Friday, November 10, 2023

Petition asks SEC to amend 'smaller reporting company' definition

By Rodney F. Tonkovic, J.D.

A petition for rulemaking asks the SEC to amend Rule 12b-2's definition of "smaller reporting company." Specifically, the petition requests a change to an instruction accompanying the definition to accommodate smaller foreign private issuers. To avail themselves of an exemption from the rule's auditor attestation report requirement, smaller foreign private issuers must accept significant compliance costs and administrative burdens involved in reporting as currently required. The petitioner believes the suggested addition to the instruction would eliminate a deterrent for these issuers to list on a U.S. stock exchange.

Background. Exchange Act Rule 12b-2 contains the definitions of terms used in Regulation 12B, 13A, and 15D and forms filed pursuant to Sections 12, 13, and 15D. In March 2020, the Commission amended the definitions of "accelerated filer" and "large accelerated filer" in Rule 12b-2. As relevant to the petition, the effect of this change was to exempt certain smaller issuers with little revenue or float from the obligation to file an auditor attestation report under SOX Section 404(b). This action, the release says, will reduce unnecessary burdens—compliance costs, in particular—on certain smaller issuers.

After the 2020 amendment, an issuer that qualifies as a "smaller reporting company" is not an accelerated filer if it meets certain revenue and public float requirements (the "revenue test"). The petitioner, however, believes that this current formulation of the rule effectively discriminates against smaller reporting foreign private issuers ("FPIs") versus smaller reporting domestic companies.

Instruction 2. Instruction 2 to Rule 12b-2's definition of "smaller reporting company" says: A foreign private issuer is not eligible to use the requirements for smaller reporting companies unless it uses the forms and rules designated for domestic issuers and provides financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles. The petition seeks to add a sentence to this definition stating that for purposes of the revenue test, "a foreign private issuer may rely upon the definition of 'smaller reporting company' without using the forms and rules designated for domestic issuers or providing financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles."

Compliance costs. To illustrate, the petitioner, a law firm, describes the plight of an Australian client. Absent the added sentence to Instruction 2, the client must report on domestic forms and prepare financial statements using U.S. GAAP, regardless of the compliance burden, if it wants to avail itself of the exemption from the auditor attestation report requirement. Whether the FPI submits an attestation report or uses forms for domestic issuers prepared under GAAP, there are significant compliance burdens that could pressure a smaller FPI to delist its securities from its U.S. stock exchange. This results in disparate treatment against FPIs, the petition says, because they cannot feasibly report as required by Rule 12b-2 while complying with different, even conflicting, requirements in their home country.

In addition to the costs, conflicting requirements, and administrative burdens, the petitioner believes that having an FPI report as a smaller reporting company would cause investor confusion. An FPI could, for example, be required to report the same information under two different reporting regimes on different days. This duplicative and inconsistent reporting would confuse investors.

Policy reasons. The petitioner believes that the policy goals of the amendment apply equally to smaller reporting FPIs. If the goal is to reduce unnecessary burdens, the petition elaborates, there is no reason to discriminate against smaller reporting FPIs and impose significant costs and administrative burdens that outweigh any benefits of the exemption from the auditor attestation requirement.

The petition is No. 4-816.