On November 6, 2018, the NYSE proposed a rule change that conforms the definition of smaller reporting company (“SRC”) to the recent amendments made by the Securities and Exchange Commission (“SEC”) earlier this year. Under the SEC’s amendments a company with a public float of less than $250 million now qualifies as a SRC. Additionally, a company with no public float or with a public float of less than $700 million will qualify as an SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year. The NYSE’s proposed rule change relates to the exemption from the compensation committee requirements applicable to SRCs. Under current NYSE rules, SRCs benefit from certain exemptions and are not required to comply with various compensation committee requirements. However, the current NYSE rule references the outdated SEC definition of SRC. The NYSE’s proposed rule aligns the amended definition of SRC by eliminating the $75 million threshold in the NYSE rule and follows the SEC’s recently amended definition. A copy of the proposed rule can be found here.
At the Practising Law Institute’s Annual Institute on Securities Regulation, a number of updates were provided by the Staff regarding ongoing initiatives within the Office of Small Business. The Staff reviewed the recently adopted amendments to the definition of “smaller reporting company” (SRC) and directed practitioners to its Small Entity Compliance Guide. The Staff also noted that a number of Compliance & Disclosure Interpretations were recently updated to address changes brought about by the SRC amendments. The C&DIs also were recently reorganized and are now grouped by category, making these much easier to navigate. Below, we highlight a few of the C&DIs relating to SRC status:
Question: An issuer files its 2019 Form 10-K using the disclosure permitted for smaller reporting companies under Regulation S-K. The cover page of the Form 10-K indicates that the issuer will no longer qualify to use the smaller reporting company disclosure for 2020 because its public float exceeded $250 million at the end of its second fiscal quarter in 2019. The issuer proposes to rely on General Instruction G(3) to incorporate by reference executive compensation and other disclosure required by Part III of Form 10-K into the 2019 Form 10-K from its definitive proxy statement to be filed not later than 120 days after its 2019 fiscal year end. May the issuer use smaller reporting company disclosure in this proxy statement, even though it does not qualify to use smaller reporting company disclosure for 2020?
Answer: Yes, because the issuer could have used the smaller reporting company disclosure for Part III of its 2019 Form 10-K if it had not used General Instruction G(3) to incorporate that information by reference from the definitive proxy statement. [November 7, 2018]
Question: Could a company with a fiscal year ended December 31, 2018 be both a “smaller reporting company,” as defined in Item 10(f), and an “accelerated filer,” as defined in Rule 12b-2 under the Exchange Act, for filings due in 2019, if it was an accelerated filer with respect to filings due in 2018 and had a public float of $80 million on the last business day of its second fiscal quarter of 2018?
Answer: Yes. A company must look to the definitions of “smaller reporting company” and “accelerated filer” to determine if it qualifies as a smaller reporting company and non-accelerated filer for each year. This company will qualify as a smaller reporting company for filings due in 2019 because on the last business day of its second fiscal quarter of 2018 it had a public float below $250 million. However, because the company was an accelerated filer with respect to filings due in 2018, it is required to have less than $50 million in public float on the last business day of its second fiscal quarter in 2018 to exit accelerated filer status for filings due in 2019, as provided in paragraph (3)(ii) of the definition of “accelerated filer” in Rule 12b-2. This company had a public float of $80 million on the last business day of its second fiscal quarter of 2018, and therefore is unable to transition to non-accelerated filer status. As this example illustrates, a company can be both an accelerated filer and a smaller reporting company at the same time. Such a company may use the scaled disclosure rules for smaller reporting companies in its annual report on Form 10-K, but the report is due 75 days after the end of its fiscal year and must include the Sarbanes-Oxley Section 404 auditor attestation report described in Item 308(b) of Regulation S-K. [November 7, 2018]
Question: Will a company that does not qualify as a smaller reporting company for filings due in a particular year be able to qualify as a smaller reporting company if its public float or annual revenues later decrease?
Answer: Once a reporting company determines that it does not qualify as a smaller reporting company, it will remain unqualified unless when making a subsequent annual determination either:
- It determines that its public float is less than $200 million; or
- It determines that:
- for any threshold that it previously exceeded, it is below the subsequent annual determination threshold (public float of less than $560 million and annual revenues of less than $80 million); and
- for any threshold that it previously met, it remains below the initial determination threshold (public float of less than $700 million or no public float and annual revenues of less than $100 million). See Amendments to the Smaller Reporting Company Definition – Compliance Guide for more information.
Example: A company has a December 31 fiscal year end. Its public float as of June 28, 2019 was $710 million and its annual revenues for the fiscal year ended December 31, 2018 were $90 million. It therefore does not qualify as a smaller reporting company. At the next determination date, June 30, 2020, it will remain unqualified unless it determines that its public float as of June 30, 2020 was less than $560 million and its annual revenues for the fiscal year ended December 31, 2019 remained less than $100 million. [November 7, 2018]
The Staff also provided some insights regarding reliance on exempt offering alternatives. For the twelve months ended June 30, 2018, approximately $1.2 trillion was raised in Rule 506 offerings, of which nearly 97% was raised in reliance on Rule 506(b) offerings. Most of this was attributable to offerings by funds, although operating company offerings accounted for approximately $175 billion. The Staff has noted a slow but steady increase in the number of Rule 506(c) transactions. Regulation A offering activity also has been robust. For the three years from effectiveness of the amendments to Regulation A through September 30, 2018, there were 257 offerings qualified and nearly $1.3 billion raised in Regulation A offerings. Real estate and REIT offerings account for the largest percentage of these transactions. The Staff noted it is currently working on recommendations in order to implement the rulemaking mandate to make Regulation A available to reporting companies. Finally, the Staff also is working on a review of exempt offering alternatives that would, among other things, seek to harmonize the requirements for various offering exemptions.