Buried in the Fixing America's Surface Transportation Act of 2015 is a requirement that the Securities and Exchange Commission review and revise Regulation S-K to scale or reduce the reporting burden on smaller registrants. As part of this initiative, on June 27, 2016, the SEC issued proposed rules soliciting comment on an increase in the thresholds for qualifying as a "smaller reporting company." If adopted, the proposed expansion of smaller reporting company eligibility would substantially lessen the reporting burden for an estimated 780 additional registrants.
Under the proposal, an issuer would qualify as a smaller reporting company if it has less than $250 million in public float, up from $75 million in public float. An issuer's "public float" is the market value of its common equity held by nonaffiliates of the issuer as of the last day of the second quarter of the most recently completed fiscal year, generally reported on the cover page of its Form 10-K. For an issuer with no public float, for example, because no market exists for its common equity, the proposal would raise the limit on annual revenue from $50 million to $100 million. Existing filers with less than $200 million of public float that do not currently qualify for smaller reporting company status would be eligible to elect smaller reporting company status. Accelerated filers (companies with more than $75 million in public float) that elect smaller reporting company status would continue to be subject to accelerated filing deadlines for periodic reporting. Investment companies, asset-backed issuers, and majority-held subsidiaries of non-smaller reporting companies would continue to be ineligible to elect smaller reporting company status.
Smaller reporting companies are currently eligible to take advantage of "scaled" reporting requirements, including substantially reduced compensation disclosure and elimination or reduction of certain financial and other disclosures. For example, smaller reporting companies are required to provide only two years of audited financial statements and management's discussion and analysis of financial condition and results of operations (MD&A), and a description of only three years of the development of the issuer's business. Compensation disclosure for smaller reporting companies is reduced to two years of compensation information about three named executive officers and eliminates compensation discussion and analysis (CD&A), a compensation committee report, many compensation tables, and CEO pay ratio. Unlike "emerging growth companies," smaller reporting companies must comply with "say on pay" and Sarbanes-Oxley Act Section 404(b) auditor attestation of internal controls. Public comment on the proposed rule is due August 30, 2016.
The existing scaled disclosure may be only the beginning for smaller reporting companies and other smaller issuers. As part of the SEC's ongoing disclosure effectiveness initiative, in April the SEC requested public comment on a wide range of potential disclosure matters, many of which would reduce the reporting burden on small issuers. Among these 340 proposals are questions relating to whether smaller reporting companies should be required to provide semi-annual, in lieu of quarterly, interim financial reports, and whether smaller reporting companies should be exempt from some or all of the current XBRL requirements. Although it seems likely that few, if any, of the proposals in the SEC's April concept release will be enacted in their current form, it is clear that both Congress and the SEC are working toward reducing the reporting burden on public companies, particularly smaller public companies.
If you have any questions, please contact the Venable attorney with whom you work, one of the authors of this alert, or a member of Venable's Corporate Finance and Securities Team.