What Has the SEC Been Up To? A Roundup of Recent Regulatory Developments
Reprinted with permission from the August 6, 2018, issue of The Legal Intelligencer. © 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
The Securities and Exchange Commission (SEC) has been staying busy recently with final rule-making and proposed regulatory changes. This article will outline some of these recent developments.
On June 28, the SEC adopted amendments to the definition of “smaller reporting company” (SRC) that would increase the number of companies eligible to provide reduced or scaled disclosures. Before the amendments, a company would qualify as an SRC either by having a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter (the public float test) or, if the company has no public float, by having less than $50 million in annual revenues (the revenues test). Under the amended definition, the threshold under the public float test increased from $75 million to $250 million, and the threshold under the revenues test increased from $50 million to $100 million if the company has no public float or a public float of less than $700 million.
According to the SEC, these amendments are designed to promote capital formation and reduce compliance costs for smaller companies while maintaining appropriate investor protections. The benefits of qualifying as an SRC is that a company has the option to comply, on an item-by-item basis, with scaled disclosures rather than complying with the more extensive disclosure requirements that apply to larger reporting companies. The SEC estimates that about 1,000 additional companies will qualify for SRC status in the first year after the amendments become effective.
The SEC did not adopt conforming changes to the thresholds in the definitions of “accelerated filer” and “large accelerated filer.” Rather, the SEC eliminated the automatic exclusion of SRCs that had been built into these definitions. As a result, some reporting companies that will now qualify as SRCs will also remain accelerated filers if they have a public float between $75 million to $250 million. These companies would continue to be subject to the accelerated filer requirement to provide an auditor’s attestation report as well as the current shorter filing deadlines for accelerated filers.
Although scaled disclosures may lower compliance costs and disclosure burdens, a company should consider the investor reaction that could result from relying on scaled disclosures and seek input from its management, advisors, investor relations team or investors on this topic. A company will also want to review its material contracts provisions, for example, indenture covenants, to ensure that it is not obligated to comply with the more detailed disclosure requirements under these contracts.
In conjunction with the amendments to the SRC definition, the SEC also adopted technical revisions to the cover pages of certain SEC forms to account for the possible overlapping category of filers. The amendments will be effective on September 10.
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