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SEC Proposed Expansion of Smaller Reporting Company Definition

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A recent proposal from the Securities and Exchange Commission (SEC) aims to lower compliance costs for smaller public companies. The SEC's proposed amendments would affect qualifications for the scaled disclosure requirements, which companies beneath set revenue and public float thresholds can use. Changes would increase the thresholds so that more companies could take advantage of the streamlined approach to disclosures, an update that the SEC says will have a statistically significant impact on smaller companies' bottom lines.

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SEC Proposed Expansion of Smaller Reporting Company Definition

  1. 1. our roots rundeepTM MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM A publication of the Professional Standards Group MHMMessenger © 2 0 1 6 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. TM S-K study as required by the Jumpstart Our Business Startups (JOBS) Act. It also analyzed the definition as part of the Fixing America’s Surface Transportation (FAST) Act of 2015. After evaluating the recommendations, the SEC drew up changes designed to address both the concerns about compliance cost and the information provided to investors. Resetting the smaller reporting company thresholds involved an analysis of several factors, including whether inflation could be used. The SEC decided against it, as inflation did not produce a meaningful enough change for small filers. Regulators also considered whether to use thresholds based on the emerging growth companies (EGC) criteria, because these companies often have larger public floats and revenues than other smaller reporting companies. Ultimately, the SEC decided against basing its changes on the EGC definitions because the EGC thresholds generally phase out by the fifth year after the first registered sale of equity. Instead, the SEC decided to base its thresholds off comments received as part of the Disclosure Effectiveness Initiative. Although the numbers have changed, the SEC retains the provisions that registrants that qualify would still be liable for their disclosures and would need to provide additional information about their financial position if so required. Their review process also would not change, nor would the scaled disclosure requirements in Regulation S-K and Regulation S-X. Summary of Proposed Changes Thresholds would change for all companies qualifying for the smaller reporting company designation. A recent proposal from the Securities and Exchange Commission (SEC) aims to lower compliance costs for smaller public companies. The SEC’s proposed amendments would affect qualifications for the scaled disclosure requirements, which companies beneath set revenue and public float thresholds can use. Changes would increase the thresholds so that more companies could take advantage of the streamlined approach to disclosures, an update that the SEC says will have a statistically significant impact on smaller companies’ bottom lines. All Roads Point to Change The impetus for changing the smaller reporting company thresholds comes from several SEC initiatives to improve reporting requirements. Two small business advisory groups that work with the SEC, its Advisory Committee on Small and Emerging Companies, and its Governmental-Business Forum on Small Business Capital Formation, have asked that the threshold be expanded to reduce compliance costs. Commenters on the SEC’s Disclosure Effectiveness Initiative also highlighted the smaller reporting company threshold as an area to be changed. Federal acts brought their share of attention to the mater as well. The SEC had to examine the smaller reporting company definition when performing its Regulation August 2016 SEC Proposes Expansion of Smaller Reporting Company Definition
  2. 2. © 2 0 1 6 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. MHMMessenger 2 The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report. Currently, reporting registrants must have less than $75 million of public float at the end of the second quarter in order to meet the definition of a smaller reporting company. Under the proposed definition, the threshold would increase to $250 million. The SEC made the decision because currently, about 32 percent of all registrants have less than $75 million in public float, which is less than the 42 percent of registrants who had met the public float threshold when the standard was created. Increasing the threshold to $250 million would mean that 42 percent of registrants would qualify for the scaled disclosures. The threshold would also be raised for registrants filing initial registration statements. Currently, initial registrants must have less than $75 million in public float within the first 30 days of filing in order to qualify for scaled disclosures. That would increase to $250 million. For companies that no longer qualify as smaller reporting companies, the proposed standard suggests that those companies should not be able to requalify as smaller reporting companies until they meet a lower public float amount. The proposal suggests that the threshold to requalify as a smaller reporting company would be set at a public float of less than $200 million, which is an increase over the current requirement of less than $50 million of public float at the end of their second fiscal quarter. Currently, companies that no longer qualify as smaller reporting companies that have zero public float will not requalify as smaller reporting companies until they have less than $40 million of revenues in the most recent fiscal year, and that threshold would increase to $80 million under the proposal. The SEC expects this will affect only a very small percentage of companies, but would reduce frequency of situations in which small fluctuations of revenue cause a company to enter and exit smaller reporting company status. Accelerated Filer Status Amendments were also made to the accelerated filer definition to maintain the status quo. Accelerated filer and large accelerated filer definitions essentially pick up where the smaller reporting company definition leaves off in current practice. Entities qualify as accelerated filers if they have at least $75 million in public float. By definition, any smaller reporting companies would be excluded, and there is a rule that reiterates the exclusion. The proposed amendments would preserve the $75 million public float threshold for accelerated filers but would eliminate the exclusion of smaller reporting companies from the accelerated filer definition. This would allow companies in the $75-$250 million public float range to continue taking advantage of the accelerated filer definition even though the companies would now be considered smaller reporting companies in the proposed amendments’ expanded definition. Large accelerated filers, entities with more than $700 million in public float, would not be affected by the proposed amendments. Stay Tuned The SEC is accepting comments on the proposal via its website, email and mail through August 30, 2016. We will keep you up-to-date as developments become available. For specific comments, questions or concerns about the proposed amendments, please contact Rich Howard of MHM’s Professional Standards Group. Rich can be reached at rhoward@cbiz.com or 949.450.4402.

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