This Securities Briefing provides an overview of the SEC’s final rules amending the disclosure and reporting requirements for smaller companies under the Federal securities laws, including expanding the group of companies eligible for the smaller company requirements and integrating Regulation S-B with Regulation S-K.
This Securities Briefing is intended only as a summary of the SEC’s final rules discussed and you are encouraged to review the full text of the final rules.
The SEC has adopted rules to amend the disclosure and reporting requirements for a greater number of smaller companies under the Federal securities laws. As proposed, the final rules create a new term – “smaller reporting company” – to replace the current term “small business issuer.” The final rules permit most companies with a public float of less than $75 million to qualify for the simpler or “scaled” disclosure and reporting requirements currently available to small business issuers. The final rules provide a revenue test for issuers that do not have a public float or are unable to calculate it. As proposed, the final rules also eliminate the stand-alone Regulation S-B by integrating its requirements into Regulation S-K.
The final rules are intended to implement various recommendations of the Advisory Committee on Smaller Public Companies that the SEC established to assess the current regulatory system for smaller public companies. The SEC’s primary objectives for the final rules include:
The final rules are effective as of February 4, 2008 except as follows:
Prior to adoption of the final rules, there were two categories of smaller companies: “small business issuers” with both a public float and revenues of less than $25 million and “non-accelerated filers” that did not qualify as “large accelerated filers” or “accelerated filers.” In general, non-accelerated filers were companies with a public float of less than $75 million. As proposed, the final rules create a new company category called “smaller reporting company” to replace the current “small business issuer” category plus capture non-accelerated filers. A smaller reporting company is defined as a company that:
A company’s public float is calculated by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity in the principal market for the common equity. In the case of an IPO, the public float is computed by multiplying the aggregate worldwide number of shares held by non-affiliates before the registration plus the number of shares included in the registration statement by the estimated public offering price of the shares.
The definition of small business issuer under the old rules excluded companies that were not organized in the United States or Canada, investment companies and asset-backed issuers. The final rules continue to exclude investment companies and asset-backed issuers from eligibility to qualify as a smaller reporting company. Foreign companies that meet the smaller reporting company criteria and make their filings on domestic company forms are eligible to qualify as smaller reporting companies under the final rules.
The SEC decided to eliminate the dual disclosure scheme of Regulations S-B and S-K because it was overly complex and a possible deterrent for smaller public companies to take advantage of the scaled disclosure and reporting requirements. The final rules integrate Regulation S-B requirements into Regulation S-K largely as proposed by adding new subsections to the relevant items of Regulation S-K which contain the applicable provisions of Regulations S-B. Each new subsection has a heading of “Smaller reporting companies” to make it easier to find the disclosure requirements applicable to smaller reporting companies in each item. The SEC has also added an index of scaled disclosure requirements in new Item 10(f) of Regulation S-K to highlight the items with scaled disclosure requirements for smaller reporting companies.
The final rules do not make any major substantive changes to the Regulation S-B items moved into Regulation S-K. When the disclosure standards of identically numbered items in Regulations S-B and S-K are substantially the same for smaller reporting companies and other companies, there are no changes made to the existing Regulation S-K item. The final rules make the following integration changes, among others:
Note that the SEC decided against amending Item 401 (Directors, executive officers, promoters and control persons) to include the Regulation S-B standard for disclosing involvement in Federal bankruptcy or state insolvency proceedings. As a result, smaller reporting companies now need to comply with the slightly different disclosure requirements of Item 401 of Regulation S-K for such matters (i.e., disclosure must be provided for any petitions filed under the Federal bankruptcy laws or any state insolvency laws by or against a director or officer during the past five years).
In response to comments, the final rules move the financial statement requirements for smaller reporting companies into a new Article 8 of Regulation S-X (the proposed release had suggested adding them as a new Item 310 to Regulation S-K). In addition, Article 8 now requires two years of comparative audited balance sheet data (rather than the one year required by Regulation S-B). The final rules also adopt a technical amendment to Regulation S-X Rule 3-05(b)(2)(iv) (Financial Statements of Businesses Acquired or to be Acquired) to replace the $25 million small business issuer revenue standard with the $50 million revenue standard for a smaller reporting company unable to calculate public float.
As proposed, the final rules allow a smaller reporting company to choose, on an item-by-item basis, to comply with the financial and non-financial disclosure standards applicable to smaller reporting companies or the financial and non-financial disclosure standards applicable to larger companies. In this way, a smaller reporting company has, in the SEC’s words, the “option to take advantage of the smaller reporting company requirements for one, some, all or none of the items, at its election, in any one filing.” Note, however, the following inconsistency with the “a la carte” approach. New Item 10(f) of Regulation S-K provides that a smaller reporting company may comply with either the requirements applicable to smaller reporting companies or the requirements applicable to other companies for each item unless the requirements for smaller reporting companies specify that smaller reporting companies must comply with the smaller reporting company requirements. It appears that Item 404(d) (Transactions with related persons, promoters and certain control persons) is the only place in Regulation S-K, as amended, to specify that a smaller reporting company must comply with the smaller reporting company disclosure standard. All the other smaller reporting company standards in Regulation S-K appear to be permissive.
In addition, the SEC provided the following guidance in the adopting release on use of the “a la carte” disclosure approach:
Finally, as proposed, a new check box appears on the cover page of Securities Act and Exchange Act filings for smaller reporting companies to check in order to indicate that they are eligible for smaller reporting company status. The SEC intends this approach to balance the interests of investors who wish to determine if a filer is eligible for smaller reporting company status with the need for transparency while not “unduly stigmatizing smaller companies.”
In response to comments, the final rules eliminate some of the forms associated with Regulation S-B on a transitional basis rather than eliminating all of them immediately as proposed. The final rules rescind the registration statements on Forms SB-1, SB-2 and 10-SB effective February 4, 2008. A small business issuer may file its annual report for a fiscal year ending on or after December 15, 2007 on either Form 10-KSB or Form 10-K. A small business issuer may also continue to file its periodic reports using Regulation S-B and the related “SB” forms until its next annual report is filed. Once that annual report is filed, the small business issuer may no longer file periodic reports on “SB” forms. As a result of the optional transition rules, Form 10-QSB will not be removed until October 31, 2008 and Form 10-KSB will not be removed until March 15, 2009.
Under the final rules, whether or not a company is a smaller reporting company is determined on an annual basis. The final rules provide that a smaller reporting company will lose eligibility for smaller reporting company status in the first quarter after the year its public float is greater than $75 million as of the last business day of the second fiscal quarter. A company that does not file reports as a smaller reporting company will be required to transition to that status no later than the first quarter of the next fiscal year if its public float falls below $50 million as of the last business day of the second fiscal quarter. Unlike the proposed rules, the final rules permit a company newly eligible to be a smaller reporting company to choose to reflect this determination and comply with the scaled disclosure requirements in the first Form 10-Q filed after the determination.
If a company does not have a public float or no public market for its common equity securities exists and its annual revenues are less than $50 million, it will retain smaller reporting company status until its annual revenues exceed $50 million. If an issuer does not qualify for smaller reporting company status under the revenue test, it remains unqualified as a smaller reporting company until its annual revenues are less than $40 million during the previous fiscal year.
A copy of the final SEC rules amending the disclosure and reporting requirements for smaller reporting companies is available on the SEC’s website at www.sec.gov by selecting Final Rule: Smaller Reporting Company Regulatory Relief and Simplification or by going to http://www.sec.gov/rules/final/2007/33-8876.pdf
Attorneys on the Securities Team include:
J.C. Anderson (612) 632-3002
Lindley S. Branson (612) 632-3024
Maxwell J. Bremer (612) 632-3056
Christopher A. Carlisle (612) 632-3033
Barry F. Clegg (612) 632-3220
Gene H. Hennig (612) 632-3202
Alyssa J. Hirschfeld (612) 632-3316
Inchan Hwang (612) 632-3310
Julia S. Offenhauser (612) 632-3067
Douglas M. Ramler (612) 632-3324
Michael P. Sullivan, Jr. (612) 632-3350
Daniel R. Tenenbaum (612) 632-3050
Mark D. Williamson (612) 632-3379
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This newsletter is a periodic publication of Gray, Plant, Mooty, Mooty & Bennett, P.A. that should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult legal counsel concerning your situation and any specific legal questions you may have.
Copyright. 2008. All rights reserved.
Gray, Plant, Mooty, Mooty & Bennett, P.A.
This article is provided for general informational purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have.
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