guide.

Foreign companies meeting the applicable thresholds may use the SRC scaled disclosure accommodations if they use domestic forms instead of the separate forms for foreign private issuers and prepare financial statements in accordance with U.S. GAAP, the guide explains. However, the staff cautions, investment companies, asset-backed issuers, and majority-owned subsidiaries of a parent that is not an SRC are not eligible for SRC status.