Hoping to reduce compliance costs and promote capital formation while maintaining appropriate investor protections, the Securities and Exchange Commission (SEC), on June 28, increased the upper limit on smaller reporting company (SRC) thresholds.
The new definition of SRC includes registrants with a public float of less than $250 million (up from $75 million), as well as registrants with either no public float or a public float of less than $700 million, provided that their annual revenues for the previous year did not exceed $100 million (up from $50 million).
The change does not apply to companies designated as “accelerated filers” or “large accelerated fliers,” although SEC Chairman Jay Clayton has directed SEC staff to formulate recommendations for potential future changes to those designations as well. The ongoing question, as it was for the SRC amendments, is where to draw the line between regulatory relief and investor protection.
As such, this change might cause some confusion, but to be clear – in regard to accelerated filers – companies with $75 million or more of public float that qualify as SRCs will remain subject to many requirements applicable to accelerated filers. These requirements include the timing of the filing of periodic reports and providing an annual auditor’s attestation of management’s assessment of internal control over financial reporting, as required by Section 404(b) of the Sarbanes-Oxley Act of 2002 (SOX).
Notwithstanding the above, the SEC staff estimates that nearly 1,000 additional companies will become eligible for reduced or scaled disclosure accommodations in the first year under the SRC amendments. The rules become effective 60 days following publication in the Federal Register. The Commission’s announcement is available online.
The SRC amendments are part of a larger trend in which regulators have been taking proactive measures to ease regulation without waiting for legislation to mandate the change. Debate over the accelerated-filer thresholds has raged on for many years with respect to compliance with section 404(b) of SOX, but we expect further developments, so please stay tuned.
Looking ahead, the Senate Committee on Banking, Housing and Urban Affairs recently discussed an exemption from Section 404(b) of SOX for emerging growth companies – something that could bring them significant regulatory relief.
While it would be premature for issuers to tap the brakes on their 404(b) compliance in hopes of relief before the end of the year, we are watching to see what measures regulators will take. For a more detailed analysis of the SRC amendments and the current climate for regulatory relief in Washington, read the Flash Report on our website.