On March 12, 2020, the Securities and Exchange Commission announced (available here) the adoption of a final rule (available here) amending the “accelerated filer” and “large accelerated filer” definitions. The amendments will be effective April 27, 2020 and first impact annual reports on Form 10-K due after the effective date.
The amendments exclude from the “accelerated filer” and “large accelerated filer” definitions issuers that are otherwise eligible to be a “smaller reporting company” and that had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. The amendments are consistent with the Commission’s and Congress’s historical practice of providing scaled disclosure and other accommodations to reduce unnecessary burdens for new and smaller issuers.
Background
On June 2018, the Commission adopted amendments to the definition of “smaller reporting company,” which increased the number of issuers who would otherwisequalify for such status and the related reduced disclosure obligations. These 2018 amendments increased the public float threshold test for an issuer to qualify as a smaller reporting company from less than $75 million to less than $250 million. The Commission also expanded the revenue test to include issuers with annual revenues of less than $100 million if they have no public float or a public float of less than $700 million.
One consequence of the 2018 amendments was to create an overlap on the definitions of smaller reporting company and accelerated filer and large accelerated filer – creating a situation in which a company could qualify as both a small reporting company and accelerated filer or large accelerated filer.
Overlap
Prior to the 2018 amendments, the smaller reporting company category of filers generally did not overlap with either the accelerated or large accelerated filer categories. However, with the 2018 amendments, the public float tests in the smaller reporting company and accelerated filer definitions partially overlap, and the accelerated and large accelerated filer definitions no longer specifically excluded an issuer that is eligible to be a smaller reporting company. As demonstrated by the figure below, an issuer would meet both the accelerated filer definition and the smaller reporting company definition if it had:
• a public float of $75 million or more, but less than $250 million in public float, regardless of annual revenues; or
• less than $100 million in annual revenues, and a public float of $250 million or more, but less than $700 million in public float.
| $0 | $75 million | $250 million | $700 million | |
| Public | ||||
| Float | ||||
| Non-Accelerated Filer | Accelerated Filer | Large Accelerated Filer | ||
| Always Smaller Reporting Company | Smaller Reporting Company based only on annual revenues with less than $100 million | |||
Resolution
The current amendments will amend the definition of accelerated filer and large accelerated filer to exclude an issuer that is eligible to be a smaller reporting company and that meets the smaller reporting company test.
The amendments will:
• exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available (business development companies will be excluded in analogous circumstances);
• increase the public float transition threshold for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for existing large accelerated filer status from $500 million to $560 million;
• add the Smaller Reporting Company revenue test to the transition threshold for both accelerated filer and large accelerated filer status; and
• add a check box to the cover pages of Forms 10-K, 20-F, and 40-F to indicate whether an internal control over financial reporting auditor attestation is included in the filing.
The Commission is amending Item 10(f) of Regulation S-K, Rule 405 under the Securities Act of 1933, Rule 12b-2, Form 10-K, Form 20-F and Form 40-F.
Important Implications
The most notable effect of the current amendments is that a smaller reporting company with less than $100 million in revenues will not be subject to the requirements of Section 404(b) of the Sarbanes-Oxley Act. Section 404(b) requires that an issuer’s independent auditor attest to, and report on, management’s assessment of the effectiveness of the issuer’s internal control over financial reporting (i.e., the so-called auditor attestation report).
Following the adoption of the amendments, smaller reporting companies with less than $100 million in revenues will continue to be required to establish and maintain effective internal control over financial reporting (“ICFR”). Their principal executive and financial officers must continue to certify that, among other things, they are responsible for establishing and maintaining ICFR and have evaluated and reported on the effectiveness of the company’s disclosure controls and procedures. In addition, these smaller companies will continue to be subject to a financial statement audit by an independent auditor, who is required to consider ICFR in the performance of that audit, but will not be required to obtain an auditor attestation report.
Smaller reporting companies with less than $100 million in revenues will be permitted to file their annual and quarterly reports an additional 15 days and five days, respectively, after the end of each period, relative to the deadlines that apply to accelerated filers (90 days, as opposed to 75 days, for annual reports, and 45 days, as opposed to 40 days, for quarterly reports). For further information, please see the updated Gibson Dunn 2020 SEC Filing Deadlines Calendar.
Effective Date
The final rule amendments are effective as of April 27, 2020. The amended rules will apply to annual reports on Form 10-K, Form 20-F and Form 40-F due on or after the effective date (i.e, 2020 annual reports on Form 10-K for calendar year filers).
Special appreciation to associate Rodrigo Surcan in our New York office for his contributions to this post.