SUMMARY: We are adopting amendments to the definition of “smaller reporting company” as
summary
In September 2018, the SEC expanded the definition of 'smaller reporting company' to include issuers with public float under $250 million or annual revenues under $100 million plus public float under $700 million, reducing compliance costs by an estimated $66–67 million annually and over 500,000 reporting hours while preserving investor protections and accelerated filer thresholds.
paragraph
The SEC finalized amendments effective September 10, 2018, expanding eligibility for smaller reporting company (SRC) status to companies with a public float below $250 million or annual revenues below $100 million and either no public float or a public float below $700 million. The changes increased the revenue threshold for omitting acquired business financial statements under Regulation S-X from $50 million to $100 million and preserved existing public float thresholds for accelerated and large accelerated filer status. The amendments are projected to reduce external compliance costs by $66–67 million annually and save over 500,000 reporting hours over three years, with no significant adverse effects on market liquidity or investor protections.
narrative
In September 2018, the SEC adopted final amendments to expand the definition of 'smaller reporting company' (SRC) to include issuers with a public float under $250 million, or those with annual revenues under $100 million and either no public float or a public float under $700 million, significantly broadening eligibility for scaled disclosure requirements. The changes, effective immediately, updated key provisions in Regulation S-K and Regulation S-X, including raising the revenue threshold for omitting audited financial statements for acquired businesses from $50 million to $100 million. While the SEC preserved the existing public float thresholds for accelerated and large accelerated filer status, it directed staff to explore further reforms to reduce the number of registrants classified as accelerated filers. The amendments were supported by industry commenters and projected to save between $66 million and $67 million in annual external compliance costs and over 500,000 reporting hours over three years, primarily through reduced burdens on Form 10-K and 10-Q filings. Empirical analysis indicated modest audit fee savings and no material adverse effects on market liquidity or investor protections. The rule change aimed to promote capital formation and reduce regulatory burdens on smaller firms without compromising transparency. Approximately 966 to 1,181 additional companies became eligible for SRC status, enhancing access to capital markets for mid-sized issuers.
Classified unclassified. No EDGAR filing fingerprint (criminal/DOJ-side scheme). detection rule →
Statutes
15 U.S.C. 77a15 U.S.C. 78a15 U.S.C. 77b(a)15 U.S.C. 78c(a)44 U.S.C. 350144 U.S.C. 3507(d)5 U.S.C. 6015 U.S.C. 5535 U.S.C. 60417 CFR 230.40517 CFR 240.12b-217 CFR 210.3-0517 CFR 229.10(f)17 CFR 239.1117 CFR.239.1317 CFR 239.2517 CFR 239.16b17 CFR 239.1817 CFR 249.21017 CFR 249.308a17 CFR 249.31017 CFR 210.1-0117 CFR 229.1017 CFR 229.402(l)17 CFR 229.40417 CFR 229.110117 CFR 240.10b-517 CFR 230.40817 CFR 240.12b-2017 CFR 229.101(e)17 CFR 210.8-0417 CFR 229.407(d)17 CFR 229.503(d)17 CFR 230.15717 CFR 240.0-Sections 11, 12, and 17 of the Securities ActSections 11, 12, and 17 of the Securities ActSections 11, 12, and 17 of the Securities ActSection 2(b) of the Securities ActSection 13(a) or 15(d) of the Securities Exchange ActSection 13(a) or 15(d) of the Securities Exchange ActRule 12b-2Rule 3-05Rule 3-05(b)Rule 10b-5Rule 12b-20Rule 8-04Rule 0-10(a)
Parties
amendments to the definition of smaller reporting companyamy reischauerfinal rulesfurther informationjennifer riegelqualifying as a smaller reporting companySecurities and Exchange Commission
Keywords
public floatpublicmillionfloatregistrantsless millionsrcaccelerated filerseedefinitionlessacceleratedfloat lessdisclosurefiler
Extracted insights
Dollar amounts 50
- $98.70B $98.7 billion ≥$1B
- $96.20B $96.2 billion ≥$1B
- $40.10B $40.1 billion ≥$1B
- $700.00M $700 million $100M–$1B
- $560.00M $560 million $100M–$1B
- $500.00M $500 million $100M–$1B
- $480.10M $480.1 million $100M–$1B
- $317.70M $317.7 million $100M–$1B
- $279.00M $279 million $100M–$1B
- $250.00M $250 million $100M–$1B
- $250.00M $250 Million $100M–$1B
- $220.00M $220 million $100M–$1B
Entities 7
- company amendments to the definition of smaller reporting company
- person amy reischauer
- person final rules
- person further information
- person jennifer riegel
- company qualifying as a smaller reporting company
- agency Securities and Exchange Commission
Triples 6
- Securities and Exchange Commission Are Adopting Amendments to the Definition of Smaller Reporting Company
- Final Rules Are Effective September 10, 2018
- Amy Reischauer Is Contact For Further Information
- Jennifer Riegel Is Contact For Further Information
- Chairman Has Directed Staff to Formulate Recommendations to the Commission
- Qualifying as a Smaller Reporting Company Will Not Make Registrant a Non-Accelerated Filer
PDF
Text layers
Extracted body text (258,062c)
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Conformed to Federal Register Version
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 230, 239, 240, and 249
[Release Nos. 33-10513; 34-83550; File No. S7-12-16]
RIN 3235-AL90
SMALLER REPORTING COMPANY DEFINITION
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
SUMMARY: We are adopting amendments to the definition of “smaller reporting company” as
used in our rules and regulations. The amendments expand the number of registrants that qualify
as smaller reporting companies and are intended to reduce compliance costs for these registrants
and promote capital formation, while maintaining appropriate investor protections. We are
amending the definition of “smaller reporting company” to include registrants with a public float
of less than $250 million, as well as registrants with annual revenues of less than $100 million
for the previous year and either no public float or a public float of less than $700 million. We
also are amending other rules and forms in light of the new definition of “smaller reporting
company,” including amendments to the definitions of “accelerated filer” and “large accelerated
filer” to preserve the existing thresholds in those definitions. Qualifying as a “smaller reporting
company” will no longer automatically make a registrant a non-accelerated filer. The Chairman,
however, has directed the staff to formulate recommendations to the Commission for possible
additional changes to the “accelerated filer” definition that, if adopted, would have the effect of
reducing the number of registrants that qualify as accelerated filers.
DATES: The final rules are effective September 10, 2018.
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FOR FURTHER INFORMATION CONTACT: Amy Reischauer or Jennifer Riegel, Office
of Small Business Policy, Division of Corporation Finance, at (202) 551-3460, U.S. Securities
and Exchange Commission, 100 F Street, NE, Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR 230.405
(“Rule 405”) and Forms S-1, 1 S-3, 2 S-4, 3 S-8, 4 and S-11 5 under the Securities Act of 1933
(“Securities Act”); 6 17 CFR 240.12b-2 (“Rule 12b-2”) and Forms 10, 7 10-Q, 8 and 10-K 9 under
the Securities Exchange Act of 1934 (“Exchange Act”); 10 17 CFR 210.3-05 (“Rule 3-05” of
Regulation S-X); 11 and 17 CFR 229.10(f) (“Item 10(f)” of Regulation S-K). 12
1
17 CFR 239.11.
2
17 CFR.239.13.
3
17 CFR 239.25.
4
17 CFR 239.16b.
5
17 CFR 239.18.
6
15 U.S.C. 77a et seq.
7
17 CFR 249.210.
8
17 CFR 249.308a.
9
17 CFR 249.310.
10
15 U.S.C. 78a et seq.
11
17 CFR 210.1-01 through 210.12-29.
12
17 CFR 229.10 through 229.1208.
2
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Table of Contents
I. Introduction ............................................................................................................................. 5
II. Final Amendments ................................................................................................................... 9
A. Amendments to Smaller Reporting Company Definition................................................ 9
1. Public Float Test ......................................................................................................... 12
2. Revenue Test .............................................................................................................. 18
B. Amendments to Rule 3-05(b)(2)(iv) of Regulation S-X ................................................ 24
C. Amendments to Accelerated Filer and Large Accelerated Filer Definitions ................. 25
1. Proposed Amendments ............................................................................................... 25
2. Comments ................................................................................................................... 27
3. Final Amendments ...................................................................................................... 30
III. Other Matters ......................................................................................................................... 32
IV. Economic Analysis ................................................................................................................ 32
A. Baseline .......................................................................................................................... 33
B. Potential Economic Effects ............................................................................................ 38
1. Introduction ................................................................................................................ 38
2. Impact on Eligibility for Smaller Reporting Company Status ................................... 42
3. Estimation of Potential Costs and Benefits ................................................................ 46
4. Affiliated Ownership and Adverse Selection ............................................................. 57
5. Effects on Efficiency, Competition and Capital Formation ....................................... 60
C. Possible Alternatives ...................................................................................................... 61
V. Paperwork Reduction Act ...................................................................................................... 64
A. Background .................................................................................................................... 64
B. Summary of the Final Amendments .............................................................................. 65
C. Summary of Comment Letters ....................................................................................... 67
D. Revisions to Burden and Cost Estimates ....................................................................... 68
1. Form 10-K .................................................................................................................. 69
2. Form 10-Q .................................................................................................................. 70
3. Form 8-K .................................................................................................................... 71
4. Schedule 14A .............................................................................................................. 72
5. Schedule 14C .............................................................................................................. 72
6. Form 10....................................................................................................................... 73
7. Form S-1 ..................................................................................................................... 74
8. Form S-3 ..................................................................................................................... 74
3
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9. Form S-4 ..................................................................................................................... 75
10. Form S-11 ................................................................................................................... 76
VI. Final Regulatory Flexibility Analysis.................................................................................... 77
A. Need for, and Objectives of, the Final Rules ................................................................. 77
B. Significant Issues Raised by Public Comments ............................................................. 78
C. Small Entities Subject to the Final Rules ....................................................................... 82
D. Projected Reporting, Recordkeeping and Other Compliance Requirements ................. 83
E. Agency Action to Minimize Effect on Small Entities ................................................... 84
VII. Statutory Amendments and Text of Final Rules ................................................................... 86
4
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I. Introduction
On June 27, 2016, the Commission proposed amendments that would increase the
financial thresholds in the “smaller reporting company” (“SRC”) definition and would have the
effect of expanding the number of companies that benefit from the scaled disclosure
accommodations available to SRCs.13 In developing final rules, we considered comment letters
received in response to the Proposing Release, 14 as well as recommendations made by the
Securities and Exchange Commission Advisory Committee on Small and Emerging Companies
(“ACSEC”) 15 and the SEC Government-Business Forum on Small Business Capital Formation
(“Small Business Forum”). 16 The Commission last revised the SRC definition in 2008. 17 Our
13
See Amendments to Smaller Reporting Company Definition, Release No. 33-10107 (Jun. 27, 2016) [81 FR
43130 (Jul. 1, 2016)] (“Proposing Release”). As the Commission noted in the Proposing Release, raising the
financial thresholds in the SRC definition would be responsive to the Fixing America’s Surface Transportation
Act of 2015 (“FAST Act”) because it would reduce the burden on the specified registrants by increasing the
number of registrants eligible for scaled disclosure. See Pub. L. No. 114-94, 129 Stat. 1312 (2015).
14
The comment letters received in response to the Proposing Release are available at
https://www.sec.gov/comments/s7-12-16/s71216.htm.
15
In September 2015 and March 2013, the ACSEC recommended revising the SRC definition to include
registrants with a public float of up to $250 million. The recommendations made by ACSEC in March 2013 also
included a recommendation to revise the SRC definition for registrants that are unable to calculate their public
float to include registrants with less than $100 million in annual revenues. ACSEC Recommendations about
Expanding Simplified Disclosure for Smaller Issuers (Sept. 23, 2015), available at
https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-expanding-simplified-disclosure-for-smaller-
issuers.pdf and ACSEC Recommendations Regarding Disclosure and Other Requirements for Smaller Public
Companies (Mar. 21, 2013), available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-
032113-smaller-public-co-ltr.pdf. Both of these recommendations also included a recommendation that the
Commission revise the “accelerated filer” definition to include registrants with a public float of $250 million or
more, but less than $700 million. The accelerated filer definition currently includes registrants with a public
float of $75 million or more, but less than $700 million. See Exchange Act Rule 12b-2. See Section II.C for a
discussion of the accelerated filer definition.
16
The 2017 Small Business Forum recommended that the SRC definition be revised to include registrants with a
public float of less than $250 million or registrants with annual revenues of less than $100 million, excluding
large accelerated filers. See Final Report of the 2017 SEC Government Business Forum on Small Business
Capital Formation (Mar. 2018), available at https://www.sec.gov/files/gbfor36.pdf. Registrants with a public
float of $700 million or more generally qualify as large accelerated filers. See Exchange Act Rule 12b-2. Prior
Small Business Forums made the same or similar recommendations. Final Small Business Forum reports are
available at https://www.sec.gov/info/smallbus/sbforumreps.htm. Information about the Small Business Forum is
available at http://www.sec.gov/info/smallbus/sbforum.shtml. These recommendations also included a
recommendation that the Commission revise the “accelerated filer” definition consistent with the recommended
changes to the SRC definition. See Section II.C for a discussion of the accelerated filer definition.
5
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amendments reflect the need to solicit input and retrospectively review our rules in order to
determine whether they are outdated or are not functioning as intended. Today, we are amending
the SRC definition in an effort to promote capital formation and reduce compliance costs for
specified registrants by expanding the number of registrants that are eligible to provide scaled
disclosure while maintaining appropriate investor protections.
We are adopting the amendments generally as proposed with two changes. As proposed,
we are amending the SRC definition to include registrants with a public float of less than $250
million, as well as registrants with annual revenues of less than $100 million for the previous
year and no public float. In a change from the proposal, the SRC definition in the final rules also
includes registrants with annual revenues of less than $100 million for the previous year and a
public float of less than $700 million. Specifically, we are amending Securities Act Rule 405,
Exchange Act Rule 12b-2, and Item 10(f) of Regulation S-K to effect these changes. In another
change from the proposal, we are amending Rule 3-05(b)(2)(iv) of Regulation S-X to increase
the revenue threshold under which certain acquirers may omit the earliest of the three fiscal years
of audited financial statements of certain targets. Finally, we are adopting amendments to the
“accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2, as
proposed, to preserve the application of the current public float thresholds in those definitions. 18
The Chairman, however, has directed the staff to formulate recommendations to the Commission
for possible additional changes to the “accelerated filer” definition that, if adopted, would have
17
See Smaller Reporting Company Regulatory Relief and Simplification, Release No. 33-8876 (Dec. 19, 2007) [73
FR 934 (Jan. 4, 2008)] (“SRC Adopting Release”).
18
The definitions of accelerated filer and large accelerated filer are based on public float, but currently contain a
provision excluding registrants that are eligible to use the SRC requirements in Regulation S-K for their annual
and quarterly reports. As a result, raising the SRC public float threshold without eliminating that provision
effectively would raise the accelerated filer public float threshold. See Section II.C for a discussion of the
amendments to the accelerated filer and large accelerated filer definitions.
6
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the effect of reducing the number of registrants that qualify as accelerated filers in order to
promote capital formation by reducing compliance costs for certain registrants, while
maintaining appropriate investor protections. As part of the staff’s consideration of possible
recommended amendments, the Chairman has directed the staff to consider, among other things,
the historical and current relationship between the SRC and “accelerated filer” definitions. The
staff has begun work to prepare these recommendations.
Consistent with the proposal, we are not amending any of the scaled disclosure
accommodations available to SRCs in Regulation S-K and Regulation S-X.19 SRCs may comply
with the scaled disclosure requirements available to them on an item-by-item basis.20 The following
table summarizes these scaled disclosure accommodations.21
Regulation S-K
Item Scaled Disclosure Accommodation
101 − Description of Business May satisfy disclosure obligations by describing the development of the
registrant’s business during the last three years rather than five years. Business
development description requirements are less detailed than disclosure
requirements for non-SRCs.
201 − Market Price of and Stock performance graph not required.
Dividends on the Registrant’s
Common Equity and Related
19
Several of these scaled disclosure accommodations, such as the scaled executive compensation disclosures under
Item 402(l) through (r) of Regulation S-K [17 CFR 229.402(l) through (r)], are similar to the disclosure
accommodations available to an emerging growth company (“EGC”). See Securities Act Rule 405 [17 CFR
230.405] and Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. EGCs also are exempt from the Sarbanes-Oxley Act
Section 404(b) auditor attestation of internal control over financial reporting. For a discussion of scaled
disclosure accommodations available to EGCs, see Business and Financial Disclosure Required by Regulation S-
K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (April 22, 2016)] (“Regulation S-K Concept Release”).
20
See SRC Adopting Release, 73 FR at 940. Where a disclosure requirement applicable to SRCs is more stringent
than the corresponding requirement for non-SRCs, however, SRCs must comply with the more stringent
standard. The SRC Adopting Release identified Item 404 of Regulation S-K [17 CFR 229.404] as the only
instance in Regulation S-K in which the disclosure requirements applicable to SRCs could be more stringent.
21
In addition to the accommodations itemized in the table, SRCs using Form S-1 may incorporate by reference
information filed prior and subsequent to the effectiveness of the registration statement if they meet the
eligibility requirements in General Instruction VII of Form S-1. See Item 12(b) of Form S-1; see also
Simplification of Disclosure Requirements for Emerging Growth Companies and Forward Incorporation by
Reference on Form S-1 for Smaller Reporting Companies, Release No. 33-10003 (Jan. 19, 2016) [81 FR 2743
(Jan. 19, 2016)].
7
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Regulation S-K
Item Scaled Disclosure Accommodation
Stockholder Matters
301 – Selected Financial Data Not required.
302 – Supplementary Financial Not required.
Information
303 – Management’s Discussion Two-year MD&A comparison rather than three-year comparison.
and Analysis of Financial Two year discussion of impact of inflation and changes in prices rather than
Condition and Results of three years.
Operations (“MD&A”)
Tabular disclosure of contractual obligations not required.
305 – Quantitative and Not required.
Qualitative Disclosures About
Market Risk
402 – Executive Compensation Three named executive officers rather than five.
Two years of summary compensation table information rather than three.
Not required:
• Compensation discussion and analysis.
• Grants of plan-based awards table.
• Option exercises and stock vested table.
• Pension benefits table.
• Nonqualified deferred compensation table.
• Disclosure of compensation policies and practices related to risk
management.
• Pay ratio disclosure.
404 – Transactions With Related Description of policies/procedures for the review, approval or ratification of
Persons, Promoters and Certain related party transactions not required.
Control Persons 22
407 – Corporate Governance Audit committee financial expert disclosure not required in first annual report
Compensation committee interlocks and insider participation disclosure not
required.
Compensation committee report not required.
503 – Prospectus Summary, Risk No ratio of earnings to fixed charges disclosure required.
Factors and Ratio of Earnings to No risk factors required in Exchange Act filings.
Fixed Charges
601 – Exhibits Statements regarding computation of ratios not required.
22
Item 404 also contains the following expanded disclosure requirements applicable to SRCs: (1) rather than a flat
$120,000 disclosure threshold, the threshold is the lesser of $120,000 or 1% of total assets, (2) disclosures are
required about underwriting discounts and commissions where a related person is a principal underwriter or a
controlling person or member of a firm that was or is going to be a principal underwriter, (3) disclosures are
required about the issuer’s parent(s) and their basis of control, and (4) an additional year of Item 404 disclosure
is required in filings other than registration statements.
8
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Regulation S-X
Rule Scaled Disclosure
8-02 – Annual Financial Two years of income statements rather than three years.
Statements Two years of cash flow statements rather than three years.
Two years of changes in stockholders’ equity statements rather than three years.
8-03 – Interim Financial Permits certain historical financial data in lieu of separate historical financial
Statements statements of equity investees.
8-04 – Financial Statements of Maximum of two years of acquiree financial statements rather than three years.
Businesses Acquired or to Be
Acquired
8-05 – Pro forma Financial Fewer circumstances under which pro forma financial statements are required.
Information
8-06 – Real Estate Operations Maximum of two years of financial statements for acquisition of properties from
Acquired or to Be Acquired related parties rather than three years.
8-08 – Age of Financial Less stringent age of financial statements requirements.
Statements
II. Final Amendments
A. Amendments to Smaller Reporting Company Definition
We are adopting amendments to the SRC definition to expand the number of registrants
that qualify as SRCs and thereby benefit from scaled disclosure requirements. These
amendments will enable a registrant to qualify as a SRC based on a public float test or a revenue
test. 23
Under the final rules, SRCs generally 24 are registrants with:
• a public float of less than $250 million; 25 or
23
See Item 10(f)(1)(i) and (ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
24
Consistent with the current definition, the SRC definition in the final rules specifically excludes investment
companies, asset-backed issuers (as defined in Item 1101 of Regulation AB [17 CFR 229.1101]) and majority-
owned subsidiaries of a parent that is not a SRC. See Item 10(f)(1) of Regulation S-K; Securities Act Rule 405;
Exchange Act Rule 12b-2. Lower public float and revenue thresholds apply to registrants that determined that
they did not qualify as SRCs in the prior year, but are eligible to transition to SRC status. See Item 10(f)(2)(iii)
of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. See also Section II.A for a discussion of
the amendments to these thresholds.
25
Consistent with the current definition, public float is computed under the final rules by multiplying the aggregate
worldwide number of shares of a registrant’s voting and non-voting common equity held by non-affiliates by the
9
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• annual revenues of less than $100 million 26 and either no public float 27 or a public
float of less than $700 million. 28
As proposed, the final rules increase the threshold for determining SRC status based on
public float from $75 million to $250 million. A registrant that qualifies as a SRC under the
public float test would qualify regardless of its revenues. 29 In a change from the proposal, the
final rules will expand the SRC definition to include registrants with a public float of less than
$700 million, if they also have annual revenues of less than $100 million.30 The following table
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. See Item 10(f)(1)(i) of Regulation S-K; Securities Act Rule 405;
Exchange Act Rule 12b-2. The determination of public float is premised on the existence of a public trading
market for the issuer’s equity securities. Therefore, an entity with equity securities outstanding but not trading in
any public trading market would not be able to qualify on the basis of a public float test. In contrast to public
float, market capitalization reflects the value of a registrant’s voting and non-voting common equity held by all
holders, whether affiliates or non-affiliates.
A reporting registrant calculates its public float as of the last business day of its most recently completed second
fiscal quarter. See Item 10(f)(2)(i) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. A
registrant filing its initial registration statement under the Securities Act or Exchange Act calculates its public
float as of a date within 30 days of the date the registration statement is filed by multiplying the aggregate
worldwide number of shares of its voting and non-voting common equity held by non-affiliates before the
registration plus, in the case of a Securities Act registration statement, the number of such shares included in the
registration statement by the estimated public offering price of the shares. See Item 10(f)(2)(ii)(A) of Regulation
S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
26
Consistent with the current definition, annual revenues are as of the most recently completed fiscal year for
which audited financial statements are available. Item 10(f)(2)(i)(B) and (f)(2)(ii)(B) of Regulation S-K;
Securities Act Rule 405; Exchange Act Rule 12b-2.
27
See Item 10(f)(1)(ii)(A) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. A registrant
may have no public float because it has no public common equity outstanding or no market price for its common
equity exists. Based on data compiled by our Division of Economic and Risk Analysis (“DERA”), in calendar
year 2016, approximately 21.5% of registrants that qualified as SRCs (and 7.7% of all registrants) had no public
float. The estimated number of registrants with no public float here and elsewhere in this release may be over-
inclusive due to the difficulty of ascertaining this status based on data extracted from registrants’ filings. See
note 137 for a discussion of the methodology used by the staff to obtain this data.
28
See Item 10(f)(1)(ii)(B) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
29
See Instruction to Paragraph (f) of Item 10 of Regulation S-K; Instruction to definition of “smaller reporting
company” in Securities Act Rule 405; Instruction to definition of “smaller reporting company” in Exchange Act
Rule 12b-2.
30
See Item 10(f)(1)(ii)(B) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
10
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summarizes the amendments to the SRC definition for a registrant making an initial
determination under the amendments 31 or a current SRC seeking to continue to qualify.
Criteria Current Definition Revised Definition
Public Float Public float of less than $75 Public float of less than $250 million
million
Revenues Less than $50 million of annual Less than $100 million of annual revenues and
revenues and no public float
• no public float, or
• public float of less than $700 million
Consistent with the current definition, and as proposed, under the final rules, a registrant
that determines that it does not qualify as a SRC under the initial qualification thresholds will
remain unqualified unless and until it determines that it meets one or more lower qualification
thresholds. The subsequent qualification thresholds, set forth in the table below, are set at 80%
of the initial qualification thresholds. 32
31
For purposes of the first fiscal year ending after effectiveness of the amendments, a registrant will qualify as a
SRC if it meets one of the initial qualification thresholds in the revised definition as of the date it is required to
measure its public float or revenues (the “measurement date”), even if such registrant previously did not qualify
as a SRC. See Item 10(f)(2)(i) and (ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2 for
additional information about the measurement date. For example, a registrant with a September 30 fiscal year
end that previously was not a SRC and that had a public float of $220 million as of March 30, 2018 (the last
business day of its most recently completed second quarter) will qualify as a SRC for the fiscal year ending
September 30, 2018.
32
See Item 10(f)(2)(iii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
11
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Criteria 33 Current Definition Revised Definition
Public Float Public float of less than $50 Public float of less than $200 million, if it previously
million had $250 million or more of public float 34
Revenues Less than $40 million of annual Less than $80 million of annual revenues, if it
revenues and no public float previously had $100 million or more of annual
revenues; and
Less than $560 million of public float, if it previously
had $700 million or more of public float.
1. Public Float Test
a. Proposed Amendments
As proposed, a registrant with a public float of less than $250 million would qualify as a
SRC.35 Consistent with the current definition, the Commission proposed that once a registrant
does not qualify as a SRC, 36 it would remain unqualified until its public float falls below another,
lower threshold. Specifically, the Commission proposed amending the rules to provide that a
registrant that previously did not qualify as a SRC would qualify as a SRC if it has a public float
of less than $200 million as of its most recently completed second fiscal quarter. 37
33
A registrant that does not qualify as a SRC may subsequently seek to qualify under either test.
34
A registrant that previously was not a SRC that subsequently qualifies based on a public float of less than $200
million will qualify as a SRC regardless of its revenues. See Instruction to Paragraph (f) of Item 10 of
Regulation S-K; Instruction to definition of “smaller reporting company” in Securities Act Rule 405; Instruction
to definition of “smaller reporting company” in Exchange Act Rule 12b-2.
35
See Proposed Item 10(f)(1)(i) and (ii) of Regulation S-K; Proposed Securities Act Rule 405; Proposed Exchange
Act Rule 12b-2.
36
This applies either upon an initial determination in the case of registrants filing an initial registration statement,
or as of an annual determination in the case of reporting registrants.
37
The proposed $200 million subsequent qualification threshold represents 80% of the proposed $250 million
initial qualification threshold. Under the current definition, a registrant that previously determined that it did not
qualify as a SRC because its public float exceeded the current $75 million threshold may qualify based on a
subsequent determination if it has a public float of less than $50 million. That registrant would then remain a
SRC until its public float again exceeded $75 million. Consistent with the current definition, under the proposed
definition, a registrant that subsequently qualifies under the $200 million public float threshold would remain
qualified until its public float exceeds $250 million.
12
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b. Comments
Most commenters addressed the overall costs and benefits of expanding the pool of
registrants eligible for SRC status. Many of these commenters expressed general support for the
proposed amendments to the SRC definition.38 Several of these commenters stated that the
proposed definition appropriately considers the objectives of capital formation and investor
protection 39 and promotes capital formation or liquidity for smaller registrants. 40
On the other hand, three commenters generally opposed the proposed amendments to the
SRC definition or generally opposed accommodations based on company size. 41 One of these
commenters stated that the accommodations for SRCs exist solely for the expedience of issuers
and must be balanced against the cost to market participants who have less information from
which to draw conclusions. 42 Another of these commenters stated that it was concerned that the
scaled disclosure regime for SRCs may prevent investors from receiving all of the material
38
See Letter from Acorda Therapeutics, Inc. et al, August 23, 2016 (“Acorda, et al”); Letter from Advanced
Medical Technology Association, August 20, 2016 (“AMTA”); Letter from Biotechnology Innovation
Organization, August 30, 2016 (“BIO”); Letter from BDO USA, LLP, August 29, 2016 (“BDO”); Letter from
Center for Audit Quality and Counsel of Institutional Investors, August 30, 2016 (“CAQ/CII”); Letter from
CONNECT, August 4, 2016 (“CONNECT”); Letter from Corporate Governance Coalition for Investor Value,
August 30, 2016 (“Coalition”); Letter from Independent Community Bankers of America, August 29, 2016
(“ICBA”); Letter from MidSouth Bancorp, Inc., August 24, 2016 (“MidSouth”); Letter from Nasdaq, August 30,
2016 (“Nasdaq”); Letter from NYSE Group, July 25, 2016 (“NYSE”); Letter from National Venture Capital
Association, August 25, 2016 (“NVCA”); Letter from Seneca Foods Corporation, August 2, 2016 (“Seneca”);
and Letter from The Small Business Financial and Regulatory Affairs Committee of the Institute of Management
Accountants, August 24, 2016 (“IMA”).
39
See AMTA; BDO; BIO; Coalition; ICBA.
40
See AMTA; BDO; BIO; Coalition; ICBA; NVCA; and NYSE. See also CONNECT (supporting the proposal to
amend the SRC definition to encompass a wider range of emerging businesses for which regulatory costs present
a significant burden to growth).
41
See Letter from Cable Car Capital LLC, June 28, 2016 (“Cable Car”); Letter from CFA Institute, August 30,
2016 (“CFA Institute”); Letter from Ernst & Young LLP, September 8, 2016 (“EY”).
42
See Cable Car.
13
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information needed to conduct a thorough analysis. 43 This commenter also noted that allowing
different sized entities to use different disclosure regimes would signal to investors that the
entities lack comparable quality. 44 The third commenter recommended that the Commission
consider adopting disclosure objectives that would mitigate the need to scale disclosure
requirements based on the size or nature of a reporting entity. 45
Two commenters stated that the proposed amendments would potentially provide only
marginal cost savings. 46 One of these commenters did not support the proposal and instead
encouraged the Commission to continue its review of scaled disclosure to determine which
disclosures are repetitive and should be deleted and which should be retained. 47 The other
commenter stated that the proposed change and the resulting reduced disclosure requirements for
additional registrants would have a minimal effect on its annual compliance costs. 48
Many commenters expressed support for the proposed increases in both the public float
and revenue thresholds. 49 One commenter supported the amendments and viewed them as an
acknowledgement that the current public float threshold is overly restrictive. 50 Another
43
See CFA Institute (noting that “the pension benefits table and a disclosure of compensation policies and practices
related to risk management (both of which can be deleted under scaled disclosure) are more vital than certain
other disclosures”).
44
See CFA Institute.
45
See EY (noting that it “previously recommended that the Commission consider adopting disclosure objectives
that would mitigate the need for scaling disclosure requirements based on the size or nature of a reporting entity”
and citing to its letter dated July 21, 2016 responding to the SEC’s concept release on business and financial
disclosures required by Regulation S-K (Release No. 33-10064; File No. S7-06-16)).
46
See CFA Institute; and Seneca.
47
See CFA Institute.
48
See Seneca.
49
See Acorda et al; AMTA; BDO; BIO; CAQ/CII; CONNECT; Coalition; ICBA; MidSouth; Nasdaq; NVCA;
NYSE; Seneca; and IMA.
50
See Letter from Council of State Bioscience Associations, August 26, 2016 (“CSBA”) (stating that the
Commission should similarly reform the accelerated filer definition and institute an alternative revenue test for
both the SRC and accelerated filer definitions).
14
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commenter specifically stated that it supported the proposed approach to adjusting the thresholds
rather than simply relying on inflation adjustments. 51
Two commenters recommended that the Commission review the SRC definition
periodically to determine whether the thresholds being used remain appropriate. 52 One of these
commenters specifically recommended that the Commission revisit the thresholds after three
years. 53
c. Final Amendments
After considering the comments received, as well as the recommendations made by the
ACSEC 54 and the Small Business Forum, 55 consistent with the proposal, we are adopting
amendments to the SRC definition that will permit registrants with a public float of less than
$250 million to qualify as SRCs. 56 As is the case with the current definition, once a registrant
determines that it does not qualify as a SRC under the applicable thresholds, 57 it will not
subsequently qualify until its public float falls below another, lower threshold, set at 80% of the
initial qualification threshold. While we did not receive any comments on the subsequent
qualification thresholds, we continue to believe that these thresholds are necessary to avoid
situations in which registrants frequently enter and exit SRC status due to small fluctuations in
their public float and that the thresholds do not impose an undue burden on registrants seeking to
qualify for SRC status. Accordingly, we are amending the rules to permit a registrant that
51
See NYSE.
52
See CFA Institute; and Letter from Kermit Kubitz, August 31, 2016 (“Kubitz”).
53
See Kubitz.
54
See note 15.
55
See note 16.
56
See Item 10(f)(1)(i) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
57
This applies either upon an initial determination in the case of registrants filing an initial registration statement,
or as of an annual determination in the case of reporting registrants.
15
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previously did not qualify as a SRC because its public float was $250 million or more to qualify
as a SRC if it has a public float of less than $200 million, regardless of its revenues. 58
We are not revising the method of calculating public float, as suggested by one
commenter. 59 The staff is not aware of significant incidence of manipulation or stock price
volatility affecting qualification under the public float test. In addition, the method of calculating
public float is consistent with the existing rules and with the method of determining eligibility to
use Form S-3 or Form F-3 to register a primary offering. 60 This consistency will avoid additional
burdens or confusion for registrants and investors that may result if registrants were required to
calculate their public float in one manner for determining SRC status and in another manner for
Form S-3 or Form F-3 eligibility.
We believe that these amendments will promote capital formation through a modest
reduction in compliance costs for newly eligible SRCs while maintaining appropriate investor
protections. 61 In 2016, approximately 28% of registrants had less than $75 million in public
float, 62 compared to approximately 42% of registrants when the SRC definition was established. 63
58
See Item 10(f)(2)(iii)(A) and Instruction to Paragraph (f) of Item 10 of Regulation S-K; Securities Act Rule 405
and Instruction to definition of “smaller reporting company” in Securities Act Rule 405; Exchange Act Rule
12b-2 and Instruction to definition of “smaller reporting company” in Exchange Act Rule 12b-2. Consistent
with the current definition, under the amended definition, a registrant that subsequently qualifies under the $200
million public float threshold would remain qualified until its public float exceeds $250 million.
59
See Letter from Paul W. Zeller, July 18, 2016 (“Zeller”) (suggesting that the Commission, in the calculation of
public float, adopt a revenue test for thinly traded registrants to address price manipulation and volatility
concerns).
60
See Instructions I.B.1 and I.B.6 of Form S-3; Instructions I.B.1 and I.B.5 of Form F-3. Certain newly eligible
SRCs under the new definition will continue to be eligible to rely on Instruction I.B.1 of Form S-3 and Form F-3
to register primary offerings.
61
See Section IV.B.
62
Based on public float values disclosed by registrants in their Form 10-K filings, 2,072, or 28.0%, of the 7,395
registrants that filed a Form 10-K in 2016 reported having a public float of less than $75 million.
63
Approximately 4,976, or 41.8%, of the 11,898 registrants that filed Exchange Act annual reports in 2006 had a
public float of less than $75 million. See SRC Adopting Release. The release cites data from the Commission’s
EDGAR filing system and Thomson Financial (“Datastream”). The Datastream data included all registered
16
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Increasing the public float threshold to $250 million would have resulted in approximately 39%
of registrants qualifying as SRCs in 2016 based on their public float. 64
We believe the existing scaled disclosure accommodations have reduced compliance
costs for SRCs. 65 These amendments will extend those benefits to a broader pool of registrants,
consistent with the intent of the Commission when it adopted the SRC definition in 2007.66
Although the amendments will permit a broader group of registrants to make scaled disclosure to
their investors, we do not believe that this scaling of disclosure will detract substantially from the
investor protection objectives of our disclosure regime in light of the other protections available
under current law and regulations. First, the additional registrants that will qualify for scaled
disclosure, like all registrants, will remain liable for their disclosures 67 and, in addition to the
disclosure expressly required by the rules, will continue to be required to provide such further
material information, if any, as may be necessary to make any required statements, in the light of
the circumstances under which they are made, not misleading. 68 Moreover, their disclosure also
will continue to be subject to the Division of Corporation Finance’s filing review process. These
measures of investor protection will remain unchanged.
public firms trading on the New York Stock Exchange, the American Stock Exchange, the Nasdaq, the Over-the-
Counter Bulletin Board and the Pink Sheets and excluded closed end funds, exchange traded funds, American
depositary receipts and direct foreign listings.
64
Based on public float values disclosed by registrants in their Form 10-K filings, 2,851, or 38.6%, of the 7,395
registrants that filed a Form 10-K in 2016 reported having a public float of less than $250 million.
65
See Section IV.B.3.a.
66
See SRC Adopting Release, 73 FR at 934 and 942 (stating that the Commission was “adopting amendments to its
disclosure and reporting requirements…to expand the number of companies that qualify for its scaled disclosure
requirements for smaller reporting companies;” and “[w]e believe this standard is appropriately scaled in that it
reduces costs to smaller companies caused by unnecessary information requirements, consistent with investor
protection.”).
67
See, e.g., Sections 11, 12, and 17 of the Securities Act, Sections 10(b) and 18 of the Exchange Act, and
Exchange Act Rule 10b-5 [17 CFR 240.10b-5].
68
See Securities Act Rule 408 [17 CFR 230.408] and Exchange Act Rule 12b-20 [17 CFR 240.12b-20].
17
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2. Revenue Test
a. Proposed Amendments
As proposed, a registrant with no public float would qualify as a SRC if it had annual
revenues of less than $100 million during its most recently completed fiscal year. 69 Consistent
with the current definition, the Commission proposed that once a registrant determines that it
does not qualify as a SRC, 70 it would not subsequently qualify until its revenues fall below
another, lower threshold. Specifically the Commission proposed amending the rules to provide
that a registrant with no public float that previously determined that it did not qualify as a SRC
would qualify as a SRC if it had annual revenues of less than $80 million as of the relevant
measurement date. 71 The proposed $80 million subsequent qualification threshold would
maintain the 80% ratio that exists between the $50 million initial qualification threshold and $40
million subsequent qualification threshold in the current SRC definition.
The Proposing Release noted that the 2015 Small Business Forum recommended that the
SRC definition be revised to include, in addition to registrants with a public float of less than
$250 million, registrants with a public float of less than $700 million and annual revenues of less
than $100 million.72 The Proposing Release also solicited comment on whether the Commission
should revise the SRC definition to include an alternative revenue test.
69
See Proposed Item 10(f)(1)(ii)(A) of Regulation S-K; Proposed Securities Act Rule 405; Proposed Exchange Act
Rule 12b-2.
70
This applies either upon an initial determination in the case of registrants filing an initial registration statement,
or as of an annual determination in the case of reporting registrants.
71
Under the current definition, a registrant that previously determined that it did not qualify as a SRC because it
had no public float and its revenues exceeded the current $50 million threshold may qualify based on a
subsequent determination if it had annual revenues of less than $40 million. That registrant would then remain a
SRC until its revenues exceeded $50 million. Consistent with the current definition, under the proposed
definition, a registrant with no public float that subsequently qualifies under the $80 million revenue threshold
would remain qualified until its revenue exceeds $100 million.
72
See Proposing Release at text accompanying note 22.
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b. Comments
Many commenters recommended that the Commission add a revenue test to the SRC
definition for companies with a public float. 73 Several commenters stated that businesses below
$100 million in revenue are viewed by reasonable observers as “small.” 74 One commenter
believed that a revenue test would stimulate innovation and drive business growth. 75 Another
commenter stated that a revenue test would ensure that pre-revenue companies are not “forced to
divert investment funds…from science to compliance.” 76 Another commenter supported an
alternative revenue test for highly valued pre-revenue companies “to avoid stifling the
advancement” of these companies with costly compliance. 77 Two commenters suggested that we
adopt a revenue test without a limitation on the public float or market capitalization of the
company. 78 Another two commenters specifically recommended that the Commission adopt a
definition based on revenues of less than $100 million and a public float of less than $700
million, as recommended by the Small Business Forum. 79
73
See Acorda, et al (recommending a revenue test, stating that public float is largely a marker of future value but
paints an inaccurate picture of small businesses in the present); AMTA; BIO (stating that the Commission should
move away from its reliance on public float as the ultimate arbiter of company size); Letter from Calithera
Biosciences, August 8, 2016 (“Calithera”); CONNECT; CSBA; Nasdaq (recommending a well-crafted revenue
only threshold); NYSE (recommending a simple revenue test without a limitation on market capitalization); and
Zeller (recommending a revenue test for any issuers that are thinly traded). See also Section II.A.1.b for a
discussion of comments addressing the overall costs and benefits of expanding the pool of registrants eligible for
SRC status, including the proposed revision to expand the revenue threshold for registrants with no public float.
74
See Acorda, et al; BIO; and Calithera.
75
See BIO (stating that pre-revenue small businesses should remain focused on innovation and do not have the
capital to pay for expensive compliance requirements, and therefore allowing them to qualify as SRCs until they
generate revenue would stimulate innovation and drive business growth).
76
See Acorda, et al.
77
See AMTA.
78
See NYSE; and Nasdaq.
79
See BIO; and Calithera.
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c. Final Amendments
After considering the comments received as well as the recommendations made by the
ACSEC 80 and the Small Business Forum, 81 we are adopting the proposed amendments to the
revenue test of the SRC definition and expanding the revenue test to include certain registrants
with a public float. The definition in the final rules will include, in addition to registrants with a
public float of less than $250 million, registrants with annual revenues of less than $100 million
during their most recently completed fiscal year and either no public float (calculated as discussed
in Section II.A.1) or a public float of less than $700 million. 82 We are persuaded by commenters’
suggestions that it is appropriate to provide a measure by which a registrant with a public float
but limited revenues may qualify as a SRC. 83 This amended revenue test expands the proposed
revenue threshold for companies with no public float to permit registrants with a public float that
is less than $700 million to qualify based on their revenues. The $700 million public float
threshold included in this amended revenue test was recommended by two commenters 84 and the
Small Business Forum. 85 This change from the proposal permits some additional registrants to
80
See note 15.
81
See note 16.
82
See Item 10(f)(1)(ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. Under the public
float test discussed in Section II.A.1., a registrant with public float of less than $250 million will qualify as a
SRC regardless of its revenues. See Instruction to Paragraph (f) of Item 10 of Regulation S-K; Instruction to
definition of “smaller reporting company” in Securities Act Rule 405; Instruction to definition of “smaller
reporting company” in Exchange Act Rule 12b-2.
83
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; and CSBA.
84
See BIO and Calithera.
85
See note 16. In 2016 and 2017, the Small Business Forum recommended that the SRC definition be revised to
include registrants with a public float of less than $250 million or registrants with annual revenues of less than
$100 million, excluding large accelerated filers. Registrants with a public float of $700 million or more
generally qualify as large accelerated filers. See Exchange Act Rule 12b-2. In prior years, the Small Business
Forum recommended that the Commission revise the SRC definition to include registrants with a public float of
less than $250 million or registrants with a public float of less than $700 million and annual revenues of less than
$100 million. See, e.g., Final Report of the 2015 SEC Government Business Forum on Small Business Capital
Formation (Apr. 2016), available at https://www.sec.gov/info/smallbus/gbfor34.pdf.
20
--- page 21 ---
qualify as SRCs, 86 and we believe that these low-revenue registrants would benefit from the cost
savings of scaled disclosure accommodations and could redirect those savings into growing their
businesses without significantly detracting from investor protections. For example, these
registrants will remain liable for their disclosures, will continue to be required to provide all
material information necessary to make any required statements not misleading, and will
continue to be subject to the Division of Corporation Finance’s filing review process.
The amended revenue test that we are adopting is consistent with the position expressed
by several commenters 87 that it is not necessary to subject capital-intensive, low-revenue
registrants with larger public floats or market capitalizations to the same reporting requirements
as registrants with larger public floats and more well-established, revenue-generating businesses.
Although two commenters suggested that we adopt a revenue test without a limitation on the
public float or market capitalization of the company, 88 we believe that it is appropriate to include
a public float limitation because, as a registrant’s business and public float grows, investors
should benefit from greater disclosure. The additional information provided by the registrant in
these circumstances will assist a growing investor base in making informed investment decisions
and also should lead to a lower cost of capital for the business as it grows. In this way, the
amended revenue test in the final rules will enable some additional capital-intensive, low-
revenue registrants to benefit from the cost-savings of scaled reporting, while continuing to
require larger registrants to comply with the disclosure requirements applicable to non-SRCs.
86
Excluding the 2,851 registrants that based on their 2016 data would qualify under the public float test described
in Section II.A.1 and the 594 registrants that would qualify under the proposed no public float and less than $100
million in annual revenues test, we estimate that this change would permit an additional 161 registrants to
qualify as a SRC.
87
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; CSBA; NYSE; and Nasdaq.
88
See NYSE; and Nasdaq.
21
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In 2016, approximately 7.7% of registrants qualified as SRCs by having no public float
and less than $50 million in annual revenues. 89 The number of registrants that would qualify as
SRCs would have increased by 26, or 0.4%, under the new $100 million annual revenue
threshold for registrants with no public float. 90 Expanding the definition further to include
registrants with annual revenues of less than $100 million and public float of less than $700
million would have increased the number of eligible registrants by an additional 161, or 2.2%. 91
Under the current definition, and as proposed, once a registrant with no public float
determines that it does not qualify as a SRC, 92 it cannot subsequently qualify based on revenues
until its revenues fall below another, lower threshold. As discussed above with respect to the
public float test, while we did not receive any comments on the subsequent qualification
thresholds, we believe that a separate, lower revenue threshold for these registrants helps to
avoid situations in which registrants enter and exit SRC status due to small fluctuations in their
revenues and does not impose an undue burden on registrants seeking to qualify for SRC status.
Therefore, consistent with the proposal, once an issuer with no public float determines that it does
not qualify for SRC status because its annual revenues exceeded $100 million, it will remain
89
Based on public float values and revenues disclosed by registrants in their Form 10-K filings in 2016, 568, or
7.7%, of the 7,395 registrants that filed a Form 10-K in 2016 reported having no public float and less than $50
million in annual revenues.
90
Based on public float values and revenues disclosed by registrants in their Form 10-K filings in 2016, 26, or
0.4%, of the 7,395 registrants that filed a Form 10-K in 2016 had no public float and $50 million or more but less
than $100 million in annual revenues.
91
Based on public float values and revenues disclosed by registrants in their Form 10-K filings in 2016, 161, or
2.2%, of the 7,395 registrants that filed a Form 10-K in 2016 had $250 million or more but less than $700
million of public float and less than $100 million in annual revenues.
92
This applies either upon an initial determination in the case of registrants filing an initial registration statement,
or as of an annual determination in the case of reporting registrants.
22
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unqualified unless and until its annual revenues are less than $80 million as of the measurement
date.93
Consistent with the 80% ratio we are adopting for the other subsequent qualification thresholds,
under the amended revenue test, once a registrant with public float determines that it does not qualify as
a SRC because it exceeds either or both of the $100 million annual revenue and $700 million public
float thresholds, it will remain unqualified unless and until it meets a lower threshold for the criteria
on which it previously failed to qualify ($80 million of annual revenue and $560 million of public float)
and continues to meet any threshold it previously satisfied ($100 million of annual revenue or $700
million of public float). 94 By requiring that a registrant satisfy a lower threshold only with respect
to a threshold it previously exceeded, we are attempting to strike a balance between avoiding
situations in which registrants frequently enter and exit SRC status due to small fluctuations and
not imposing an undue burden on registrants seeking to qualify for SRC status. A registrant that
exceeded both the public float threshold and the revenue threshold, however, would not qualify unless
and until it met both lower thresholds in order to avoid situations in which registrants enter and exit
SRC status due to small fluctuations in either their revenues or public float. The table below sets
forth the thresholds for qualification as of the respective measurement date under the amended revenue
test after one or both thresholds have been exceeded:
93
See Item 10(f)(2)(iii)(B) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. Consistent with
the current definition, under the amended definition, a registrant with no public float that subsequently qualifies
under the $80 million revenue threshold remains qualified until its revenue exceeds $100 million.
94
Id. Consistent with the current definition, under the amended definition, a registrant that subsequently qualifies
under the $560 million public float threshold or $80 million revenue threshold remains qualified until its public
float exceeds $700 million or its revenue exceeds $100 million.
23
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Prior Public Float
Prior Annual
Revenues None or less than $700 million $700 million or more
Public float Less than $560
million; and
Less than $100
Neither threshold exceeded.
million
Revenues Less than $100
million.
Public float None or less than Public float Less than $560
$100 million or $700 million; and million; and
more Revenues Less than $80 Revenues Less than $80
million. million.
B. Amendments to Rule 3-05(b)(2)(iv) of Regulation S-X
In the Proposing Release, the Commission asked whether, if the revenue threshold in the
SRC definition is increased, the threshold in Rule 3-05 of Regulation S-X also should increase.
Rule 3-05 of Regulation S-X provides the requirements for financial statements of businesses
acquired or to be acquired in certain registration statements and current reports. Current
paragraph (b)(2)(iv) allows certain registrants to omit such financial statements for the earliest of
the three fiscal years required if the net revenues of the business to be acquired are less than $50
million.95 The $50 million threshold is based on the revenue threshold in the SRC definition.96
95
Rule 3-05(b)(2) sets forth the requirements for financial statements of an acquired business or to be acquired
business to be provided other than when registering securities to be offered to the security holders of the business
to be acquired.
96
In 1996, the Commission revised Rule 3-05 to streamline the requirements for financial statements of significant
business acquisitions in filings made under the Securities Act and the Exchange Act, stating:
“The threshold at which audited financial statements of an acquired business are required for three years, as
required for the issuer itself (except for small business issuers), has been raised from 40% to 50% in recognition
of the significant burden imposed by the lower threshold. In addition, consistent with the criteria for small
business issuers, financial statements for periods preceding the most recent two fiscal years would not be
required for acquired businesses reporting revenues below $25 million.” See Streamlining Disclosure
Requirements Relating to Significant Business Acquisitions. Release No. 33-7355 (Oct. 10, 1996) [61 FR 54509
(Oct. 18, 1996)] (“1996 Rule 3-05 Adopting Release”).
When the Commission adopted the SRC definition (which replaced the small business issuer definition) in 2007,
it noted:
24
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Two commenters recommended amending Rule 3-05 to increase the revenue threshold in
paragraph (b)(2)(iv) to $100 million to maintain the alignment between Rule 3-05 and the
definition of a SRC. 97 One commenter noted that this alignment should be retained to “maintain
the objective the Commission expressed when it adopted the 2007 S-X Rule 3-05 relief.” 98 The
other commenter noted that this amendment would avoid having the financial statement
requirements for a SRC-sized target company exceed those of a similarly sized registrant. 99
Consistent with these comments, we are amending Rule 3-05 to increase the net revenue
threshold in Rule 3-05(b)(2)(iv) of Regulation S-X to $100 million.100 Given that the current $50
million revenue threshold in Rule 3-05(b)(2)(iv) was based on the revenue threshold in the SRC
definition, and in light of our decision to increase the revenue threshold in the SRC definition
from $50 million to $100 million, we are raising the net revenue threshold in Rule 3-05(b)(2)(iv)
of Regulation S-X from $50 million to $100 million.
C. Amendments to Accelerated Filer and Large Accelerated Filer Definitions
1. Proposed Amendments
The Commission proposed amending the definitions of “accelerated filer” and “large
accelerated filer” to remove the automatic exclusion from these definitions of any registrant that
“Several comment letters noted that in light of the $50 million in revenues threshold proposed for determining a
company’s qualification as a SRC if a company is unable to calculate public float, the Commission should
consider revising [Rule 3-05(b)(2)(iv)] to raise to $50 million the $25 million threshold currently used to limit to
two the periods required for audited financial statements of an acquired business. The $25 million threshold was
based on the $25 million in revenues standard in Regulation S-B that we are rescinding. We are amending this
standard to increase the threshold to $50 million in revenues, as suggested by the commenters.” See SRC
Adopting Release.
97
See EY; and BDO. No other commenters addressed whether to amend Rule 3-05 of Regulation S-X.
98
See EY; see also SRC Adopting Release.
99
See BDO.
100
See Rule 3-05(b)(2)(iv) of Regulation S-X.
25
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qualifies as an SRC 101 and solicited comment on a number of questions related to this issue. 102
Among other requirements, 103 being an accelerated filer or a large accelerated filer triggers the
requirement contained in Section 404(b) of the Sarbanes-Oxley Act 104 to have the auditor provide
an attestation report on internal control over financial reporting. Currently, the accelerated filer
and large accelerated filer definitions include a provision that specifically excludes registrants
that are eligible to use the SRC requirements under Regulation S-K for their annual and quarterly
reports. 105 As a result, the existing public float threshold in the accelerated filer definition aligns
with the current public float threshold in the SRC definition. 106
Figure 1: Current Definitions of SRC,
Accelerated Filer, and Large Accelerated Filer
101
See Proposing Release, 81 FR at 43136.
102
See Proposing Release, 81 FR at 43137. As discussed in the Proposing Release, the ACSEC and the Small
Business Forum have recommended increasing the thresholds in both the SRC and the accelerated filer
definitions. See notes 15 and 16.
103
Accelerated and large accelerated filers are subject to accelerated periodic report filing deadlines. In addition,
they must provide their internet address and disclosure regarding the availability of their filings required by
Items 101(e)(3) and (4) of Regulation S-K [17 CFR 229.101(e)(3) and (4)], as well as disclosure required by
Item 1B of Form 10-K about unresolved staff comments on their periodic or current reports.
104
Pub. L. 107-204, Sec. 404(b) 116 Stat. 745 (2002).
105
Paragraphs (1)(iv) of the accelerated filer definition and (2)(iv) of the large accelerated filer definition in
Exchange Act Rule 12b-2.
106
The public float thresholds for exiting SRC status and entering accelerated filer status currently are both $75
million, and the determinations are both made as of the last business day of a registrant’s most recently
completed second fiscal quarter for purposes of the following fiscal year.
26
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Increasing the SRC public float threshold to $250 million without eliminating the SRC
provision from the accelerated filer definition would exclude from the definition of accelerated
filer those registrants that are newly eligible to use the SRC disclosure requirements, keeping the
thresholds for both definitions linked as they have been historically.
The Commission proposed to eliminate the provision in the accelerated filer definition
that excludes SRCs to maintain the current thresholds at which registrants are subject to the
accelerated filer disclosure and filing requirements. As a result, as illustrated in Figure 2, some
registrants would qualify as both SRCs and accelerated filers.
Figure 2: Proposed Definitions of SRC,
Accelerated Filer and Large Accelerated Filer
As discussed in the Proposing Release, the public float threshold for entering large
accelerated filer status currently is $700 million, so newly eligible SRCs under the proposed
increased public float threshold of $250 million would not include any registrants that currently
qualify as large accelerated filers. Nevertheless, the Commission proposed to eliminate this
provision because it currently does not capture any registrants, would not have captured any
registrants under the proposed amendments, and could lead to confusion if retained.
2. Comments
Some commenters responded to the Commission’s solicitation of comment on this issue
by supporting the elimination of the provisions in the accelerated filer and large accelerated filer
27
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definitions that specifically exclude registrants that are eligible to use the SRC disclosure
requirements for their annual or quarterly reports. 107 One commenter stated that it found no
compelling argument to support what it sees as a weakening of investor protections, particularly
in light of the 2011 Staff Section 404(b) Study 108 finding that accelerated filers subject to Section
404(b) had a lower restatement rate compared to non-accelerated filers not subject to Section
404(b). 109 Another commenter recommended that the Commission undertake a separate
rulemaking before deciding whether to change the Section 404(b) requirements. 110 A third
commenter recommended that the Commission provide more time for registrants with a public
float of less than $250 million to file their periodic reports. 111
In contrast, many commenters responded to the Commission’s solicitation of comment on
this issue by recommending that the Commission increase the thresholds in the accelerated filer
definition, consistent with the changes to the SRC definition. 112 Commenters recommended
increasing the public float threshold in the accelerated filer definition to reduce compliance
costs 113 and to maintain uniformity across our rules. 114 Many of these commenters stated that
107
See BDO; CAQ/CII; CFA Institute; Letter from Deloitte, August 23, 2016 (“Deloitte”); and EY.
108
Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 For Issuers With Public
Float Between $75 and $250 Million (Apr. 2011), available at
https://www.sec.gov/news/studies/2011/404bfloat-study.pdf.
109
See CFA Institute, citing 2011 Staff Section 404(b) Study.
110
See EY.
111
See BDO.
112
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; Coalition; CSBA; ICBA; Letter from The Dixie Group,
Inc., July 11, 2016 (“Dixie”); MidSouth; Nasdaq; NVCA; NYSE; and Seneca.
113
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; Coalition; CSBA; ICBA; Dixie; MidSouth; Nasdaq;
NVCA; NYSE; and Seneca.
114
See BIO (stating that uniformity alone is a sufficiently compelling argument to align the two definitions, that
avoiding investor confusion is an important responsibility of the SEC, and that issuers and investors alike are
used to having one standard for small company status); Coalition; Nasdaq; NVCA; and NYSE.
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Section 404(b) is particularly costly for SRCs and emerging businesses 115 and that audit costs
associated with Section 404(b) divert capital from core business needs. 116
Several commenters addressed the costs associated with complying with the requirements
of Section 404(b). 117 A few commenters stated that, for many growing biotechnology
companies, the Section 404(b) audit represents over $1 million of capital diversion. 118 One
commenter indicated that Section 404(b) compliance imposes a significant burden on emerging
biotech companies, citing the 2011 Staff Section 404(b) Study that estimated that companies
with a public float between $75 million and $250 million spend, on average, $840,276 to comply
with Section 404(b). 119 Another commenter estimated that it will spend more than $400,000
annually on compliance with Section 404(b). 120 One commenter that stated that its public float
was more than $75 million but less than $250 million estimated that relief from Section 404(b)
would result in a 35% reduction in compliance costs whereas there would be no material change
in such costs from the proposed amendments. 121 Another commenter noted that, while most
firms already take an integrated accounting approach to Section 404(b) requirements that
115
See Acorda, et al; AMTA; BIO; Calithera; Coalition; CONNECT; CSBA; and Seneca. See also Dixie.
116
See Acorda, et al; BIO; CSBA; ICBA; and NVCA.
117
See Acorda, et al; BIO; Calithera; CONNECT; CSBA (stating that “accelerated filers spend, on average, more
than $1 million complying with Section 404(b)”); Dixie; and Seneca.
118
See Acorda, et al; and CONNECT. See also CSBA.
119
See BIO.
120
See Calithera. This estimate is generally consistent with the estimate set forth by a presenter at a recent ACSEC
meeting. The presenter stated that some biotechnology companies that anticipate losing their status as EGCs in
the next few years “believe they will incur somewhere between $150,000 to $350,000 in additional audit fees,
$50,000 to $150,000 in other consulting costs and either $40,000 or as much as $200,000 for internal labor.” See
Transcript of Presentation by William Newell at September 13, 2017 ACSEC Meeting available at
https://www.sec.gov/info/smallbus/acsec/acsec-transcript-091317.pdf (pages 49 to 54); see also Newell, William
J., “Sarbanes-Oxley Section 404(b): Costs of Compliance and Proposed Reforms”, presentation at ACSEC
meeting on Sept. 13, 2017 available at https://www.sec.gov/info/smallbus/acsec/william-newell-acsec-
091317.pdf.
121
See Seneca.
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includes a complete internal control review, if smaller companies were exempt from Section
404(b), they would avoid the added legal liability of the auditor attestation, providing a savings
opportunity and lowering the cost of being public for those companies. 122
A few commenters stated that the market does not value the audit of such internal
control 123 or that the costs of Section 404(b) outweigh the benefits. 124 Another commenter stated
that expanding relief from Section 404(b) to registrants with a public float of less than $250
million would encourage capital formation because reduced audit and disclosure requirements
may encourage companies that have been hesitant to go public to do so. 125
A number of commenters recommended that the Commission allow a revenue test for the
accelerated filer definition, similar to the amended revenue test being adopted by the
Commission in the SRC definition. 126
3. Final Amendments
As proposed, we are adopting amendments to the “accelerated filer” and “large
accelerated filer” definitions in Exchange Act Rule 12b-2 to preserve the application of the
current thresholds contained in those definitions. 127 Specifically, we are eliminating from the
definitions of accelerated filer and large accelerated filer the exclusions for registrants that are
eligible to use the SRC requirements under Regulation S-K for their annual and quarterly reports.
122
See Dixie.
123
See Acorda, et al (stating that the market does not demand a Section 404(b) audit as a prerequisite for investing
in emerging, innovative companies and that virtually no EGCs are voluntarily forgoing their exemption from
Section 404(b)). See also Dixie.
124
See MidSouth.
125
See ICBA (citing a 2005 ICBA study that estimated that audit fees for publicly held bank holding companies
would drop dramatically – some by as much as 50% – if they were exempted from Section 404(b)).
126
See Acorda, et al; AMTA; BIO; CONNECT; Calithera; CSBA; Nasdaq; and NYSE.
127
See “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2.
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After the amendments to the SRC definition become effective, some SRCs will exceed the public
float thresholds for initial or subsequent qualification in the accelerated filer definition, and a few
of these registrants also may exceed the public float threshold for subsequent qualification in the
large accelerated filer definition. 128
Although we are not raising the accelerated filer public float threshold or modifying the
Section 404(b) requirements for registrants with a public float between $75 million and
$250 million in this release, as stated above, the Chairman has directed the staff to formulate
recommendations to the Commission for possible changes to reduce the number of registrants
that our rules define as accelerated filers. Eliminating the SRC provision in the accelerated filer
and large accelerated filer definitions will maintain the current thresholds at which registrants are
subject to the accelerated filer and large accelerated filer disclosure and filing requirements. In
2007, the Commission noted that aligning the SRC public float threshold based on the levels
established for non-accelerated filers 129 was practical and avoided regulatory complexity. 130
These amendments will change the current relationship between the SRC and “accelerated filer”
definitions by allowing a registrant to qualify as both a SRC and an accelerated filer. 131 We
acknowledge the regulatory complexity created by this potential overlap between the SRC and
128
The only registrants that would qualify as both SRCs and large accelerated filers would be those companies (1)
that previously qualified as large accelerated filers because at one time their public float was $700 million or
more, (2) whose revenues for the most recent fiscal year were less than $100 million, and (3) whose public float
as of the end of the most recent second quarter was less than $560 million, such that they now qualify as SRCs,
but not less than $500 million, such that they are not eligible to exit large accelerated filer status.
129
A non-accelerated filer is a filer that is not an “accelerated filer” or a “large accelerated filer.” See subpart (3) of
the accelerated filer and large accelerated filer definitions in Exchange Act Rule 12b-2 [17 CFR 240.12b-2].
130
See SRC Adopting Release 73 FR at 942.
131
In conjunction with these amendments, we also are adopting technical revisions to Securities Act Forms S-1, S-
3, S-4, S-8, and S-11 and Exchange Act Forms 10, 10-Q and 10-K. These amendments modify the cover page of
the specified forms to remove the parenthetical next to the “non-accelerated filer” definition that states “(Do not
check if a smaller reporting company).” After these amendments, a registrant should check all applicable boxes
on the cover page addressing, among other things, non-accelerated, accelerated, and large accelerated filer status,
SRC status, and emerging growth company status.
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“accelerated filer” definitions. 132 As part of the staff’s consideration of possible recommended
amendments to the “accelerated filer” definition, the Chairman has directed the staff to consider,
among other things, the historical and current relationship between the SRC and “accelerated
filer” definitions.
III. Other Matters
If any of the provisions of these amendments, or the application thereof to any person or
circumstance, is held to be invalid, such invalidity shall not affect other provisions or application
of such provisions to other persons or circumstances that can be given effect without the invalid
provision or application.
IV. Economic Analysis
As discussed above, we are adopting amendments to the definition of SRC as used in our
rules and regulations. The amendments expand the number of registrants that are eligible to
provide scaled disclosure to their investors and are intended to reduce compliance costs for these
registrants and promote capital formation, while maintaining appropriate investor protections.
Registrants with a public float of less than $250 million (an increase from the current $75 million
threshold) will qualify as SRCs, as will registrants with no public float if their revenues are less
than $100 million (an increase from the current $50 million threshold). 133 In addition, registrants
with a public float of less than $700 million will qualify as SRCs if their revenues are less than
$100 million.134
132
Several commenters specifically recommended increasing the public float threshold in the accelerated filer
definition to, among other things, maintain uniformity across our rules. See BIO; Coalition; Nasdaq; NVCA; and
NYSE.
133
See note 25 and related text for a discussion of how and when public float is calculated and when revenues are
measured.
134
The Commission received a number of comments in support of expanding the definition of SRC to include a
revenue test for registrants with a public float. See Section II.A.1.b.
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We also are making corresponding amendments to other rules in light of the new SRC
definition. As proposed, we are adopting amendments to the “accelerated filer” and “large
accelerated filer” definitions in Exchange Act Rule 12b-2 to preserve the application of the
public float thresholds in those definitions. In addition, we are amending Rule 3-05(b)(2)(iv) of
Regulation S-X to increase the revenue threshold under which certain registrants may omit the
earliest of the three fiscal years of audited financial statements of an acquired business or
business to be acquired.
We are mindful of the costs and benefits of the amendments. In this economic analysis,
we examine the existing baseline, which consists of the current regulatory framework and market
practices, and discuss the potential costs and benefits of the amendments, relative to this
baseline, and their potential effects on efficiency, competition, and capital formation. 135 We also
consider the potential costs and benefits of reasonable alternatives to the amendments. Where
practicable, we have attempted to quantify the economic effects of the amendments; however, in
certain cases, we are unable to do so because either the necessary data are unavailable or the
economic effects are not quantifiable. In these cases, we provide a qualitative assessment of the
likely economic effects.
A. Baseline
In calendar year 2016, 7,395 registrants filed a Form 10-K with the Commission.
Excluding investment companies, business development companies, and ABS issuers, which are
not eligible for SRC status, 6,739 registrants filed a Form 10-K in calendar year 2016. Of these
135
Section 23(a)(2) of the Exchange Act requires us, when adopting rules, to consider the impact that any new rule
would have on competition. In addition, Section 2(b) of the Securities Act and Section 3(f) of the Exchange Act
direct us, when engaging in rulemaking that requires us to consider or determine whether an action is necessary
or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.
33
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registrants, 2,592 (35.1% of all registrants) claimed SRC status by checking the box on the cover
page of their Forms 10-K indicating that the registrant was a SRC. Under the current definition,
a registrant with a public float may qualify as a SRC if its public float is less than $75 million or
a registrant with no public float may qualify as a SRC if its annual revenues are less than $50
million. An additional 232 filers in calendar year 2016 reported public float of less than $75
million or no public float and revenues of less than $50 million, but did not check the box on the
cover page of their Forms 10-K indicating that they were SRCs. 136 Of the 2,592 registrants that
claimed SRC status in 2016, 1,899 registrants (25.7% of all registrants) reported having a public
float that was less than $75 million and 509 registrants (6.9% of all registrants) reported having
no public float and revenues of less than $50 million. 137 Of the 2,592 SRCs, 833 (11.3% of all
registrants) also indicated in their filings that they were EGCs. 138
Table 1 summarizes the number and percentage of registrants that claimed SRC status in
each calendar year over the 2013-2016 period.
136
There are two potential explanations for why the number of registrants meeting the SRC thresholds exceeds the
number of reported SRCs. First, the public float and revenue thresholds establish eligibility for SRC status, but
do not require eligible registrants to take advantage of the scaled disclosure requirements. Thus, some
registrants may be opting out of SRC status if they do not find the reduced compliance costs to be net beneficial.
Second, some registrants that appear to be eligible may not be if they previously exceeded the SRC threshold and
were required to meet the lower eligibility threshold (i.e., public float of less than $50 million or revenues of less
than $40 million) to subsequently qualify as a SRC.
137
Based on analysis by DERA of available data. Staff obtained the SRC status and public float data from
information extracted from exhibits to corporate financial reports filed with the Commission using eXtensible
Business Reporting Language (“XBRL”), available at: http://www.sec.gov/dera/data/financial-statement-data-
sets.html. Staff also extracted the SRC status and public float directly from Forms 10-K using a computer
program. For robustness, staff compared the SRC status and public float information between the two sources
and corrected discrepancies using data from Ives Group Audit Analytics. Staff extracted annual revenue data
from the Compustat database and XBRL data in Form 10-K filings.
138
Staff determined whether a registrant claimed EGC status by parsing several types of filings (for example,
Forms S-1, S-1/A, 10-K, 10-Q, 8-K, 20-F/40-F, and 6-K) filed by that registrant with supplemental data drawn
from Ives Group Audit Analytics.
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Table 1: SRCs in 2013-2016 Period
Qualified
based on
no public
float and
revenue <
Qualified based $50
on public float million
Filing Total # of # of < $75 million (% of
Year Registrants SRCs % of Total (% of Total) Total)
2013 7,624 3,380 44.3% 33.5% 10.8%
2014 7,642 3,179 41.6% 32.7% 8.9%
2015 7,557 2,900 38.4% 29.7% 8.7%
2016 7,395 2,592 35.1% 25.7% 6.9%
Table 2 shows that, while registrants claiming SRC status with available data account for
a substantial percentage of the total number of registrants in calendar year 2016, they account for
less than one percent of the entire public float, market value and revenue of all registrants. 139
Table 2: Size Proxies for SRCs in 2016
Public Float Market Value Revenue
Mean $14.7 million $57.2 million $42.8 million
Median $4.3 million $14.1 million $1.9 million
Aggregate size $40.1 billion $98.7 billion $96.2 billion
% of the aggregate size of
0.15% 0.34% 0.66%
all registrants
Table 3 shows the distribution of registrants that were eligible for SRC status based on
available data in calendar year 2016 using the Fama-French 49-industry classification. 140 The
“Business Services” industry accounts for 10.6% of all SRCs, followed by “Financial Trading”
139
Compustat data on market value is obtained for calendar year 2016 filings. Staff obtained revenue data either
from XBRL data in Form 10-K filings or directly from the filing itself. The summary statistics presented in
Table 2 represent those registrants for which information on public float and revenue is concurrently available.
Market value, as used throughout this Economic Analysis, is equivalent to market capitalization and presented
for registrants with available data (described in footnote 25).
140
The standard Fama-French classification sorts Standard Industry Classification codes into 49 main industrial
categories; available at:
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_49_ind_port.html.
35
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(9.8%), “Pharmaceutical Products” (8.5%), “Banking” (7.1%), “Petroleum and Natural Gas”
(5.6%), and “Computer Software” (5.2%). 141 We note that industries with a larger fixed
component of operating costs, such as shipping, defense, and aircraft, tend to have fewer SRCs.
Table 3: Industry Distribution of SRCs in 2016
Industry # of % of all Industry # of % of all
ID Industry SRCs SRCs ID Industry SRCs SRCs
1 Agriculture 26 1.0% 26 Defense 2 0.1%
2 Food Products 35 1.3% 27 Precious Metals 38 1.4%
3 Candy & Soda 3 0.1% 28 Non-Metallic 76 2.9%
and Industrial
Metal Mining
4 Beer & Liquor 18 0.7% 29 Coal 3 0.1%
5 Tobacco 9 0.3% 30 Petroleum and 149 5.6%
Products Natural Gas
6 Recreation 23 0.8% 31 Utilities 15 0.6%
7 Entertainment 55 2.0% 32 Communication 45 1.7%
8 Printing and 8 0.3% 33 Personal 37 1.4%
Publishing Services
9 Consumer 40 1.6% 34 Business 281 10.7%
Goods Services
10 Apparel 17 0.6% 35 Computers 22 0.8%
11 Healthcare 37 1.4% 36 Computer 136 5.2%
Software
12 Medical 116 4.4% 37 Electronic 102 3.9%
Equipment Equipment
13 Pharmaceutical 225 8.5% 38 Measuring and 41 1.6%
Products Control
Equipment
14 Chemicals 54 2.1% 39 Business 6 0.2%
Supplies
15 Rubber and 20 0.8% 40 Shipping 2 0.1%
Plastic Containers
Products
16 Textiles 4 0.2% 41 Transportation 24 0.9%
17 Construction 29 1.1% 42 Wholesale 78 3.0%
Materials
141
In 2016, SRCs accounted for 57% of all Form 10-K filers in “Business Services,” 37% in “Financial Trading,”
20% in “Banking,” 39% in “Pharmaceutical Products,” 50% in “Petroleum and Natural Gas” and 47% in
“Computer Software,” suggesting that these industries all have a fairly high concentration of small registrants.
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Table 3: Industry Distribution of SRCs in 2016
Industry # of % of all Industry # of % of all
ID Industry SRCs SRCs ID Industry SRCs SRCs
18 Construction 22 0.8% 43 Retail 82 3.1%
19 Steel Works 9 0.3% 44 Restaurants, 28 1.1%
Hotels, Motels
20 Fabricated 5 0.2% 45 Banking 187 7.1%
Products
21 Machinery 54 2.0% 46 Insurance 20 0.8%
22 Electrical 39 1.5% 47 Real Estate 96 3.6%
Equipment
23 Automobiles 21 0.8% 48 Financial 258 9.8%
and Trucks Trading
24 Aircraft 8 0.3% Other and 30 1.1%
Unknown
25 Shipbuilding, 3 0.1%
Railroad
Equipment
As discussed above, we are amending Rule 3-05(b)(2)(iv) of Regulation S-X to increase
the revenue threshold under which certain registrants may omit the earliest of the three fiscal
years of audited financial statements of an acquired business or business to be acquired. Rule 3-
05 applies to registrants that are not SRCs. 142 Rule 3-05(b)(2)(iv) provides that, if the acquired
business is large enough relative to the registrant (i.e., any of the significant subsidiary tests for
the acquired business exceed 50%), the registrant must file three years of historical financial
statements of the acquired business unless the acquired business has revenues of less than $50
million, in which case only two years of the acquired business’s most recent financial statements
need to be filed. Given the difficulty in accurately identifying registrants that have acquisitions
(1) that meet any of the significant subsidiary tests at the 50% level and (2) where the acquired
business has revenues of less than $50 million, we are unable to estimate the number of
142
Rule 8-04 of Regulation S-X [17 CFR 210.8-04] applies to financial statements of business acquired or to be
acquired by SRCs.
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registrants that were affected by the $50 million revenue threshold in Rule 3-05(b)(2)(iv) in
2016. We do not believe the disclosure accommodation in Rule 3-05(b)(2)(iv) is frequently used
because the acquired business not only would need to meet one of the significant subsidiary
thresholds at the 50% level compared to the non-SRC acquirer, but also would need to have less
than $50 million of revenues in its most recent fiscal year.
B. Potential Economic Effects
1. Introduction
The primary benefit stemming from the amendments is a reduction in compliance costs
for the registrants that will newly qualify for SRC status. To the extent that the reduced
compliance costs have a fixed cost component, 143 which typically burdens smaller registrants
disproportionately, the cost savings may be particularly helpful for those registrants.
As a secondary effect of the amendments, a lower disclosure burden could spur growth in
the registrants that will newly qualify for SRC status to the extent that the compliance cost
savings and other resources (e.g., managerial effort) otherwise devoted to disclosure and
compliance are productively deployed in alternative ways. It also could encourage capital
formation because companies that may have been hesitant to go public may choose to do so if
they face reduced disclosure requirements.
With respect to costs, we expect that the amendments to the SRC definition will result in
a modest change in some indicators of the overall quality of the information environment.
143
See, e.g., William A. Brock & David S. Evans, The Economics of Small Businesses: Their Role and Regulation
in the U.S. Economy 65 at 70 (1986); C. Steven Bradford, Does Size Matter? An Economic Analysis of Small
Business Exemptions from Regulation, College of Law, Faculty Publications. 72 (2004). See also Cindy R.
Alexander et al., Economic Effects of SOX Section 404 Compliance: A Corporate Insider Perspective, 56 J.
Account. & Econ. 267-290 at 285 (2013) (noting, among other things, that they found “evidence of fixed costs
that weigh disproportionately on smaller firms”).
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Generally, a decrease in the amount of direct disclosure could increase the information
asymmetry between investors and company insiders, leading to lower liquidity and higher costs
of capital for the affected registrants. For example, one study found that, during the three-month
period following the establishment of the SRC definition, registrants with public floats of $25
million or more and less than $75 million that claimed SRC status experienced a significant
reduction in liquidity relative to comparable registrants. 144 In addition, one of the sources of
information asymmetry under the amendments will be that the newly eligible SRCs will not be
required to provide certain executive compensation disclosures, potentially lowering corporate
governance transparency of these registrants. 145 Furthermore, by introducing overlap between
the SRC and the accelerated filer definitions, the amendments we are adopting would increase
regulatory complexity. 146
The number of affected registrants that will make scaled disclosures will ultimately
depend on the choices of those registrants. That is, the SRC definition establishes eligibility for,
but does not mandate reliance on, any of the scaled disclosure accommodations. 147 We identified
232 registrants in 2016 that met either the $75 million public float threshold or the $50 million
revenue threshold for SRC status but did not claim SRC status. While some of these registrants
may not have been eligible (for example, a registrant that previously did not qualify as a SRC
144
See Lin Cheng, Scott Liao, and Haiwen Zhang, Commitment Effect versus Information Effect of Disclosure:
Evidence from Smaller Reporting Companies, 88 Account. Rev. 1239 (Jul. 2013).
145
For a review of the effects of executive compensation disclosures on compensation practices, see Kevin J.
Murphy, “Executive compensation: Where we are, and how we got there,” Handbook of the Economics of
Finance, Vol. 2. Elsevier (2013) 211-356. See also Benjamin E. Hermalin and Michael S. Weisbach,
Information Disclosure and Corporate Governance, 67 J. Fin. 195 (2012), and Anya Kleymenova and Irem A.
Tuna, Regulation of Compensation (June 21, 2017), Chicago Booth Research Paper No. 16-07, available at
SSRN: https://ssrn.com/abstract=2755621.
146
See SRC Adopting Release 73 FR at 942.
147
If a disclosure requirement applicable to SRCs is more stringent than for non-SRCs, however, SRCs must
comply with the more stringent standard. Item 404 is the only Regulation S-K disclosure requirement that could
be more stringent.
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because it exceeded the thresholds and is now subject to a lower threshold), it is possible that
some elected not to avail themselves of the scaled disclosure requirements. 148
Under the amendments, we expect registrants will weigh their own costs and benefits of
scaled disclosure and decide whether to take advantage of any of the scaled disclosure
accommodations for which they are newly eligible. Some registrants may determine that the
costs of potentially reduced liquidity for their securities and higher cost of capital exceed the
benefits of the lower compliance costs. Those registrants may elect not to rely on the scaled
disclosure accommodations available to them. On the other hand, expanding SRC eligibility
could provide opportunities for adverse selection in a greater number of registrants. For
example, registrants whose outside investors would have benefited from more disclosure might
choose the less burdensome disclosure requirement once becoming eligible. The net benefit or
cost for each newly eligible registrant and its investors will ultimately depend on the specific
facts and circumstances.
Expanding the pool of registrants eligible for SRC status to include registrants with
revenues of less than $100 million and a public float of $250 million or more and less than $700
million will increase the cost savings, information asymmetries, and other effects of scaled
disclosure in proportion to the increase in the number of registrants that become newly eligible at
those higher thresholds and choose to avail themselves of the scaled disclosure accommodation.
This number is likely to be small, as indicated by the evidence that 161 (2.2%) of the registrants
that filed a Form 10-K in 2016 would have met the thresholds in the amended revenue test for
148
Data from 2008 show that registrants do not always take advantage of scaled disclosure. In a sample of 283
registrants that were newly eligible for scaled disclosure in 2008, the evidence from Form 10-K and proxy filings
by those registrants shows that 109 of the registrants chose to maintain their disclosure level for all ten eligible
items, while 174 of the registrants reduced the disclosure level for at least one eligible item. See Lin Cheng,
Scott Liao, and Haiwen Zhang, Commitment Effect versus Information Effect of Disclosure: Evidence from
Smaller Reporting Companies, 88 Account. Rev. 1239 (Jul. 2013) at 1247
40
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registrants with public float.
The effects of scaled disclosure for registrants with a public float of $250 million or more
and less than $700 million and revenues of less than $100 million may be different from the
effects of scaled disclosure for registrants with public float nearer to the current threshold of
$75 million. This is because the characteristics of registrants eligible for SRC status under the
final rules may be different from those of registrants close to the current threshold. For example,
differences in the relationships between management and outside investors in registrants with
higher public float could affect the level of information asymmetries between those registrants
and investors. This may cause those registrants to make different decisions about how much
information they choose to disclose and whether to rely on the scaled disclosure
accommodations, leading to differences in the observed use of scaled disclosure by different
registrants of the same size. The 161 additional registrants had an average public float of $396
million, while those that qualify under the current definition had an average public float of
$15 million, and those that would have qualified under the proposed rules had an average public
float of $55 million. These differences can affect whether a registrant decides to rely on scaled
disclosure and how that decision affects the registrant’s investors. We do not have sufficient
information about the experiences of registrants at the higher public float levels with lower
revenues implementing scaled disclosure to estimate the frequency with which these registrants
will implement scaled disclosure, if available.
Similarly, increasing the revenue threshold below which registrants are eligible to
provide two rather than three years of certain acquired businesses’ historical financial statements
under Rule 3-05(b)(2)(iv) from $50 million to $100 million will increase the cost savings,
information asymmetries, and other effects of the reduced historical financial statement
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disclosure that investors receive at or around the time of the acquisition in proportion to the
increase in the number of registrants that acquire businesses with revenues below the higher
threshold and choose to avail themselves of this disclosure accommodation.
Overall, we expect the effect of raising the revenue threshold in Rule 3-05(b)(2)(iv) of
Regulation S-X from $50 million to $100 million on information disclosed by registrants and its
consequences for registrants and investors to be modest. This reflects our appraisal that few
registrants are eligible to provide two rather than three years of an acquired business’s historical
financial statements under Rule 3-05(b)(2)(iv), because the acquired business not only would
need to meet one of the significant subsidiary thresholds at the 50% level compared to the non-
SRC acquirer, but the acquired business also would need to have less than the $50 million of
revenues in its most recent fiscal year. 149 The amendments we are adopting will have two
potentially countervailing effects on the number of registrants that are eligible for the disclosure
accommodation in Rule 3-05(b)(2)(iv). First, they will increase the number of registrants that
are eligible to provide two rather than three years of an acquired business’s historical financial
statements under Rule 3-05(b)(2)(iv) by raising the revenue threshold for eligibility. Second,
they will reduce the number of registrants that are required to comply with Rule 3-05, because
Rule 3-05 is only applicable to registrants that are not SRCs, and our final rules are likely to
increase the number of SRCs. Thus, the net effect may be to increase the number of registrants
eligible to provide two rather than three years of an acquired business’s historical financial
statements under Rule 3-05(b)(2)(iv), but we do not expect the net increase to be significant.
2. Impact on Eligibility for Smaller Reporting Company Status
By increasing the public float threshold from $75 million to $250 million, increasing the
149
See text accompanying note 142.
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annual revenue threshold for registrants with no public float from $50 million to $100 million,
and expanding the revenue test to include registrants with a public float of less than $700 million
and revenues of less than $100 million in the SRC definition, the amendments will permit more
registrants to qualify as SRCs. To estimate the number of additional registrants that are likely to
be affected by the amendments, we use public float data and revenue data from Form 10-K
filings. 150 Our estimate of the number of registrants likely to be eligible in the first year under the
new definition that would not have qualified under the current definition is the number that
would have been eligible had the rule been in effect. We use evidence on the composition of
those registrants from the 2016 data to estimate the likely composition of the registrants that
would be eligible in the first year under the new definition.
We estimate that 966 additional registrants will be eligible for SRC status in the first year
under the new definition. These registrants estimated to be eligible in the first year comprise 779
registrants with a public float of $75 million or more and less than $250 million, 26 registrants
with no public float and revenues of $50 million or more and less than $100 million, and 161
registrants with a public float of $250 million or more and less than $700 million and revenues of
less than $100 million.
The 966 registrants that we estimate will be newly eligible for SRC status are
characterized by an average public float of $191 million (median $162 million), an average
market value of $279 million (median $201 million), and average revenues of $196 million
(median $68 million). Of these registrants, 365 currently are EGCs and are eligible for certain
scaled disclosure under Title I of the JOBS Act, including the scaled executive compensation
150
Float and revenue values are from data in Form 10-K filings filed in calendar year 2016 and extracted from
XBRL exhibits.
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disclosures available to SRCs under Item 402 of Regulation S-K. The newly eligible registrants
with available data in 2016 were concentrated in the following industries: “Pharmaceutical
Products” (17.3%), “Banking” (15.2%), “Financial Trading” (11.8%), “Business Services”
(5.2%), and “Electronic Equipment” (3.7%). If the distribution of eligible registrants does not
change over time, and if all of them claim SRC status, the amendments will lead to a noticeable
increase in the presence of “Pharmaceutical Products” and “Banking” registrants in the pool of
SRCs.
Registrants eligible for SRC status with available data using the public float threshold of
less than $250 million represent approximately 38.6% of all registrants, while only 28.0% of all
registrants qualify under the existing public float threshold of less than $75 million. The 38.6%
of all registrants that will qualify under the public float threshold would be more in line with the
42% of registrants that qualified under the public float threshold when the Commission first
established the definition of SRC. 151 An additional 8.0% of registrants will qualify based on
having no public float and revenues of less than $100 million, while currently 7.7% of registrants
reported having no public float and less than $50 million in revenues. 152 Finally, based on the
2016 data, 2.2% of registrants had a public float of $250 million or more and less than $700
million and revenues of less than $100 million.
151
These percentages reflect the estimated number of registrants that qualify under the respective public float tests
and do not include any registrants that are estimated to qualify under the respective revenue tests.
152
Using 2016 data, we estimate that, of the 7,395 total registrants that filed Forms 10-K with available data, 3,606
registrants will meet one of the SRC thresholds under the amendments. In particular, we estimate that 2,851
registrants reported public float below $250 million and greater than zero in 2016, resulting in a percentage of
38.6% (2,851/7,395) of registrants potentially qualifying as SRCs under the amended public float threshold, and
2,072 registrants reported a public float below $75 million in 2016, resulting in a percentage of 28.0%
(2,072/7,395). Also, we estimate that 594 registrants reported no public float and annual revenues below $100
million in 2016, resulting in a percentage of 8.0% (594/7,395) of registrants potentially qualifying as SRCs under
the amended revenue threshold, and 568 registrants reported no public float and annual revenues below $50
million in 2016, resulting in a percentage of 7.7% (568/7,395). Finally, we estimate that 161 registrants reported
public float of $250 million or more and less than $700 million and annual revenues below $100 million in 2016,
resulting in an additional 2.2% (161/7,395) of registrants potentially qualifying as SRCs.
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Increasing the percentage of registrants that will qualify under the public float threshold
to align more closely with the 2007 level is consistent with the rise in market capitalization of
public companies that has occurred since that time. 153 We do not have sufficient data to be able
to compare the percentage of registrants qualifying under the revenue threshold when the
Commission first established the definition of SRC to the estimated 8.0% that will qualify using
a revenue threshold of $100 million. Table 4 summarizes the size of the potential SRCs in terms
of public float, market value, and annual revenue under the amendments.
Table 4: Size Proxies for SRCs Eligible
Under the Amendments
Public Float Market Value Revenue
Mean $59.9 million $480.1 million $317.7 million
Median $12.1 million $40.9 million $10.3 million
Aggregate size $202.6 billion $1,220.5 billion $1,074.0 billion
% of the aggregate
0.9% 4.8% 8.7%
size of all registrants
As discussed above, we are amending Rule 3-05(b)(2)(iv) of Regulation S-X to increase
the revenue threshold under which certain registrants may omit the earliest of the three fiscal
years of audited financial statements of an acquired business or business to be acquired. Similar
to the baseline discussion of Rule 3-05, given the difficulty in accurately identifying registrants
that have acquisitions (1) that meet any of the significant subsidiary tests at the 50% level and (2)
where the acquired business has revenues of less than $100 million, we are unable to estimate the
number of registrants that will be affected by raising the revenue threshold in Rule 3-05(b)(2)(iv)
from $50 million to $100 million. The amendments we are adopting today increase the number
of registrants that qualify as SRCs (which will likely decrease the application of Rule 3-05) but
153
For example, the S&P 500 index grew by more than 80 percent over the decade ending with the fourth quarter of
2017. Source: CRSP and St. Louis Fed (https://fred.stlouisfed.org/series/GDPDEF).
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also increase the revenue threshold in Rule 3-05(b)(2)(iv) (which may offset the decreased
number of companies affected by Rule 3-05). Therefore, we do not expect that the amendments
will significantly alter the number of registrants that will be eligible to omit the earliest of three
years of financial statements of an acquired business pursuant to Rule 3-05(b)(2)(iv).
3. Estimation of Potential Costs and Benefits
In this section, we estimate the incremental costs and benefits associated with SRC-
related scaled disclosures, using a multivariate empirical analysis. We cannot isolate the costs
and benefits associated with scaled disclosures using available data from SRCs, because we
cannot with the data isolate the effects of scaled disclosures from the effects of some other
accommodations, such as the exemption from Section 404(b) that is currently available to all
SRCs through their status as non-accelerated filers. 154 Under the final rules, some newly eligible
SRCs will be able to provide scaled disclosures but will continue to be subject to Section 404(b)
as accelerated filers.
It is possible, however, to isolate the effects of scaled disclosures on registrants with
public float slightly below or above the current $75 million public float threshold using 2006-
2009 data. This is because, as a result of the rules that established the SRC definition in 2007,
registrants with public float of $25 million or more and less than $75 million experienced no
change in the Section 404(b) exemption (that is, they remained exempt from the requirement),
but became eligible for the SRC scaled disclosures. Our empirical method is a difference-in-
154
Although there is a clear threshold for eligibility, we cannot use the well-known empirical method of Regression
Discontinuity Design to assess the treatment effect of scaled disclosures for SRCs. This method requires that the
assignment of the treatment among registrants be “as good as random” around the threshold. Under this
assumption, the registrants that receive the treatment of scaled disclosure (i.e., SRCs) should be comparable to
those registrants that do not receive the treatment because their public float is just above the $75 million
threshold. Given the exemption from Section 404(b) available to current SRCs with public float below $75
million, this assumption does not hold.
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difference estimation between a treatment group and a control group that is the basis for
comparison. 155 In particular, the treatment group (“Treatment Group”) consists of registrants
with public float of $25 million or more and less than $75 million that claimed SRC status in
2008. Two natural control groups exist. The first (“Control Group 1”) consists of registrants
that did not qualify for SRC status because they had public float at or just above $75 million
($75 million or more and less than $125 million). 156 The second (“Control Group 2”) consists of
registrants with public float and revenues below $25 million that were already eligible for scaled
disclosures at that time and thus not affected by the Commission’s 2007 rules. 157
To analyze the economic effects of eligibility for scaled disclosures resulting from the
Commission’s 2007 rules by this method, we compare the Treatment Group with Control
Group 1 and Control Group 2 in the following areas: cost savings, information environment,
liquidity, and growth. We then use the analysis to extrapolate the likely effects of the expansion
of eligibility for SRC status under the final rules. In extrapolating the likely effects, we place
particular emphasis on the comparison between the Treatment Group and Control Group 1,
which represents a closer group in size to the newly eligible SRCs under the final rules.
We believe that the evidence from analysis of changes in the information environments
of registrants around the 2007 amendments is a suitable basis for evaluating the effects of the
155
Difference-in-difference is a technique used to calculate the effect of a variable on a treatment group versus a
control group. In particular, in the analysis below, the average change over time in the outcome of a variable for
the treatment group is compared to the average change over time in the outcome of that variable for the control
group.
156
This would allow for a $50 million bandwidth similar to that used in the Commission’s 2007 rules, which raised
the threshold for relief from $25 million to $75 million.
157
The comparison groups help control for confounding factors that may also independently affect the economic
effects associated with scaled disclosures. While we determine Treatment Group and Control Group 1 based on
public float alone, we use both public float and revenues to determine Control Group 2, because, prior to the
Commission’s 2007 rules, registrants with public float below $25 million were not eligible for scaled disclosures
if their revenues exceeded $25 million.
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current amendments on registrants with public floats at the low end of the range that are newly
eligible for scaled disclosure. We included a similar analysis in the Proposing Release and
solicited comments on this analysis, including ways to better quantify the effects of scaled
disclosure on SRCs, but did not receive any comments in response.
While the 2007 amendments resulted in changes that are similar to what we expect will
occur under the current amendments, our analysis is subject to a number of assumptions and
limitations. The evidence from the 2007 amendments may be less suitable as a basis for
evaluating the effects of the current amendments on registrants with relatively higher levels of
public float than for evaluating potential effects of the current amendments on registrants with
public float around the $75 million threshold.158 It is thus more challenging to quantify the likely
effects of the current amendments on newly eligible SRCs with public float levels that are farther
from the $75 million level, such as those closer to the $250 million and $700 million levels.159
We believe those challenges may be less pronounced for registrants that have other
characteristics, such as revenue, similar to those of the registrants that were affected by the prior
rules.
a. Potential Cost Savings: Estimates Based on Changes in Audit Fees
The cost savings from scaled disclosures could include savings of resources that are
likely to be used for the relevant parts of disclosures, for example, managerial and employee
time, other internal resources, and audit fees related to certain disclosures. Among these
158
The 2007 rule amendments affected the reporting practices of registrants with public floats near the $75 million
threshold (i.e., $25 million or more and less than $75 million) and, accordingly, may indicate the effects of
increasing the public float threshold on registrants with public float of $75 million or slightly more than $75
million.
159
One limitation of difference-in-difference and regression discontinuity design studies of the effects of changes in
regulatory rules is that their results are more applicable in evaluating the effects of the changes on the registrants
whose characteristics most closely resemble those who were affected by the event under the analysis than in
evaluating effects on other registrants. See, e.g., Leuz and Wysocki (2016).
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potential savings, changes in audit fees are readily quantifiable. To the extent that the scaled
disclosure accommodations affect information that must be audited, scaled disclosures of the
audited portions of the filings should lead to a reduction in audit expenses. Because many of the
scaled disclosures available to SRCs relate to governance and executive compensation
disclosures that are not subject to audit, a reduction in audit fees is likely a small part of the total
cost savings associated with scaled disclosures. However, quantifying the change in audit fees
can potentially help us estimate the entire cost savings.
To estimate the cost savings from the amendments, we first examine changes in the audit
fees of registrants that were newly eligible to use scaled disclosures as a result of the 2007
amendments relative to those in the control, or comparison, groups between the pre-amendment
2006-2007 period and the post-amendment 2008-2009 period. Audit fee data come from the
Ives Group Audit Analytics database. We include only registrants that had both pre-amendment
and post-amendment audit fee data in the analysis. Table 5 reflects the general results.
Table 5: Pre- and Post-Commission’s 2007 Amendments Audit Fees for SRCs and Control
Groups
Treatment Group Control Group 1 Control Group 2
(SRCs w/ public (Non-SRCs w/ (SRCs w/ public
float $25m- public float $75m- float and revenues
Fiscal Year $75m) $125m) below $25m)
Avg. 2006-2007 $311,105 $676,194 $113,757
Avg. 2008-2009 $267,252 $654,463 $101,854
Number of Observations 1,315 694 962
For SRCs with public floats of $25 million or more and less than $75 million, in 2008-
2009, average audit fees declined by $43,853. In contrast, both Control Group 1, which just
missed eligibility for SRC status, and Control Group 2, which already was eligible for scaled
disclosures, experienced smaller declines in average audit fees after the adoption of the 2007
amendments: $21,731 and $11,903, respectively. Thus, the difference-in-difference estimate of
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the savings in audit fees associated with scaled disclosures is between $22,122 and $31,950 per
SRC with public float around the $75 million threshold. Although two different control groups
are used to control for other factors that may have caused the changes in audit fees noted in
Table 5 during the 2006-2009 period, 160 the effect of the 2008 financial crisis may not be
completely ruled out and could make the estimated savings in audit fees appear larger than they
actually were.
We also estimate the savings in audit fees in terms of a percentage reduction, instead of a
dollar value. 161 The audit fees for the Treatment Group declined by 14.1% in the 2008-2009
period relative to the 2006-2007 period, but only by 3.2% for Control Group 1 and 10.5% for
Control Group 2. Thus, the difference-in-difference estimate of the treatment effect in terms of a
percentage reduction is a 3.6% to 10.9% reduction in the audit fees.
For the 966 newly eligible registrants that we estimate would be potentially affected by
the amendments, the average audit fees were $658,735 in fiscal year 2016. Thus, if we use the
dollar value estimates of the audit fee savings, the estimated reduction in audit fees would be
between $28,490 and $41,147 for this group, which are the inflation-adjusted values of the audit
160
For example, among other factors, we note that the Commission approved Public Company Accounting
Oversight Board Auditing Standard No. 5 regarding Audits of Internal Control over Financial Reporting (AS 5).
Among other things, AS 5 was intended to reduce unnecessary costs by making the audit scalable to fit the size
and complexity of a company. AS 5 became effective in November 2007, and registrants with fiscal years
ending between July and November were allowed to avail themselves of the provision earlier. The adoption and
implementation of AS 5 in 2007 could have had an impact on the audit fees of all registrants subject to
Section 404(b). Given that in our analysis both Treatment Group and Control Group 1 were affected by AS 5,
however, the difference-in-difference methodology should control for the potential effects of AS 5 on audit fees.
In addition, based on registrants’ fiscal year end, we have no reason to believe that early adopters were more or
less concentrated in Treatment Group than Control Group 1. See also Commission Guidance Regarding
Management's Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, Release No. 33-8810 (Jun. 20, 2007) [72 FR 35324 (Jun. 27, 2007)].
161
If there is a fixed (dollar value) component in audit expenses that apply to registrants of all sizes, then the
estimates under this alternative approach can be viewed as the upper bound of the potential audit fee savings.
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fee savings estimates in 2008 and 2009. 162 This estimate of savings on audit fees for the newly
eligible registrants is approximately 4.3% ($28,491/$658,735) to 6.2% ($41,148/$658,735) of the
audit fees.
We recognize that this analysis of the audit fee data is subject to a number of
assumptions, some of which may not be fully applicable when estimating the potential change in
audit expenses as a result of the amendments. 163 As a result, there are limitations to our ability to
draw conclusions from the analysis. For example, we recognize that audit expenses are only one
component of costs for registrants and that changes in audit fees do not capture the full range of
potential cost savings stemming from scaled disclosures. There are cost savings apart from the
audit, such as cost savings resulting from a SRC not being required to prepare a compensation
discussion and analysis and from other scaled disclosures in Item 402 of Regulation S-K. These
cost savings likely will include both internal cost savings (such as employee and managerial time
and resources) and external cost savings from fees for other outside professionals such as
attorneys. Given the nature of scaled disclosures available to SRCs, we expect these other cost
savings to be much larger than the cost savings in audit fees. In the Proposing Release, we
assumed that 25% of the total cost savings from scaled disclosure comes from savings in audit
fees and 75% of the savings comes from reduction in other expenses. We solicited comments on
this assumption and on whether we should use a different assumption but did not receive any
162
The inflation adjustment was performed using the CPI calculator of the Bureau of Labor Statistics
(http://data.bls.gov/cgi-bin/cpicalc.pl).
163
Estimates based on data from 2006 to 2009 may not be directly applicable to the estimation of audit fees for the
newly eligible registrants under the rule amendments. On the one hand, because auditors may charge larger
registrants more for auditing the same disclosure items, our estimate could be viewed as a conservative estimate
on the potential savings of audit fees for the newly eligible SRCs. On the other hand, if there were any increased
competition in the auditing industry since 2009, then it could have led to lower audit expenses for the same
disclosure items. Thus, our estimate could be higher or lower than the actual savings on audit fees for SRCs in
2008 and 2009.
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comments in response. Accordingly, we use the same assumption here.
Given this assumption, we estimate total annual cost savings per newly eligible registrant
with a public float around the $75 million threshold to be between $98,439 ($24,610×4) and
$298,052 ($74,513×4). The savings to registrants that become newly eligible with public floats
closer to the $250 million and $700 million thresholds, will vary from this estimate by amounts
that are difficult to quantify, because these registrants are less comparable to the Control Groups,
and will depend on the facts and circumstances of the newly eligible registrant. For example, the
audit cost for some of these registrants may be higher as a result of greater complexity in their
business operations, increasing the cost savings associated with SRC status.
b. Information Environment, Liquidity, and Growth
A registrant’s information environment can be measured by the amount of useful
information available to investors and the quality of that information. To gauge the potential
effects on the degree of external information production about the registrant that could benefit
investors, we determine a registrant’s percentage of institutional ownership, total 5% block
institutional ownership, and analyst coverage (i.e., whether a registrant is covered by at least one
analyst and the number of analysts).
To measure disclosure quality, we use four discretionary accrual measures commonly
used in the accounting literature as proxies for earnings management and the incidence of
material restatements (based on the first year of financial statements restated and the filing year).
Scaled disclosure may contribute to lowering the overall quality of the information environment,
which is proxied in this analysis by the propensity for earnings management and the incidence of
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material restatements. 164 The data on restatements are from the Ives Group Audit Analytics
database. A material restatement is defined as a restatement that is reported under Item 4.02 of
Form 8-K.
To examine the potential effects on liquidity, we focus on the share turnover ratio, which
is calculated by dividing the total number of shares traded over a period by the number of shares
outstanding. To assess the effects of scaled disclosures on growth, we examine a registrant’s
capital investment, which is measured by the capital expenditures to assets ratio, as a proxy for
real growth. Because there is a high concentration of SRCs in industries for which research and
development (“R&D”) investment is important (e.g., pharmaceutical products and electronic
equipment), we also examine a registrant’s investment in R&D. Finally, we examine asset
growth, which is the growth rate in book assets, which could capture a registrant’s growth
through both capital investment and acquisition.
Table 6 reports the estimated treatment effect. The number in the Treatment Group vs.
Control Group 1 column reflects the difference between: (1) the average change in the metric for
the Treatment Group, from the 2006-2007 period, when it was not eligible for scaled disclosure,
to the 2008-2009 period, when it was eligible for scaled disclosure, and (2) the average change in
the metric between the same periods for Control Group 1, which was never eligible for scaled
disclosure. Similarly, the number in the Treatment Group vs. Control Group 2 column reflects
the difference between: (1) the average change in the metric for the Treatment Group from the
2006-2007 period, when it was not eligible for scaled disclosure, to the 2008-2009 period, when
it was eligible for scaled disclosure and (2) the average change in the metric between the same
164
In using these proxies, we do not mean to suggest that scaled disclosure would be expected to directly cause an
increase in earnings management or an increased incidence of material restatements, as there is little direct
connection between the types of disclosure governed by our scaled disclosure requirements and the disclosure
affected by a restatement.
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periods for Control Group 2, which had been eligible for scaled disclosure for both periods. 165
Table 6: Scaled Disclosures and the Information Environment, Liquidity, and Growth 166
Treatment Group Treatment Group
vs. Control vs. Control
Group 1 Group 2
Information Environment:
External Information Production
Institutional Ownership -0.052*** -0.022***
Institutional Block Ownership -0.016** -0.002
Number of Analysts -0.179 -0.068
Analyst Coverage Dummy -0.099*** 0.087***
Information Environment:
Disclosure Quality
Earnings Mgmt. 1 0.025 0.015
Earnings Mgmt. 2 0.024 0.013
Earnings Mgmt. 3 0.020 0.024
Earnings Mgmt. 4 0.018 0.023
Material Restatement (Filing Year) 0.018 0.015
Material Restatement (First Year 0.036** 0.016
Restated)
165
Specifically, for each number reported in Table 6, we estimate the following equation:
y = a + b * SRC + c * After + d * [SRC * After]
where the single-letter terms “a” to “d” are coefficients to be estimated; “SRC” equals one for the treatment group
and zero for the comparison group; and “After” equals one for fiscal years 2008 and 2009 and zero for fiscal
years 2006 and 2007. The treatment effect is reflected in the coefficient estimate d, which is the differential
value of the variable y for treated firms following the start of the treatment. A statistically negative estimate of d
is consistent with a reduction in the value of the dependent variable y (Institutional Ownership, Institutional
Block Ownership, etc.) for treated firms.
166
This table shows changes in the information environment, liquidity, and growth upon the introduction of scaled
disclosure for SRCs. Treatment Group consists of SRCs with public float of $25 million or more and less than
$75 million in fiscal year 2008. Control Group 1 consists of non-SRCs with public float of $75 million or more
and less than $125 million. Control Group 2 consists of small business issuers with public float and revenues
below $25 million. Institutional Ownership is total percentage institutional ownership. Block Institutional
Ownership is total block (5%) institutional ownership. Number of Analysts is the number of analysts following
a registrant. Analyst Coverage Dummy is a dummy variable indicating the existence of analyst following.
Earnings Mgmt. 1-4 are four different discretionary accruals measures. Earnings Mgmt. 1 follows Kothari,
Leone, and Wasley (2005), and Earnings Mgmt. 2-4 follows Dechow, Sloan, and Sweeney (1995).166 Material
Restatement (Filing Year) is a dummy variable that equals one if a registrant discloses restatement under Item
4.02 of Form 8-K in that year, and zero otherwise. Material Restatement (First Year Restated) is a dummy
variable that equals one if the material reason for the restatement under Item 4.02 of Form 8-K originated in that
year, and zero otherwise. Share Turnover is the ratio of shares traded over shares outstanding. Capital
Investment is capital expenditures over book assets. R&D investment is R&D expenditures over revenue. Asset
Growth is the annual growth rate of book assets. ***, **, and * indicate significance at 1%, 5%, and 10%
confidence levels, respectively.
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Treatment Group Treatment Group
vs. Control vs. Control
Group 1 Group 2
Liquidity
Share Turnover Ratio -0.063 -0.052
Growth
Capital Investment 0.005 -0.005
R&D Investment -0.035 -0.002
Asset Growth Rate -0.005 -0.282***
The results in Table 6 suggest that the scaled disclosures had a negative effect on
institutional ownership. The Treatment Group, which became eligible for scaled disclosures,
experienced a 5.2% greater decrease in average institutional ownership from period to period
than the registrants in Control Group 1, which remained ineligible for scaled disclosures, and a
2.2% greater decrease in average institutional ownership from period to period than the
registrants in Control Group 2, which were eligible for scaled disclosures throughout both
periods.
The results reflect a positive effect on material restatements in SRCs based on the first
year restated, while the effect on analyst coverage is inconclusive. SRCs tend to lose analyst
coverage relative to comparable registrants that just missed eligibility, but they gain coverage
relative to even smaller registrants that already were eligible for scaled disclosures. There is no
statistically significant effect on earnings quality as captured by discretionary accruals measures
or the incidence of material restatement based on when the restatement was filed. Overall, the
evidence suggests a modest, but statistically significant, negative effect of scaled disclosure on
SRCs’ overall information environment.
The effect of scaled disclosures on share turnover ratio is negative but statistically
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insignificant, suggesting no significant effect of scaled disclosures on SRCs’ liquidity. 167
Because the newly eligible registrants are larger in market value and have more institutional
ownership and analyst coverage than the current SRCs, to the extent those registrants rely on the
accommodations, we do not expect a significant negative impact on their liquidity.
The results in Table 6 indicate no clear difference between SRCs and registrants in
Control Group 1 and Control Group 2 in terms of changes in capital investment and R&D
investment. The effect on asset growth rate is mixed. There is no significant difference between
the Treatment Group and Control Group 1, but compared to Control Group 2, the Treatment
Group had deterioration in asset growth rate after the 2007 rules. Overall, our empirical analysis
suggests that scaled disclosures have only a minimal effect on growth in current SRCs relative to
the Control Groups. Thus, we do not expect the use of scaled disclosures to have a significant
effect on the growth of the newly eligible registrants under the final rules.
c. Rule 3-05
Similar to our discussion of the amendments to the SRC definition, we generally expect a
modest reduction in compliance costs for registrants that are eligible to provide two rather than
three years of historical financial statements of certain acquired businesses under Rule
3-05(b)(2)(iv), with corresponding potential modest increases in information asymmetries. We
expect the magnitude of the effects of the change in the revenue threshold in Rule 3-05(b)(2)(iv)
to be smaller for those registrants that acquire relevant businesses and their investors, as
167
In contrast, Chang et al. (2013) did find a negative and significant effect of the Commission’s 2007 amendments
on SRCs’ liquidity. The difference in the results could stem from the use of a different empirical methodology,
sample, and sample period. Chang et al. (2013) excluded financial companies. While the authors examined a
pre-amendment period of April to June 2007, we included the entire 2006 and 2007 periods. Also, while the
authors examined a post-amendment period of February to August 2008, we included the entire 2008 and 2009
periods. In addition, the authors focus on a set of illiquidity measures, while we focus on the share turnover
ratio, a commonly used liquidity measure.
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compared to the change in the SRC definition for newly eligible registrants and their
investors. The reason for this expectation is that the revenue threshold in Rule 3-05(b)(2)(iv)
only affects the historical financial statements of the acquired businesses (by limiting them to
two years rather than three years), whereas a registrant that qualifies as a SRC will be able to
comply with a number of scaled disclosure accommodations, including providing two years of
financial statements and scaled executive compensation disclosures. 168
d. Conclusion
Taken together, our empirical analysis suggests that, for most of the newly eligible SRCs
under the final rules, scaled disclosures may generate a modest, but statistically significant,
amount of cost savings in terms of the reduction in compliance costs, a modest, but statistically
significant, deterioration in some of the proxies used to assess the overall quality of information
environment, and a muted effect on the growth of the registrant’s capital investments,
investments in R&D, and assets. We expect the effects on registrants that are newly eligible for
reduced disclosure under Rule 3-05(b)(2)(iv) to be lesser in magnitude but qualitatively similar.
4. Affiliated Ownership and Adverse Selection
In general, holding market value constant, the use of public float to define eligibility
favors registrants with more affiliated ownership. If we consider two registrants with the same
market value but different affiliated ownership, the one with greater affiliated ownership will
have a lower public float, which is the value of non-affiliated ownership, and thus will be more
likely to qualify for SRC status based on the public float threshold. This could be problematic if
the adverse selection problem creates a conflict of interest between affiliated owners—who are
often the decision makers—and non-affiliated owners—who are often the uninformed minority
168
See Section I for a discussion of the scaled disclosure accommodations available to SRCs.
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shareholders on whom reduced disclosure may have a greater impact. We examine whether the
effects of scaled disclosure on registrants’ information environment, liquidity, and growth
depend on the percentage of affiliated ownership, which is the market value of affiliated equity
shares divided by the registrant’s total market value of equity. The average affiliated ownership
is 43% for SRCs in the treatment group in years 2008 and 2009 (median 42%). Specifically, we
examine whether and to what extent the effects of scaled disclosure on information environment,
liquidity, and growth differ for SRCs with high, or above-average, affiliated ownership as
compared to low, or below-average, affiliated ownership.
The results are reflected in Table 7. The number in the Treatment Group vs. Control
Group 1 column reflects the difference between: (1) the difference between the average metric
of registrants in the Treatment Group with affiliated ownership that is higher than the group
median and that of the registrants in the Treatment Group with affiliated ownership that is lower
than the group median and (2) the difference between the average metric of registrants in Control
Group 1 with affiliated ownership that is higher than the group median and that of the registrants
in Control Group 1 with affiliated ownership that is lower than the group median. Similarly, the
number in the Treatment Group vs. Control Group 2 column reflects the difference between: (1)
the difference between the average metric for the higher-than-median affiliated ownership
registrants and that of the lower-than-median affiliated ownership registrants in the Treatment
Group and (2) the difference between the average metrics for the same sectors of Control
Group 2. 169
169
Specifically, for each number reported in Table 7, we estimate the following equation:
y = a + b * SRC + c * After + d * HighAff + e * [SRC * After] + f * [SRC * HighAff] + g * [After * HighAff] + h
* [SRC * HighAff * After]
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Table 7: Affiliated Ownership and Adverse Selection 170
Treatment Group vs. Treatment Group
Control Group 1 vs. Control Group 2
Information Environment:
External Information Production
Institutional Ownership -0.127*** -0.110*
Institutional Block Ownership -0.079** -0.126*
Number of Analysts -0.742** 1.277**
Analyst Coverage Dummy -0.052 0.500**
Information Environment:
Disclosure Quality
Earnings Mgmt. 1 0.010 0.286
Material Restatement (Filing Year) 0.038 -0.040
Material Restatement (Beginning Year) 0.084** 0.001
Liquidity
Share Turnover Ratio 0.052 0.059
Growth
Capital Investment 0.029** 0.049
R&D Investment 0.014 -0.756
Asset Growth Rate 0.136 -1.485
Our analysis suggests that affiliated ownership may exacerbate the potential negative
effects of scaled disclosure on external information production by professionals such as
institutional investors. There is also some evidence that larger affiliated ownership may
exacerbate the adverse effect of scaled disclosure on material restatements based on when such
restatement was triggered in SRCs (relative to Control Group 1). At the same time, scaled
where the single-letter terms “a” to “h” are coefficients to be estimated. “After” and “SRC” are defined in note 165.
“HighAff” is a dummy variable equal to one if the firm’s affiliated ownership is greater than the sample median
of 0.42; otherwise, “HighAff” is equal to zero. The treatment effect of interest is measured by the coefficient h,
which is the differential value of the variable y for treated firms with high affiliated ownership, following the
start of the treatment. See also note 165.
170
This table shows the differences in the changes between registrants with high affiliated ownership and those with
low affiliated ownership upon the introduction of scaled disclosure for SRCs. Affiliated ownership is the
percentage of a registrant’s market value of equity that is owned by affiliated parties (i.e., corporate insiders and
10% block owners). Registrants with high (low) affiliated ownership include registrants with affiliated
ownership above (below) the sample median. A negative and significant estimate means that scaled disclosures
have a more negative effect on SRCs with high affiliated ownership than on those with low affiliated ownership.
***, **, and * indicate significance at 1%, 5%, and 10% confidence levels, respectively
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disclosures tend to have a more positive effect on SRCs’ capital investment when affiliated
ownership is higher. Overall, there is inconclusive evidence that affiliated ownership is
associated with adverse selection in current SRCs.
5. Effects on Efficiency, Competition and Capital Formation
The final rules may have competitive effects. On one hand, the amendments may reduce
the compliance-related costs of newly eligible registrants relative to current SRCs. The
amendments may also increase the competitive advantage of the newly eligible registrants
relative to non-eligible registrants that compete with them in the product market. However,
because there is no clear evidence that scaled disclosures have a significant effect on the growth
of current SRCs, we expect these potentially positive competitive effects to be modest. On the
other hand, setting any eligibility threshold may create a competitive disadvantage for those
registrants that miss eligibility because their public float or revenue is just above the specified
threshold, relative to the newly eligible registrants. However, our economic analysis suggests
that this potentially negative effect also is likely to be modest.
As discussed above, our empirical analysis suggests that scaled disclosures are unlikely
to have a significant negative effect on the overall information environment of SRCs. Thus, we
do not expect the amendments to have a significant negative effect on the information efficiency
of affected parties. Finally, it is difficult to quantify the effect of scaled disclosures on capital
formation. The Commission’s 2007 amendments coincided with the 2008 financial crisis and its
aftermath, which contributed to extremely thin public capital market activities. The potential
cost savings and the potential negative consequences of scaled disclosure for reporting
companies discussed in Tables 5 and 6 (based on data encompassing the period during the
financial crisis) are modest. These figures do not include potential cost savings from newly-
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eligible companies that may contemplate going public. 171
C. Possible Alternatives
In this section, we present several alternatives to the final rules and discuss their relative
costs and benefits.
As a first alternative, we could have used a different registrant size metric in the SRC
definition. While public float has the advantage of capturing the value held by non-affiliated
investors who may be more affected by informational asymmetries, the disadvantage of public
float is twofold. First, reported public float numbers are not easily verifiable. Second, using
public float to define eligibility may increase adverse selection due to conflicts of interest
between affiliated and non-affiliated owners. We considered equity market value as an
alternative size metric to public float. Equity market value is in many instances more accessible
and more easily verifiable than public float. It does not as effectively differentiate registrants
based on the degree of informational asymmetry concerns, but it also does not favor registrants
with more affiliated ownership. If we define registrants as SRCs when they have (1) less than
$250 million in equity market value, (2) no equity market value and revenue below $100 million,
or (3) less than $700 million in equity market value and revenue below $100 million, the number
of registrants estimated to become eligible for scaled disclosure declines by five percent, relative
to the number that are estimated to be eligible under the rule amendments with available 2016
data on public float, revenue and market value. Thus, this alternative would lead to a slightly
smaller pool of registrants eligible for SRC status than under the amendments.
As a second alternative, we could have used different thresholds. Neither public float nor
revenue data show a natural breakpoint for different thresholds. For example, we could take
171
See Section IV.B.1.
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inflation since 2007 into account, raising the public float threshold from $75 million to $86.2
million and the revenue threshold from $50 million to $57.5 million. An inflation adjustment of
the current thresholds would expand the pool of eligible SRCs by 83 registrants, 78 of which
reported public float of between $75 million and $86.2 million in their 2016 Form 10-Ks, and
five of which had no public float and revenue of between $50 million and $57.5 million. 172
Alternatively, instead of the $250 million public float threshold for all registrants and the
$700 million public float threshold for registrants with revenue below $100 million, we could
have allowed the $700 million public float threshold to apply to all registrants, regardless of
revenue. A test capturing all registrants with less than $700 million in public float, regardless of
revenue, would have expanded the pool of eligible SRCs with available data by 1,029 registrants.
Because the $700 million is the threshold in the “large accelerated filer” definition, the effect of
this alternative would be to permit all accelerated filers to provide the SRC scaled disclosures.
For registrants with no public float or public float of less than $700 million, instead of the
$100 million revenue threshold, we could have used a revenue threshold of $1 billion. A
$1 billion revenue threshold would make scaled disclosure accommodations for SRCs and EGCs
generally more consistent for the subset of SRCs that have no public float or public float of less
than $700 million. 173 Using 2016 data, we estimate that if we were to increase the revenue
threshold from $100 million to $1 billion in addition to the accommodations being adopted, there
would be 879 newly eligible registrants based on revenues, in addition to the 966 newly eligible
172
The inflation adjustment was performed using the CPI calculator of the Bureau of Labor Statistics
(http://data.bls.gov/cgi-bin/cpicalc.pl).
173
An EGC is defined as an issuer that had total annual gross revenues of less than $1.07 million during its most
recently completed fiscal year. Pub. L. No. 112-106, Sec. 101, 126 Stat. 306 (2012); 15 U.S.C. 77b(a)(19); 15
U.S.C. 78c(a)(80). Inflation Adjustments and Other Technical Amendments under Titles I and II of the JOBS
Act, Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)].
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registrants under the final rules. Expanding the pool of registrants eligible for SRC status using
this alternative revenue threshold would further reduce overall compliance costs for registrants
but also potentially increase the informational asymmetries and other adverse effects associated
with scaled disclosures. Relative to the current SRCs or the newly eligible SRCs under the final
rules, these additional qualifying registrants also may have different characteristics that could
affect the appropriateness of scaled disclosure. For example, the 879 additional registrants under
this alternative are much larger, implying that any cost savings from scaled disclosures would
generate a much smaller impact on the registrants’ market value, and may not justify the
potential loss of informational transparency.
As a third alternative, we could have considered reducing the number of registrants that
our rules define as accelerated filers, which would expand the number of registrants eligible for
the Sarbanes-Oxley Act Section 404(b) exemption. The newly eligible SRCs under the final
rules will remain accelerated filers and must comply with Section 404(b). This creates two tiers
among SRCs. Registrants with public floats below $75 million are eligible for the scaled
disclosures and, as non-accelerated filers, are exempt from Section 404(b). Registrants with
either (1) public floats of $75 million or more and less than $250 million or (2) public floats of
$75 million or more and less than $700 million and less than $100 million in revenues will be
eligible only for the scaled disclosures and, as accelerated filers, must comply with Section
404(b). In evaluating the costs and benefits of this alternative, we considered the comments that
the Commission received in response to the Proposing Release. In light of these comments, as
stated above, the Chairman has directed the staff to formulate recommendations to the
Commission for possible changes to reduce the number of registrants that our rules define as
accelerated filers.
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V. Paperwork Reduction Act
A. Background
The final rules will affect existing rules, regulations and forms that contain “collection of
information” requirements within the meaning of the Paperwork Reduction Act of 1995
(“PRA”). 174 We are submitting the proposals to the Office of Management and Budget (“OMB”)
for review in accordance with the PRA and its implementing regulations. 175 We also requested
comment on the changes to these “collection of information” requirements in the Proposing
Release.
The titles of the collections of information are: 176
(1) “Regulation S-X” (OMB Control No. 3235-0009);
(2) “Regulation S-K” (OMB Control No. 3235-0071);
(3) “Regulation C” (OMB Control No. 3235-0074);
(4) “Regulation 12B” (OMB Control No. 3235-0062);
(5) “Form 10-K” (OMB Control No. 3235-0063);
(6) “Form 10-Q” (OMB Control No. 3235-0070);
(7) “Form 8-K” (OMB Control No. 3235-0060);
(8) “Regulation 14A and Schedule 14A” (OMB Control No. 3235-0059);
(9) “Regulation 14C and Schedule 14C” (OMB Control No. 3235-0057);
(10) “Form 10” (OMB Control No. 3235-0064);
174
44 U.S.C. 3501 et seq.
175
44 U.S.C. 3507(d); 5 CFR 1320.11.
176
The paperwork burdens from Regulation S-X, Regulation S-K, Regulation C, and Regulation 12B are imposed
through the forms that are subject to the requirements in those regulations and are reflected in the analysis of
those forms. To avoid a PRA inventory reflecting duplicative burdens and for administrative convenience, we
assign a one-hour burden to each of Regulation S-X, Regulation S-K, Regulation C, and Regulation 12B.
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(11) “Form S-1” (OMB Control No. 3235-0065);
(12) “Form S-3” (OMB Control No. 3235-0073);
(13) “Form S-4” (OMB Control No. 3235-0324); and
(14) “Form S-11” (OMB Control No. 3235-0067).
We adopted the existing rules, regulations, and forms pursuant to the Securities Act and
the Exchange Act. These rules, regulations, and forms set forth the disclosure requirements for
annual and quarterly reports, proxy and information statements, current reports, and registration
statements that are prepared by registrants to provide investors information to make informed
investment and voting decisions.
The hours and costs associated with preparing disclosure, filing information required by
forms, and retaining records constitute reporting and cost burdens imposed by collection of
information requirements. An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information requirement unless it displays a currently valid control
number. Compliance with the information collections listed above is mandatory to the extent
applicable to each registrant. 177 Responses to the information collections are not kept
confidential and there is no mandatory retention period for the information disclosed.
B. Summary of the Final Amendments
As described in more detail above, we are adopting final rules to amend the definition of
SRC to encompass a greater number of registrants and to revise Rule 3-05(b)(2)(iv) of
Regulation S-X to align the revenue threshold in that rule with the new revenue threshold in the
definition of SRC. The final rules make scaled disclosure accommodations available to a larger
177
As noted above, registrants claiming SRC status have the option to comply with the scaled disclosures available
to them on an item-by-item basis.
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number of registrants. As a result, the final rules should decrease the disclosure requirements for
registrants that fall within the expanded thresholds of the SRC definition and should decrease the
disclosure burden for registrants acquiring other companies by increasing the number of acquired
companies for which Rule 3-05(b)(2)(iv) of Regulation S-X permits one less year of financial
information to be disclosed.
In the Proposing Release, we proposed to amend the SRC definition to include registrants
with a public float of less than $250 million, as well as registrants with annual revenues of less
than $100 million for the previous year and no public float. We are adopting the amendments
generally as proposed with two changes. In a change from the proposal, the SRC definition in
the final rules also will include registrants with annual revenues of less than $100 million for the
previous year and a public float of less than $700 million. As detailed below, the burden
estimates for the respective forms and schedules have been revised to reflect that the SRC scaled
disclosure accommodations also will be available to the additional registrants that come within
these revised thresholds.
In another change from the proposal, we are amending Rule 3-05(b)(2)(iv) of Regulation
S-X to increase the revenue threshold under which certain registrants may omit from certain
registration statements or current reports the earliest of the three fiscal years of audited financial
statements of an acquired business or business to be acquired. 178 Accordingly, we have added
two new titles, “Regulation S-X” (OMB Control No. 3235-0009) and “Form 8-K” (OMB
Control No. 3235-0060), to the collections of information affected by the final rules. The impact
of the amendment to Rule 3-05(b)(2)(iv) is reflected in the burden estimates for the applicable
178
See note 95.
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forms. 179 However, as discussed below, while we estimate that the amendment to Rule 3-05 may
decrease the existing paperwork burden for some issuers, we do not believe it will change the
total burden estimates for the relevant registration statements and current reports.
The final rules do not change the amount of information required to be included in
Exchange Act reports by any registrant because of its status as an accelerated filer or a large
accelerated filer.
C. Summary of Comment Letters
One commenter addressed the specific PRA-related comment requests in the Proposing
Release. 180 This commenter stated that the proposed adjustment to the SRC definition is fair and
that the details provided as the basis for the cost reduction estimates appear to be thorough and
specific. 181 As to the ways to enhance the information collected, the commenter stated that the
burden of preparing information remained with the respective registrant and that registrants may
be required to provide additional disclosure if they are entering into capital transactions. 182 As to
ways to minimize the burden of the collection of information, the commenter stated that XBRL
may facilitate the evaluation of data. 183 Lastly, the commenter stated that the list of collections of
information appeared to be complete and that it was not aware of any collection of information
that would be negatively affected. 184
179
See note 176.
180
See IMA.
181
Id.
182
Id.
183
Id.
184
Id.
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D. Revisions to Burden and Cost Estimates
For purposes of the PRA, the final rules decrease the burden hour and costs estimates for
Form 10-K, Form 10-Q, Schedule 14A, Schedule 14C, Form 10, Form S-1, Form S-3, Form S-4,
and Form S-11 by approximately 493,016 burden hours and decrease external costs by
approximately $ 66,242,345. 185
Our burden hour and cost estimates below reflect the average burdens for all registrants
that may benefit from the expanded accommodations. In deriving our estimates, we recognize
that the burdens likely will vary among individual registrants based on a number of factors,
including the size and complexity of their business. We believe that some registrants will
experience costs in excess of this average and some registrants will experience less than the
average costs.
For quarterly and annual reports and for proxy and information statements, we estimate
that 75% of the burden of preparation is carried by the registrant internally and that 25% of the
burden is carried by outside professionals retained by the registrant at an average cost of $400
per hour. 186 For registration statements, we estimate that 25% of the burden of preparation is
carried by the registrant internally and that 75% of the burden is carried by outside professionals
retained by the registrant at an average cost of $400 per hour. While we cannot predict with
185
These estimates reflect the difference between (1) our estimates of the burden hours and costs for each affected
collection of information under the final rules and (2) the current estimates for each affected collection of
information prior to effectiveness of the final rules. The current estimates for some of the affected collections of
information have changed since the Proposing Release due to changes in our rules that are unrelated to the
amendments we are adopting. As a result, our estimated changes in the burden hours and costs for each affected
collection of information in this release may differ from our estimates for the same collection of information in
the Proposing Release.
186
We recognize that the costs of retaining outside professionals may vary depending on the nature of the
professional services, but for purposes of this PRA analysis, we estimate that such costs will average $400 per
hour. This is the rate we typically estimate for outside legal services used in connection with public company
reporting. See Section VI.D below for a discussion of the professional skills needed to comply with the
amendments.
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certainty the number of newly eligible SRCs that will begin to use the scaled disclosure
provisions, for purposes of our PRA calculations, we estimate that 80% of them will do so. 187
For purposes of the PRA, we estimate that over a three-year period, 188 the annual
aggregate decreased burden 189 resulting from the amendments in the final rules will average:
• 403,250 hours and $53,883,321 of external costs for Form 10-K;
• 88,864 hours and $11,851,661 of external costs for Form 10-Q;
• 481 hours and $64,160 of external costs for Schedule 14A;
• 11 hours and $1,440 of external costs for Schedule 14C;
• nine hours and $11,163 of external costs for Form 10;
• 145 hours and $174,000 of external costs for Form S-1;
• 38 hours and $45,600 of external costs for Form S-3;
• 203 hours and $243,600 of external costs for Form S-4; and
• 15 hours and $17,400 of external costs for Form S-11.
1. Form 10-K
We estimate that approximately 966 additional registrants will satisfy the revised
definition of a SRC and become eligible to use scaled disclosure in their annual reports on Form
187
This estimated realization rate reflects the percentage of registrants eligible to claim SRC status in 2016 that
claimed such status. Based on data collected by DERA, 2,408, or approximately 91.2%, of an estimated 2,640
eligible registrants claimed SRC status.
In addition, this estimated realization rate is further reduced to reflect that a portion of newly eligible SRCs may
already qualify as EGCs, which are eligible to rely on certain scaled disclosure requirements for a limited period,
including some of the scaled requirements available to SRCs. Based on data collected by DERA, 365, or
approximately 37.8%, of the 966 registrants in 2016 that would have been newly eligible for scaled disclosure
under the final rules were EGCs and therefore already benefitting from a portion of these estimated savings.
188
We calculated an annual average over a three-year period because OMB approval of PRA submissions covers a
three-year period.
189
Our decreased burden estimates take into account, and are net of, any increased burden that may result from
SRCs providing expanded disclosures under disclosure requirements that are more stringent for SRCs than for
non-SRCs, such as Item 404 of Regulation S-K.
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10-K. These registrants could experience burden and cost savings under the final rules. 190 We
estimate that, if all of these registrants used all of the scaled disclosure requirements, they would
save an estimated 504,063 burden hours and an aggregate cost of $67,291,651. 191
Based on our assumption that 80% of newly eligible registrants will begin to use scaled
disclosure, we estimate an aggregate decrease of 403,250 internal burden hours and costs of
$53,833,321 for Form 10-K. 192
2. Form 10-Q
We assume that the same approximately 966 registrants will become newly eligible to
use scaled disclosure for purposes of their quarterly reports. We estimate that if all of these
registrants used all of the scaled SRC requirements, they would save 111,080 burden hours and
an aggregate cost of $14,814,576. 193
190
We estimate that 966 additional registrants will be eligible under the final rules to use the scaled disclosure
requirements available to SRCs for their annual and quarterly reports in the first year. We base this estimate on
the number of additional registrants that would have been eligible to use scaled disclosure for their annual and
quarterly reports in 2016, based on data collected by DERA from annual reports on Form 10-K filed in 2016.
The data show that 779 registrants had a public float of $75 million or more but less than $250 million, 26
registrants had no public float and annual revenues of $50 million or more but less than $100 million, and 161
registrants had a public float of $250 million or more but less than $700 million and annual revenues of less than
$100 million.
191
Consistent with our analysis in the SRC Adopting Release and the Proposing Release, we estimate the
compliance burden for a Form 10-K for a SRC using all scaled disclosure available to be the same as the last
available PRA inventory for completing a Form 10-KSB, which was 1,272 burden hours and a cost of $169,600
(424 professional hours x $400/hour) per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Form 10-K by up to 504,062.65hours (1,793.80 internal hours per filing using
standard Regulation S-K and Regulation S-X disclosure minus 1,272.00 internal hours per filing using scaled
disclosure = 521.80 internal hours saved per filing x 966 filings) and decrease the cost by up to $67,291,651.41
(598.15 professional hours per filing using standard Regulation S-K and Regulation S-X disclosure minus
424.00 professional hours per filing using scaled disclosure = 174.15 external hours saved per filing x $400 per
hour = $69,660.09 external cost savings per filing x 966 filings).
192
This estimated decrease in the compliance burden for Form 10-K is based on 80% x 504,062.65 internal hours
saved = 403,250.12 internal hours saved and 80% x $67,291,651.41 external cost savings = $53,833,312.13
external cost savings.
193
Similar to our approach to estimating the reduced compliance burden for a Form 10-K using scaled disclosure,
we base our estimates of the reduced compliance burden for SRCs using all scaled disclosure available for
certain other filings on the last available PRA inventory for completing the most comparable form under
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Assuming that 80% of newly eligible registrants will begin to use scaled disclosure, we
estimate an aggregate decrease of 88,864 internal burden hours and costs of $11,851,661 for
Form 10-Q. 194
3. Form 8-K
We estimate that the amendments to Rule 3-05 may decrease the existing paperwork
burden for some registrants but not change the total burden estimates for Form 8-K. This reflects
our appraisal that few registrants are eligible to rely on the $50 million threshold in Rule 3-
05(b)(2)(iv) and our expectation that the amendments will not significantly change the number of
registrants that are eligible to rely on Rule 3-05(b)(2)(iv). 195 This also is consistent with the
Commission’s estimate of the impact on the compliance burden for Form 8-K when it revised
Rule 3-05 of Regulation S-X in 2007 to increase the threshold in Rule 3-05(b)(iv) from $25
million to $50 million. 196
Regulation SB. We estimate the compliance burden for a Form 10-Q for a SRC using all scaled disclosure
available to be the same as the last available PRA inventory for completing a Form 10-QSB, which was 102.24
burden hours and a cost of $13,362 (34.08 professional hours x $400/hour) per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Form 10-Q by up to 111,080.34 hours (140.57 internal hours per filing using
standard Regulation S-K disclosure minus 102.24 internal hours per filing using scaled disclosure = 38.33
internal hours saved per filing x 966 registrants x 3 filings per year) and decrease the cost by up to
$14,814,576.00 (46.86 professional hours per filing using standard Regulation S-K disclosure minus 34.08
professional hours per filing using scaled disclosure = 12.78 external hours saved per filing x $400 per hour =
$5,112 external cost savings per filing x 966 registrants x 3 filings per year).
194
This estimated decrease in the compliance burden for Form 10-Q is based on 80% x 111,080.34 internal hours
saved = 88,864.27 internal hours saved and 80% x $14,814,576.00 external cost savings = $11,851,660.80
external cost savings.
195
See Section IV.B.1.
196
See SRC Adopting Release.
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4. Schedule 14A
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 802 definitive proxy statements on Schedule 14A per year. 197 We estimate that if
all of these registrants used all of the scaled SRC requirements, they would save 602 burden
hours and an aggregate cost of $80,200. 198
Assuming that 80% of newly eligible registrants will begin to use scaled disclosure, we
estimate an aggregate decrease of 481 internal burden hours and costs of $64,160 for Schedule
14A. 199
5. Schedule 14C
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 18 definitive information statements on Schedule 14C per year. 200 We estimate
197
We base this estimate on the number of definitive proxy statements on Schedule 14A filed in 2016 by registrants
that would have been newly eligible to use scaled disclosure under the final rules. Based on data collected by
DERA, registrants with a public float of $75 million or more but less than $250 million filed 652 definitive
proxy statements on Schedule 14A, registrants with no public float and annual revenues of $50 million or more
but less than $100 million filed 17 definitive proxy statements on Schedule 14A, and registrants with a public
float of $250 million or more but less than $700 million and annual revenues of less than $100 million filed 133
definitive proxy statements on Schedule 14A.
198
We base our estimate of the reduced compliance burden for Schedule 14A for a SRC using all scaled disclosure
available on our estimate of the compliance burden for Item 407(d)(5) and (e)(4) and (5) of Regulation S-K [17
CFR 229.407(d)(5) and (e)(4) and (5)], with which SRCs are not required to comply. We estimate this burden to
be 0.75 burden hours and a cost of $100 (0.25 professional hours x $400/hour) per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Schedule 14A by up to 601.57 hours (0.75 internal hours saved per filing x
802 filings) and decrease the cost by up to $80,200.00 (0.25 professional hours saved per filing x $400 per hour
= $100 external cost savings per filing x 802 filings).
199
This estimated decrease in the compliance burden for Schedule 14A is based on 80% x 601.57 internal hours
saved = 481.25 internal hours saved and 80% x $80,200.00 external cost savings = $64,160.00 external cost
savings.
200
We base this estimate on the number of definitive information statements on Schedule 14C filed in 2016 by
registrants that would have been newly eligible to use scaled disclosure under the final rules. Based on data
collected by DERA, registrants with a public float of $75 million or more but less than $250 million filed nine
definitive information statements on Schedule 14C, registrants with no public float and annual revenues of $50
million or more but less than $100 million filed no definitive information statements on Schedule 14C, and
registrants with a public float of $250 million or more but less than $700 million and annual revenues of less
than $100 million filed nine definitive information statements on Schedule 14C.
72
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that if all of these registrants used all of the scaled SRC requirements, they would save 14 burden
hours and an aggregate cost of $1,800. 201
Assuming that 80% of newly eligible registrants will begin to use scaled disclosure, we
estimate an aggregate decrease in burden of 11 internal burden hours and costs of $1,440 for
Schedule 14C. 202
6. Form 10
We estimate that registrants newly eligible to use scaled disclosure will file one
registration statements on Form 10 per year. 203 Assuming that this registrant uses all of the
scaled SRC requirements, we estimate an aggregate decrease of nine internal burden hours and
cost of $11,163 for Form 10. 204 Due to the low number of Form 10 filers and rounding
201
Similar to Schedule 14A, we base our estimate of the decrease in the compliance burden for Schedule 14C for a
SRC using all scaled disclosure available on our estimate of the compliance burden for Item 407(d)(5) and (e)(4)
and (5) of Regulation S-K, which is 0.75 burden hours and a cost of $100 (0.25 professional hours x $400/hour)
per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Schedule 14C by up to 13.48 hours (0.75 internal hours saved per filing x 18
filings) and decrease the cost by up to $1,800.00 (0.25 professional hours saved per filing x $400 per hour =
$100 external cost savings per filing x 18 filings).
202
This estimated decrease in the compliance burden for Schedule 14C is based on 80% x 13.48 internal hours
saved = 10.79 internal hours saved and 80% x $1,800 external cost savings = $1,440 external cost savings.
203
We generally base our estimated number of each type of registration statement filed on the average number of
that type of registration statement filed in each of the calendar years 2014 through 2016 by registrants that would
have been newly eligible to use scaled disclosure under the final rules.
Based on data collected by DERA, registrants that would have been newly eligible to use scaled disclosure under
the final rules filed an average of less than one registration statement on Form 10 per year during the period 2014
through 2016. However, we believe an estimate of one Form 10 is more reasonable because, as reflected in the
Proposing Release, such registrants have filed more than one Form 10 in prior years.
204
We estimate the compliance burden for a Form 10 for a SRC using all scaled disclosure available to be the same
as the last available PRA inventory for completing a Form 10-SB, which was 44.50 burden hours and a cost of
$53,400 (133.50 professional hours x $400/hour) per report.
Accordingly, if all eligible registrants used all available scaled disclosure, we estimate that the final rules will
decrease the compliance burden of Form 10 by up to 9.30 hours (53.80 internal hours per filing using standard
Regulation S-K and Regulation S-X disclosure minus 44.50 internal hours per filing using scaled disclosure =
9.30 internal hours saved per filing x one filing) and decrease the cost by up to $11,163.20 (161.41 professional
hours per filing using standard Regulation S-K and Regulation S-X disclosure minus 133.50 professional hours
73
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considerations, we assume that all newly eligible registrants filing Form 10 will begin to use
scaled disclosure and therefore realize the full extent of burden and cost savings.
7. Form S-1
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 25 registration statements on Form S-1 per year. 205 We estimate that if all of these
registrants use all of the scaled SRC requirements, they would save 181 burden hours and an
aggregate cost of $217,500. 206
Assuming that 80% of these newly eligible registrants will begin to use scaled disclosure,
we estimate an aggregate decrease of 145 internal burden hours and costs of $174,000 for Form
S-1. 207
8. Form S-3
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 190 registration statements on Form S-3 per year. 208 We estimate that if all of
per filing using scaled disclosure = 27.91 external hours saved per filing x $400 per hour = $11,163.20 external
cost savings per filing x one filing).
205
Based on data collected by DERA, during 2014 through 2016, registrants with a public float of $75 million or
more but less than $250 million filed an average of approximately 17 registration statements on Form S-1 each
year, registrants with no public float and annual revenues of $50 million or more but less than $100 million filed
an average of approximately two registration statements on Form S-1 each year, and registrants with a public
float of $250 million or more but less than $700 million and annual revenues of less than $100 million filed an
average of six registration statements on Form S-1 each year.
206
We estimate the compliance burden for a Form S-1 for a SRC using all scaled disclosure available to be the same
as the last available PRA inventory for completing a Form SB-2, which was 159.50 burden hours and a cost of
$191,400 (478.50 professional hours x $400/hour) per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Form S-1 by up to 181.25 hours (166.75 internal hours per filing using
standard Regulation S-K and Regulation S-X disclosure minus 159.50 internal hours per filing using scaled
disclosure = 7.25 internal hours saved per filing x 25 filings) and decrease the cost by up to $217,500.00 (500.25
professional hours per filing using standard Regulation S-K and Regulation S-X disclosure minus 478.50
professional hours per filing using scaled disclosure = 21.75 external hours saved per filing x $400 per hour =
$8,700 external cost savings per filing x 25 filings).
207
This estimated decrease in the compliance burden for Form S-1 is based on 80% x 181.25 internal hours saved =
145.00 internal hours saved and 80% x $217,500.00 external cost savings = $174,000.00 external cost savings.
74
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these registrants use all of the scaled SRC requirements, they would save 48 burden hours and an
aggregate cost of $57,000. 209
Assuming that 80% of the newly eligible registrants will begin to use scaled disclosure,
we estimate an aggregate decrease of 38 internal burden hours and costs of $ 45,600 for Form
S-3. 210
9. Form S-4
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 35 registration statements on Form S-4 per year. 211 We estimate that if all of these
registrants use all of the scaled SRC requirements, they would save 254 burden hours and an
aggregate cost of $304,500. 212
208
Based on data collected by DERA, during 2014 through 2016, registrants with a public float of $75 million or
more but less than $250 million filed an average of approximately 148 registration statements on Form S-3 each
year, registrants with no public float and annual revenues of $50 million or more but less than $100 million filed
an average of two registration statements on Form S-3 each year, and registrants with a public float of $250
million or more but less than $700 million and annual revenues of less than $100 million filed an average of 40
registration statements on Form S-3 each year.
209
We base our estimate of the reduced compliance burden for Form S-3 for a SRC using all scaled disclosure
available on our estimate of the average compliance burden for Items 503(d) and 504 of Regulation S-K [17
CFR 229.503(d) and 229.504], which requirements are scaled for SRCs. We estimate the decrease in
compliance burden for a registration statement on Form S-3 for a SRC using all scaled disclosure available to be
0.25 burden hours and a cost of $300 (0.75 professional hours x $400/hour) per filing.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Form S-3 by up to 47.50 hours (0.25 internal hours saved per filing x 190
filings) and decrease the cost by up to $57,000.00 ($300 external cost savings per filing x 190 filings).
210
This estimated decrease in the compliance burden for Form S-3 is based on 80% x 47.50 internal hours saved =
38.00 internal hours saved and 80% x $57,000.00 external cost savings = $45,600.00 external cost savings.
211
Based on data collected by DERA, during 2014 through 2016, registrants with a public float of $75 million or
more but less than $250 million filed an average of approximately 30 registration statements on Form S-4 each
year, registrants with no public float and revenues of $50 million or more but less than $100 million filed an
average of approximately one registration statement on Form S-4 each year, and registrants with a public float of
$250 million or more but less than $700 million and annual revenues of less than $100 million filed an average
of four registration statements on Form S-4 each year.
212
We estimate the reduction in the compliance burden for Form S-4 for a SRC using all scaled disclosure available
to be the same as the reduction in the compliance burden for a Form S-1 for a SRC using all scaled disclosure
available as compared to standard Regulation S-K and Regulation S-X disclosure, which was 7.25 burden hours
and a cost of $8,700 (21.75 professional hours x $400/hour) per report.
75
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Assuming that 80% of newly eligible registrants will begin to use scaled disclosure, we
estimate an aggregate decrease of 203 internal burden hours and costs of $243,600 for Form
S-4. 213
10. Form S-11
We estimate that registrants newly eligible to use scaled disclosure will file
approximately two registration statements on Form S-11 per year. 214 Assuming that both of these
registrants use all of the scaled SRC requirements, we estimate an aggregate decrease of 15
burden hours and cost of $17,400 for Form S-11. 215
Due to the low number of Form S-11 filers and rounding considerations, we assume that
both of the newly eligible registrants filing Form S-11 will begin to use scaled disclosure and
realize the full extent of burden and cost savings.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules will
decrease the compliance burden of Form S-4 by up to 253.75 hours (7.25 internal hours saved per filing x 35
filings) and decrease the annual cost by up to $304,500.00 ($8,700 external cost savings per filing x 35 filings).
213
This estimated decrease in the compliance burden for Form S-4 is based on 80% x 253.75 internal hours saved =
203.00 internal hours saved and 80% x $304,500.00 external cost savings = $243,600.00 external cost savings.
214
Based on data collected by DERA, during 2014 through 2016, registrants with a public float of $75 million or
more but less than $250 million filed an average of approximately one registration statement on Form S-11 each
year, registrants with no public float and revenues of $50 million or more but less than $100 million filed an
average of less than one registration statement on Form S-11 each year, and registrants with a public float of
$250 million or more but less than $700 million and annual revenues of less than $100 million filed an average
of one registration statement on Form S-11 each year.
215
We estimate the reduction in the compliance burden for Form S-11 for a SRC using all scaled disclosure
available to be the same as reduction in the compliance burden for Form S-1 for a SRC using all scaled
disclosure available as compared to standard Regulation S-K disclosure and Regulation S-X, which was 7.25
burden hours and a cost of $8,700 (21.75 professional hours x $400/hour) per report.
Accordingly, we estimate that, if both eligible registrants used all available scaled disclosure, the final rules will
decrease the compliance burden of Form S-11 by up to 14.50 hours (7.25 internal hours saved per filing x two
filings) and decrease the annual cost by up to $17,400.00 ($8,700 external cost savings per filing x two filings).
76
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VI. Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (“RFA”) 216 requires us, in promulgating rules under
Section 553 of the Administrative Procedure Act, 217 to consider the impact of those rules on
small entities. We have prepared this Final Regulatory Flexibility Analysis (“FRFA”) in
accordance with Section 604 of the RFA. 218 This FRFA relates to amendments to the SRC
definition as used in our rules and Rule 3-05 of Regulation S-X. An Initial Regulatory
Flexibility Analysis (“IRFA”) was prepared in accordance with the RFA and was included in the
Proposing Release.
A. Need for, and Objectives of, the Final Rules
The amendments to the SRC definition in the final rules are intended to promote capital
formation through a modest reduction in compliance costs and disclosure burdens for these
registrants by expanding the number of registrants that qualify as SRCs and are eligible to
provide scaled disclosure, while maintaining appropriate investor protections. These
amendments will enable a registrant to qualify as a SRC based on a public float test or a revenue
test that includes registrants both with and without a public float. 219 We believe that the
amendments will permit a broader group of registrants to make scaled disclosure to their
investors without significantly detracting from investor protections.
The amendments to Rule 3-05(b)(2)(iv) of Regulation S-X will maintain the consistency
of the revenue thresholds in Rule 3-05 and the definition of a SRC. The current revenue
threshold in Rule 3-05(b)(2)(iv) was based on the revenue threshold in the SRC definition, and
216
5 U.S.C. 601 et seq.
217
5 U.S.C. 553.
218
5 U.S.C. 604.
219
See Item 10(f)(1)(i) and (ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
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the final rules maintain this consistency by increasing the revenue threshold in Rule 3-
05(b)(2)(iv) to $100 million. This amendment will enable more registrants to omit the earliest of
the three fiscal years of audited financial statements of an acquired business or business to be
acquired in certain registration statements and current reports.
The amendments to the accelerated filer and large accelerated filer definitions in
Exchange Act Rule 12b-2 maintain the current thresholds at which registrants are subject to
accelerated and large accelerated filer disclosure and filing requirements. At this time, we are
not raising the accelerated filer public float threshold or modifying the Section 404(b)
requirements for registrants.
The need for, and objectives of, the final rules are discussed in more detail in Sections II
and IV above.
B. Significant Issues Raised by Public Comments
In the Proposing Release, we requested comment on all aspects of the IRFA, including
the number of small entities that would be affected by the proposed amendments, the existence
or nature of the potential impact of the proposals on small entities discussed in the analysis, and
how to quantify the impact of the proposed amendments. We did not receive any comments
specifically addressing the IRFA. We did, however, receive comments from members of the
public on matters that could potentially impact small entities. These comments are discussed at
length by topic in the corresponding subsections of Section II above.
While many commenters expressed support for the proposed amendments to the SRC
definition, 220 commenters also recommended making changes to the proposed rules that would
220
See Acorda et al; AMTA; BDO; BIO; CAQ/CII; CONNECT; Coalition; ICBA; MidSouth; Nasdaq; NVCA;
NYSE; Seneca; and IMA.
78
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further expand the number of registrants that would qualify as SRCs and would be eligible to
rely on the scaled disclosure requirements. For example, many commenters recommended that
the Commission allow a revenue test for companies with a public float. 221 Commenters stated
that a revenue test would “stimulat[e] innovation and drive business growth,” 222 “ensure that pre-
revenue companies are not forced to divert investment funds…from science to compliance,” 223
and help “avoid stifling the advancement of [these] companies that face costly compliance
burdens.” 224 Two commenters specifically recommended that the Commission adopt a test based
on revenues of less than $100 million and a public float of less than $700 million, as
recommended by the Small Business Forum. 225 In response to commenters 226 and
recommendations from the Small Business Forum, 227 the definition in the final rules will include,
in addition to registrants with a public float of less than $250 million, registrants with annual
revenues of less than $100 million during their most recently completed fiscal year and either no
public float or a public float of less than $700 million. 228 As described above, we believe that it
is appropriate to provide a measure by which a registrant with public float but with limited
revenues may qualify as a SRC. 229
221
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; CSBA; Nasdaq; NYSE; and Zeller.
222
BIO.
223
Acorda, et al.
224
AMTA.
225
See BIO; and Calithera.
226
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; and CSBA.
227
See notes 16 and 85 for a discussion of the Small Business Forum recommendations.
228
See Item 10(f)(1)(ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
229
See Section II.A.2.
79
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We are not, however, adopting a revenue test without a limitation on the public float or
market capitalization of the company, as specifically suggested by two commenters. 230 We
believe the amended revenue test in the final rules is consistent with the position expressed by
these commenters and others 231 that it is not necessary to subject capital-intensive, low-revenue
registrants with larger public floats or market capitalizations to the same reporting requirements
as registrants with larger public floats and more well-established, revenue-generating businesses.
The amended revenue test in the final rules will enable these registrants to benefit from the cost-
savings of scaled reporting, while recognizing that as a registrant’s business and public float
grows, investors should benefit from greater disclosure. The additional information provided by
the registrant in these circumstances will assist a growing investor base in making informed
investment decisions and should also lead to a lower cost of capital for the business as it grows.
Two commenters recommended amending Rule 3-05 to increase the revenue threshold in
paragraph (b)(2)(iv) to $100 million to maintain the alignment between Rule 3-05 and the
definition of a SRC. 232 Given that the current revenue threshold in Rule 3-05(b)(2)(iv) was based
on the revenue threshold in the SRC definition233 and that the final rules, among other things,
increase the revenue threshold in the SRC definition from $50 million to $100 million, we
believe it is appropriate to raise the net revenue threshold in Rule 3-05(b)(2)(iv) of Regulation
S-X from $50 million to $100 million.
While some commenters supported eliminating the provision in the accelerated filer and
large accelerated filer definitions that specifically excludes registrants that are eligible to use the
230
See NYSE; and Nasdaq.
231
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; CSBA; NYSE; and Nasdaq.
232
See EY; and BDO.
233
See 1996 Rule 3-05 Adopting Release and SRC Adopting Release.
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SRC disclosure requirements for their annual or quarterly reports, 234 many other commenters
recommended that the Commission increase the thresholds in the accelerated filer definition,
consistent with the changes to the SRC definition.235 Commenters recommended increasing the
public float threshold in the accelerated filer definition to reduce compliance costs 236 and to
maintain consistency in the rules. 237
The final rules include amendments to the accelerated filer and large accelerated filer
definitions in Exchange Act Rule 12b-2 to maintain the current thresholds at which registrants
are subject to accelerated and large accelerated filer disclosure and filing requirements. These
amendments will change the current relationship between the SRC and “accelerated filer”
definitions by allowing a registrant to qualify as both a SRC and an accelerated filer. 238 As stated
above, the Chairman has directed the staff to formulate recommendations to the Commission for
possible changes to reduce the number of registrants that our rules define as accelerated filers.
As part of the staff’s consideration of possible recommended amendments, the Chairman has
directed the staff to consider, among other things, the historical and current relationship between
the SRC and “accelerated filer” definitions.
234
See BDO; CAQ/CII; CFA Institute; Deloitte; and EY.
235
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; Coalition; CSBA; ICBA; Dixie; MidSouth; Nasdaq;
NVCA; NYSE; and Seneca.
236
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; Coalition; CSBA; ICBA; Dixie; MidSouth; Nasdaq;
NVCA; NYSE; and Seneca.
237
See BIO; Coalition; Nasdaq; NVCA; and NYSE.
238
In conjunction with these amendments, we also are adopting technical revisions to Securities Act Forms S-1, S-
3, S-4, S-8, and S-11 and Exchange Act Forms 10, 10-Q and 10-K. These amendments modify the cover page of
the specified forms to remove the parenthetical next to the “non-accelerated filer” definition that states “(Do not
check if a smaller reporting company).” After these amendments, a registrant should check all applicable boxes
on the cover page addressing, among other things, non-accelerated, accelerated, and large accelerated filer status,
SRC status, and emerging growth company status.
81
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We believe that the final rules will reduce disclosure burdens by expanding the number of
registrants that will qualify as SRCs and that are eligible to provide scaled disclosure, while
maintaining appropriate investor protections.
C. Small Entities Subject to the Final Rules
For purposes of the RFA, under 17 CFR 230.157 (Securities Act Rule 157), an issuer,
other than an investment company, is a “small business” or “small organization” if it had total
assets of $5 million or less on the last day of its most recent fiscal year and is engaged or
proposing to engage in an offering of securities not exceeding $5 million. Under 17 CFR 240.0-
10(a) (Exchange Act Rule 0-10(a)), an issuer, other than an investment company, is a “small
business” or “small organization” if it had total assets of $5 million or less on the last day of its
most recent fiscal year.
We estimate that there are currently 1,181 entities that qualify as “small” under the
definitions set forth above. 239 We believe it is likely that virtually all small businesses or small
organizations, as defined in our rules described above, are already encompassed within the
current SRC definition and the current revenue threshold in Rule 3-05(b)(2)(iv) of Regulation S-
X and will continue to be encompassed within the revised thresholds contained in the final rules.
To the extent any small business or small organization, as defined for RFA purposes, is not
already encompassed within the current SRC definition and the current revenue threshold in Rule
3-05(b)(2)(iv) of Regulation S-X, we believe it is likely that the revised thresholds contained in
the final rules will capture those entities.
239
This estimate is based on staff analysis of XBRL data submitted by filers, excluding co-registrants, with EDGAR
filings of Forms 10-K filed during the calendar year of January 1, 2016 to December 31, 2016.
82
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D. Projected Reporting, Recordkeeping and Other Compliance Requirements
The amendments to the SRC definition in the final rules increase the number of
registrants eligible to provide scaled disclosures in response to Regulation S-K and Regulation
S-X disclosure requirements. These amendments do not revise the scaled disclosure
requirements themselves, but could modestly decrease the disclosures required for registrants
that will qualify as SRCs under the expanded thresholds.
Consistent with the amendments to the revenue threshold in the SRC definition, the
amendment to Rule 3-05 of Regulation S-X raises the net revenue threshold in Rule 3-
05(b)(2)(iv) of Regulation S-X from $50 million to $100 million. Current Rule 3-05(b)(2)(iv)
allows certain registrants to omit financial statements of businesses acquired or to be acquired in
certain registration statements and current reports for the earliest of the three fiscal years required
if the net revenues of the business to be acquired are less than $50 million. With the amendment,
those registrants will become eligible to omit the relevant financial statements for acquired
businesses with net annual revenues of $50 million or more but less than $100 million in the
most recent fiscal year. In this way, the amendment to Rule 3-05 could moderately decrease the
existing disclosure requirements for some registrants; however, we do not expect that the number
of registrants affected by the amendments will be significant.
Both (i) the amendments to the SRC definition, which expand the number of registrants
that qualify for the scaled disclosure based on revenue and public float measures, and (ii) the
amendment to Rule 3-05 of Regulation S-X, which expands the pool of acquired companies for
which registrants are required to provide only two years of financials, reduce disclosure already
required to be prepared under our rules. Accordingly, there are no particular professional skills
needed to comply with the amendments themselves. Consistent with the current rules, however,
83
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a registrant will need to monitor the applicable thresholds for disclosure and to comply with the
underlying existing disclosure requirements, which may require the use of professional skills,
including information technology, accounting, and legal skills.
The amendments are discussed in detail in Section II above. We discuss the economic
impact, including the estimated compliance costs and burdens, of the final rules in Section IV
(Economic Analysis) and Section V (Paperwork Reduction Act) above.
E. Agency Action to Minimize Effect on Small Entities
The RFA directs us to consider significant alternatives that would accomplish the stated
objectives of the amendments, while minimizing any significant adverse impact on small entities.
Accordingly, we considered the following alternatives:
• establishing different compliance or reporting requirements or timetables that take into
account the resources available to small entities;
• clarifying, consolidating or simplifying compliance and reporting requirements for small
entities under our rules as revised by the amendments;
• using performance rather than design standards; and
• exempting small entities from coverage of all or part of the amendments.
The amendments generally do not create any new compliance or reporting requirements.
Instead, the amendments expand the number of companies eligible for the different compliance
and reporting requirements available to SRCs and increase the revenue threshold to qualify for
the disclosure accommodation in Rule 3-05(b)(2)(iv) of Regulation S-X. 240 As a result, we do
not believe it is necessary or appropriate to exempt small entities in connection with this
240
As discussed in note 20, Item 404 is the only disclosure item in Regulation S-K that may require more extensive
information for SRCs than for non-SRCs. See also note 22.
84
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rulemaking. The amendments are intended to increase the number of registrants eligible to
provide scaled disclosures under Regulation S-K and Regulation S-X. To the extent any small
entity is not already encompassed within the current SRC definition or the current revenue
threshold in Rule 3-05(b)(2)(iv) of Regulation S-X, we believe it is likely that the revised
thresholds contained in the final rules will capture those entities, thereby enabling them to
provide scaled disclosures. Therefore, we believe that the amendments will simplify compliance
and reporting requirements for small entities. Small entities may avail themselves of the
amendments upon their effective date. This timetable will provide newly-eligible small entities
with the ability to take advantage of the scaled disclosure requirements at the earliest possible
date. In this regard, we do not believe that it is necessary to establish a different timetable for
small entities. With respect to the use of performance rather than design standards, because the
amendments are not expected to have any significant adverse effect on small entities (and are, in
fact, expected to relieve burdens for some such entities), we do not believe it is necessary to use
performance standards in connection with this rulemaking.
In Section IV, above, we discuss additional alternatives that we have considered and their
economic impact. 241 We note that those alternatives, such as using a different threshold or
different standard for determining SRC status, would be unlikely to have a significant effect on
smaller entities because, as noted above, we believe virtually all small entities are already
eligible for SRC status. Similarly, with respect to the alternative of not amending the accelerated
and large accelerated filer definitions, we believe there are very few small entities that will be
241
See Section IV.C. (alternatives include (i) using a different registrant size metric in the SRC definition, (ii)
revising the SRC definition using different thresholds, and (iii) reducing the number of registrants that our rules
define as accelerated filers, which would expand the number of registrants eligible for the Sarbanes-Oxley Act
Section 404(b) exemption).
85
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considered accelerated filers under the definitions in the final rules, and, therefore, this
alternative would not significantly affect small entities. 242
VII. Statutory Amendments and Text of Final Rules
The rule amendments described in this release are being adopted pursuant to Sections 7,
10 and 19 of the Securities Act (15 U.S.C. 77a et seq.), as amended, Sections 3(b), 12, 13, 15(d)
and 23(a) of the Exchange Act (15 U.S.C. 78a et seq.), as amended, and Section 72002 of the
FAST Act.
List of Subjects in 17 CFR Parts 210, 229, 230, 239, 240, and 249
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, the Commission is amending title 17, chapter II
of the Code of Federal Regulations as follows:
PART 210 – FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934,
INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940,
AND ENERGY POLICY AND CONSERVATION ACT OF 1975
1. The authority citation for part 210 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26),
77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-
20, 80a-29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c), Pub. L.
112-106, 126 Stat. 310 (2012), unless otherwise noted.
2. Amend § 210.3-05 by revising paragraph (b)(2)(iv) to read as follows:
§ 210.3-05 Financial statements of businesses acquired or to be acquired.
*****
242
See Section IV.B.
86
--- page 87 ---
(b) * * *
(2) * * *
(iv) If any of the conditions exceed 50 percent, the full financial statements specified
in §§ 210.3-01 and 210.3-02 shall be furnished. However, financial statements for the earliest of
the three fiscal years required may be omitted if net revenues reported by the acquired business
in its most recent fiscal year are less than $100 million.
*****
PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934, AND ENERGY POLICY AND
CONSERVATION ACT OF 1975—REGULATION S-K
3. The authority citation for part 229 continues to read as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26),
77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1,
78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-38(a),
80a-39, 80b-11, and 7201 et seq., and 18 U.S.C. 1350; sec. 953(b), Pub. L. 111-203, 124 Stat.
1904 (2010); and sec. 102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
*****
4. Amend § 229.10 by revising paragraphs (f)(1) and (2) to read as follows:
§ 229.10 (Item 10) General.
*****
(f) * * * * *
(1) Definition of smaller reporting company. As used in this part, the term smaller
reporting company means an issuer that is not an investment company, an asset-backed issuer (as
87
--- page 88 ---
defined in § 229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting
company and that:
(i) Had a public float of less than $250 million; or
(ii) Had annual revenues of less than $100 million and either:
(A) No public float; or
(B) A public float of less than $700 million.
(2) Determination. Whether an issuer is a smaller reporting company is determined
on an annual basis.
(i) For issuers that are required to file reports under section 13(a) or 15(d) of the
Exchange Act:
(A) Public float is measured as of the last business day of the issuer’s most recently
completed second fiscal quarter and computed 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;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) An issuer must reflect the determination of whether it came within the definition
of smaller reporting company in its quarterly report on Form 10-Q for the first fiscal quarter of the
next year, indicating on the cover page of that filing, and in subsequent filings for that fiscal year,
whether it is a smaller reporting company, except that, if a determination based on public float
indicates that the issuer is newly eligible to be a smaller reporting company, the issuer may choose
88
--- page 89 ---
to reflect this determination beginning with its first quarterly report on Form 10-Q following the
determination, rather than waiting until the first fiscal quarter of the next year.
(ii) For determinations based on an initial registration statement under the Securities
Act or Exchange Act for shares of its common equity:
(A) Public float is measured as of a date within 30 days of the date of the filing of the
registration statement and computed by multiplying the aggregate worldwide number of shares of
its voting and non-voting common equity held by non-affiliates before the registration plus, in the
case of a Securities Act registration statement, the number of shares of its voting and non-voting
common equity included in the registration statement by the estimated public offering price of the
shares;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) The issuer must reflect the determination of whether it came within the definition
of smaller reporting company in the registration statement and must appropriately indicate on the
cover page of the filing, and subsequent filings for the fiscal year in which the filing is made,
whether it is a smaller reporting company. The issuer must re-determine its status at the end of its
second fiscal quarter and then reflect any change in status as provided in paragraph (f)(2)(i)(C) of
this section. In the case of a determination based on an initial Securities Act registration
statement, an issuer that was not determined to be a smaller reporting company has the option to
re-determine its status at the conclusion of the offering covered by the registration statement
based on the actual offering price and number of shares sold.
89
--- page 90 ---
(iii) Once an issuer determines that it does not qualify for smaller reporting company
status because it exceeded one or more of the current thresholds, it will remain unqualified unless
when making its annual determination either:
(A) It determines that its public float was less than $200 million; or
(B) It determines that its public float and its annual revenues meet the requirements for
subsequent qualification included in the following chart:
Prior Public Float
Prior Annual
Revenues None or less than $700 million $700 million or more
Public float Less than $560
million; and
Less than $100
Neither threshold exceeded.
million
Revenues Less than $100
million.
Public float None or less than Public float Less than $560
$100 million or $700 million; and million; and
more Revenues Less than $80 Revenues Less than $80
million. million.
Instruction 1 to paragraph (f): A registrant that qualifies as a smaller reporting company under
the public float thresholds identified in paragraphs (f)(1)(i) and (f)(2)(iii)(A) of this section will
qualify as a smaller reporting company regardless of its revenues.
*****
PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
5. The authority citation for part 230 continues to read in part as follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss,
78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28,
80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 Stat. 313 (2012),
unless otherwise noted.
90
--- page 91 ---
*****
6. Amend § 230.405 by revising the definition of “smaller reporting company” to
read as follows:
§ 230.405 Definitions of terms.
*****
Smaller reporting company. As used in this part, the term smaller reporting company
means an issuer that is not an investment company, an asset-backed issuer (as defined in §
229.1101 of this chapter), or a majority-owned subsidiary of a parent that is not a smaller
reporting company and that:
(1) Had a public float of less than $250 million; or
(2) Had annual revenues of less than $100 million and either:
(i) No public float; or
(ii) A public float of less than $700 million.
(3) Whether an issuer is a smaller reporting company is determined on an annual
basis.
(i) For issuers that are required to file reports under section 13(a) or 15(d) of the
Exchange Act:
(A) Public float is measured as of the last business day of the issuer’s most recently
completed second fiscal quarter and computed 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;
91
--- page 92 ---
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) An issuer must reflect the determination of whether it came within the definition
of smaller reporting company in its quarterly report on Form 10-Q for the first fiscal quarter of the
next year, indicating on the cover page of that filing, and in subsequent filings for that fiscal year,
whether it is a smaller reporting company, except that, if a determination based on public float
indicates that the issuer is newly eligible to be a smaller reporting company, the issuer may
choose to reflect this determination beginning with its first quarterly report on Form 10-Q
following the determination, rather than waiting until the first fiscal quarter of the next year.
(ii) For determinations based on an initial registration statement under the Securities
Act or Exchange Act for shares of its common equity:
(A) Public float is measured as of a date within 30 days of the date of the filing of the
registration statement and computed by multiplying the aggregate worldwide number of shares of
its voting and non-voting common equity held by non-affiliates before the registration plus, in the
case of a Securities Act registration statement, the number of shares of its voting and non-voting
common equity included in the registration statement by the estimated public offering price of the
shares;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) The issuer must reflect the determination of whether it came within the definition
of smaller reporting company in the registration statement and must appropriately indicate on the
cover page of the filing, and subsequent filings for the fiscal year in which the filing is made,
whether it is a smaller reporting company. The issuer must re-determine its status at the end of its
92
--- page 93 ---
second fiscal quarter and then reflect any change in status as provided in paragraph (3)(i)(C) of
this definition. In the case of a determination based on an initial Securities Act registration
statement, an issuer that was not determined to be a smaller reporting company has the option to
re-determine its status at the conclusion of the offering covered by the registration statement
based on the actual offering price and number of shares sold.
(iii) Once an issuer determines that it does not qualify for smaller reporting company
status because it exceeded one or more of the current thresholds, it will remain unqualified unless
when making its annual determination either:
(A) It determines that its public float was less than $200 million; or
(B) It determines that its public float and its annual revenues meet the requirements for
subsequent qualification included in the following chart:
Prior Public Float
Prior Annual
Revenues None or less than $700 million $700 million or more
Public float Less than $560
million; and
Less than $100
Neither threshold exceeded.
million
Revenues Less than $100
million.
Public float None or less than Public float Less than $560
$100 million or $700 million; and million; and
more Revenues Less than $80 Revenues Less than $80
million. million.
Instruction 1 to definition of “smaller reporting company”: A registrant that qualifies as a
smaller reporting company under the public float thresholds identified in paragraphs (1) and
(3)(iii)(A) of this definition will qualify as a smaller reporting company regardless of its
revenues.
*****
93
--- page 94 ---
PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
7. The authority citation for part 239 continues to read in part as follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77sss, 78c, 78l, 78m,
78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-
13, 80a-24, 80a-26, 80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat. 312,
unless otherwise noted.
*****
8. Amend Form S-1 (referenced in §239.11) by revising the text and check boxes on
the cover page immediately before the text “If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the
Securities Act.” The revisions read as follows:
Note: The text of Form S-1 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
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--- page 95 ---
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
9. Amend Form S-3 (referenced in §239.13) by revising the text and check boxes on
the cover page immediately before the text “If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the
Securities Act.” The revisions read as follows:
Note: The text of Form S-3 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
95
--- page 96 ---
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
10. Amend Form S-8 (referenced in §239.16b) by revising the text and check boxes
on the cover page immediately before the text “If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)
of the Securities Act.” The revisions read as follows:
Note: The text of Form S-8 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-8
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
96
--- page 97 ---
Emerging growth company
*****
11. Amend Form S-11 (referenced in §239.18) by revising the text and check boxes
on the cover page immediately before the text “If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)
of the Securities Act.” The revisions read as follows:
Note: The text of Form S-11 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
97
--- page 98 ---
12. Amend Form S-4 (referenced in §239.25) by revising the text and check boxes on the
cover page immediately before the text “If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the
Securities Act.” The revisions read as follows:
Note: The text of Form S-4 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
98
--- page 99 ---
PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT
OF 1934
13. The authority citation for part 240 continues to read in part as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss,
77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o,
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37,
80b-3, 80b-4, 80b-11, 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; and Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, Pub. L. 112-106,
126 Stat. 326 (2012), unless otherwise noted.
*****
14. Amend § 240.12b-2 by:
a. In the definition of “accelerated filer and large accelerated filer”:
i. Adding the word “and” at the end of paragraph (1)(ii);
ii. Removing “; and” at the end of paragraph (1)(iii) and in its place adding a period;
iii. Removing paragraph (1)(iv);
iv. Adding the word “and” at the end of paragraph (2)(ii);
v. Removing “; and” at the end of paragraph (2)(iii) and in its place adding a period;
and
vi. Removing paragraph (2)(iv).
b. Revising the definition of “smaller reporting company.” The addition and revision
reads as follows:
§ 240.12b-2 Definitions.
*****
99
--- page 100 ---
Smaller reporting company. As used in this part, the term smaller reporting company
means an issuer that is not an investment company, an asset-backed issuer (as defined in
§ 229.1101 of this chapter), or a majority-owned subsidiary of a parent that is not a smaller
reporting company and that:
(1) Had a public float of less than $250 million; or
(2) Had annual revenues of less than $100 million and either:
(i) No public float; or
(ii) A public float of less than $700 million.
(3) Whether an issuer is a smaller reporting company is determined on an annual
basis.
(i) For issuers that are required to file reports under section 13(a) or 15(d) of the
Exchange Act:
(A) Public float is measured as of the last business day of the issuer’s most recently
completed second fiscal quarter and computed 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;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) An issuer must reflect the determination of whether it came within the definition
of smaller reporting company in its quarterly report on Form 10-Q for the first fiscal quarter of the
next year, indicating on the cover page of that filing, and in subsequent filings for that fiscal year,
whether it is a smaller reporting company, except that, if a determination based on public float
100
--- page 101 ---
indicates that the issuer is newly eligible to be a smaller reporting company, the issuer may
choose to reflect this determination beginning with its first quarterly report on Form 10-Q
following the determination, rather than waiting until the first fiscal quarter of the next year.
(ii) For determinations based on an initial registration statement under the Securities
Act or Exchange Act for shares of its common equity:
(A) Public float is measured as of a date within 30 days of the date of the filing of the
registration statement and computed by multiplying the aggregate worldwide number of shares of
its voting and non-voting common equity held by non-affiliates before the registration plus, in the
case of a Securities Act registration statement, the number of shares of its voting and non-voting
common equity included in the registration statement by the estimated public offering price of the
shares;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) The issuer must reflect the determination of whether it came within the definition
of smaller reporting company in the registration statement and must appropriately indicate on the
cover page of the filing, and subsequent filings for the fiscal year in which the filing is made,
whether it is a smaller reporting company. The issuer must re-determine its status at the end of its
second fiscal quarter and then reflect any change in status as provided in paragraph (3)(i)(C) of
this definition. In the case of a determination based on an initial Securities Act registration
statement, an issuer that was not determined to be a smaller reporting company has the option to
re-determine its status at the conclusion of the offering covered by the registration statement
based on the actual offering price and number of shares sold.
101
--- page 102 ---
(iii) Once an issuer determines that it does not qualify for smaller reporting company
status because it exceeded one or more of the current thresholds, it will remain unqualified unless
when making its annual determination either:
(A) It determines that its public float was less than $200 million; or
(B) It determines that its public float and its annual revenues meet the requirements for
subsequent qualification included in the following chart:
Prior Public Float
Prior Annual
Revenues None or less than $700 million $700 million or more
Public float Less than $560
million; and
Less than $100
Neither threshold exceeded.
million
Revenues Less than $100
million.
Public float None or less than Public float Less than $560
$100 million or $700 million; and million; and
more Revenues Less than $80 Revenues Less than $80
million. million.
Instruction 1 to definition of “smaller reporting company”: A registrant that qualifies as a
smaller reporting company under the public float thresholds identified in paragraphs (1) and
(3)(iii)(A) of this definition will qualify as a smaller reporting company regardless of its
revenues.
*****
PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934
15. The authority citation for part 249 continues to read in part as follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C.
1350; Sec. 953(b), Pub. L. 111-203, 124 Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat.
102
--- page 103 ---
309 (2012); Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001, Pub. L. 114-94,
129 Stat. 1312 (2015), unless otherwise noted.
*****
16. Amend Form 10 (referenced in §249.210) by revising the text and check boxes on
the cover page immediately before the text “If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.” The revisions read as follows:
Note: The text of Form 10 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
103
--- page 104 ---
Emerging growth company
*****
17. Amend Form 10-Q (referenced in §249.308a) by revising the text and check
boxes on the cover page immediately before the text “If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act.” The revisions read as follows:
Note: The text of Form 10-Q does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
104
--- page 105 ---
18. Amend Form 10-K (referenced in §249.310) by revising the text and check boxes
on the cover page immediately before the text “If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.” The revisions read as follows:
Note: The text of Form 10-K does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
By the Commission.
Dated: June 28, 2018.
Brent J. Fields,
Secretary.
105OCR text (258,062c · gpumon-ocr-api · 90% conf)
--- page 1 ---
Conformed to Federal Register Version
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 230, 239, 240, and 249
[Release Nos. 33-10513; 34-83550; File No. S7-12-16]
RIN 3235-AL90
SMALLER REPORTING COMPANY DEFINITION
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
SUMMARY: We are adopting amendments to the definition of “smaller reporting company” as
used in our rules and regulations. The amendments expand the number of registrants that qualify
as smaller reporting companies and are intended to reduce compliance costs for these registrants
and promote capital formation, while maintaining appropriate investor protections. We are
amending the definition of “smaller reporting company” to include registrants with a public float
of less than $250 million, as well as registrants with annual revenues of less than $100 million
for the previous year and either no public float or a public float of less than $700 million. We
also are amending other rules and forms in light of the new definition of “smaller reporting
company,” including amendments to the definitions of “accelerated filer” and “large accelerated
filer” to preserve the existing thresholds in those definitions. Qualifying as a “smaller reporting
company” will no longer automatically make a registrant a non-accelerated filer. The Chairman,
however, has directed the staff to formulate recommendations to the Commission for possible
additional changes to the “accelerated filer” definition that, if adopted, would have the effect of
reducing the number of registrants that qualify as accelerated filers.
DATES: The final rules are effective September 10, 2018.
--- page 2 ---
FOR FURTHER INFORMATION CONTACT: Amy Reischauer or Jennifer Riegel, Office
of Small Business Policy, Division of Corporation Finance, at (202) 551-3460, U.S. Securities
and Exchange Commission, 100 F Street, NE, Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR 230.405
(“Rule 405”) and Forms S-1, 1 S-3, 2 S-4, 3 S-8, 4 and S-11 5 under the Securities Act of 1933
(“Securities Act”); 6 17 CFR 240.12b-2 (“Rule 12b-2”) and Forms 10, 7 10-Q, 8 and 10-K 9 under
the Securities Exchange Act of 1934 (“Exchange Act”); 10 17 CFR 210.3-05 (“Rule 3-05” of
Regulation S-X); 11 and 17 CFR 229.10(f) (“Item 10(f)” of Regulation S-K). 12
1
17 CFR 239.11.
2
17 CFR.239.13.
3
17 CFR 239.25.
4
17 CFR 239.16b.
5
17 CFR 239.18.
6
15 U.S.C. 77a et seq.
7
17 CFR 249.210.
8
17 CFR 249.308a.
9
17 CFR 249.310.
10
15 U.S.C. 78a et seq.
11
17 CFR 210.1-01 through 210.12-29.
12
17 CFR 229.10 through 229.1208.
2
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Table of Contents
I. Introduction ............................................................................................................................. 5
II. Final Amendments ................................................................................................................... 9
A. Amendments to Smaller Reporting Company Definition................................................ 9
1. Public Float Test ......................................................................................................... 12
2. Revenue Test .............................................................................................................. 18
B. Amendments to Rule 3-05(b)(2)(iv) of Regulation S-X ................................................ 24
C. Amendments to Accelerated Filer and Large Accelerated Filer Definitions ................. 25
1. Proposed Amendments ............................................................................................... 25
2. Comments ................................................................................................................... 27
3. Final Amendments ...................................................................................................... 30
III. Other Matters ......................................................................................................................... 32
IV. Economic Analysis ................................................................................................................ 32
A. Baseline .......................................................................................................................... 33
B. Potential Economic Effects ............................................................................................ 38
1. Introduction ................................................................................................................ 38
2. Impact on Eligibility for Smaller Reporting Company Status ................................... 42
3. Estimation of Potential Costs and Benefits ................................................................ 46
4. Affiliated Ownership and Adverse Selection ............................................................. 57
5. Effects on Efficiency, Competition and Capital Formation ....................................... 60
C. Possible Alternatives ...................................................................................................... 61
V. Paperwork Reduction Act ...................................................................................................... 64
A. Background .................................................................................................................... 64
B. Summary of the Final Amendments .............................................................................. 65
C. Summary of Comment Letters ....................................................................................... 67
D. Revisions to Burden and Cost Estimates ....................................................................... 68
1. Form 10-K .................................................................................................................. 69
2. Form 10-Q .................................................................................................................. 70
3. Form 8-K .................................................................................................................... 71
4. Schedule 14A .............................................................................................................. 72
5. Schedule 14C .............................................................................................................. 72
6. Form 10....................................................................................................................... 73
7. Form S-1 ..................................................................................................................... 74
8. Form S-3 ..................................................................................................................... 74
3
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9. Form S-4 ..................................................................................................................... 75
10. Form S-11 ................................................................................................................... 76
VI. Final Regulatory Flexibility Analysis.................................................................................... 77
A. Need for, and Objectives of, the Final Rules ................................................................. 77
B. Significant Issues Raised by Public Comments ............................................................. 78
C. Small Entities Subject to the Final Rules ....................................................................... 82
D. Projected Reporting, Recordkeeping and Other Compliance Requirements ................. 83
E. Agency Action to Minimize Effect on Small Entities ................................................... 84
VII. Statutory Amendments and Text of Final Rules ................................................................... 86
4
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I. Introduction
On June 27, 2016, the Commission proposed amendments that would increase the
financial thresholds in the “smaller reporting company” (“SRC”) definition and would have the
effect of expanding the number of companies that benefit from the scaled disclosure
accommodations available to SRCs.13 In developing final rules, we considered comment letters
received in response to the Proposing Release, 14 as well as recommendations made by the
Securities and Exchange Commission Advisory Committee on Small and Emerging Companies
(“ACSEC”) 15 and the SEC Government-Business Forum on Small Business Capital Formation
(“Small Business Forum”). 16 The Commission last revised the SRC definition in 2008. 17 Our
13
See Amendments to Smaller Reporting Company Definition, Release No. 33-10107 (Jun. 27, 2016) [81 FR
43130 (Jul. 1, 2016)] (“Proposing Release”). As the Commission noted in the Proposing Release, raising the
financial thresholds in the SRC definition would be responsive to the Fixing America’s Surface Transportation
Act of 2015 (“FAST Act”) because it would reduce the burden on the specified registrants by increasing the
number of registrants eligible for scaled disclosure. See Pub. L. No. 114-94, 129 Stat. 1312 (2015).
14
The comment letters received in response to the Proposing Release are available at
https://www.sec.gov/comments/s7-12-16/s71216.htm.
15
In September 2015 and March 2013, the ACSEC recommended revising the SRC definition to include
registrants with a public float of up to $250 million. The recommendations made by ACSEC in March 2013 also
included a recommendation to revise the SRC definition for registrants that are unable to calculate their public
float to include registrants with less than $100 million in annual revenues. ACSEC Recommendations about
Expanding Simplified Disclosure for Smaller Issuers (Sept. 23, 2015), available at
https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-expanding-simplified-disclosure-for-smaller-
issuers.pdf and ACSEC Recommendations Regarding Disclosure and Other Requirements for Smaller Public
Companies (Mar. 21, 2013), available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-
032113-smaller-public-co-ltr.pdf. Both of these recommendations also included a recommendation that the
Commission revise the “accelerated filer” definition to include registrants with a public float of $250 million or
more, but less than $700 million. The accelerated filer definition currently includes registrants with a public
float of $75 million or more, but less than $700 million. See Exchange Act Rule 12b-2. See Section II.C for a
discussion of the accelerated filer definition.
16
The 2017 Small Business Forum recommended that the SRC definition be revised to include registrants with a
public float of less than $250 million or registrants with annual revenues of less than $100 million, excluding
large accelerated filers. See Final Report of the 2017 SEC Government Business Forum on Small Business
Capital Formation (Mar. 2018), available at https://www.sec.gov/files/gbfor36.pdf. Registrants with a public
float of $700 million or more generally qualify as large accelerated filers. See Exchange Act Rule 12b-2. Prior
Small Business Forums made the same or similar recommendations. Final Small Business Forum reports are
available at https://www.sec.gov/info/smallbus/sbforumreps.htm. Information about the Small Business Forum is
available at http://www.sec.gov/info/smallbus/sbforum.shtml. These recommendations also included a
recommendation that the Commission revise the “accelerated filer” definition consistent with the recommended
changes to the SRC definition. See Section II.C for a discussion of the accelerated filer definition.
5
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amendments reflect the need to solicit input and retrospectively review our rules in order to
determine whether they are outdated or are not functioning as intended. Today, we are amending
the SRC definition in an effort to promote capital formation and reduce compliance costs for
specified registrants by expanding the number of registrants that are eligible to provide scaled
disclosure while maintaining appropriate investor protections.
We are adopting the amendments generally as proposed with two changes. As proposed,
we are amending the SRC definition to include registrants with a public float of less than $250
million, as well as registrants with annual revenues of less than $100 million for the previous
year and no public float. In a change from the proposal, the SRC definition in the final rules also
includes registrants with annual revenues of less than $100 million for the previous year and a
public float of less than $700 million. Specifically, we are amending Securities Act Rule 405,
Exchange Act Rule 12b-2, and Item 10(f) of Regulation S-K to effect these changes. In another
change from the proposal, we are amending Rule 3-05(b)(2)(iv) of Regulation S-X to increase
the revenue threshold under which certain acquirers may omit the earliest of the three fiscal years
of audited financial statements of certain targets. Finally, we are adopting amendments to the
“accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2, as
proposed, to preserve the application of the current public float thresholds in those definitions. 18
The Chairman, however, has directed the staff to formulate recommendations to the Commission
for possible additional changes to the “accelerated filer” definition that, if adopted, would have
17
See Smaller Reporting Company Regulatory Relief and Simplification, Release No. 33-8876 (Dec. 19, 2007) [73
FR 934 (Jan. 4, 2008)] (“SRC Adopting Release”).
18
The definitions of accelerated filer and large accelerated filer are based on public float, but currently contain a
provision excluding registrants that are eligible to use the SRC requirements in Regulation S-K for their annual
and quarterly reports. As a result, raising the SRC public float threshold without eliminating that provision
effectively would raise the accelerated filer public float threshold. See Section II.C for a discussion of the
amendments to the accelerated filer and large accelerated filer definitions.
6
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the effect of reducing the number of registrants that qualify as accelerated filers in order to
promote capital formation by reducing compliance costs for certain registrants, while
maintaining appropriate investor protections. As part of the staff’s consideration of possible
recommended amendments, the Chairman has directed the staff to consider, among other things,
the historical and current relationship between the SRC and “accelerated filer” definitions. The
staff has begun work to prepare these recommendations.
Consistent with the proposal, we are not amending any of the scaled disclosure
accommodations available to SRCs in Regulation S-K and Regulation S-X.19 SRCs may comply
with the scaled disclosure requirements available to them on an item-by-item basis.20 The following
table summarizes these scaled disclosure accommodations.21
Regulation S-K
Item Scaled Disclosure Accommodation
101 − Description of Business May satisfy disclosure obligations by describing the development of the
registrant’s business during the last three years rather than five years. Business
development description requirements are less detailed than disclosure
requirements for non-SRCs.
201 − Market Price of and Stock performance graph not required.
Dividends on the Registrant’s
Common Equity and Related
19
Several of these scaled disclosure accommodations, such as the scaled executive compensation disclosures under
Item 402(l) through (r) of Regulation S-K [17 CFR 229.402(l) through (r)], are similar to the disclosure
accommodations available to an emerging growth company (“EGC”). See Securities Act Rule 405 [17 CFR
230.405] and Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. EGCs also are exempt from the Sarbanes-Oxley Act
Section 404(b) auditor attestation of internal control over financial reporting. For a discussion of scaled
disclosure accommodations available to EGCs, see Business and Financial Disclosure Required by Regulation S-
K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (April 22, 2016)] (“Regulation S-K Concept Release”).
20
See SRC Adopting Release, 73 FR at 940. Where a disclosure requirement applicable to SRCs is more stringent
than the corresponding requirement for non-SRCs, however, SRCs must comply with the more stringent
standard. The SRC Adopting Release identified Item 404 of Regulation S-K [17 CFR 229.404] as the only
instance in Regulation S-K in which the disclosure requirements applicable to SRCs could be more stringent.
21
In addition to the accommodations itemized in the table, SRCs using Form S-1 may incorporate by reference
information filed prior and subsequent to the effectiveness of the registration statement if they meet the
eligibility requirements in General Instruction VII of Form S-1. See Item 12(b) of Form S-1; see also
Simplification of Disclosure Requirements for Emerging Growth Companies and Forward Incorporation by
Reference on Form S-1 for Smaller Reporting Companies, Release No. 33-10003 (Jan. 19, 2016) [81 FR 2743
(Jan. 19, 2016)].
7
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Regulation S-K
Item Scaled Disclosure Accommodation
Stockholder Matters
301 – Selected Financial Data Not required.
302 – Supplementary Financial Not required.
Information
303 – Management’s Discussion Two-year MD&A comparison rather than three-year comparison.
and Analysis of Financial Two year discussion of impact of inflation and changes in prices rather than
Condition and Results of three years.
Operations (“MD&A”)
Tabular disclosure of contractual obligations not required.
305 – Quantitative and Not required.
Qualitative Disclosures About
Market Risk
402 – Executive Compensation Three named executive officers rather than five.
Two years of summary compensation table information rather than three.
Not required:
• Compensation discussion and analysis.
• Grants of plan-based awards table.
• Option exercises and stock vested table.
• Pension benefits table.
• Nonqualified deferred compensation table.
• Disclosure of compensation policies and practices related to risk
management.
• Pay ratio disclosure.
404 – Transactions With Related Description of policies/procedures for the review, approval or ratification of
Persons, Promoters and Certain related party transactions not required.
Control Persons 22
407 – Corporate Governance Audit committee financial expert disclosure not required in first annual report
Compensation committee interlocks and insider participation disclosure not
required.
Compensation committee report not required.
503 – Prospectus Summary, Risk No ratio of earnings to fixed charges disclosure required.
Factors and Ratio of Earnings to No risk factors required in Exchange Act filings.
Fixed Charges
601 – Exhibits Statements regarding computation of ratios not required.
22
Item 404 also contains the following expanded disclosure requirements applicable to SRCs: (1) rather than a flat
$120,000 disclosure threshold, the threshold is the lesser of $120,000 or 1% of total assets, (2) disclosures are
required about underwriting discounts and commissions where a related person is a principal underwriter or a
controlling person or member of a firm that was or is going to be a principal underwriter, (3) disclosures are
required about the issuer’s parent(s) and their basis of control, and (4) an additional year of Item 404 disclosure
is required in filings other than registration statements.
8
--- page 9 ---
Regulation S-X
Rule Scaled Disclosure
8-02 – Annual Financial Two years of income statements rather than three years.
Statements Two years of cash flow statements rather than three years.
Two years of changes in stockholders’ equity statements rather than three years.
8-03 – Interim Financial Permits certain historical financial data in lieu of separate historical financial
Statements statements of equity investees.
8-04 – Financial Statements of Maximum of two years of acquiree financial statements rather than three years.
Businesses Acquired or to Be
Acquired
8-05 – Pro forma Financial Fewer circumstances under which pro forma financial statements are required.
Information
8-06 – Real Estate Operations Maximum of two years of financial statements for acquisition of properties from
Acquired or to Be Acquired related parties rather than three years.
8-08 – Age of Financial Less stringent age of financial statements requirements.
Statements
II. Final Amendments
A. Amendments to Smaller Reporting Company Definition
We are adopting amendments to the SRC definition to expand the number of registrants
that qualify as SRCs and thereby benefit from scaled disclosure requirements. These
amendments will enable a registrant to qualify as a SRC based on a public float test or a revenue
test. 23
Under the final rules, SRCs generally 24 are registrants with:
• a public float of less than $250 million; 25 or
23
See Item 10(f)(1)(i) and (ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
24
Consistent with the current definition, the SRC definition in the final rules specifically excludes investment
companies, asset-backed issuers (as defined in Item 1101 of Regulation AB [17 CFR 229.1101]) and majority-
owned subsidiaries of a parent that is not a SRC. See Item 10(f)(1) of Regulation S-K; Securities Act Rule 405;
Exchange Act Rule 12b-2. Lower public float and revenue thresholds apply to registrants that determined that
they did not qualify as SRCs in the prior year, but are eligible to transition to SRC status. See Item 10(f)(2)(iii)
of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. See also Section II.A for a discussion of
the amendments to these thresholds.
25
Consistent with the current definition, public float is computed under the final rules by multiplying the aggregate
worldwide number of shares of a registrant’s voting and non-voting common equity held by non-affiliates by the
9
--- page 10 ---
• annual revenues of less than $100 million 26 and either no public float 27 or a public
float of less than $700 million. 28
As proposed, the final rules increase the threshold for determining SRC status based on
public float from $75 million to $250 million. A registrant that qualifies as a SRC under the
public float test would qualify regardless of its revenues. 29 In a change from the proposal, the
final rules will expand the SRC definition to include registrants with a public float of less than
$700 million, if they also have annual revenues of less than $100 million.30 The following table
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. See Item 10(f)(1)(i) of Regulation S-K; Securities Act Rule 405;
Exchange Act Rule 12b-2. The determination of public float is premised on the existence of a public trading
market for the issuer’s equity securities. Therefore, an entity with equity securities outstanding but not trading in
any public trading market would not be able to qualify on the basis of a public float test. In contrast to public
float, market capitalization reflects the value of a registrant’s voting and non-voting common equity held by all
holders, whether affiliates or non-affiliates.
A reporting registrant calculates its public float as of the last business day of its most recently completed second
fiscal quarter. See Item 10(f)(2)(i) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. A
registrant filing its initial registration statement under the Securities Act or Exchange Act calculates its public
float as of a date within 30 days of the date the registration statement is filed by multiplying the aggregate
worldwide number of shares of its voting and non-voting common equity held by non-affiliates before the
registration plus, in the case of a Securities Act registration statement, the number of such shares included in the
registration statement by the estimated public offering price of the shares. See Item 10(f)(2)(ii)(A) of Regulation
S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
26
Consistent with the current definition, annual revenues are as of the most recently completed fiscal year for
which audited financial statements are available. Item 10(f)(2)(i)(B) and (f)(2)(ii)(B) of Regulation S-K;
Securities Act Rule 405; Exchange Act Rule 12b-2.
27
See Item 10(f)(1)(ii)(A) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. A registrant
may have no public float because it has no public common equity outstanding or no market price for its common
equity exists. Based on data compiled by our Division of Economic and Risk Analysis (“DERA”), in calendar
year 2016, approximately 21.5% of registrants that qualified as SRCs (and 7.7% of all registrants) had no public
float. The estimated number of registrants with no public float here and elsewhere in this release may be over-
inclusive due to the difficulty of ascertaining this status based on data extracted from registrants’ filings. See
note 137 for a discussion of the methodology used by the staff to obtain this data.
28
See Item 10(f)(1)(ii)(B) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
29
See Instruction to Paragraph (f) of Item 10 of Regulation S-K; Instruction to definition of “smaller reporting
company” in Securities Act Rule 405; Instruction to definition of “smaller reporting company” in Exchange Act
Rule 12b-2.
30
See Item 10(f)(1)(ii)(B) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
10
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summarizes the amendments to the SRC definition for a registrant making an initial
determination under the amendments 31 or a current SRC seeking to continue to qualify.
Criteria Current Definition Revised Definition
Public Float Public float of less than $75 Public float of less than $250 million
million
Revenues Less than $50 million of annual Less than $100 million of annual revenues and
revenues and no public float
• no public float, or
• public float of less than $700 million
Consistent with the current definition, and as proposed, under the final rules, a registrant
that determines that it does not qualify as a SRC under the initial qualification thresholds will
remain unqualified unless and until it determines that it meets one or more lower qualification
thresholds. The subsequent qualification thresholds, set forth in the table below, are set at 80%
of the initial qualification thresholds. 32
31
For purposes of the first fiscal year ending after effectiveness of the amendments, a registrant will qualify as a
SRC if it meets one of the initial qualification thresholds in the revised definition as of the date it is required to
measure its public float or revenues (the “measurement date”), even if such registrant previously did not qualify
as a SRC. See Item 10(f)(2)(i) and (ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2 for
additional information about the measurement date. For example, a registrant with a September 30 fiscal year
end that previously was not a SRC and that had a public float of $220 million as of March 30, 2018 (the last
business day of its most recently completed second quarter) will qualify as a SRC for the fiscal year ending
September 30, 2018.
32
See Item 10(f)(2)(iii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
11
--- page 12 ---
Criteria 33 Current Definition Revised Definition
Public Float Public float of less than $50 Public float of less than $200 million, if it previously
million had $250 million or more of public float 34
Revenues Less than $40 million of annual Less than $80 million of annual revenues, if it
revenues and no public float previously had $100 million or more of annual
revenues; and
Less than $560 million of public float, if it previously
had $700 million or more of public float.
1. Public Float Test
a. Proposed Amendments
As proposed, a registrant with a public float of less than $250 million would qualify as a
SRC.35 Consistent with the current definition, the Commission proposed that once a registrant
does not qualify as a SRC, 36 it would remain unqualified until its public float falls below another,
lower threshold. Specifically, the Commission proposed amending the rules to provide that a
registrant that previously did not qualify as a SRC would qualify as a SRC if it has a public float
of less than $200 million as of its most recently completed second fiscal quarter. 37
33
A registrant that does not qualify as a SRC may subsequently seek to qualify under either test.
34
A registrant that previously was not a SRC that subsequently qualifies based on a public float of less than $200
million will qualify as a SRC regardless of its revenues. See Instruction to Paragraph (f) of Item 10 of
Regulation S-K; Instruction to definition of “smaller reporting company” in Securities Act Rule 405; Instruction
to definition of “smaller reporting company” in Exchange Act Rule 12b-2.
35
See Proposed Item 10(f)(1)(i) and (ii) of Regulation S-K; Proposed Securities Act Rule 405; Proposed Exchange
Act Rule 12b-2.
36
This applies either upon an initial determination in the case of registrants filing an initial registration statement,
or as of an annual determination in the case of reporting registrants.
37
The proposed $200 million subsequent qualification threshold represents 80% of the proposed $250 million
initial qualification threshold. Under the current definition, a registrant that previously determined that it did not
qualify as a SRC because its public float exceeded the current $75 million threshold may qualify based on a
subsequent determination if it has a public float of less than $50 million. That registrant would then remain a
SRC until its public float again exceeded $75 million. Consistent with the current definition, under the proposed
definition, a registrant that subsequently qualifies under the $200 million public float threshold would remain
qualified until its public float exceeds $250 million.
12
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b. Comments
Most commenters addressed the overall costs and benefits of expanding the pool of
registrants eligible for SRC status. Many of these commenters expressed general support for the
proposed amendments to the SRC definition.38 Several of these commenters stated that the
proposed definition appropriately considers the objectives of capital formation and investor
protection 39 and promotes capital formation or liquidity for smaller registrants. 40
On the other hand, three commenters generally opposed the proposed amendments to the
SRC definition or generally opposed accommodations based on company size. 41 One of these
commenters stated that the accommodations for SRCs exist solely for the expedience of issuers
and must be balanced against the cost to market participants who have less information from
which to draw conclusions. 42 Another of these commenters stated that it was concerned that the
scaled disclosure regime for SRCs may prevent investors from receiving all of the material
38
See Letter from Acorda Therapeutics, Inc. et al, August 23, 2016 (“Acorda, et al”); Letter from Advanced
Medical Technology Association, August 20, 2016 (“AMTA”); Letter from Biotechnology Innovation
Organization, August 30, 2016 (“BIO”); Letter from BDO USA, LLP, August 29, 2016 (“BDO”); Letter from
Center for Audit Quality and Counsel of Institutional Investors, August 30, 2016 (“CAQ/CII”); Letter from
CONNECT, August 4, 2016 (“CONNECT”); Letter from Corporate Governance Coalition for Investor Value,
August 30, 2016 (“Coalition”); Letter from Independent Community Bankers of America, August 29, 2016
(“ICBA”); Letter from MidSouth Bancorp, Inc., August 24, 2016 (“MidSouth”); Letter from Nasdaq, August 30,
2016 (“Nasdaq”); Letter from NYSE Group, July 25, 2016 (“NYSE”); Letter from National Venture Capital
Association, August 25, 2016 (“NVCA”); Letter from Seneca Foods Corporation, August 2, 2016 (“Seneca”);
and Letter from The Small Business Financial and Regulatory Affairs Committee of the Institute of Management
Accountants, August 24, 2016 (“IMA”).
39
See AMTA; BDO; BIO; Coalition; ICBA.
40
See AMTA; BDO; BIO; Coalition; ICBA; NVCA; and NYSE. See also CONNECT (supporting the proposal to
amend the SRC definition to encompass a wider range of emerging businesses for which regulatory costs present
a significant burden to growth).
41
See Letter from Cable Car Capital LLC, June 28, 2016 (“Cable Car”); Letter from CFA Institute, August 30,
2016 (“CFA Institute”); Letter from Ernst & Young LLP, September 8, 2016 (“EY”).
42
See Cable Car.
13
--- page 14 ---
information needed to conduct a thorough analysis. 43 This commenter also noted that allowing
different sized entities to use different disclosure regimes would signal to investors that the
entities lack comparable quality. 44 The third commenter recommended that the Commission
consider adopting disclosure objectives that would mitigate the need to scale disclosure
requirements based on the size or nature of a reporting entity. 45
Two commenters stated that the proposed amendments would potentially provide only
marginal cost savings. 46 One of these commenters did not support the proposal and instead
encouraged the Commission to continue its review of scaled disclosure to determine which
disclosures are repetitive and should be deleted and which should be retained. 47 The other
commenter stated that the proposed change and the resulting reduced disclosure requirements for
additional registrants would have a minimal effect on its annual compliance costs. 48
Many commenters expressed support for the proposed increases in both the public float
and revenue thresholds. 49 One commenter supported the amendments and viewed them as an
acknowledgement that the current public float threshold is overly restrictive. 50 Another
43
See CFA Institute (noting that “the pension benefits table and a disclosure of compensation policies and practices
related to risk management (both of which can be deleted under scaled disclosure) are more vital than certain
other disclosures”).
44
See CFA Institute.
45
See EY (noting that it “previously recommended that the Commission consider adopting disclosure objectives
that would mitigate the need for scaling disclosure requirements based on the size or nature of a reporting entity”
and citing to its letter dated July 21, 2016 responding to the SEC’s concept release on business and financial
disclosures required by Regulation S-K (Release No. 33-10064; File No. S7-06-16)).
46
See CFA Institute; and Seneca.
47
See CFA Institute.
48
See Seneca.
49
See Acorda et al; AMTA; BDO; BIO; CAQ/CII; CONNECT; Coalition; ICBA; MidSouth; Nasdaq; NVCA;
NYSE; Seneca; and IMA.
50
See Letter from Council of State Bioscience Associations, August 26, 2016 (“CSBA”) (stating that the
Commission should similarly reform the accelerated filer definition and institute an alternative revenue test for
both the SRC and accelerated filer definitions).
14
--- page 15 ---
commenter specifically stated that it supported the proposed approach to adjusting the thresholds
rather than simply relying on inflation adjustments. 51
Two commenters recommended that the Commission review the SRC definition
periodically to determine whether the thresholds being used remain appropriate. 52 One of these
commenters specifically recommended that the Commission revisit the thresholds after three
years. 53
c. Final Amendments
After considering the comments received, as well as the recommendations made by the
ACSEC 54 and the Small Business Forum, 55 consistent with the proposal, we are adopting
amendments to the SRC definition that will permit registrants with a public float of less than
$250 million to qualify as SRCs. 56 As is the case with the current definition, once a registrant
determines that it does not qualify as a SRC under the applicable thresholds, 57 it will not
subsequently qualify until its public float falls below another, lower threshold, set at 80% of the
initial qualification threshold. While we did not receive any comments on the subsequent
qualification thresholds, we continue to believe that these thresholds are necessary to avoid
situations in which registrants frequently enter and exit SRC status due to small fluctuations in
their public float and that the thresholds do not impose an undue burden on registrants seeking to
qualify for SRC status. Accordingly, we are amending the rules to permit a registrant that
51
See NYSE.
52
See CFA Institute; and Letter from Kermit Kubitz, August 31, 2016 (“Kubitz”).
53
See Kubitz.
54
See note 15.
55
See note 16.
56
See Item 10(f)(1)(i) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
57
This applies either upon an initial determination in the case of registrants filing an initial registration statement,
or as of an annual determination in the case of reporting registrants.
15
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previously did not qualify as a SRC because its public float was $250 million or more to qualify
as a SRC if it has a public float of less than $200 million, regardless of its revenues. 58
We are not revising the method of calculating public float, as suggested by one
commenter. 59 The staff is not aware of significant incidence of manipulation or stock price
volatility affecting qualification under the public float test. In addition, the method of calculating
public float is consistent with the existing rules and with the method of determining eligibility to
use Form S-3 or Form F-3 to register a primary offering. 60 This consistency will avoid additional
burdens or confusion for registrants and investors that may result if registrants were required to
calculate their public float in one manner for determining SRC status and in another manner for
Form S-3 or Form F-3 eligibility.
We believe that these amendments will promote capital formation through a modest
reduction in compliance costs for newly eligible SRCs while maintaining appropriate investor
protections. 61 In 2016, approximately 28% of registrants had less than $75 million in public
float, 62 compared to approximately 42% of registrants when the SRC definition was established. 63
58
See Item 10(f)(2)(iii)(A) and Instruction to Paragraph (f) of Item 10 of Regulation S-K; Securities Act Rule 405
and Instruction to definition of “smaller reporting company” in Securities Act Rule 405; Exchange Act Rule
12b-2 and Instruction to definition of “smaller reporting company” in Exchange Act Rule 12b-2. Consistent
with the current definition, under the amended definition, a registrant that subsequently qualifies under the $200
million public float threshold would remain qualified until its public float exceeds $250 million.
59
See Letter from Paul W. Zeller, July 18, 2016 (“Zeller”) (suggesting that the Commission, in the calculation of
public float, adopt a revenue test for thinly traded registrants to address price manipulation and volatility
concerns).
60
See Instructions I.B.1 and I.B.6 of Form S-3; Instructions I.B.1 and I.B.5 of Form F-3. Certain newly eligible
SRCs under the new definition will continue to be eligible to rely on Instruction I.B.1 of Form S-3 and Form F-3
to register primary offerings.
61
See Section IV.B.
62
Based on public float values disclosed by registrants in their Form 10-K filings, 2,072, or 28.0%, of the 7,395
registrants that filed a Form 10-K in 2016 reported having a public float of less than $75 million.
63
Approximately 4,976, or 41.8%, of the 11,898 registrants that filed Exchange Act annual reports in 2006 had a
public float of less than $75 million. See SRC Adopting Release. The release cites data from the Commission’s
EDGAR filing system and Thomson Financial (“Datastream”). The Datastream data included all registered
16
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Increasing the public float threshold to $250 million would have resulted in approximately 39%
of registrants qualifying as SRCs in 2016 based on their public float. 64
We believe the existing scaled disclosure accommodations have reduced compliance
costs for SRCs. 65 These amendments will extend those benefits to a broader pool of registrants,
consistent with the intent of the Commission when it adopted the SRC definition in 2007.66
Although the amendments will permit a broader group of registrants to make scaled disclosure to
their investors, we do not believe that this scaling of disclosure will detract substantially from the
investor protection objectives of our disclosure regime in light of the other protections available
under current law and regulations. First, the additional registrants that will qualify for scaled
disclosure, like all registrants, will remain liable for their disclosures 67 and, in addition to the
disclosure expressly required by the rules, will continue to be required to provide such further
material information, if any, as may be necessary to make any required statements, in the light of
the circumstances under which they are made, not misleading. 68 Moreover, their disclosure also
will continue to be subject to the Division of Corporation Finance’s filing review process. These
measures of investor protection will remain unchanged.
public firms trading on the New York Stock Exchange, the American Stock Exchange, the Nasdaq, the Over-the-
Counter Bulletin Board and the Pink Sheets and excluded closed end funds, exchange traded funds, American
depositary receipts and direct foreign listings.
64
Based on public float values disclosed by registrants in their Form 10-K filings, 2,851, or 38.6%, of the 7,395
registrants that filed a Form 10-K in 2016 reported having a public float of less than $250 million.
65
See Section IV.B.3.a.
66
See SRC Adopting Release, 73 FR at 934 and 942 (stating that the Commission was “adopting amendments to its
disclosure and reporting requirements…to expand the number of companies that qualify for its scaled disclosure
requirements for smaller reporting companies;” and “[w]e believe this standard is appropriately scaled in that it
reduces costs to smaller companies caused by unnecessary information requirements, consistent with investor
protection.”).
67
See, e.g., Sections 11, 12, and 17 of the Securities Act, Sections 10(b) and 18 of the Exchange Act, and
Exchange Act Rule 10b-5 [17 CFR 240.10b-5].
68
See Securities Act Rule 408 [17 CFR 230.408] and Exchange Act Rule 12b-20 [17 CFR 240.12b-20].
17
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2. Revenue Test
a. Proposed Amendments
As proposed, a registrant with no public float would qualify as a SRC if it had annual
revenues of less than $100 million during its most recently completed fiscal year. 69 Consistent
with the current definition, the Commission proposed that once a registrant determines that it
does not qualify as a SRC, 70 it would not subsequently qualify until its revenues fall below
another, lower threshold. Specifically the Commission proposed amending the rules to provide
that a registrant with no public float that previously determined that it did not qualify as a SRC
would qualify as a SRC if it had annual revenues of less than $80 million as of the relevant
measurement date. 71 The proposed $80 million subsequent qualification threshold would
maintain the 80% ratio that exists between the $50 million initial qualification threshold and $40
million subsequent qualification threshold in the current SRC definition.
The Proposing Release noted that the 2015 Small Business Forum recommended that the
SRC definition be revised to include, in addition to registrants with a public float of less than
$250 million, registrants with a public float of less than $700 million and annual revenues of less
than $100 million.72 The Proposing Release also solicited comment on whether the Commission
should revise the SRC definition to include an alternative revenue test.
69
See Proposed Item 10(f)(1)(ii)(A) of Regulation S-K; Proposed Securities Act Rule 405; Proposed Exchange Act
Rule 12b-2.
70
This applies either upon an initial determination in the case of registrants filing an initial registration statement,
or as of an annual determination in the case of reporting registrants.
71
Under the current definition, a registrant that previously determined that it did not qualify as a SRC because it
had no public float and its revenues exceeded the current $50 million threshold may qualify based on a
subsequent determination if it had annual revenues of less than $40 million. That registrant would then remain a
SRC until its revenues exceeded $50 million. Consistent with the current definition, under the proposed
definition, a registrant with no public float that subsequently qualifies under the $80 million revenue threshold
would remain qualified until its revenue exceeds $100 million.
72
See Proposing Release at text accompanying note 22.
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b. Comments
Many commenters recommended that the Commission add a revenue test to the SRC
definition for companies with a public float. 73 Several commenters stated that businesses below
$100 million in revenue are viewed by reasonable observers as “small.” 74 One commenter
believed that a revenue test would stimulate innovation and drive business growth. 75 Another
commenter stated that a revenue test would ensure that pre-revenue companies are not “forced to
divert investment funds…from science to compliance.” 76 Another commenter supported an
alternative revenue test for highly valued pre-revenue companies “to avoid stifling the
advancement” of these companies with costly compliance. 77 Two commenters suggested that we
adopt a revenue test without a limitation on the public float or market capitalization of the
company. 78 Another two commenters specifically recommended that the Commission adopt a
definition based on revenues of less than $100 million and a public float of less than $700
million, as recommended by the Small Business Forum. 79
73
See Acorda, et al (recommending a revenue test, stating that public float is largely a marker of future value but
paints an inaccurate picture of small businesses in the present); AMTA; BIO (stating that the Commission should
move away from its reliance on public float as the ultimate arbiter of company size); Letter from Calithera
Biosciences, August 8, 2016 (“Calithera”); CONNECT; CSBA; Nasdaq (recommending a well-crafted revenue
only threshold); NYSE (recommending a simple revenue test without a limitation on market capitalization); and
Zeller (recommending a revenue test for any issuers that are thinly traded). See also Section II.A.1.b for a
discussion of comments addressing the overall costs and benefits of expanding the pool of registrants eligible for
SRC status, including the proposed revision to expand the revenue threshold for registrants with no public float.
74
See Acorda, et al; BIO; and Calithera.
75
See BIO (stating that pre-revenue small businesses should remain focused on innovation and do not have the
capital to pay for expensive compliance requirements, and therefore allowing them to qualify as SRCs until they
generate revenue would stimulate innovation and drive business growth).
76
See Acorda, et al.
77
See AMTA.
78
See NYSE; and Nasdaq.
79
See BIO; and Calithera.
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c. Final Amendments
After considering the comments received as well as the recommendations made by the
ACSEC 80 and the Small Business Forum, 81 we are adopting the proposed amendments to the
revenue test of the SRC definition and expanding the revenue test to include certain registrants
with a public float. The definition in the final rules will include, in addition to registrants with a
public float of less than $250 million, registrants with annual revenues of less than $100 million
during their most recently completed fiscal year and either no public float (calculated as discussed
in Section II.A.1) or a public float of less than $700 million. 82 We are persuaded by commenters’
suggestions that it is appropriate to provide a measure by which a registrant with a public float
but limited revenues may qualify as a SRC. 83 This amended revenue test expands the proposed
revenue threshold for companies with no public float to permit registrants with a public float that
is less than $700 million to qualify based on their revenues. The $700 million public float
threshold included in this amended revenue test was recommended by two commenters 84 and the
Small Business Forum. 85 This change from the proposal permits some additional registrants to
80
See note 15.
81
See note 16.
82
See Item 10(f)(1)(ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. Under the public
float test discussed in Section II.A.1., a registrant with public float of less than $250 million will qualify as a
SRC regardless of its revenues. See Instruction to Paragraph (f) of Item 10 of Regulation S-K; Instruction to
definition of “smaller reporting company” in Securities Act Rule 405; Instruction to definition of “smaller
reporting company” in Exchange Act Rule 12b-2.
83
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; and CSBA.
84
See BIO and Calithera.
85
See note 16. In 2016 and 2017, the Small Business Forum recommended that the SRC definition be revised to
include registrants with a public float of less than $250 million or registrants with annual revenues of less than
$100 million, excluding large accelerated filers. Registrants with a public float of $700 million or more
generally qualify as large accelerated filers. See Exchange Act Rule 12b-2. In prior years, the Small Business
Forum recommended that the Commission revise the SRC definition to include registrants with a public float of
less than $250 million or registrants with a public float of less than $700 million and annual revenues of less than
$100 million. See, e.g., Final Report of the 2015 SEC Government Business Forum on Small Business Capital
Formation (Apr. 2016), available at https://www.sec.gov/info/smallbus/gbfor34.pdf.
20
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qualify as SRCs, 86 and we believe that these low-revenue registrants would benefit from the cost
savings of scaled disclosure accommodations and could redirect those savings into growing their
businesses without significantly detracting from investor protections. For example, these
registrants will remain liable for their disclosures, will continue to be required to provide all
material information necessary to make any required statements not misleading, and will
continue to be subject to the Division of Corporation Finance’s filing review process.
The amended revenue test that we are adopting is consistent with the position expressed
by several commenters 87 that it is not necessary to subject capital-intensive, low-revenue
registrants with larger public floats or market capitalizations to the same reporting requirements
as registrants with larger public floats and more well-established, revenue-generating businesses.
Although two commenters suggested that we adopt a revenue test without a limitation on the
public float or market capitalization of the company, 88 we believe that it is appropriate to include
a public float limitation because, as a registrant’s business and public float grows, investors
should benefit from greater disclosure. The additional information provided by the registrant in
these circumstances will assist a growing investor base in making informed investment decisions
and also should lead to a lower cost of capital for the business as it grows. In this way, the
amended revenue test in the final rules will enable some additional capital-intensive, low-
revenue registrants to benefit from the cost-savings of scaled reporting, while continuing to
require larger registrants to comply with the disclosure requirements applicable to non-SRCs.
86
Excluding the 2,851 registrants that based on their 2016 data would qualify under the public float test described
in Section II.A.1 and the 594 registrants that would qualify under the proposed no public float and less than $100
million in annual revenues test, we estimate that this change would permit an additional 161 registrants to
qualify as a SRC.
87
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; CSBA; NYSE; and Nasdaq.
88
See NYSE; and Nasdaq.
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In 2016, approximately 7.7% of registrants qualified as SRCs by having no public float
and less than $50 million in annual revenues. 89 The number of registrants that would qualify as
SRCs would have increased by 26, or 0.4%, under the new $100 million annual revenue
threshold for registrants with no public float. 90 Expanding the definition further to include
registrants with annual revenues of less than $100 million and public float of less than $700
million would have increased the number of eligible registrants by an additional 161, or 2.2%. 91
Under the current definition, and as proposed, once a registrant with no public float
determines that it does not qualify as a SRC, 92 it cannot subsequently qualify based on revenues
until its revenues fall below another, lower threshold. As discussed above with respect to the
public float test, while we did not receive any comments on the subsequent qualification
thresholds, we believe that a separate, lower revenue threshold for these registrants helps to
avoid situations in which registrants enter and exit SRC status due to small fluctuations in their
revenues and does not impose an undue burden on registrants seeking to qualify for SRC status.
Therefore, consistent with the proposal, once an issuer with no public float determines that it does
not qualify for SRC status because its annual revenues exceeded $100 million, it will remain
89
Based on public float values and revenues disclosed by registrants in their Form 10-K filings in 2016, 568, or
7.7%, of the 7,395 registrants that filed a Form 10-K in 2016 reported having no public float and less than $50
million in annual revenues.
90
Based on public float values and revenues disclosed by registrants in their Form 10-K filings in 2016, 26, or
0.4%, of the 7,395 registrants that filed a Form 10-K in 2016 had no public float and $50 million or more but less
than $100 million in annual revenues.
91
Based on public float values and revenues disclosed by registrants in their Form 10-K filings in 2016, 161, or
2.2%, of the 7,395 registrants that filed a Form 10-K in 2016 had $250 million or more but less than $700
million of public float and less than $100 million in annual revenues.
92
This applies either upon an initial determination in the case of registrants filing an initial registration statement,
or as of an annual determination in the case of reporting registrants.
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unqualified unless and until its annual revenues are less than $80 million as of the measurement
date.93
Consistent with the 80% ratio we are adopting for the other subsequent qualification thresholds,
under the amended revenue test, once a registrant with public float determines that it does not qualify as
a SRC because it exceeds either or both of the $100 million annual revenue and $700 million public
float thresholds, it will remain unqualified unless and until it meets a lower threshold for the criteria
on which it previously failed to qualify ($80 million of annual revenue and $560 million of public float)
and continues to meet any threshold it previously satisfied ($100 million of annual revenue or $700
million of public float). 94 By requiring that a registrant satisfy a lower threshold only with respect
to a threshold it previously exceeded, we are attempting to strike a balance between avoiding
situations in which registrants frequently enter and exit SRC status due to small fluctuations and
not imposing an undue burden on registrants seeking to qualify for SRC status. A registrant that
exceeded both the public float threshold and the revenue threshold, however, would not qualify unless
and until it met both lower thresholds in order to avoid situations in which registrants enter and exit
SRC status due to small fluctuations in either their revenues or public float. The table below sets
forth the thresholds for qualification as of the respective measurement date under the amended revenue
test after one or both thresholds have been exceeded:
93
See Item 10(f)(2)(iii)(B) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2. Consistent with
the current definition, under the amended definition, a registrant with no public float that subsequently qualifies
under the $80 million revenue threshold remains qualified until its revenue exceeds $100 million.
94
Id. Consistent with the current definition, under the amended definition, a registrant that subsequently qualifies
under the $560 million public float threshold or $80 million revenue threshold remains qualified until its public
float exceeds $700 million or its revenue exceeds $100 million.
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Prior Public Float
Prior Annual
Revenues None or less than $700 million $700 million or more
Public float Less than $560
million; and
Less than $100
Neither threshold exceeded.
million
Revenues Less than $100
million.
Public float None or less than Public float Less than $560
$100 million or $700 million; and million; and
more Revenues Less than $80 Revenues Less than $80
million. million.
B. Amendments to Rule 3-05(b)(2)(iv) of Regulation S-X
In the Proposing Release, the Commission asked whether, if the revenue threshold in the
SRC definition is increased, the threshold in Rule 3-05 of Regulation S-X also should increase.
Rule 3-05 of Regulation S-X provides the requirements for financial statements of businesses
acquired or to be acquired in certain registration statements and current reports. Current
paragraph (b)(2)(iv) allows certain registrants to omit such financial statements for the earliest of
the three fiscal years required if the net revenues of the business to be acquired are less than $50
million.95 The $50 million threshold is based on the revenue threshold in the SRC definition.96
95
Rule 3-05(b)(2) sets forth the requirements for financial statements of an acquired business or to be acquired
business to be provided other than when registering securities to be offered to the security holders of the business
to be acquired.
96
In 1996, the Commission revised Rule 3-05 to streamline the requirements for financial statements of significant
business acquisitions in filings made under the Securities Act and the Exchange Act, stating:
“The threshold at which audited financial statements of an acquired business are required for three years, as
required for the issuer itself (except for small business issuers), has been raised from 40% to 50% in recognition
of the significant burden imposed by the lower threshold. In addition, consistent with the criteria for small
business issuers, financial statements for periods preceding the most recent two fiscal years would not be
required for acquired businesses reporting revenues below $25 million.” See Streamlining Disclosure
Requirements Relating to Significant Business Acquisitions. Release No. 33-7355 (Oct. 10, 1996) [61 FR 54509
(Oct. 18, 1996)] (“1996 Rule 3-05 Adopting Release”).
When the Commission adopted the SRC definition (which replaced the small business issuer definition) in 2007,
it noted:
24
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Two commenters recommended amending Rule 3-05 to increase the revenue threshold in
paragraph (b)(2)(iv) to $100 million to maintain the alignment between Rule 3-05 and the
definition of a SRC. 97 One commenter noted that this alignment should be retained to “maintain
the objective the Commission expressed when it adopted the 2007 S-X Rule 3-05 relief.” 98 The
other commenter noted that this amendment would avoid having the financial statement
requirements for a SRC-sized target company exceed those of a similarly sized registrant. 99
Consistent with these comments, we are amending Rule 3-05 to increase the net revenue
threshold in Rule 3-05(b)(2)(iv) of Regulation S-X to $100 million.100 Given that the current $50
million revenue threshold in Rule 3-05(b)(2)(iv) was based on the revenue threshold in the SRC
definition, and in light of our decision to increase the revenue threshold in the SRC definition
from $50 million to $100 million, we are raising the net revenue threshold in Rule 3-05(b)(2)(iv)
of Regulation S-X from $50 million to $100 million.
C. Amendments to Accelerated Filer and Large Accelerated Filer Definitions
1. Proposed Amendments
The Commission proposed amending the definitions of “accelerated filer” and “large
accelerated filer” to remove the automatic exclusion from these definitions of any registrant that
“Several comment letters noted that in light of the $50 million in revenues threshold proposed for determining a
company’s qualification as a SRC if a company is unable to calculate public float, the Commission should
consider revising [Rule 3-05(b)(2)(iv)] to raise to $50 million the $25 million threshold currently used to limit to
two the periods required for audited financial statements of an acquired business. The $25 million threshold was
based on the $25 million in revenues standard in Regulation S-B that we are rescinding. We are amending this
standard to increase the threshold to $50 million in revenues, as suggested by the commenters.” See SRC
Adopting Release.
97
See EY; and BDO. No other commenters addressed whether to amend Rule 3-05 of Regulation S-X.
98
See EY; see also SRC Adopting Release.
99
See BDO.
100
See Rule 3-05(b)(2)(iv) of Regulation S-X.
25
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qualifies as an SRC 101 and solicited comment on a number of questions related to this issue. 102
Among other requirements, 103 being an accelerated filer or a large accelerated filer triggers the
requirement contained in Section 404(b) of the Sarbanes-Oxley Act 104 to have the auditor provide
an attestation report on internal control over financial reporting. Currently, the accelerated filer
and large accelerated filer definitions include a provision that specifically excludes registrants
that are eligible to use the SRC requirements under Regulation S-K for their annual and quarterly
reports. 105 As a result, the existing public float threshold in the accelerated filer definition aligns
with the current public float threshold in the SRC definition. 106
Figure 1: Current Definitions of SRC,
Accelerated Filer, and Large Accelerated Filer
101
See Proposing Release, 81 FR at 43136.
102
See Proposing Release, 81 FR at 43137. As discussed in the Proposing Release, the ACSEC and the Small
Business Forum have recommended increasing the thresholds in both the SRC and the accelerated filer
definitions. See notes 15 and 16.
103
Accelerated and large accelerated filers are subject to accelerated periodic report filing deadlines. In addition,
they must provide their internet address and disclosure regarding the availability of their filings required by
Items 101(e)(3) and (4) of Regulation S-K [17 CFR 229.101(e)(3) and (4)], as well as disclosure required by
Item 1B of Form 10-K about unresolved staff comments on their periodic or current reports.
104
Pub. L. 107-204, Sec. 404(b) 116 Stat. 745 (2002).
105
Paragraphs (1)(iv) of the accelerated filer definition and (2)(iv) of the large accelerated filer definition in
Exchange Act Rule 12b-2.
106
The public float thresholds for exiting SRC status and entering accelerated filer status currently are both $75
million, and the determinations are both made as of the last business day of a registrant’s most recently
completed second fiscal quarter for purposes of the following fiscal year.
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Increasing the SRC public float threshold to $250 million without eliminating the SRC
provision from the accelerated filer definition would exclude from the definition of accelerated
filer those registrants that are newly eligible to use the SRC disclosure requirements, keeping the
thresholds for both definitions linked as they have been historically.
The Commission proposed to eliminate the provision in the accelerated filer definition
that excludes SRCs to maintain the current thresholds at which registrants are subject to the
accelerated filer disclosure and filing requirements. As a result, as illustrated in Figure 2, some
registrants would qualify as both SRCs and accelerated filers.
Figure 2: Proposed Definitions of SRC,
Accelerated Filer and Large Accelerated Filer
As discussed in the Proposing Release, the public float threshold for entering large
accelerated filer status currently is $700 million, so newly eligible SRCs under the proposed
increased public float threshold of $250 million would not include any registrants that currently
qualify as large accelerated filers. Nevertheless, the Commission proposed to eliminate this
provision because it currently does not capture any registrants, would not have captured any
registrants under the proposed amendments, and could lead to confusion if retained.
2. Comments
Some commenters responded to the Commission’s solicitation of comment on this issue
by supporting the elimination of the provisions in the accelerated filer and large accelerated filer
27
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definitions that specifically exclude registrants that are eligible to use the SRC disclosure
requirements for their annual or quarterly reports. 107 One commenter stated that it found no
compelling argument to support what it sees as a weakening of investor protections, particularly
in light of the 2011 Staff Section 404(b) Study 108 finding that accelerated filers subject to Section
404(b) had a lower restatement rate compared to non-accelerated filers not subject to Section
404(b). 109 Another commenter recommended that the Commission undertake a separate
rulemaking before deciding whether to change the Section 404(b) requirements. 110 A third
commenter recommended that the Commission provide more time for registrants with a public
float of less than $250 million to file their periodic reports. 111
In contrast, many commenters responded to the Commission’s solicitation of comment on
this issue by recommending that the Commission increase the thresholds in the accelerated filer
definition, consistent with the changes to the SRC definition. 112 Commenters recommended
increasing the public float threshold in the accelerated filer definition to reduce compliance
costs 113 and to maintain uniformity across our rules. 114 Many of these commenters stated that
107
See BDO; CAQ/CII; CFA Institute; Letter from Deloitte, August 23, 2016 (“Deloitte”); and EY.
108
Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 For Issuers With Public
Float Between $75 and $250 Million (Apr. 2011), available at
https://www.sec.gov/news/studies/2011/404bfloat-study.pdf.
109
See CFA Institute, citing 2011 Staff Section 404(b) Study.
110
See EY.
111
See BDO.
112
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; Coalition; CSBA; ICBA; Letter from The Dixie Group,
Inc., July 11, 2016 (“Dixie”); MidSouth; Nasdaq; NVCA; NYSE; and Seneca.
113
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; Coalition; CSBA; ICBA; Dixie; MidSouth; Nasdaq;
NVCA; NYSE; and Seneca.
114
See BIO (stating that uniformity alone is a sufficiently compelling argument to align the two definitions, that
avoiding investor confusion is an important responsibility of the SEC, and that issuers and investors alike are
used to having one standard for small company status); Coalition; Nasdaq; NVCA; and NYSE.
28
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Section 404(b) is particularly costly for SRCs and emerging businesses 115 and that audit costs
associated with Section 404(b) divert capital from core business needs. 116
Several commenters addressed the costs associated with complying with the requirements
of Section 404(b). 117 A few commenters stated that, for many growing biotechnology
companies, the Section 404(b) audit represents over $1 million of capital diversion. 118 One
commenter indicated that Section 404(b) compliance imposes a significant burden on emerging
biotech companies, citing the 2011 Staff Section 404(b) Study that estimated that companies
with a public float between $75 million and $250 million spend, on average, $840,276 to comply
with Section 404(b). 119 Another commenter estimated that it will spend more than $400,000
annually on compliance with Section 404(b). 120 One commenter that stated that its public float
was more than $75 million but less than $250 million estimated that relief from Section 404(b)
would result in a 35% reduction in compliance costs whereas there would be no material change
in such costs from the proposed amendments. 121 Another commenter noted that, while most
firms already take an integrated accounting approach to Section 404(b) requirements that
115
See Acorda, et al; AMTA; BIO; Calithera; Coalition; CONNECT; CSBA; and Seneca. See also Dixie.
116
See Acorda, et al; BIO; CSBA; ICBA; and NVCA.
117
See Acorda, et al; BIO; Calithera; CONNECT; CSBA (stating that “accelerated filers spend, on average, more
than $1 million complying with Section 404(b)”); Dixie; and Seneca.
118
See Acorda, et al; and CONNECT. See also CSBA.
119
See BIO.
120
See Calithera. This estimate is generally consistent with the estimate set forth by a presenter at a recent ACSEC
meeting. The presenter stated that some biotechnology companies that anticipate losing their status as EGCs in
the next few years “believe they will incur somewhere between $150,000 to $350,000 in additional audit fees,
$50,000 to $150,000 in other consulting costs and either $40,000 or as much as $200,000 for internal labor.” See
Transcript of Presentation by William Newell at September 13, 2017 ACSEC Meeting available at
https://www.sec.gov/info/smallbus/acsec/acsec-transcript-091317.pdf (pages 49 to 54); see also Newell, William
J., “Sarbanes-Oxley Section 404(b): Costs of Compliance and Proposed Reforms”, presentation at ACSEC
meeting on Sept. 13, 2017 available at https://www.sec.gov/info/smallbus/acsec/william-newell-acsec-
091317.pdf.
121
See Seneca.
29
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includes a complete internal control review, if smaller companies were exempt from Section
404(b), they would avoid the added legal liability of the auditor attestation, providing a savings
opportunity and lowering the cost of being public for those companies. 122
A few commenters stated that the market does not value the audit of such internal
control 123 or that the costs of Section 404(b) outweigh the benefits. 124 Another commenter stated
that expanding relief from Section 404(b) to registrants with a public float of less than $250
million would encourage capital formation because reduced audit and disclosure requirements
may encourage companies that have been hesitant to go public to do so. 125
A number of commenters recommended that the Commission allow a revenue test for the
accelerated filer definition, similar to the amended revenue test being adopted by the
Commission in the SRC definition. 126
3. Final Amendments
As proposed, we are adopting amendments to the “accelerated filer” and “large
accelerated filer” definitions in Exchange Act Rule 12b-2 to preserve the application of the
current thresholds contained in those definitions. 127 Specifically, we are eliminating from the
definitions of accelerated filer and large accelerated filer the exclusions for registrants that are
eligible to use the SRC requirements under Regulation S-K for their annual and quarterly reports.
122
See Dixie.
123
See Acorda, et al (stating that the market does not demand a Section 404(b) audit as a prerequisite for investing
in emerging, innovative companies and that virtually no EGCs are voluntarily forgoing their exemption from
Section 404(b)). See also Dixie.
124
See MidSouth.
125
See ICBA (citing a 2005 ICBA study that estimated that audit fees for publicly held bank holding companies
would drop dramatically – some by as much as 50% – if they were exempted from Section 404(b)).
126
See Acorda, et al; AMTA; BIO; CONNECT; Calithera; CSBA; Nasdaq; and NYSE.
127
See “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2.
30
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After the amendments to the SRC definition become effective, some SRCs will exceed the public
float thresholds for initial or subsequent qualification in the accelerated filer definition, and a few
of these registrants also may exceed the public float threshold for subsequent qualification in the
large accelerated filer definition. 128
Although we are not raising the accelerated filer public float threshold or modifying the
Section 404(b) requirements for registrants with a public float between $75 million and
$250 million in this release, as stated above, the Chairman has directed the staff to formulate
recommendations to the Commission for possible changes to reduce the number of registrants
that our rules define as accelerated filers. Eliminating the SRC provision in the accelerated filer
and large accelerated filer definitions will maintain the current thresholds at which registrants are
subject to the accelerated filer and large accelerated filer disclosure and filing requirements. In
2007, the Commission noted that aligning the SRC public float threshold based on the levels
established for non-accelerated filers 129 was practical and avoided regulatory complexity. 130
These amendments will change the current relationship between the SRC and “accelerated filer”
definitions by allowing a registrant to qualify as both a SRC and an accelerated filer. 131 We
acknowledge the regulatory complexity created by this potential overlap between the SRC and
128
The only registrants that would qualify as both SRCs and large accelerated filers would be those companies (1)
that previously qualified as large accelerated filers because at one time their public float was $700 million or
more, (2) whose revenues for the most recent fiscal year were less than $100 million, and (3) whose public float
as of the end of the most recent second quarter was less than $560 million, such that they now qualify as SRCs,
but not less than $500 million, such that they are not eligible to exit large accelerated filer status.
129
A non-accelerated filer is a filer that is not an “accelerated filer” or a “large accelerated filer.” See subpart (3) of
the accelerated filer and large accelerated filer definitions in Exchange Act Rule 12b-2 [17 CFR 240.12b-2].
130
See SRC Adopting Release 73 FR at 942.
131
In conjunction with these amendments, we also are adopting technical revisions to Securities Act Forms S-1, S-
3, S-4, S-8, and S-11 and Exchange Act Forms 10, 10-Q and 10-K. These amendments modify the cover page of
the specified forms to remove the parenthetical next to the “non-accelerated filer” definition that states “(Do not
check if a smaller reporting company).” After these amendments, a registrant should check all applicable boxes
on the cover page addressing, among other things, non-accelerated, accelerated, and large accelerated filer status,
SRC status, and emerging growth company status.
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“accelerated filer” definitions. 132 As part of the staff’s consideration of possible recommended
amendments to the “accelerated filer” definition, the Chairman has directed the staff to consider,
among other things, the historical and current relationship between the SRC and “accelerated
filer” definitions.
III. Other Matters
If any of the provisions of these amendments, or the application thereof to any person or
circumstance, is held to be invalid, such invalidity shall not affect other provisions or application
of such provisions to other persons or circumstances that can be given effect without the invalid
provision or application.
IV. Economic Analysis
As discussed above, we are adopting amendments to the definition of SRC as used in our
rules and regulations. The amendments expand the number of registrants that are eligible to
provide scaled disclosure to their investors and are intended to reduce compliance costs for these
registrants and promote capital formation, while maintaining appropriate investor protections.
Registrants with a public float of less than $250 million (an increase from the current $75 million
threshold) will qualify as SRCs, as will registrants with no public float if their revenues are less
than $100 million (an increase from the current $50 million threshold). 133 In addition, registrants
with a public float of less than $700 million will qualify as SRCs if their revenues are less than
$100 million.134
132
Several commenters specifically recommended increasing the public float threshold in the accelerated filer
definition to, among other things, maintain uniformity across our rules. See BIO; Coalition; Nasdaq; NVCA; and
NYSE.
133
See note 25 and related text for a discussion of how and when public float is calculated and when revenues are
measured.
134
The Commission received a number of comments in support of expanding the definition of SRC to include a
revenue test for registrants with a public float. See Section II.A.1.b.
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We also are making corresponding amendments to other rules in light of the new SRC
definition. As proposed, we are adopting amendments to the “accelerated filer” and “large
accelerated filer” definitions in Exchange Act Rule 12b-2 to preserve the application of the
public float thresholds in those definitions. In addition, we are amending Rule 3-05(b)(2)(iv) of
Regulation S-X to increase the revenue threshold under which certain registrants may omit the
earliest of the three fiscal years of audited financial statements of an acquired business or
business to be acquired.
We are mindful of the costs and benefits of the amendments. In this economic analysis,
we examine the existing baseline, which consists of the current regulatory framework and market
practices, and discuss the potential costs and benefits of the amendments, relative to this
baseline, and their potential effects on efficiency, competition, and capital formation. 135 We also
consider the potential costs and benefits of reasonable alternatives to the amendments. Where
practicable, we have attempted to quantify the economic effects of the amendments; however, in
certain cases, we are unable to do so because either the necessary data are unavailable or the
economic effects are not quantifiable. In these cases, we provide a qualitative assessment of the
likely economic effects.
A. Baseline
In calendar year 2016, 7,395 registrants filed a Form 10-K with the Commission.
Excluding investment companies, business development companies, and ABS issuers, which are
not eligible for SRC status, 6,739 registrants filed a Form 10-K in calendar year 2016. Of these
135
Section 23(a)(2) of the Exchange Act requires us, when adopting rules, to consider the impact that any new rule
would have on competition. In addition, Section 2(b) of the Securities Act and Section 3(f) of the Exchange Act
direct us, when engaging in rulemaking that requires us to consider or determine whether an action is necessary
or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation.
33
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registrants, 2,592 (35.1% of all registrants) claimed SRC status by checking the box on the cover
page of their Forms 10-K indicating that the registrant was a SRC. Under the current definition,
a registrant with a public float may qualify as a SRC if its public float is less than $75 million or
a registrant with no public float may qualify as a SRC if its annual revenues are less than $50
million. An additional 232 filers in calendar year 2016 reported public float of less than $75
million or no public float and revenues of less than $50 million, but did not check the box on the
cover page of their Forms 10-K indicating that they were SRCs. 136 Of the 2,592 registrants that
claimed SRC status in 2016, 1,899 registrants (25.7% of all registrants) reported having a public
float that was less than $75 million and 509 registrants (6.9% of all registrants) reported having
no public float and revenues of less than $50 million. 137 Of the 2,592 SRCs, 833 (11.3% of all
registrants) also indicated in their filings that they were EGCs. 138
Table 1 summarizes the number and percentage of registrants that claimed SRC status in
each calendar year over the 2013-2016 period.
136
There are two potential explanations for why the number of registrants meeting the SRC thresholds exceeds the
number of reported SRCs. First, the public float and revenue thresholds establish eligibility for SRC status, but
do not require eligible registrants to take advantage of the scaled disclosure requirements. Thus, some
registrants may be opting out of SRC status if they do not find the reduced compliance costs to be net beneficial.
Second, some registrants that appear to be eligible may not be if they previously exceeded the SRC threshold and
were required to meet the lower eligibility threshold (i.e., public float of less than $50 million or revenues of less
than $40 million) to subsequently qualify as a SRC.
137
Based on analysis by DERA of available data. Staff obtained the SRC status and public float data from
information extracted from exhibits to corporate financial reports filed with the Commission using eXtensible
Business Reporting Language (“XBRL”), available at: http://www.sec.gov/dera/data/financial-statement-data-
sets.html. Staff also extracted the SRC status and public float directly from Forms 10-K using a computer
program. For robustness, staff compared the SRC status and public float information between the two sources
and corrected discrepancies using data from Ives Group Audit Analytics. Staff extracted annual revenue data
from the Compustat database and XBRL data in Form 10-K filings.
138
Staff determined whether a registrant claimed EGC status by parsing several types of filings (for example,
Forms S-1, S-1/A, 10-K, 10-Q, 8-K, 20-F/40-F, and 6-K) filed by that registrant with supplemental data drawn
from Ives Group Audit Analytics.
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Table 1: SRCs in 2013-2016 Period
Qualified
based on
no public
float and
revenue <
Qualified based $50
on public float million
Filing Total # of # of < $75 million (% of
Year Registrants SRCs % of Total (% of Total) Total)
2013 7,624 3,380 44.3% 33.5% 10.8%
2014 7,642 3,179 41.6% 32.7% 8.9%
2015 7,557 2,900 38.4% 29.7% 8.7%
2016 7,395 2,592 35.1% 25.7% 6.9%
Table 2 shows that, while registrants claiming SRC status with available data account for
a substantial percentage of the total number of registrants in calendar year 2016, they account for
less than one percent of the entire public float, market value and revenue of all registrants. 139
Table 2: Size Proxies for SRCs in 2016
Public Float Market Value Revenue
Mean $14.7 million $57.2 million $42.8 million
Median $4.3 million $14.1 million $1.9 million
Aggregate size $40.1 billion $98.7 billion $96.2 billion
% of the aggregate size of
0.15% 0.34% 0.66%
all registrants
Table 3 shows the distribution of registrants that were eligible for SRC status based on
available data in calendar year 2016 using the Fama-French 49-industry classification. 140 The
“Business Services” industry accounts for 10.6% of all SRCs, followed by “Financial Trading”
139
Compustat data on market value is obtained for calendar year 2016 filings. Staff obtained revenue data either
from XBRL data in Form 10-K filings or directly from the filing itself. The summary statistics presented in
Table 2 represent those registrants for which information on public float and revenue is concurrently available.
Market value, as used throughout this Economic Analysis, is equivalent to market capitalization and presented
for registrants with available data (described in footnote 25).
140
The standard Fama-French classification sorts Standard Industry Classification codes into 49 main industrial
categories; available at:
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_49_ind_port.html.
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(9.8%), “Pharmaceutical Products” (8.5%), “Banking” (7.1%), “Petroleum and Natural Gas”
(5.6%), and “Computer Software” (5.2%). 141 We note that industries with a larger fixed
component of operating costs, such as shipping, defense, and aircraft, tend to have fewer SRCs.
Table 3: Industry Distribution of SRCs in 2016
Industry # of % of all Industry # of % of all
ID Industry SRCs SRCs ID Industry SRCs SRCs
1 Agriculture 26 1.0% 26 Defense 2 0.1%
2 Food Products 35 1.3% 27 Precious Metals 38 1.4%
3 Candy & Soda 3 0.1% 28 Non-Metallic 76 2.9%
and Industrial
Metal Mining
4 Beer & Liquor 18 0.7% 29 Coal 3 0.1%
5 Tobacco 9 0.3% 30 Petroleum and 149 5.6%
Products Natural Gas
6 Recreation 23 0.8% 31 Utilities 15 0.6%
7 Entertainment 55 2.0% 32 Communication 45 1.7%
8 Printing and 8 0.3% 33 Personal 37 1.4%
Publishing Services
9 Consumer 40 1.6% 34 Business 281 10.7%
Goods Services
10 Apparel 17 0.6% 35 Computers 22 0.8%
11 Healthcare 37 1.4% 36 Computer 136 5.2%
Software
12 Medical 116 4.4% 37 Electronic 102 3.9%
Equipment Equipment
13 Pharmaceutical 225 8.5% 38 Measuring and 41 1.6%
Products Control
Equipment
14 Chemicals 54 2.1% 39 Business 6 0.2%
Supplies
15 Rubber and 20 0.8% 40 Shipping 2 0.1%
Plastic Containers
Products
16 Textiles 4 0.2% 41 Transportation 24 0.9%
17 Construction 29 1.1% 42 Wholesale 78 3.0%
Materials
141
In 2016, SRCs accounted for 57% of all Form 10-K filers in “Business Services,” 37% in “Financial Trading,”
20% in “Banking,” 39% in “Pharmaceutical Products,” 50% in “Petroleum and Natural Gas” and 47% in
“Computer Software,” suggesting that these industries all have a fairly high concentration of small registrants.
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Table 3: Industry Distribution of SRCs in 2016
Industry # of % of all Industry # of % of all
ID Industry SRCs SRCs ID Industry SRCs SRCs
18 Construction 22 0.8% 43 Retail 82 3.1%
19 Steel Works 9 0.3% 44 Restaurants, 28 1.1%
Hotels, Motels
20 Fabricated 5 0.2% 45 Banking 187 7.1%
Products
21 Machinery 54 2.0% 46 Insurance 20 0.8%
22 Electrical 39 1.5% 47 Real Estate 96 3.6%
Equipment
23 Automobiles 21 0.8% 48 Financial 258 9.8%
and Trucks Trading
24 Aircraft 8 0.3% Other and 30 1.1%
Unknown
25 Shipbuilding, 3 0.1%
Railroad
Equipment
As discussed above, we are amending Rule 3-05(b)(2)(iv) of Regulation S-X to increase
the revenue threshold under which certain registrants may omit the earliest of the three fiscal
years of audited financial statements of an acquired business or business to be acquired. Rule 3-
05 applies to registrants that are not SRCs. 142 Rule 3-05(b)(2)(iv) provides that, if the acquired
business is large enough relative to the registrant (i.e., any of the significant subsidiary tests for
the acquired business exceed 50%), the registrant must file three years of historical financial
statements of the acquired business unless the acquired business has revenues of less than $50
million, in which case only two years of the acquired business’s most recent financial statements
need to be filed. Given the difficulty in accurately identifying registrants that have acquisitions
(1) that meet any of the significant subsidiary tests at the 50% level and (2) where the acquired
business has revenues of less than $50 million, we are unable to estimate the number of
142
Rule 8-04 of Regulation S-X [17 CFR 210.8-04] applies to financial statements of business acquired or to be
acquired by SRCs.
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registrants that were affected by the $50 million revenue threshold in Rule 3-05(b)(2)(iv) in
2016. We do not believe the disclosure accommodation in Rule 3-05(b)(2)(iv) is frequently used
because the acquired business not only would need to meet one of the significant subsidiary
thresholds at the 50% level compared to the non-SRC acquirer, but also would need to have less
than $50 million of revenues in its most recent fiscal year.
B. Potential Economic Effects
1. Introduction
The primary benefit stemming from the amendments is a reduction in compliance costs
for the registrants that will newly qualify for SRC status. To the extent that the reduced
compliance costs have a fixed cost component, 143 which typically burdens smaller registrants
disproportionately, the cost savings may be particularly helpful for those registrants.
As a secondary effect of the amendments, a lower disclosure burden could spur growth in
the registrants that will newly qualify for SRC status to the extent that the compliance cost
savings and other resources (e.g., managerial effort) otherwise devoted to disclosure and
compliance are productively deployed in alternative ways. It also could encourage capital
formation because companies that may have been hesitant to go public may choose to do so if
they face reduced disclosure requirements.
With respect to costs, we expect that the amendments to the SRC definition will result in
a modest change in some indicators of the overall quality of the information environment.
143
See, e.g., William A. Brock & David S. Evans, The Economics of Small Businesses: Their Role and Regulation
in the U.S. Economy 65 at 70 (1986); C. Steven Bradford, Does Size Matter? An Economic Analysis of Small
Business Exemptions from Regulation, College of Law, Faculty Publications. 72 (2004). See also Cindy R.
Alexander et al., Economic Effects of SOX Section 404 Compliance: A Corporate Insider Perspective, 56 J.
Account. & Econ. 267-290 at 285 (2013) (noting, among other things, that they found “evidence of fixed costs
that weigh disproportionately on smaller firms”).
38
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Generally, a decrease in the amount of direct disclosure could increase the information
asymmetry between investors and company insiders, leading to lower liquidity and higher costs
of capital for the affected registrants. For example, one study found that, during the three-month
period following the establishment of the SRC definition, registrants with public floats of $25
million or more and less than $75 million that claimed SRC status experienced a significant
reduction in liquidity relative to comparable registrants. 144 In addition, one of the sources of
information asymmetry under the amendments will be that the newly eligible SRCs will not be
required to provide certain executive compensation disclosures, potentially lowering corporate
governance transparency of these registrants. 145 Furthermore, by introducing overlap between
the SRC and the accelerated filer definitions, the amendments we are adopting would increase
regulatory complexity. 146
The number of affected registrants that will make scaled disclosures will ultimately
depend on the choices of those registrants. That is, the SRC definition establishes eligibility for,
but does not mandate reliance on, any of the scaled disclosure accommodations. 147 We identified
232 registrants in 2016 that met either the $75 million public float threshold or the $50 million
revenue threshold for SRC status but did not claim SRC status. While some of these registrants
may not have been eligible (for example, a registrant that previously did not qualify as a SRC
144
See Lin Cheng, Scott Liao, and Haiwen Zhang, Commitment Effect versus Information Effect of Disclosure:
Evidence from Smaller Reporting Companies, 88 Account. Rev. 1239 (Jul. 2013).
145
For a review of the effects of executive compensation disclosures on compensation practices, see Kevin J.
Murphy, “Executive compensation: Where we are, and how we got there,” Handbook of the Economics of
Finance, Vol. 2. Elsevier (2013) 211-356. See also Benjamin E. Hermalin and Michael S. Weisbach,
Information Disclosure and Corporate Governance, 67 J. Fin. 195 (2012), and Anya Kleymenova and Irem A.
Tuna, Regulation of Compensation (June 21, 2017), Chicago Booth Research Paper No. 16-07, available at
SSRN: https://ssrn.com/abstract=2755621.
146
See SRC Adopting Release 73 FR at 942.
147
If a disclosure requirement applicable to SRCs is more stringent than for non-SRCs, however, SRCs must
comply with the more stringent standard. Item 404 is the only Regulation S-K disclosure requirement that could
be more stringent.
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because it exceeded the thresholds and is now subject to a lower threshold), it is possible that
some elected not to avail themselves of the scaled disclosure requirements. 148
Under the amendments, we expect registrants will weigh their own costs and benefits of
scaled disclosure and decide whether to take advantage of any of the scaled disclosure
accommodations for which they are newly eligible. Some registrants may determine that the
costs of potentially reduced liquidity for their securities and higher cost of capital exceed the
benefits of the lower compliance costs. Those registrants may elect not to rely on the scaled
disclosure accommodations available to them. On the other hand, expanding SRC eligibility
could provide opportunities for adverse selection in a greater number of registrants. For
example, registrants whose outside investors would have benefited from more disclosure might
choose the less burdensome disclosure requirement once becoming eligible. The net benefit or
cost for each newly eligible registrant and its investors will ultimately depend on the specific
facts and circumstances.
Expanding the pool of registrants eligible for SRC status to include registrants with
revenues of less than $100 million and a public float of $250 million or more and less than $700
million will increase the cost savings, information asymmetries, and other effects of scaled
disclosure in proportion to the increase in the number of registrants that become newly eligible at
those higher thresholds and choose to avail themselves of the scaled disclosure accommodation.
This number is likely to be small, as indicated by the evidence that 161 (2.2%) of the registrants
that filed a Form 10-K in 2016 would have met the thresholds in the amended revenue test for
148
Data from 2008 show that registrants do not always take advantage of scaled disclosure. In a sample of 283
registrants that were newly eligible for scaled disclosure in 2008, the evidence from Form 10-K and proxy filings
by those registrants shows that 109 of the registrants chose to maintain their disclosure level for all ten eligible
items, while 174 of the registrants reduced the disclosure level for at least one eligible item. See Lin Cheng,
Scott Liao, and Haiwen Zhang, Commitment Effect versus Information Effect of Disclosure: Evidence from
Smaller Reporting Companies, 88 Account. Rev. 1239 (Jul. 2013) at 1247
40
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registrants with public float.
The effects of scaled disclosure for registrants with a public float of $250 million or more
and less than $700 million and revenues of less than $100 million may be different from the
effects of scaled disclosure for registrants with public float nearer to the current threshold of
$75 million. This is because the characteristics of registrants eligible for SRC status under the
final rules may be different from those of registrants close to the current threshold. For example,
differences in the relationships between management and outside investors in registrants with
higher public float could affect the level of information asymmetries between those registrants
and investors. This may cause those registrants to make different decisions about how much
information they choose to disclose and whether to rely on the scaled disclosure
accommodations, leading to differences in the observed use of scaled disclosure by different
registrants of the same size. The 161 additional registrants had an average public float of $396
million, while those that qualify under the current definition had an average public float of
$15 million, and those that would have qualified under the proposed rules had an average public
float of $55 million. These differences can affect whether a registrant decides to rely on scaled
disclosure and how that decision affects the registrant’s investors. We do not have sufficient
information about the experiences of registrants at the higher public float levels with lower
revenues implementing scaled disclosure to estimate the frequency with which these registrants
will implement scaled disclosure, if available.
Similarly, increasing the revenue threshold below which registrants are eligible to
provide two rather than three years of certain acquired businesses’ historical financial statements
under Rule 3-05(b)(2)(iv) from $50 million to $100 million will increase the cost savings,
information asymmetries, and other effects of the reduced historical financial statement
41
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disclosure that investors receive at or around the time of the acquisition in proportion to the
increase in the number of registrants that acquire businesses with revenues below the higher
threshold and choose to avail themselves of this disclosure accommodation.
Overall, we expect the effect of raising the revenue threshold in Rule 3-05(b)(2)(iv) of
Regulation S-X from $50 million to $100 million on information disclosed by registrants and its
consequences for registrants and investors to be modest. This reflects our appraisal that few
registrants are eligible to provide two rather than three years of an acquired business’s historical
financial statements under Rule 3-05(b)(2)(iv), because the acquired business not only would
need to meet one of the significant subsidiary thresholds at the 50% level compared to the non-
SRC acquirer, but the acquired business also would need to have less than the $50 million of
revenues in its most recent fiscal year. 149 The amendments we are adopting will have two
potentially countervailing effects on the number of registrants that are eligible for the disclosure
accommodation in Rule 3-05(b)(2)(iv). First, they will increase the number of registrants that
are eligible to provide two rather than three years of an acquired business’s historical financial
statements under Rule 3-05(b)(2)(iv) by raising the revenue threshold for eligibility. Second,
they will reduce the number of registrants that are required to comply with Rule 3-05, because
Rule 3-05 is only applicable to registrants that are not SRCs, and our final rules are likely to
increase the number of SRCs. Thus, the net effect may be to increase the number of registrants
eligible to provide two rather than three years of an acquired business’s historical financial
statements under Rule 3-05(b)(2)(iv), but we do not expect the net increase to be significant.
2. Impact on Eligibility for Smaller Reporting Company Status
By increasing the public float threshold from $75 million to $250 million, increasing the
149
See text accompanying note 142.
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annual revenue threshold for registrants with no public float from $50 million to $100 million,
and expanding the revenue test to include registrants with a public float of less than $700 million
and revenues of less than $100 million in the SRC definition, the amendments will permit more
registrants to qualify as SRCs. To estimate the number of additional registrants that are likely to
be affected by the amendments, we use public float data and revenue data from Form 10-K
filings. 150 Our estimate of the number of registrants likely to be eligible in the first year under the
new definition that would not have qualified under the current definition is the number that
would have been eligible had the rule been in effect. We use evidence on the composition of
those registrants from the 2016 data to estimate the likely composition of the registrants that
would be eligible in the first year under the new definition.
We estimate that 966 additional registrants will be eligible for SRC status in the first year
under the new definition. These registrants estimated to be eligible in the first year comprise 779
registrants with a public float of $75 million or more and less than $250 million, 26 registrants
with no public float and revenues of $50 million or more and less than $100 million, and 161
registrants with a public float of $250 million or more and less than $700 million and revenues of
less than $100 million.
The 966 registrants that we estimate will be newly eligible for SRC status are
characterized by an average public float of $191 million (median $162 million), an average
market value of $279 million (median $201 million), and average revenues of $196 million
(median $68 million). Of these registrants, 365 currently are EGCs and are eligible for certain
scaled disclosure under Title I of the JOBS Act, including the scaled executive compensation
150
Float and revenue values are from data in Form 10-K filings filed in calendar year 2016 and extracted from
XBRL exhibits.
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disclosures available to SRCs under Item 402 of Regulation S-K. The newly eligible registrants
with available data in 2016 were concentrated in the following industries: “Pharmaceutical
Products” (17.3%), “Banking” (15.2%), “Financial Trading” (11.8%), “Business Services”
(5.2%), and “Electronic Equipment” (3.7%). If the distribution of eligible registrants does not
change over time, and if all of them claim SRC status, the amendments will lead to a noticeable
increase in the presence of “Pharmaceutical Products” and “Banking” registrants in the pool of
SRCs.
Registrants eligible for SRC status with available data using the public float threshold of
less than $250 million represent approximately 38.6% of all registrants, while only 28.0% of all
registrants qualify under the existing public float threshold of less than $75 million. The 38.6%
of all registrants that will qualify under the public float threshold would be more in line with the
42% of registrants that qualified under the public float threshold when the Commission first
established the definition of SRC. 151 An additional 8.0% of registrants will qualify based on
having no public float and revenues of less than $100 million, while currently 7.7% of registrants
reported having no public float and less than $50 million in revenues. 152 Finally, based on the
2016 data, 2.2% of registrants had a public float of $250 million or more and less than $700
million and revenues of less than $100 million.
151
These percentages reflect the estimated number of registrants that qualify under the respective public float tests
and do not include any registrants that are estimated to qualify under the respective revenue tests.
152
Using 2016 data, we estimate that, of the 7,395 total registrants that filed Forms 10-K with available data, 3,606
registrants will meet one of the SRC thresholds under the amendments. In particular, we estimate that 2,851
registrants reported public float below $250 million and greater than zero in 2016, resulting in a percentage of
38.6% (2,851/7,395) of registrants potentially qualifying as SRCs under the amended public float threshold, and
2,072 registrants reported a public float below $75 million in 2016, resulting in a percentage of 28.0%
(2,072/7,395). Also, we estimate that 594 registrants reported no public float and annual revenues below $100
million in 2016, resulting in a percentage of 8.0% (594/7,395) of registrants potentially qualifying as SRCs under
the amended revenue threshold, and 568 registrants reported no public float and annual revenues below $50
million in 2016, resulting in a percentage of 7.7% (568/7,395). Finally, we estimate that 161 registrants reported
public float of $250 million or more and less than $700 million and annual revenues below $100 million in 2016,
resulting in an additional 2.2% (161/7,395) of registrants potentially qualifying as SRCs.
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Increasing the percentage of registrants that will qualify under the public float threshold
to align more closely with the 2007 level is consistent with the rise in market capitalization of
public companies that has occurred since that time. 153 We do not have sufficient data to be able
to compare the percentage of registrants qualifying under the revenue threshold when the
Commission first established the definition of SRC to the estimated 8.0% that will qualify using
a revenue threshold of $100 million. Table 4 summarizes the size of the potential SRCs in terms
of public float, market value, and annual revenue under the amendments.
Table 4: Size Proxies for SRCs Eligible
Under the Amendments
Public Float Market Value Revenue
Mean $59.9 million $480.1 million $317.7 million
Median $12.1 million $40.9 million $10.3 million
Aggregate size $202.6 billion $1,220.5 billion $1,074.0 billion
% of the aggregate
0.9% 4.8% 8.7%
size of all registrants
As discussed above, we are amending Rule 3-05(b)(2)(iv) of Regulation S-X to increase
the revenue threshold under which certain registrants may omit the earliest of the three fiscal
years of audited financial statements of an acquired business or business to be acquired. Similar
to the baseline discussion of Rule 3-05, given the difficulty in accurately identifying registrants
that have acquisitions (1) that meet any of the significant subsidiary tests at the 50% level and (2)
where the acquired business has revenues of less than $100 million, we are unable to estimate the
number of registrants that will be affected by raising the revenue threshold in Rule 3-05(b)(2)(iv)
from $50 million to $100 million. The amendments we are adopting today increase the number
of registrants that qualify as SRCs (which will likely decrease the application of Rule 3-05) but
153
For example, the S&P 500 index grew by more than 80 percent over the decade ending with the fourth quarter of
2017. Source: CRSP and St. Louis Fed (https://fred.stlouisfed.org/series/GDPDEF).
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also increase the revenue threshold in Rule 3-05(b)(2)(iv) (which may offset the decreased
number of companies affected by Rule 3-05). Therefore, we do not expect that the amendments
will significantly alter the number of registrants that will be eligible to omit the earliest of three
years of financial statements of an acquired business pursuant to Rule 3-05(b)(2)(iv).
3. Estimation of Potential Costs and Benefits
In this section, we estimate the incremental costs and benefits associated with SRC-
related scaled disclosures, using a multivariate empirical analysis. We cannot isolate the costs
and benefits associated with scaled disclosures using available data from SRCs, because we
cannot with the data isolate the effects of scaled disclosures from the effects of some other
accommodations, such as the exemption from Section 404(b) that is currently available to all
SRCs through their status as non-accelerated filers. 154 Under the final rules, some newly eligible
SRCs will be able to provide scaled disclosures but will continue to be subject to Section 404(b)
as accelerated filers.
It is possible, however, to isolate the effects of scaled disclosures on registrants with
public float slightly below or above the current $75 million public float threshold using 2006-
2009 data. This is because, as a result of the rules that established the SRC definition in 2007,
registrants with public float of $25 million or more and less than $75 million experienced no
change in the Section 404(b) exemption (that is, they remained exempt from the requirement),
but became eligible for the SRC scaled disclosures. Our empirical method is a difference-in-
154
Although there is a clear threshold for eligibility, we cannot use the well-known empirical method of Regression
Discontinuity Design to assess the treatment effect of scaled disclosures for SRCs. This method requires that the
assignment of the treatment among registrants be “as good as random” around the threshold. Under this
assumption, the registrants that receive the treatment of scaled disclosure (i.e., SRCs) should be comparable to
those registrants that do not receive the treatment because their public float is just above the $75 million
threshold. Given the exemption from Section 404(b) available to current SRCs with public float below $75
million, this assumption does not hold.
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difference estimation between a treatment group and a control group that is the basis for
comparison. 155 In particular, the treatment group (“Treatment Group”) consists of registrants
with public float of $25 million or more and less than $75 million that claimed SRC status in
2008. Two natural control groups exist. The first (“Control Group 1”) consists of registrants
that did not qualify for SRC status because they had public float at or just above $75 million
($75 million or more and less than $125 million). 156 The second (“Control Group 2”) consists of
registrants with public float and revenues below $25 million that were already eligible for scaled
disclosures at that time and thus not affected by the Commission’s 2007 rules. 157
To analyze the economic effects of eligibility for scaled disclosures resulting from the
Commission’s 2007 rules by this method, we compare the Treatment Group with Control
Group 1 and Control Group 2 in the following areas: cost savings, information environment,
liquidity, and growth. We then use the analysis to extrapolate the likely effects of the expansion
of eligibility for SRC status under the final rules. In extrapolating the likely effects, we place
particular emphasis on the comparison between the Treatment Group and Control Group 1,
which represents a closer group in size to the newly eligible SRCs under the final rules.
We believe that the evidence from analysis of changes in the information environments
of registrants around the 2007 amendments is a suitable basis for evaluating the effects of the
155
Difference-in-difference is a technique used to calculate the effect of a variable on a treatment group versus a
control group. In particular, in the analysis below, the average change over time in the outcome of a variable for
the treatment group is compared to the average change over time in the outcome of that variable for the control
group.
156
This would allow for a $50 million bandwidth similar to that used in the Commission’s 2007 rules, which raised
the threshold for relief from $25 million to $75 million.
157
The comparison groups help control for confounding factors that may also independently affect the economic
effects associated with scaled disclosures. While we determine Treatment Group and Control Group 1 based on
public float alone, we use both public float and revenues to determine Control Group 2, because, prior to the
Commission’s 2007 rules, registrants with public float below $25 million were not eligible for scaled disclosures
if their revenues exceeded $25 million.
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current amendments on registrants with public floats at the low end of the range that are newly
eligible for scaled disclosure. We included a similar analysis in the Proposing Release and
solicited comments on this analysis, including ways to better quantify the effects of scaled
disclosure on SRCs, but did not receive any comments in response.
While the 2007 amendments resulted in changes that are similar to what we expect will
occur under the current amendments, our analysis is subject to a number of assumptions and
limitations. The evidence from the 2007 amendments may be less suitable as a basis for
evaluating the effects of the current amendments on registrants with relatively higher levels of
public float than for evaluating potential effects of the current amendments on registrants with
public float around the $75 million threshold.158 It is thus more challenging to quantify the likely
effects of the current amendments on newly eligible SRCs with public float levels that are farther
from the $75 million level, such as those closer to the $250 million and $700 million levels.159
We believe those challenges may be less pronounced for registrants that have other
characteristics, such as revenue, similar to those of the registrants that were affected by the prior
rules.
a. Potential Cost Savings: Estimates Based on Changes in Audit Fees
The cost savings from scaled disclosures could include savings of resources that are
likely to be used for the relevant parts of disclosures, for example, managerial and employee
time, other internal resources, and audit fees related to certain disclosures. Among these
158
The 2007 rule amendments affected the reporting practices of registrants with public floats near the $75 million
threshold (i.e., $25 million or more and less than $75 million) and, accordingly, may indicate the effects of
increasing the public float threshold on registrants with public float of $75 million or slightly more than $75
million.
159
One limitation of difference-in-difference and regression discontinuity design studies of the effects of changes in
regulatory rules is that their results are more applicable in evaluating the effects of the changes on the registrants
whose characteristics most closely resemble those who were affected by the event under the analysis than in
evaluating effects on other registrants. See, e.g., Leuz and Wysocki (2016).
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potential savings, changes in audit fees are readily quantifiable. To the extent that the scaled
disclosure accommodations affect information that must be audited, scaled disclosures of the
audited portions of the filings should lead to a reduction in audit expenses. Because many of the
scaled disclosures available to SRCs relate to governance and executive compensation
disclosures that are not subject to audit, a reduction in audit fees is likely a small part of the total
cost savings associated with scaled disclosures. However, quantifying the change in audit fees
can potentially help us estimate the entire cost savings.
To estimate the cost savings from the amendments, we first examine changes in the audit
fees of registrants that were newly eligible to use scaled disclosures as a result of the 2007
amendments relative to those in the control, or comparison, groups between the pre-amendment
2006-2007 period and the post-amendment 2008-2009 period. Audit fee data come from the
Ives Group Audit Analytics database. We include only registrants that had both pre-amendment
and post-amendment audit fee data in the analysis. Table 5 reflects the general results.
Table 5: Pre- and Post-Commission’s 2007 Amendments Audit Fees for SRCs and Control
Groups
Treatment Group Control Group 1 Control Group 2
(SRCs w/ public (Non-SRCs w/ (SRCs w/ public
float $25m- public float $75m- float and revenues
Fiscal Year $75m) $125m) below $25m)
Avg. 2006-2007 $311,105 $676,194 $113,757
Avg. 2008-2009 $267,252 $654,463 $101,854
Number of Observations 1,315 694 962
For SRCs with public floats of $25 million or more and less than $75 million, in 2008-
2009, average audit fees declined by $43,853. In contrast, both Control Group 1, which just
missed eligibility for SRC status, and Control Group 2, which already was eligible for scaled
disclosures, experienced smaller declines in average audit fees after the adoption of the 2007
amendments: $21,731 and $11,903, respectively. Thus, the difference-in-difference estimate of
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the savings in audit fees associated with scaled disclosures is between $22,122 and $31,950 per
SRC with public float around the $75 million threshold. Although two different control groups
are used to control for other factors that may have caused the changes in audit fees noted in
Table 5 during the 2006-2009 period, 160 the effect of the 2008 financial crisis may not be
completely ruled out and could make the estimated savings in audit fees appear larger than they
actually were.
We also estimate the savings in audit fees in terms of a percentage reduction, instead of a
dollar value. 161 The audit fees for the Treatment Group declined by 14.1% in the 2008-2009
period relative to the 2006-2007 period, but only by 3.2% for Control Group 1 and 10.5% for
Control Group 2. Thus, the difference-in-difference estimate of the treatment effect in terms of a
percentage reduction is a 3.6% to 10.9% reduction in the audit fees.
For the 966 newly eligible registrants that we estimate would be potentially affected by
the amendments, the average audit fees were $658,735 in fiscal year 2016. Thus, if we use the
dollar value estimates of the audit fee savings, the estimated reduction in audit fees would be
between $28,490 and $41,147 for this group, which are the inflation-adjusted values of the audit
160
For example, among other factors, we note that the Commission approved Public Company Accounting
Oversight Board Auditing Standard No. 5 regarding Audits of Internal Control over Financial Reporting (AS 5).
Among other things, AS 5 was intended to reduce unnecessary costs by making the audit scalable to fit the size
and complexity of a company. AS 5 became effective in November 2007, and registrants with fiscal years
ending between July and November were allowed to avail themselves of the provision earlier. The adoption and
implementation of AS 5 in 2007 could have had an impact on the audit fees of all registrants subject to
Section 404(b). Given that in our analysis both Treatment Group and Control Group 1 were affected by AS 5,
however, the difference-in-difference methodology should control for the potential effects of AS 5 on audit fees.
In addition, based on registrants’ fiscal year end, we have no reason to believe that early adopters were more or
less concentrated in Treatment Group than Control Group 1. See also Commission Guidance Regarding
Management's Report on Internal Control Over Financial Reporting Under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, Release No. 33-8810 (Jun. 20, 2007) [72 FR 35324 (Jun. 27, 2007)].
161
If there is a fixed (dollar value) component in audit expenses that apply to registrants of all sizes, then the
estimates under this alternative approach can be viewed as the upper bound of the potential audit fee savings.
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fee savings estimates in 2008 and 2009. 162 This estimate of savings on audit fees for the newly
eligible registrants is approximately 4.3% ($28,491/$658,735) to 6.2% ($41,148/$658,735) of the
audit fees.
We recognize that this analysis of the audit fee data is subject to a number of
assumptions, some of which may not be fully applicable when estimating the potential change in
audit expenses as a result of the amendments. 163 As a result, there are limitations to our ability to
draw conclusions from the analysis. For example, we recognize that audit expenses are only one
component of costs for registrants and that changes in audit fees do not capture the full range of
potential cost savings stemming from scaled disclosures. There are cost savings apart from the
audit, such as cost savings resulting from a SRC not being required to prepare a compensation
discussion and analysis and from other scaled disclosures in Item 402 of Regulation S-K. These
cost savings likely will include both internal cost savings (such as employee and managerial time
and resources) and external cost savings from fees for other outside professionals such as
attorneys. Given the nature of scaled disclosures available to SRCs, we expect these other cost
savings to be much larger than the cost savings in audit fees. In the Proposing Release, we
assumed that 25% of the total cost savings from scaled disclosure comes from savings in audit
fees and 75% of the savings comes from reduction in other expenses. We solicited comments on
this assumption and on whether we should use a different assumption but did not receive any
162
The inflation adjustment was performed using the CPI calculator of the Bureau of Labor Statistics
(http://data.bls.gov/cgi-bin/cpicalc.pl).
163
Estimates based on data from 2006 to 2009 may not be directly applicable to the estimation of audit fees for the
newly eligible registrants under the rule amendments. On the one hand, because auditors may charge larger
registrants more for auditing the same disclosure items, our estimate could be viewed as a conservative estimate
on the potential savings of audit fees for the newly eligible SRCs. On the other hand, if there were any increased
competition in the auditing industry since 2009, then it could have led to lower audit expenses for the same
disclosure items. Thus, our estimate could be higher or lower than the actual savings on audit fees for SRCs in
2008 and 2009.
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comments in response. Accordingly, we use the same assumption here.
Given this assumption, we estimate total annual cost savings per newly eligible registrant
with a public float around the $75 million threshold to be between $98,439 ($24,610×4) and
$298,052 ($74,513×4). The savings to registrants that become newly eligible with public floats
closer to the $250 million and $700 million thresholds, will vary from this estimate by amounts
that are difficult to quantify, because these registrants are less comparable to the Control Groups,
and will depend on the facts and circumstances of the newly eligible registrant. For example, the
audit cost for some of these registrants may be higher as a result of greater complexity in their
business operations, increasing the cost savings associated with SRC status.
b. Information Environment, Liquidity, and Growth
A registrant’s information environment can be measured by the amount of useful
information available to investors and the quality of that information. To gauge the potential
effects on the degree of external information production about the registrant that could benefit
investors, we determine a registrant’s percentage of institutional ownership, total 5% block
institutional ownership, and analyst coverage (i.e., whether a registrant is covered by at least one
analyst and the number of analysts).
To measure disclosure quality, we use four discretionary accrual measures commonly
used in the accounting literature as proxies for earnings management and the incidence of
material restatements (based on the first year of financial statements restated and the filing year).
Scaled disclosure may contribute to lowering the overall quality of the information environment,
which is proxied in this analysis by the propensity for earnings management and the incidence of
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material restatements. 164 The data on restatements are from the Ives Group Audit Analytics
database. A material restatement is defined as a restatement that is reported under Item 4.02 of
Form 8-K.
To examine the potential effects on liquidity, we focus on the share turnover ratio, which
is calculated by dividing the total number of shares traded over a period by the number of shares
outstanding. To assess the effects of scaled disclosures on growth, we examine a registrant’s
capital investment, which is measured by the capital expenditures to assets ratio, as a proxy for
real growth. Because there is a high concentration of SRCs in industries for which research and
development (“R&D”) investment is important (e.g., pharmaceutical products and electronic
equipment), we also examine a registrant’s investment in R&D. Finally, we examine asset
growth, which is the growth rate in book assets, which could capture a registrant’s growth
through both capital investment and acquisition.
Table 6 reports the estimated treatment effect. The number in the Treatment Group vs.
Control Group 1 column reflects the difference between: (1) the average change in the metric for
the Treatment Group, from the 2006-2007 period, when it was not eligible for scaled disclosure,
to the 2008-2009 period, when it was eligible for scaled disclosure, and (2) the average change in
the metric between the same periods for Control Group 1, which was never eligible for scaled
disclosure. Similarly, the number in the Treatment Group vs. Control Group 2 column reflects
the difference between: (1) the average change in the metric for the Treatment Group from the
2006-2007 period, when it was not eligible for scaled disclosure, to the 2008-2009 period, when
it was eligible for scaled disclosure and (2) the average change in the metric between the same
164
In using these proxies, we do not mean to suggest that scaled disclosure would be expected to directly cause an
increase in earnings management or an increased incidence of material restatements, as there is little direct
connection between the types of disclosure governed by our scaled disclosure requirements and the disclosure
affected by a restatement.
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periods for Control Group 2, which had been eligible for scaled disclosure for both periods. 165
Table 6: Scaled Disclosures and the Information Environment, Liquidity, and Growth 166
Treatment Group Treatment Group
vs. Control vs. Control
Group 1 Group 2
Information Environment:
External Information Production
Institutional Ownership -0.052*** -0.022***
Institutional Block Ownership -0.016** -0.002
Number of Analysts -0.179 -0.068
Analyst Coverage Dummy -0.099*** 0.087***
Information Environment:
Disclosure Quality
Earnings Mgmt. 1 0.025 0.015
Earnings Mgmt. 2 0.024 0.013
Earnings Mgmt. 3 0.020 0.024
Earnings Mgmt. 4 0.018 0.023
Material Restatement (Filing Year) 0.018 0.015
Material Restatement (First Year 0.036** 0.016
Restated)
165
Specifically, for each number reported in Table 6, we estimate the following equation:
y = a + b * SRC + c * After + d * [SRC * After]
where the single-letter terms “a” to “d” are coefficients to be estimated; “SRC” equals one for the treatment group
and zero for the comparison group; and “After” equals one for fiscal years 2008 and 2009 and zero for fiscal
years 2006 and 2007. The treatment effect is reflected in the coefficient estimate d, which is the differential
value of the variable y for treated firms following the start of the treatment. A statistically negative estimate of d
is consistent with a reduction in the value of the dependent variable y (Institutional Ownership, Institutional
Block Ownership, etc.) for treated firms.
166
This table shows changes in the information environment, liquidity, and growth upon the introduction of scaled
disclosure for SRCs. Treatment Group consists of SRCs with public float of $25 million or more and less than
$75 million in fiscal year 2008. Control Group 1 consists of non-SRCs with public float of $75 million or more
and less than $125 million. Control Group 2 consists of small business issuers with public float and revenues
below $25 million. Institutional Ownership is total percentage institutional ownership. Block Institutional
Ownership is total block (5%) institutional ownership. Number of Analysts is the number of analysts following
a registrant. Analyst Coverage Dummy is a dummy variable indicating the existence of analyst following.
Earnings Mgmt. 1-4 are four different discretionary accruals measures. Earnings Mgmt. 1 follows Kothari,
Leone, and Wasley (2005), and Earnings Mgmt. 2-4 follows Dechow, Sloan, and Sweeney (1995).166 Material
Restatement (Filing Year) is a dummy variable that equals one if a registrant discloses restatement under Item
4.02 of Form 8-K in that year, and zero otherwise. Material Restatement (First Year Restated) is a dummy
variable that equals one if the material reason for the restatement under Item 4.02 of Form 8-K originated in that
year, and zero otherwise. Share Turnover is the ratio of shares traded over shares outstanding. Capital
Investment is capital expenditures over book assets. R&D investment is R&D expenditures over revenue. Asset
Growth is the annual growth rate of book assets. ***, **, and * indicate significance at 1%, 5%, and 10%
confidence levels, respectively.
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Treatment Group Treatment Group
vs. Control vs. Control
Group 1 Group 2
Liquidity
Share Turnover Ratio -0.063 -0.052
Growth
Capital Investment 0.005 -0.005
R&D Investment -0.035 -0.002
Asset Growth Rate -0.005 -0.282***
The results in Table 6 suggest that the scaled disclosures had a negative effect on
institutional ownership. The Treatment Group, which became eligible for scaled disclosures,
experienced a 5.2% greater decrease in average institutional ownership from period to period
than the registrants in Control Group 1, which remained ineligible for scaled disclosures, and a
2.2% greater decrease in average institutional ownership from period to period than the
registrants in Control Group 2, which were eligible for scaled disclosures throughout both
periods.
The results reflect a positive effect on material restatements in SRCs based on the first
year restated, while the effect on analyst coverage is inconclusive. SRCs tend to lose analyst
coverage relative to comparable registrants that just missed eligibility, but they gain coverage
relative to even smaller registrants that already were eligible for scaled disclosures. There is no
statistically significant effect on earnings quality as captured by discretionary accruals measures
or the incidence of material restatement based on when the restatement was filed. Overall, the
evidence suggests a modest, but statistically significant, negative effect of scaled disclosure on
SRCs’ overall information environment.
The effect of scaled disclosures on share turnover ratio is negative but statistically
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insignificant, suggesting no significant effect of scaled disclosures on SRCs’ liquidity. 167
Because the newly eligible registrants are larger in market value and have more institutional
ownership and analyst coverage than the current SRCs, to the extent those registrants rely on the
accommodations, we do not expect a significant negative impact on their liquidity.
The results in Table 6 indicate no clear difference between SRCs and registrants in
Control Group 1 and Control Group 2 in terms of changes in capital investment and R&D
investment. The effect on asset growth rate is mixed. There is no significant difference between
the Treatment Group and Control Group 1, but compared to Control Group 2, the Treatment
Group had deterioration in asset growth rate after the 2007 rules. Overall, our empirical analysis
suggests that scaled disclosures have only a minimal effect on growth in current SRCs relative to
the Control Groups. Thus, we do not expect the use of scaled disclosures to have a significant
effect on the growth of the newly eligible registrants under the final rules.
c. Rule 3-05
Similar to our discussion of the amendments to the SRC definition, we generally expect a
modest reduction in compliance costs for registrants that are eligible to provide two rather than
three years of historical financial statements of certain acquired businesses under Rule
3-05(b)(2)(iv), with corresponding potential modest increases in information asymmetries. We
expect the magnitude of the effects of the change in the revenue threshold in Rule 3-05(b)(2)(iv)
to be smaller for those registrants that acquire relevant businesses and their investors, as
167
In contrast, Chang et al. (2013) did find a negative and significant effect of the Commission’s 2007 amendments
on SRCs’ liquidity. The difference in the results could stem from the use of a different empirical methodology,
sample, and sample period. Chang et al. (2013) excluded financial companies. While the authors examined a
pre-amendment period of April to June 2007, we included the entire 2006 and 2007 periods. Also, while the
authors examined a post-amendment period of February to August 2008, we included the entire 2008 and 2009
periods. In addition, the authors focus on a set of illiquidity measures, while we focus on the share turnover
ratio, a commonly used liquidity measure.
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compared to the change in the SRC definition for newly eligible registrants and their
investors. The reason for this expectation is that the revenue threshold in Rule 3-05(b)(2)(iv)
only affects the historical financial statements of the acquired businesses (by limiting them to
two years rather than three years), whereas a registrant that qualifies as a SRC will be able to
comply with a number of scaled disclosure accommodations, including providing two years of
financial statements and scaled executive compensation disclosures. 168
d. Conclusion
Taken together, our empirical analysis suggests that, for most of the newly eligible SRCs
under the final rules, scaled disclosures may generate a modest, but statistically significant,
amount of cost savings in terms of the reduction in compliance costs, a modest, but statistically
significant, deterioration in some of the proxies used to assess the overall quality of information
environment, and a muted effect on the growth of the registrant’s capital investments,
investments in R&D, and assets. We expect the effects on registrants that are newly eligible for
reduced disclosure under Rule 3-05(b)(2)(iv) to be lesser in magnitude but qualitatively similar.
4. Affiliated Ownership and Adverse Selection
In general, holding market value constant, the use of public float to define eligibility
favors registrants with more affiliated ownership. If we consider two registrants with the same
market value but different affiliated ownership, the one with greater affiliated ownership will
have a lower public float, which is the value of non-affiliated ownership, and thus will be more
likely to qualify for SRC status based on the public float threshold. This could be problematic if
the adverse selection problem creates a conflict of interest between affiliated owners—who are
often the decision makers—and non-affiliated owners—who are often the uninformed minority
168
See Section I for a discussion of the scaled disclosure accommodations available to SRCs.
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shareholders on whom reduced disclosure may have a greater impact. We examine whether the
effects of scaled disclosure on registrants’ information environment, liquidity, and growth
depend on the percentage of affiliated ownership, which is the market value of affiliated equity
shares divided by the registrant’s total market value of equity. The average affiliated ownership
is 43% for SRCs in the treatment group in years 2008 and 2009 (median 42%). Specifically, we
examine whether and to what extent the effects of scaled disclosure on information environment,
liquidity, and growth differ for SRCs with high, or above-average, affiliated ownership as
compared to low, or below-average, affiliated ownership.
The results are reflected in Table 7. The number in the Treatment Group vs. Control
Group 1 column reflects the difference between: (1) the difference between the average metric
of registrants in the Treatment Group with affiliated ownership that is higher than the group
median and that of the registrants in the Treatment Group with affiliated ownership that is lower
than the group median and (2) the difference between the average metric of registrants in Control
Group 1 with affiliated ownership that is higher than the group median and that of the registrants
in Control Group 1 with affiliated ownership that is lower than the group median. Similarly, the
number in the Treatment Group vs. Control Group 2 column reflects the difference between: (1)
the difference between the average metric for the higher-than-median affiliated ownership
registrants and that of the lower-than-median affiliated ownership registrants in the Treatment
Group and (2) the difference between the average metrics for the same sectors of Control
Group 2. 169
169
Specifically, for each number reported in Table 7, we estimate the following equation:
y = a + b * SRC + c * After + d * HighAff + e * [SRC * After] + f * [SRC * HighAff] + g * [After * HighAff] + h
* [SRC * HighAff * After]
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Table 7: Affiliated Ownership and Adverse Selection 170
Treatment Group vs. Treatment Group
Control Group 1 vs. Control Group 2
Information Environment:
External Information Production
Institutional Ownership -0.127*** -0.110*
Institutional Block Ownership -0.079** -0.126*
Number of Analysts -0.742** 1.277**
Analyst Coverage Dummy -0.052 0.500**
Information Environment:
Disclosure Quality
Earnings Mgmt. 1 0.010 0.286
Material Restatement (Filing Year) 0.038 -0.040
Material Restatement (Beginning Year) 0.084** 0.001
Liquidity
Share Turnover Ratio 0.052 0.059
Growth
Capital Investment 0.029** 0.049
R&D Investment 0.014 -0.756
Asset Growth Rate 0.136 -1.485
Our analysis suggests that affiliated ownership may exacerbate the potential negative
effects of scaled disclosure on external information production by professionals such as
institutional investors. There is also some evidence that larger affiliated ownership may
exacerbate the adverse effect of scaled disclosure on material restatements based on when such
restatement was triggered in SRCs (relative to Control Group 1). At the same time, scaled
where the single-letter terms “a” to “h” are coefficients to be estimated. “After” and “SRC” are defined in note 165.
“HighAff” is a dummy variable equal to one if the firm’s affiliated ownership is greater than the sample median
of 0.42; otherwise, “HighAff” is equal to zero. The treatment effect of interest is measured by the coefficient h,
which is the differential value of the variable y for treated firms with high affiliated ownership, following the
start of the treatment. See also note 165.
170
This table shows the differences in the changes between registrants with high affiliated ownership and those with
low affiliated ownership upon the introduction of scaled disclosure for SRCs. Affiliated ownership is the
percentage of a registrant’s market value of equity that is owned by affiliated parties (i.e., corporate insiders and
10% block owners). Registrants with high (low) affiliated ownership include registrants with affiliated
ownership above (below) the sample median. A negative and significant estimate means that scaled disclosures
have a more negative effect on SRCs with high affiliated ownership than on those with low affiliated ownership.
***, **, and * indicate significance at 1%, 5%, and 10% confidence levels, respectively
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disclosures tend to have a more positive effect on SRCs’ capital investment when affiliated
ownership is higher. Overall, there is inconclusive evidence that affiliated ownership is
associated with adverse selection in current SRCs.
5. Effects on Efficiency, Competition and Capital Formation
The final rules may have competitive effects. On one hand, the amendments may reduce
the compliance-related costs of newly eligible registrants relative to current SRCs. The
amendments may also increase the competitive advantage of the newly eligible registrants
relative to non-eligible registrants that compete with them in the product market. However,
because there is no clear evidence that scaled disclosures have a significant effect on the growth
of current SRCs, we expect these potentially positive competitive effects to be modest. On the
other hand, setting any eligibility threshold may create a competitive disadvantage for those
registrants that miss eligibility because their public float or revenue is just above the specified
threshold, relative to the newly eligible registrants. However, our economic analysis suggests
that this potentially negative effect also is likely to be modest.
As discussed above, our empirical analysis suggests that scaled disclosures are unlikely
to have a significant negative effect on the overall information environment of SRCs. Thus, we
do not expect the amendments to have a significant negative effect on the information efficiency
of affected parties. Finally, it is difficult to quantify the effect of scaled disclosures on capital
formation. The Commission’s 2007 amendments coincided with the 2008 financial crisis and its
aftermath, which contributed to extremely thin public capital market activities. The potential
cost savings and the potential negative consequences of scaled disclosure for reporting
companies discussed in Tables 5 and 6 (based on data encompassing the period during the
financial crisis) are modest. These figures do not include potential cost savings from newly-
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eligible companies that may contemplate going public. 171
C. Possible Alternatives
In this section, we present several alternatives to the final rules and discuss their relative
costs and benefits.
As a first alternative, we could have used a different registrant size metric in the SRC
definition. While public float has the advantage of capturing the value held by non-affiliated
investors who may be more affected by informational asymmetries, the disadvantage of public
float is twofold. First, reported public float numbers are not easily verifiable. Second, using
public float to define eligibility may increase adverse selection due to conflicts of interest
between affiliated and non-affiliated owners. We considered equity market value as an
alternative size metric to public float. Equity market value is in many instances more accessible
and more easily verifiable than public float. It does not as effectively differentiate registrants
based on the degree of informational asymmetry concerns, but it also does not favor registrants
with more affiliated ownership. If we define registrants as SRCs when they have (1) less than
$250 million in equity market value, (2) no equity market value and revenue below $100 million,
or (3) less than $700 million in equity market value and revenue below $100 million, the number
of registrants estimated to become eligible for scaled disclosure declines by five percent, relative
to the number that are estimated to be eligible under the rule amendments with available 2016
data on public float, revenue and market value. Thus, this alternative would lead to a slightly
smaller pool of registrants eligible for SRC status than under the amendments.
As a second alternative, we could have used different thresholds. Neither public float nor
revenue data show a natural breakpoint for different thresholds. For example, we could take
171
See Section IV.B.1.
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inflation since 2007 into account, raising the public float threshold from $75 million to $86.2
million and the revenue threshold from $50 million to $57.5 million. An inflation adjustment of
the current thresholds would expand the pool of eligible SRCs by 83 registrants, 78 of which
reported public float of between $75 million and $86.2 million in their 2016 Form 10-Ks, and
five of which had no public float and revenue of between $50 million and $57.5 million. 172
Alternatively, instead of the $250 million public float threshold for all registrants and the
$700 million public float threshold for registrants with revenue below $100 million, we could
have allowed the $700 million public float threshold to apply to all registrants, regardless of
revenue. A test capturing all registrants with less than $700 million in public float, regardless of
revenue, would have expanded the pool of eligible SRCs with available data by 1,029 registrants.
Because the $700 million is the threshold in the “large accelerated filer” definition, the effect of
this alternative would be to permit all accelerated filers to provide the SRC scaled disclosures.
For registrants with no public float or public float of less than $700 million, instead of the
$100 million revenue threshold, we could have used a revenue threshold of $1 billion. A
$1 billion revenue threshold would make scaled disclosure accommodations for SRCs and EGCs
generally more consistent for the subset of SRCs that have no public float or public float of less
than $700 million. 173 Using 2016 data, we estimate that if we were to increase the revenue
threshold from $100 million to $1 billion in addition to the accommodations being adopted, there
would be 879 newly eligible registrants based on revenues, in addition to the 966 newly eligible
172
The inflation adjustment was performed using the CPI calculator of the Bureau of Labor Statistics
(http://data.bls.gov/cgi-bin/cpicalc.pl).
173
An EGC is defined as an issuer that had total annual gross revenues of less than $1.07 million during its most
recently completed fiscal year. Pub. L. No. 112-106, Sec. 101, 126 Stat. 306 (2012); 15 U.S.C. 77b(a)(19); 15
U.S.C. 78c(a)(80). Inflation Adjustments and Other Technical Amendments under Titles I and II of the JOBS
Act, Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)].
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registrants under the final rules. Expanding the pool of registrants eligible for SRC status using
this alternative revenue threshold would further reduce overall compliance costs for registrants
but also potentially increase the informational asymmetries and other adverse effects associated
with scaled disclosures. Relative to the current SRCs or the newly eligible SRCs under the final
rules, these additional qualifying registrants also may have different characteristics that could
affect the appropriateness of scaled disclosure. For example, the 879 additional registrants under
this alternative are much larger, implying that any cost savings from scaled disclosures would
generate a much smaller impact on the registrants’ market value, and may not justify the
potential loss of informational transparency.
As a third alternative, we could have considered reducing the number of registrants that
our rules define as accelerated filers, which would expand the number of registrants eligible for
the Sarbanes-Oxley Act Section 404(b) exemption. The newly eligible SRCs under the final
rules will remain accelerated filers and must comply with Section 404(b). This creates two tiers
among SRCs. Registrants with public floats below $75 million are eligible for the scaled
disclosures and, as non-accelerated filers, are exempt from Section 404(b). Registrants with
either (1) public floats of $75 million or more and less than $250 million or (2) public floats of
$75 million or more and less than $700 million and less than $100 million in revenues will be
eligible only for the scaled disclosures and, as accelerated filers, must comply with Section
404(b). In evaluating the costs and benefits of this alternative, we considered the comments that
the Commission received in response to the Proposing Release. In light of these comments, as
stated above, the Chairman has directed the staff to formulate recommendations to the
Commission for possible changes to reduce the number of registrants that our rules define as
accelerated filers.
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V. Paperwork Reduction Act
A. Background
The final rules will affect existing rules, regulations and forms that contain “collection of
information” requirements within the meaning of the Paperwork Reduction Act of 1995
(“PRA”). 174 We are submitting the proposals to the Office of Management and Budget (“OMB”)
for review in accordance with the PRA and its implementing regulations. 175 We also requested
comment on the changes to these “collection of information” requirements in the Proposing
Release.
The titles of the collections of information are: 176
(1) “Regulation S-X” (OMB Control No. 3235-0009);
(2) “Regulation S-K” (OMB Control No. 3235-0071);
(3) “Regulation C” (OMB Control No. 3235-0074);
(4) “Regulation 12B” (OMB Control No. 3235-0062);
(5) “Form 10-K” (OMB Control No. 3235-0063);
(6) “Form 10-Q” (OMB Control No. 3235-0070);
(7) “Form 8-K” (OMB Control No. 3235-0060);
(8) “Regulation 14A and Schedule 14A” (OMB Control No. 3235-0059);
(9) “Regulation 14C and Schedule 14C” (OMB Control No. 3235-0057);
(10) “Form 10” (OMB Control No. 3235-0064);
174
44 U.S.C. 3501 et seq.
175
44 U.S.C. 3507(d); 5 CFR 1320.11.
176
The paperwork burdens from Regulation S-X, Regulation S-K, Regulation C, and Regulation 12B are imposed
through the forms that are subject to the requirements in those regulations and are reflected in the analysis of
those forms. To avoid a PRA inventory reflecting duplicative burdens and for administrative convenience, we
assign a one-hour burden to each of Regulation S-X, Regulation S-K, Regulation C, and Regulation 12B.
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(11) “Form S-1” (OMB Control No. 3235-0065);
(12) “Form S-3” (OMB Control No. 3235-0073);
(13) “Form S-4” (OMB Control No. 3235-0324); and
(14) “Form S-11” (OMB Control No. 3235-0067).
We adopted the existing rules, regulations, and forms pursuant to the Securities Act and
the Exchange Act. These rules, regulations, and forms set forth the disclosure requirements for
annual and quarterly reports, proxy and information statements, current reports, and registration
statements that are prepared by registrants to provide investors information to make informed
investment and voting decisions.
The hours and costs associated with preparing disclosure, filing information required by
forms, and retaining records constitute reporting and cost burdens imposed by collection of
information requirements. An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information requirement unless it displays a currently valid control
number. Compliance with the information collections listed above is mandatory to the extent
applicable to each registrant. 177 Responses to the information collections are not kept
confidential and there is no mandatory retention period for the information disclosed.
B. Summary of the Final Amendments
As described in more detail above, we are adopting final rules to amend the definition of
SRC to encompass a greater number of registrants and to revise Rule 3-05(b)(2)(iv) of
Regulation S-X to align the revenue threshold in that rule with the new revenue threshold in the
definition of SRC. The final rules make scaled disclosure accommodations available to a larger
177
As noted above, registrants claiming SRC status have the option to comply with the scaled disclosures available
to them on an item-by-item basis.
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number of registrants. As a result, the final rules should decrease the disclosure requirements for
registrants that fall within the expanded thresholds of the SRC definition and should decrease the
disclosure burden for registrants acquiring other companies by increasing the number of acquired
companies for which Rule 3-05(b)(2)(iv) of Regulation S-X permits one less year of financial
information to be disclosed.
In the Proposing Release, we proposed to amend the SRC definition to include registrants
with a public float of less than $250 million, as well as registrants with annual revenues of less
than $100 million for the previous year and no public float. We are adopting the amendments
generally as proposed with two changes. In a change from the proposal, the SRC definition in
the final rules also will include registrants with annual revenues of less than $100 million for the
previous year and a public float of less than $700 million. As detailed below, the burden
estimates for the respective forms and schedules have been revised to reflect that the SRC scaled
disclosure accommodations also will be available to the additional registrants that come within
these revised thresholds.
In another change from the proposal, we are amending Rule 3-05(b)(2)(iv) of Regulation
S-X to increase the revenue threshold under which certain registrants may omit from certain
registration statements or current reports the earliest of the three fiscal years of audited financial
statements of an acquired business or business to be acquired. 178 Accordingly, we have added
two new titles, “Regulation S-X” (OMB Control No. 3235-0009) and “Form 8-K” (OMB
Control No. 3235-0060), to the collections of information affected by the final rules. The impact
of the amendment to Rule 3-05(b)(2)(iv) is reflected in the burden estimates for the applicable
178
See note 95.
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forms. 179 However, as discussed below, while we estimate that the amendment to Rule 3-05 may
decrease the existing paperwork burden for some issuers, we do not believe it will change the
total burden estimates for the relevant registration statements and current reports.
The final rules do not change the amount of information required to be included in
Exchange Act reports by any registrant because of its status as an accelerated filer or a large
accelerated filer.
C. Summary of Comment Letters
One commenter addressed the specific PRA-related comment requests in the Proposing
Release. 180 This commenter stated that the proposed adjustment to the SRC definition is fair and
that the details provided as the basis for the cost reduction estimates appear to be thorough and
specific. 181 As to the ways to enhance the information collected, the commenter stated that the
burden of preparing information remained with the respective registrant and that registrants may
be required to provide additional disclosure if they are entering into capital transactions. 182 As to
ways to minimize the burden of the collection of information, the commenter stated that XBRL
may facilitate the evaluation of data. 183 Lastly, the commenter stated that the list of collections of
information appeared to be complete and that it was not aware of any collection of information
that would be negatively affected. 184
179
See note 176.
180
See IMA.
181
Id.
182
Id.
183
Id.
184
Id.
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D. Revisions to Burden and Cost Estimates
For purposes of the PRA, the final rules decrease the burden hour and costs estimates for
Form 10-K, Form 10-Q, Schedule 14A, Schedule 14C, Form 10, Form S-1, Form S-3, Form S-4,
and Form S-11 by approximately 493,016 burden hours and decrease external costs by
approximately $ 66,242,345. 185
Our burden hour and cost estimates below reflect the average burdens for all registrants
that may benefit from the expanded accommodations. In deriving our estimates, we recognize
that the burdens likely will vary among individual registrants based on a number of factors,
including the size and complexity of their business. We believe that some registrants will
experience costs in excess of this average and some registrants will experience less than the
average costs.
For quarterly and annual reports and for proxy and information statements, we estimate
that 75% of the burden of preparation is carried by the registrant internally and that 25% of the
burden is carried by outside professionals retained by the registrant at an average cost of $400
per hour. 186 For registration statements, we estimate that 25% of the burden of preparation is
carried by the registrant internally and that 75% of the burden is carried by outside professionals
retained by the registrant at an average cost of $400 per hour. While we cannot predict with
185
These estimates reflect the difference between (1) our estimates of the burden hours and costs for each affected
collection of information under the final rules and (2) the current estimates for each affected collection of
information prior to effectiveness of the final rules. The current estimates for some of the affected collections of
information have changed since the Proposing Release due to changes in our rules that are unrelated to the
amendments we are adopting. As a result, our estimated changes in the burden hours and costs for each affected
collection of information in this release may differ from our estimates for the same collection of information in
the Proposing Release.
186
We recognize that the costs of retaining outside professionals may vary depending on the nature of the
professional services, but for purposes of this PRA analysis, we estimate that such costs will average $400 per
hour. This is the rate we typically estimate for outside legal services used in connection with public company
reporting. See Section VI.D below for a discussion of the professional skills needed to comply with the
amendments.
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certainty the number of newly eligible SRCs that will begin to use the scaled disclosure
provisions, for purposes of our PRA calculations, we estimate that 80% of them will do so. 187
For purposes of the PRA, we estimate that over a three-year period, 188 the annual
aggregate decreased burden 189 resulting from the amendments in the final rules will average:
• 403,250 hours and $53,883,321 of external costs for Form 10-K;
• 88,864 hours and $11,851,661 of external costs for Form 10-Q;
• 481 hours and $64,160 of external costs for Schedule 14A;
• 11 hours and $1,440 of external costs for Schedule 14C;
• nine hours and $11,163 of external costs for Form 10;
• 145 hours and $174,000 of external costs for Form S-1;
• 38 hours and $45,600 of external costs for Form S-3;
• 203 hours and $243,600 of external costs for Form S-4; and
• 15 hours and $17,400 of external costs for Form S-11.
1. Form 10-K
We estimate that approximately 966 additional registrants will satisfy the revised
definition of a SRC and become eligible to use scaled disclosure in their annual reports on Form
187
This estimated realization rate reflects the percentage of registrants eligible to claim SRC status in 2016 that
claimed such status. Based on data collected by DERA, 2,408, or approximately 91.2%, of an estimated 2,640
eligible registrants claimed SRC status.
In addition, this estimated realization rate is further reduced to reflect that a portion of newly eligible SRCs may
already qualify as EGCs, which are eligible to rely on certain scaled disclosure requirements for a limited period,
including some of the scaled requirements available to SRCs. Based on data collected by DERA, 365, or
approximately 37.8%, of the 966 registrants in 2016 that would have been newly eligible for scaled disclosure
under the final rules were EGCs and therefore already benefitting from a portion of these estimated savings.
188
We calculated an annual average over a three-year period because OMB approval of PRA submissions covers a
three-year period.
189
Our decreased burden estimates take into account, and are net of, any increased burden that may result from
SRCs providing expanded disclosures under disclosure requirements that are more stringent for SRCs than for
non-SRCs, such as Item 404 of Regulation S-K.
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10-K. These registrants could experience burden and cost savings under the final rules. 190 We
estimate that, if all of these registrants used all of the scaled disclosure requirements, they would
save an estimated 504,063 burden hours and an aggregate cost of $67,291,651. 191
Based on our assumption that 80% of newly eligible registrants will begin to use scaled
disclosure, we estimate an aggregate decrease of 403,250 internal burden hours and costs of
$53,833,321 for Form 10-K. 192
2. Form 10-Q
We assume that the same approximately 966 registrants will become newly eligible to
use scaled disclosure for purposes of their quarterly reports. We estimate that if all of these
registrants used all of the scaled SRC requirements, they would save 111,080 burden hours and
an aggregate cost of $14,814,576. 193
190
We estimate that 966 additional registrants will be eligible under the final rules to use the scaled disclosure
requirements available to SRCs for their annual and quarterly reports in the first year. We base this estimate on
the number of additional registrants that would have been eligible to use scaled disclosure for their annual and
quarterly reports in 2016, based on data collected by DERA from annual reports on Form 10-K filed in 2016.
The data show that 779 registrants had a public float of $75 million or more but less than $250 million, 26
registrants had no public float and annual revenues of $50 million or more but less than $100 million, and 161
registrants had a public float of $250 million or more but less than $700 million and annual revenues of less than
$100 million.
191
Consistent with our analysis in the SRC Adopting Release and the Proposing Release, we estimate the
compliance burden for a Form 10-K for a SRC using all scaled disclosure available to be the same as the last
available PRA inventory for completing a Form 10-KSB, which was 1,272 burden hours and a cost of $169,600
(424 professional hours x $400/hour) per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Form 10-K by up to 504,062.65hours (1,793.80 internal hours per filing using
standard Regulation S-K and Regulation S-X disclosure minus 1,272.00 internal hours per filing using scaled
disclosure = 521.80 internal hours saved per filing x 966 filings) and decrease the cost by up to $67,291,651.41
(598.15 professional hours per filing using standard Regulation S-K and Regulation S-X disclosure minus
424.00 professional hours per filing using scaled disclosure = 174.15 external hours saved per filing x $400 per
hour = $69,660.09 external cost savings per filing x 966 filings).
192
This estimated decrease in the compliance burden for Form 10-K is based on 80% x 504,062.65 internal hours
saved = 403,250.12 internal hours saved and 80% x $67,291,651.41 external cost savings = $53,833,312.13
external cost savings.
193
Similar to our approach to estimating the reduced compliance burden for a Form 10-K using scaled disclosure,
we base our estimates of the reduced compliance burden for SRCs using all scaled disclosure available for
certain other filings on the last available PRA inventory for completing the most comparable form under
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Assuming that 80% of newly eligible registrants will begin to use scaled disclosure, we
estimate an aggregate decrease of 88,864 internal burden hours and costs of $11,851,661 for
Form 10-Q. 194
3. Form 8-K
We estimate that the amendments to Rule 3-05 may decrease the existing paperwork
burden for some registrants but not change the total burden estimates for Form 8-K. This reflects
our appraisal that few registrants are eligible to rely on the $50 million threshold in Rule 3-
05(b)(2)(iv) and our expectation that the amendments will not significantly change the number of
registrants that are eligible to rely on Rule 3-05(b)(2)(iv). 195 This also is consistent with the
Commission’s estimate of the impact on the compliance burden for Form 8-K when it revised
Rule 3-05 of Regulation S-X in 2007 to increase the threshold in Rule 3-05(b)(iv) from $25
million to $50 million. 196
Regulation SB. We estimate the compliance burden for a Form 10-Q for a SRC using all scaled disclosure
available to be the same as the last available PRA inventory for completing a Form 10-QSB, which was 102.24
burden hours and a cost of $13,362 (34.08 professional hours x $400/hour) per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Form 10-Q by up to 111,080.34 hours (140.57 internal hours per filing using
standard Regulation S-K disclosure minus 102.24 internal hours per filing using scaled disclosure = 38.33
internal hours saved per filing x 966 registrants x 3 filings per year) and decrease the cost by up to
$14,814,576.00 (46.86 professional hours per filing using standard Regulation S-K disclosure minus 34.08
professional hours per filing using scaled disclosure = 12.78 external hours saved per filing x $400 per hour =
$5,112 external cost savings per filing x 966 registrants x 3 filings per year).
194
This estimated decrease in the compliance burden for Form 10-Q is based on 80% x 111,080.34 internal hours
saved = 88,864.27 internal hours saved and 80% x $14,814,576.00 external cost savings = $11,851,660.80
external cost savings.
195
See Section IV.B.1.
196
See SRC Adopting Release.
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4. Schedule 14A
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 802 definitive proxy statements on Schedule 14A per year. 197 We estimate that if
all of these registrants used all of the scaled SRC requirements, they would save 602 burden
hours and an aggregate cost of $80,200. 198
Assuming that 80% of newly eligible registrants will begin to use scaled disclosure, we
estimate an aggregate decrease of 481 internal burden hours and costs of $64,160 for Schedule
14A. 199
5. Schedule 14C
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 18 definitive information statements on Schedule 14C per year. 200 We estimate
197
We base this estimate on the number of definitive proxy statements on Schedule 14A filed in 2016 by registrants
that would have been newly eligible to use scaled disclosure under the final rules. Based on data collected by
DERA, registrants with a public float of $75 million or more but less than $250 million filed 652 definitive
proxy statements on Schedule 14A, registrants with no public float and annual revenues of $50 million or more
but less than $100 million filed 17 definitive proxy statements on Schedule 14A, and registrants with a public
float of $250 million or more but less than $700 million and annual revenues of less than $100 million filed 133
definitive proxy statements on Schedule 14A.
198
We base our estimate of the reduced compliance burden for Schedule 14A for a SRC using all scaled disclosure
available on our estimate of the compliance burden for Item 407(d)(5) and (e)(4) and (5) of Regulation S-K [17
CFR 229.407(d)(5) and (e)(4) and (5)], with which SRCs are not required to comply. We estimate this burden to
be 0.75 burden hours and a cost of $100 (0.25 professional hours x $400/hour) per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Schedule 14A by up to 601.57 hours (0.75 internal hours saved per filing x
802 filings) and decrease the cost by up to $80,200.00 (0.25 professional hours saved per filing x $400 per hour
= $100 external cost savings per filing x 802 filings).
199
This estimated decrease in the compliance burden for Schedule 14A is based on 80% x 601.57 internal hours
saved = 481.25 internal hours saved and 80% x $80,200.00 external cost savings = $64,160.00 external cost
savings.
200
We base this estimate on the number of definitive information statements on Schedule 14C filed in 2016 by
registrants that would have been newly eligible to use scaled disclosure under the final rules. Based on data
collected by DERA, registrants with a public float of $75 million or more but less than $250 million filed nine
definitive information statements on Schedule 14C, registrants with no public float and annual revenues of $50
million or more but less than $100 million filed no definitive information statements on Schedule 14C, and
registrants with a public float of $250 million or more but less than $700 million and annual revenues of less
than $100 million filed nine definitive information statements on Schedule 14C.
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that if all of these registrants used all of the scaled SRC requirements, they would save 14 burden
hours and an aggregate cost of $1,800. 201
Assuming that 80% of newly eligible registrants will begin to use scaled disclosure, we
estimate an aggregate decrease in burden of 11 internal burden hours and costs of $1,440 for
Schedule 14C. 202
6. Form 10
We estimate that registrants newly eligible to use scaled disclosure will file one
registration statements on Form 10 per year. 203 Assuming that this registrant uses all of the
scaled SRC requirements, we estimate an aggregate decrease of nine internal burden hours and
cost of $11,163 for Form 10. 204 Due to the low number of Form 10 filers and rounding
201
Similar to Schedule 14A, we base our estimate of the decrease in the compliance burden for Schedule 14C for a
SRC using all scaled disclosure available on our estimate of the compliance burden for Item 407(d)(5) and (e)(4)
and (5) of Regulation S-K, which is 0.75 burden hours and a cost of $100 (0.25 professional hours x $400/hour)
per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Schedule 14C by up to 13.48 hours (0.75 internal hours saved per filing x 18
filings) and decrease the cost by up to $1,800.00 (0.25 professional hours saved per filing x $400 per hour =
$100 external cost savings per filing x 18 filings).
202
This estimated decrease in the compliance burden for Schedule 14C is based on 80% x 13.48 internal hours
saved = 10.79 internal hours saved and 80% x $1,800 external cost savings = $1,440 external cost savings.
203
We generally base our estimated number of each type of registration statement filed on the average number of
that type of registration statement filed in each of the calendar years 2014 through 2016 by registrants that would
have been newly eligible to use scaled disclosure under the final rules.
Based on data collected by DERA, registrants that would have been newly eligible to use scaled disclosure under
the final rules filed an average of less than one registration statement on Form 10 per year during the period 2014
through 2016. However, we believe an estimate of one Form 10 is more reasonable because, as reflected in the
Proposing Release, such registrants have filed more than one Form 10 in prior years.
204
We estimate the compliance burden for a Form 10 for a SRC using all scaled disclosure available to be the same
as the last available PRA inventory for completing a Form 10-SB, which was 44.50 burden hours and a cost of
$53,400 (133.50 professional hours x $400/hour) per report.
Accordingly, if all eligible registrants used all available scaled disclosure, we estimate that the final rules will
decrease the compliance burden of Form 10 by up to 9.30 hours (53.80 internal hours per filing using standard
Regulation S-K and Regulation S-X disclosure minus 44.50 internal hours per filing using scaled disclosure =
9.30 internal hours saved per filing x one filing) and decrease the cost by up to $11,163.20 (161.41 professional
hours per filing using standard Regulation S-K and Regulation S-X disclosure minus 133.50 professional hours
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considerations, we assume that all newly eligible registrants filing Form 10 will begin to use
scaled disclosure and therefore realize the full extent of burden and cost savings.
7. Form S-1
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 25 registration statements on Form S-1 per year. 205 We estimate that if all of these
registrants use all of the scaled SRC requirements, they would save 181 burden hours and an
aggregate cost of $217,500. 206
Assuming that 80% of these newly eligible registrants will begin to use scaled disclosure,
we estimate an aggregate decrease of 145 internal burden hours and costs of $174,000 for Form
S-1. 207
8. Form S-3
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 190 registration statements on Form S-3 per year. 208 We estimate that if all of
per filing using scaled disclosure = 27.91 external hours saved per filing x $400 per hour = $11,163.20 external
cost savings per filing x one filing).
205
Based on data collected by DERA, during 2014 through 2016, registrants with a public float of $75 million or
more but less than $250 million filed an average of approximately 17 registration statements on Form S-1 each
year, registrants with no public float and annual revenues of $50 million or more but less than $100 million filed
an average of approximately two registration statements on Form S-1 each year, and registrants with a public
float of $250 million or more but less than $700 million and annual revenues of less than $100 million filed an
average of six registration statements on Form S-1 each year.
206
We estimate the compliance burden for a Form S-1 for a SRC using all scaled disclosure available to be the same
as the last available PRA inventory for completing a Form SB-2, which was 159.50 burden hours and a cost of
$191,400 (478.50 professional hours x $400/hour) per report.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Form S-1 by up to 181.25 hours (166.75 internal hours per filing using
standard Regulation S-K and Regulation S-X disclosure minus 159.50 internal hours per filing using scaled
disclosure = 7.25 internal hours saved per filing x 25 filings) and decrease the cost by up to $217,500.00 (500.25
professional hours per filing using standard Regulation S-K and Regulation S-X disclosure minus 478.50
professional hours per filing using scaled disclosure = 21.75 external hours saved per filing x $400 per hour =
$8,700 external cost savings per filing x 25 filings).
207
This estimated decrease in the compliance burden for Form S-1 is based on 80% x 181.25 internal hours saved =
145.00 internal hours saved and 80% x $217,500.00 external cost savings = $174,000.00 external cost savings.
74
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these registrants use all of the scaled SRC requirements, they would save 48 burden hours and an
aggregate cost of $57,000. 209
Assuming that 80% of the newly eligible registrants will begin to use scaled disclosure,
we estimate an aggregate decrease of 38 internal burden hours and costs of $ 45,600 for Form
S-3. 210
9. Form S-4
We estimate that registrants newly eligible to use scaled disclosure will file
approximately 35 registration statements on Form S-4 per year. 211 We estimate that if all of these
registrants use all of the scaled SRC requirements, they would save 254 burden hours and an
aggregate cost of $304,500. 212
208
Based on data collected by DERA, during 2014 through 2016, registrants with a public float of $75 million or
more but less than $250 million filed an average of approximately 148 registration statements on Form S-3 each
year, registrants with no public float and annual revenues of $50 million or more but less than $100 million filed
an average of two registration statements on Form S-3 each year, and registrants with a public float of $250
million or more but less than $700 million and annual revenues of less than $100 million filed an average of 40
registration statements on Form S-3 each year.
209
We base our estimate of the reduced compliance burden for Form S-3 for a SRC using all scaled disclosure
available on our estimate of the average compliance burden for Items 503(d) and 504 of Regulation S-K [17
CFR 229.503(d) and 229.504], which requirements are scaled for SRCs. We estimate the decrease in
compliance burden for a registration statement on Form S-3 for a SRC using all scaled disclosure available to be
0.25 burden hours and a cost of $300 (0.75 professional hours x $400/hour) per filing.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules would
decrease the compliance burden of Form S-3 by up to 47.50 hours (0.25 internal hours saved per filing x 190
filings) and decrease the cost by up to $57,000.00 ($300 external cost savings per filing x 190 filings).
210
This estimated decrease in the compliance burden for Form S-3 is based on 80% x 47.50 internal hours saved =
38.00 internal hours saved and 80% x $57,000.00 external cost savings = $45,600.00 external cost savings.
211
Based on data collected by DERA, during 2014 through 2016, registrants with a public float of $75 million or
more but less than $250 million filed an average of approximately 30 registration statements on Form S-4 each
year, registrants with no public float and revenues of $50 million or more but less than $100 million filed an
average of approximately one registration statement on Form S-4 each year, and registrants with a public float of
$250 million or more but less than $700 million and annual revenues of less than $100 million filed an average
of four registration statements on Form S-4 each year.
212
We estimate the reduction in the compliance burden for Form S-4 for a SRC using all scaled disclosure available
to be the same as the reduction in the compliance burden for a Form S-1 for a SRC using all scaled disclosure
available as compared to standard Regulation S-K and Regulation S-X disclosure, which was 7.25 burden hours
and a cost of $8,700 (21.75 professional hours x $400/hour) per report.
75
--- page 76 ---
Assuming that 80% of newly eligible registrants will begin to use scaled disclosure, we
estimate an aggregate decrease of 203 internal burden hours and costs of $243,600 for Form
S-4. 213
10. Form S-11
We estimate that registrants newly eligible to use scaled disclosure will file
approximately two registration statements on Form S-11 per year. 214 Assuming that both of these
registrants use all of the scaled SRC requirements, we estimate an aggregate decrease of 15
burden hours and cost of $17,400 for Form S-11. 215
Due to the low number of Form S-11 filers and rounding considerations, we assume that
both of the newly eligible registrants filing Form S-11 will begin to use scaled disclosure and
realize the full extent of burden and cost savings.
Accordingly, we estimate that, if all eligible registrants used all available scaled disclosure, the final rules will
decrease the compliance burden of Form S-4 by up to 253.75 hours (7.25 internal hours saved per filing x 35
filings) and decrease the annual cost by up to $304,500.00 ($8,700 external cost savings per filing x 35 filings).
213
This estimated decrease in the compliance burden for Form S-4 is based on 80% x 253.75 internal hours saved =
203.00 internal hours saved and 80% x $304,500.00 external cost savings = $243,600.00 external cost savings.
214
Based on data collected by DERA, during 2014 through 2016, registrants with a public float of $75 million or
more but less than $250 million filed an average of approximately one registration statement on Form S-11 each
year, registrants with no public float and revenues of $50 million or more but less than $100 million filed an
average of less than one registration statement on Form S-11 each year, and registrants with a public float of
$250 million or more but less than $700 million and annual revenues of less than $100 million filed an average
of one registration statement on Form S-11 each year.
215
We estimate the reduction in the compliance burden for Form S-11 for a SRC using all scaled disclosure
available to be the same as reduction in the compliance burden for Form S-1 for a SRC using all scaled
disclosure available as compared to standard Regulation S-K disclosure and Regulation S-X, which was 7.25
burden hours and a cost of $8,700 (21.75 professional hours x $400/hour) per report.
Accordingly, we estimate that, if both eligible registrants used all available scaled disclosure, the final rules will
decrease the compliance burden of Form S-11 by up to 14.50 hours (7.25 internal hours saved per filing x two
filings) and decrease the annual cost by up to $17,400.00 ($8,700 external cost savings per filing x two filings).
76
--- page 77 ---
VI. Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (“RFA”) 216 requires us, in promulgating rules under
Section 553 of the Administrative Procedure Act, 217 to consider the impact of those rules on
small entities. We have prepared this Final Regulatory Flexibility Analysis (“FRFA”) in
accordance with Section 604 of the RFA. 218 This FRFA relates to amendments to the SRC
definition as used in our rules and Rule 3-05 of Regulation S-X. An Initial Regulatory
Flexibility Analysis (“IRFA”) was prepared in accordance with the RFA and was included in the
Proposing Release.
A. Need for, and Objectives of, the Final Rules
The amendments to the SRC definition in the final rules are intended to promote capital
formation through a modest reduction in compliance costs and disclosure burdens for these
registrants by expanding the number of registrants that qualify as SRCs and are eligible to
provide scaled disclosure, while maintaining appropriate investor protections. These
amendments will enable a registrant to qualify as a SRC based on a public float test or a revenue
test that includes registrants both with and without a public float. 219 We believe that the
amendments will permit a broader group of registrants to make scaled disclosure to their
investors without significantly detracting from investor protections.
The amendments to Rule 3-05(b)(2)(iv) of Regulation S-X will maintain the consistency
of the revenue thresholds in Rule 3-05 and the definition of a SRC. The current revenue
threshold in Rule 3-05(b)(2)(iv) was based on the revenue threshold in the SRC definition, and
216
5 U.S.C. 601 et seq.
217
5 U.S.C. 553.
218
5 U.S.C. 604.
219
See Item 10(f)(1)(i) and (ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
77
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the final rules maintain this consistency by increasing the revenue threshold in Rule 3-
05(b)(2)(iv) to $100 million. This amendment will enable more registrants to omit the earliest of
the three fiscal years of audited financial statements of an acquired business or business to be
acquired in certain registration statements and current reports.
The amendments to the accelerated filer and large accelerated filer definitions in
Exchange Act Rule 12b-2 maintain the current thresholds at which registrants are subject to
accelerated and large accelerated filer disclosure and filing requirements. At this time, we are
not raising the accelerated filer public float threshold or modifying the Section 404(b)
requirements for registrants.
The need for, and objectives of, the final rules are discussed in more detail in Sections II
and IV above.
B. Significant Issues Raised by Public Comments
In the Proposing Release, we requested comment on all aspects of the IRFA, including
the number of small entities that would be affected by the proposed amendments, the existence
or nature of the potential impact of the proposals on small entities discussed in the analysis, and
how to quantify the impact of the proposed amendments. We did not receive any comments
specifically addressing the IRFA. We did, however, receive comments from members of the
public on matters that could potentially impact small entities. These comments are discussed at
length by topic in the corresponding subsections of Section II above.
While many commenters expressed support for the proposed amendments to the SRC
definition, 220 commenters also recommended making changes to the proposed rules that would
220
See Acorda et al; AMTA; BDO; BIO; CAQ/CII; CONNECT; Coalition; ICBA; MidSouth; Nasdaq; NVCA;
NYSE; Seneca; and IMA.
78
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further expand the number of registrants that would qualify as SRCs and would be eligible to
rely on the scaled disclosure requirements. For example, many commenters recommended that
the Commission allow a revenue test for companies with a public float. 221 Commenters stated
that a revenue test would “stimulat[e] innovation and drive business growth,” 222 “ensure that pre-
revenue companies are not forced to divert investment funds…from science to compliance,” 223
and help “avoid stifling the advancement of [these] companies that face costly compliance
burdens.” 224 Two commenters specifically recommended that the Commission adopt a test based
on revenues of less than $100 million and a public float of less than $700 million, as
recommended by the Small Business Forum. 225 In response to commenters 226 and
recommendations from the Small Business Forum, 227 the definition in the final rules will include,
in addition to registrants with a public float of less than $250 million, registrants with annual
revenues of less than $100 million during their most recently completed fiscal year and either no
public float or a public float of less than $700 million. 228 As described above, we believe that it
is appropriate to provide a measure by which a registrant with public float but with limited
revenues may qualify as a SRC. 229
221
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; CSBA; Nasdaq; NYSE; and Zeller.
222
BIO.
223
Acorda, et al.
224
AMTA.
225
See BIO; and Calithera.
226
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; and CSBA.
227
See notes 16 and 85 for a discussion of the Small Business Forum recommendations.
228
See Item 10(f)(1)(ii) of Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
229
See Section II.A.2.
79
--- page 80 ---
We are not, however, adopting a revenue test without a limitation on the public float or
market capitalization of the company, as specifically suggested by two commenters. 230 We
believe the amended revenue test in the final rules is consistent with the position expressed by
these commenters and others 231 that it is not necessary to subject capital-intensive, low-revenue
registrants with larger public floats or market capitalizations to the same reporting requirements
as registrants with larger public floats and more well-established, revenue-generating businesses.
The amended revenue test in the final rules will enable these registrants to benefit from the cost-
savings of scaled reporting, while recognizing that as a registrant’s business and public float
grows, investors should benefit from greater disclosure. The additional information provided by
the registrant in these circumstances will assist a growing investor base in making informed
investment decisions and should also lead to a lower cost of capital for the business as it grows.
Two commenters recommended amending Rule 3-05 to increase the revenue threshold in
paragraph (b)(2)(iv) to $100 million to maintain the alignment between Rule 3-05 and the
definition of a SRC. 232 Given that the current revenue threshold in Rule 3-05(b)(2)(iv) was based
on the revenue threshold in the SRC definition233 and that the final rules, among other things,
increase the revenue threshold in the SRC definition from $50 million to $100 million, we
believe it is appropriate to raise the net revenue threshold in Rule 3-05(b)(2)(iv) of Regulation
S-X from $50 million to $100 million.
While some commenters supported eliminating the provision in the accelerated filer and
large accelerated filer definitions that specifically excludes registrants that are eligible to use the
230
See NYSE; and Nasdaq.
231
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; CSBA; NYSE; and Nasdaq.
232
See EY; and BDO.
233
See 1996 Rule 3-05 Adopting Release and SRC Adopting Release.
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SRC disclosure requirements for their annual or quarterly reports, 234 many other commenters
recommended that the Commission increase the thresholds in the accelerated filer definition,
consistent with the changes to the SRC definition.235 Commenters recommended increasing the
public float threshold in the accelerated filer definition to reduce compliance costs 236 and to
maintain consistency in the rules. 237
The final rules include amendments to the accelerated filer and large accelerated filer
definitions in Exchange Act Rule 12b-2 to maintain the current thresholds at which registrants
are subject to accelerated and large accelerated filer disclosure and filing requirements. These
amendments will change the current relationship between the SRC and “accelerated filer”
definitions by allowing a registrant to qualify as both a SRC and an accelerated filer. 238 As stated
above, the Chairman has directed the staff to formulate recommendations to the Commission for
possible changes to reduce the number of registrants that our rules define as accelerated filers.
As part of the staff’s consideration of possible recommended amendments, the Chairman has
directed the staff to consider, among other things, the historical and current relationship between
the SRC and “accelerated filer” definitions.
234
See BDO; CAQ/CII; CFA Institute; Deloitte; and EY.
235
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; Coalition; CSBA; ICBA; Dixie; MidSouth; Nasdaq;
NVCA; NYSE; and Seneca.
236
See Acorda, et al; AMTA; BIO; Calithera; CONNECT; Coalition; CSBA; ICBA; Dixie; MidSouth; Nasdaq;
NVCA; NYSE; and Seneca.
237
See BIO; Coalition; Nasdaq; NVCA; and NYSE.
238
In conjunction with these amendments, we also are adopting technical revisions to Securities Act Forms S-1, S-
3, S-4, S-8, and S-11 and Exchange Act Forms 10, 10-Q and 10-K. These amendments modify the cover page of
the specified forms to remove the parenthetical next to the “non-accelerated filer” definition that states “(Do not
check if a smaller reporting company).” After these amendments, a registrant should check all applicable boxes
on the cover page addressing, among other things, non-accelerated, accelerated, and large accelerated filer status,
SRC status, and emerging growth company status.
81
--- page 82 ---
We believe that the final rules will reduce disclosure burdens by expanding the number of
registrants that will qualify as SRCs and that are eligible to provide scaled disclosure, while
maintaining appropriate investor protections.
C. Small Entities Subject to the Final Rules
For purposes of the RFA, under 17 CFR 230.157 (Securities Act Rule 157), an issuer,
other than an investment company, is a “small business” or “small organization” if it had total
assets of $5 million or less on the last day of its most recent fiscal year and is engaged or
proposing to engage in an offering of securities not exceeding $5 million. Under 17 CFR 240.0-
10(a) (Exchange Act Rule 0-10(a)), an issuer, other than an investment company, is a “small
business” or “small organization” if it had total assets of $5 million or less on the last day of its
most recent fiscal year.
We estimate that there are currently 1,181 entities that qualify as “small” under the
definitions set forth above. 239 We believe it is likely that virtually all small businesses or small
organizations, as defined in our rules described above, are already encompassed within the
current SRC definition and the current revenue threshold in Rule 3-05(b)(2)(iv) of Regulation S-
X and will continue to be encompassed within the revised thresholds contained in the final rules.
To the extent any small business or small organization, as defined for RFA purposes, is not
already encompassed within the current SRC definition and the current revenue threshold in Rule
3-05(b)(2)(iv) of Regulation S-X, we believe it is likely that the revised thresholds contained in
the final rules will capture those entities.
239
This estimate is based on staff analysis of XBRL data submitted by filers, excluding co-registrants, with EDGAR
filings of Forms 10-K filed during the calendar year of January 1, 2016 to December 31, 2016.
82
--- page 83 ---
D. Projected Reporting, Recordkeeping and Other Compliance Requirements
The amendments to the SRC definition in the final rules increase the number of
registrants eligible to provide scaled disclosures in response to Regulation S-K and Regulation
S-X disclosure requirements. These amendments do not revise the scaled disclosure
requirements themselves, but could modestly decrease the disclosures required for registrants
that will qualify as SRCs under the expanded thresholds.
Consistent with the amendments to the revenue threshold in the SRC definition, the
amendment to Rule 3-05 of Regulation S-X raises the net revenue threshold in Rule 3-
05(b)(2)(iv) of Regulation S-X from $50 million to $100 million. Current Rule 3-05(b)(2)(iv)
allows certain registrants to omit financial statements of businesses acquired or to be acquired in
certain registration statements and current reports for the earliest of the three fiscal years required
if the net revenues of the business to be acquired are less than $50 million. With the amendment,
those registrants will become eligible to omit the relevant financial statements for acquired
businesses with net annual revenues of $50 million or more but less than $100 million in the
most recent fiscal year. In this way, the amendment to Rule 3-05 could moderately decrease the
existing disclosure requirements for some registrants; however, we do not expect that the number
of registrants affected by the amendments will be significant.
Both (i) the amendments to the SRC definition, which expand the number of registrants
that qualify for the scaled disclosure based on revenue and public float measures, and (ii) the
amendment to Rule 3-05 of Regulation S-X, which expands the pool of acquired companies for
which registrants are required to provide only two years of financials, reduce disclosure already
required to be prepared under our rules. Accordingly, there are no particular professional skills
needed to comply with the amendments themselves. Consistent with the current rules, however,
83
--- page 84 ---
a registrant will need to monitor the applicable thresholds for disclosure and to comply with the
underlying existing disclosure requirements, which may require the use of professional skills,
including information technology, accounting, and legal skills.
The amendments are discussed in detail in Section II above. We discuss the economic
impact, including the estimated compliance costs and burdens, of the final rules in Section IV
(Economic Analysis) and Section V (Paperwork Reduction Act) above.
E. Agency Action to Minimize Effect on Small Entities
The RFA directs us to consider significant alternatives that would accomplish the stated
objectives of the amendments, while minimizing any significant adverse impact on small entities.
Accordingly, we considered the following alternatives:
• establishing different compliance or reporting requirements or timetables that take into
account the resources available to small entities;
• clarifying, consolidating or simplifying compliance and reporting requirements for small
entities under our rules as revised by the amendments;
• using performance rather than design standards; and
• exempting small entities from coverage of all or part of the amendments.
The amendments generally do not create any new compliance or reporting requirements.
Instead, the amendments expand the number of companies eligible for the different compliance
and reporting requirements available to SRCs and increase the revenue threshold to qualify for
the disclosure accommodation in Rule 3-05(b)(2)(iv) of Regulation S-X. 240 As a result, we do
not believe it is necessary or appropriate to exempt small entities in connection with this
240
As discussed in note 20, Item 404 is the only disclosure item in Regulation S-K that may require more extensive
information for SRCs than for non-SRCs. See also note 22.
84
--- page 85 ---
rulemaking. The amendments are intended to increase the number of registrants eligible to
provide scaled disclosures under Regulation S-K and Regulation S-X. To the extent any small
entity is not already encompassed within the current SRC definition or the current revenue
threshold in Rule 3-05(b)(2)(iv) of Regulation S-X, we believe it is likely that the revised
thresholds contained in the final rules will capture those entities, thereby enabling them to
provide scaled disclosures. Therefore, we believe that the amendments will simplify compliance
and reporting requirements for small entities. Small entities may avail themselves of the
amendments upon their effective date. This timetable will provide newly-eligible small entities
with the ability to take advantage of the scaled disclosure requirements at the earliest possible
date. In this regard, we do not believe that it is necessary to establish a different timetable for
small entities. With respect to the use of performance rather than design standards, because the
amendments are not expected to have any significant adverse effect on small entities (and are, in
fact, expected to relieve burdens for some such entities), we do not believe it is necessary to use
performance standards in connection with this rulemaking.
In Section IV, above, we discuss additional alternatives that we have considered and their
economic impact. 241 We note that those alternatives, such as using a different threshold or
different standard for determining SRC status, would be unlikely to have a significant effect on
smaller entities because, as noted above, we believe virtually all small entities are already
eligible for SRC status. Similarly, with respect to the alternative of not amending the accelerated
and large accelerated filer definitions, we believe there are very few small entities that will be
241
See Section IV.C. (alternatives include (i) using a different registrant size metric in the SRC definition, (ii)
revising the SRC definition using different thresholds, and (iii) reducing the number of registrants that our rules
define as accelerated filers, which would expand the number of registrants eligible for the Sarbanes-Oxley Act
Section 404(b) exemption).
85
--- page 86 ---
considered accelerated filers under the definitions in the final rules, and, therefore, this
alternative would not significantly affect small entities. 242
VII. Statutory Amendments and Text of Final Rules
The rule amendments described in this release are being adopted pursuant to Sections 7,
10 and 19 of the Securities Act (15 U.S.C. 77a et seq.), as amended, Sections 3(b), 12, 13, 15(d)
and 23(a) of the Exchange Act (15 U.S.C. 78a et seq.), as amended, and Section 72002 of the
FAST Act.
List of Subjects in 17 CFR Parts 210, 229, 230, 239, 240, and 249
Reporting and recordkeeping requirements, Securities.
For the reasons set out in the preamble, the Commission is amending title 17, chapter II
of the Code of Federal Regulations as follows:
PART 210 – FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934,
INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940,
AND ENERGY POLICY AND CONSERVATION ACT OF 1975
1. The authority citation for part 210 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26),
77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-
20, 80a-29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c), Pub. L.
112-106, 126 Stat. 310 (2012), unless otherwise noted.
2. Amend § 210.3-05 by revising paragraph (b)(2)(iv) to read as follows:
§ 210.3-05 Financial statements of businesses acquired or to be acquired.
*****
242
See Section IV.B.
86
--- page 87 ---
(b) * * *
(2) * * *
(iv) If any of the conditions exceed 50 percent, the full financial statements specified
in §§ 210.3-01 and 210.3-02 shall be furnished. However, financial statements for the earliest of
the three fiscal years required may be omitted if net revenues reported by the acquired business
in its most recent fiscal year are less than $100 million.
*****
PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934, AND ENERGY POLICY AND
CONSERVATION ACT OF 1975—REGULATION S-K
3. The authority citation for part 229 continues to read as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26),
77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1,
78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-38(a),
80a-39, 80b-11, and 7201 et seq., and 18 U.S.C. 1350; sec. 953(b), Pub. L. 111-203, 124 Stat.
1904 (2010); and sec. 102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
*****
4. Amend § 229.10 by revising paragraphs (f)(1) and (2) to read as follows:
§ 229.10 (Item 10) General.
*****
(f) * * * * *
(1) Definition of smaller reporting company. As used in this part, the term smaller
reporting company means an issuer that is not an investment company, an asset-backed issuer (as
87
--- page 88 ---
defined in § 229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting
company and that:
(i) Had a public float of less than $250 million; or
(ii) Had annual revenues of less than $100 million and either:
(A) No public float; or
(B) A public float of less than $700 million.
(2) Determination. Whether an issuer is a smaller reporting company is determined
on an annual basis.
(i) For issuers that are required to file reports under section 13(a) or 15(d) of the
Exchange Act:
(A) Public float is measured as of the last business day of the issuer’s most recently
completed second fiscal quarter and computed 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;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) An issuer must reflect the determination of whether it came within the definition
of smaller reporting company in its quarterly report on Form 10-Q for the first fiscal quarter of the
next year, indicating on the cover page of that filing, and in subsequent filings for that fiscal year,
whether it is a smaller reporting company, except that, if a determination based on public float
indicates that the issuer is newly eligible to be a smaller reporting company, the issuer may choose
88
--- page 89 ---
to reflect this determination beginning with its first quarterly report on Form 10-Q following the
determination, rather than waiting until the first fiscal quarter of the next year.
(ii) For determinations based on an initial registration statement under the Securities
Act or Exchange Act for shares of its common equity:
(A) Public float is measured as of a date within 30 days of the date of the filing of the
registration statement and computed by multiplying the aggregate worldwide number of shares of
its voting and non-voting common equity held by non-affiliates before the registration plus, in the
case of a Securities Act registration statement, the number of shares of its voting and non-voting
common equity included in the registration statement by the estimated public offering price of the
shares;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) The issuer must reflect the determination of whether it came within the definition
of smaller reporting company in the registration statement and must appropriately indicate on the
cover page of the filing, and subsequent filings for the fiscal year in which the filing is made,
whether it is a smaller reporting company. The issuer must re-determine its status at the end of its
second fiscal quarter and then reflect any change in status as provided in paragraph (f)(2)(i)(C) of
this section. In the case of a determination based on an initial Securities Act registration
statement, an issuer that was not determined to be a smaller reporting company has the option to
re-determine its status at the conclusion of the offering covered by the registration statement
based on the actual offering price and number of shares sold.
89
--- page 90 ---
(iii) Once an issuer determines that it does not qualify for smaller reporting company
status because it exceeded one or more of the current thresholds, it will remain unqualified unless
when making its annual determination either:
(A) It determines that its public float was less than $200 million; or
(B) It determines that its public float and its annual revenues meet the requirements for
subsequent qualification included in the following chart:
Prior Public Float
Prior Annual
Revenues None or less than $700 million $700 million or more
Public float Less than $560
million; and
Less than $100
Neither threshold exceeded.
million
Revenues Less than $100
million.
Public float None or less than Public float Less than $560
$100 million or $700 million; and million; and
more Revenues Less than $80 Revenues Less than $80
million. million.
Instruction 1 to paragraph (f): A registrant that qualifies as a smaller reporting company under
the public float thresholds identified in paragraphs (f)(1)(i) and (f)(2)(iii)(A) of this section will
qualify as a smaller reporting company regardless of its revenues.
*****
PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
5. The authority citation for part 230 continues to read in part as follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss,
78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28,
80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 Stat. 313 (2012),
unless otherwise noted.
90
--- page 91 ---
*****
6. Amend § 230.405 by revising the definition of “smaller reporting company” to
read as follows:
§ 230.405 Definitions of terms.
*****
Smaller reporting company. As used in this part, the term smaller reporting company
means an issuer that is not an investment company, an asset-backed issuer (as defined in §
229.1101 of this chapter), or a majority-owned subsidiary of a parent that is not a smaller
reporting company and that:
(1) Had a public float of less than $250 million; or
(2) Had annual revenues of less than $100 million and either:
(i) No public float; or
(ii) A public float of less than $700 million.
(3) Whether an issuer is a smaller reporting company is determined on an annual
basis.
(i) For issuers that are required to file reports under section 13(a) or 15(d) of the
Exchange Act:
(A) Public float is measured as of the last business day of the issuer’s most recently
completed second fiscal quarter and computed 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;
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--- page 92 ---
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) An issuer must reflect the determination of whether it came within the definition
of smaller reporting company in its quarterly report on Form 10-Q for the first fiscal quarter of the
next year, indicating on the cover page of that filing, and in subsequent filings for that fiscal year,
whether it is a smaller reporting company, except that, if a determination based on public float
indicates that the issuer is newly eligible to be a smaller reporting company, the issuer may
choose to reflect this determination beginning with its first quarterly report on Form 10-Q
following the determination, rather than waiting until the first fiscal quarter of the next year.
(ii) For determinations based on an initial registration statement under the Securities
Act or Exchange Act for shares of its common equity:
(A) Public float is measured as of a date within 30 days of the date of the filing of the
registration statement and computed by multiplying the aggregate worldwide number of shares of
its voting and non-voting common equity held by non-affiliates before the registration plus, in the
case of a Securities Act registration statement, the number of shares of its voting and non-voting
common equity included in the registration statement by the estimated public offering price of the
shares;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) The issuer must reflect the determination of whether it came within the definition
of smaller reporting company in the registration statement and must appropriately indicate on the
cover page of the filing, and subsequent filings for the fiscal year in which the filing is made,
whether it is a smaller reporting company. The issuer must re-determine its status at the end of its
92
--- page 93 ---
second fiscal quarter and then reflect any change in status as provided in paragraph (3)(i)(C) of
this definition. In the case of a determination based on an initial Securities Act registration
statement, an issuer that was not determined to be a smaller reporting company has the option to
re-determine its status at the conclusion of the offering covered by the registration statement
based on the actual offering price and number of shares sold.
(iii) Once an issuer determines that it does not qualify for smaller reporting company
status because it exceeded one or more of the current thresholds, it will remain unqualified unless
when making its annual determination either:
(A) It determines that its public float was less than $200 million; or
(B) It determines that its public float and its annual revenues meet the requirements for
subsequent qualification included in the following chart:
Prior Public Float
Prior Annual
Revenues None or less than $700 million $700 million or more
Public float Less than $560
million; and
Less than $100
Neither threshold exceeded.
million
Revenues Less than $100
million.
Public float None or less than Public float Less than $560
$100 million or $700 million; and million; and
more Revenues Less than $80 Revenues Less than $80
million. million.
Instruction 1 to definition of “smaller reporting company”: A registrant that qualifies as a
smaller reporting company under the public float thresholds identified in paragraphs (1) and
(3)(iii)(A) of this definition will qualify as a smaller reporting company regardless of its
revenues.
*****
93
--- page 94 ---
PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
7. The authority citation for part 239 continues to read in part as follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77sss, 78c, 78l, 78m,
78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-
13, 80a-24, 80a-26, 80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat. 312,
unless otherwise noted.
*****
8. Amend Form S-1 (referenced in §239.11) by revising the text and check boxes on
the cover page immediately before the text “If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the
Securities Act.” The revisions read as follows:
Note: The text of Form S-1 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
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--- page 95 ---
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
9. Amend Form S-3 (referenced in §239.13) by revising the text and check boxes on
the cover page immediately before the text “If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the
Securities Act.” The revisions read as follows:
Note: The text of Form S-3 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
95
--- page 96 ---
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
10. Amend Form S-8 (referenced in §239.16b) by revising the text and check boxes
on the cover page immediately before the text “If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)
of the Securities Act.” The revisions read as follows:
Note: The text of Form S-8 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-8
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
96
--- page 97 ---
Emerging growth company
*****
11. Amend Form S-11 (referenced in §239.18) by revising the text and check boxes
on the cover page immediately before the text “If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)
of the Securities Act.” The revisions read as follows:
Note: The text of Form S-11 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-11
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
97
--- page 98 ---
12. Amend Form S-4 (referenced in §239.25) by revising the text and check boxes on the
cover page immediately before the text “If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the
Securities Act.” The revisions read as follows:
Note: The text of Form S-4 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
98
--- page 99 ---
PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT
OF 1934
13. The authority citation for part 240 continues to read in part as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss,
77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o,
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37,
80b-3, 80b-4, 80b-11, 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; and Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, Pub. L. 112-106,
126 Stat. 326 (2012), unless otherwise noted.
*****
14. Amend § 240.12b-2 by:
a. In the definition of “accelerated filer and large accelerated filer”:
i. Adding the word “and” at the end of paragraph (1)(ii);
ii. Removing “; and” at the end of paragraph (1)(iii) and in its place adding a period;
iii. Removing paragraph (1)(iv);
iv. Adding the word “and” at the end of paragraph (2)(ii);
v. Removing “; and” at the end of paragraph (2)(iii) and in its place adding a period;
and
vi. Removing paragraph (2)(iv).
b. Revising the definition of “smaller reporting company.” The addition and revision
reads as follows:
§ 240.12b-2 Definitions.
*****
99
--- page 100 ---
Smaller reporting company. As used in this part, the term smaller reporting company
means an issuer that is not an investment company, an asset-backed issuer (as defined in
§ 229.1101 of this chapter), or a majority-owned subsidiary of a parent that is not a smaller
reporting company and that:
(1) Had a public float of less than $250 million; or
(2) Had annual revenues of less than $100 million and either:
(i) No public float; or
(ii) A public float of less than $700 million.
(3) Whether an issuer is a smaller reporting company is determined on an annual
basis.
(i) For issuers that are required to file reports under section 13(a) or 15(d) of the
Exchange Act:
(A) Public float is measured as of the last business day of the issuer’s most recently
completed second fiscal quarter and computed 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;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) An issuer must reflect the determination of whether it came within the definition
of smaller reporting company in its quarterly report on Form 10-Q for the first fiscal quarter of the
next year, indicating on the cover page of that filing, and in subsequent filings for that fiscal year,
whether it is a smaller reporting company, except that, if a determination based on public float
100
--- page 101 ---
indicates that the issuer is newly eligible to be a smaller reporting company, the issuer may
choose to reflect this determination beginning with its first quarterly report on Form 10-Q
following the determination, rather than waiting until the first fiscal quarter of the next year.
(ii) For determinations based on an initial registration statement under the Securities
Act or Exchange Act for shares of its common equity:
(A) Public float is measured as of a date within 30 days of the date of the filing of the
registration statement and computed by multiplying the aggregate worldwide number of shares of
its voting and non-voting common equity held by non-affiliates before the registration plus, in the
case of a Securities Act registration statement, the number of shares of its voting and non-voting
common equity included in the registration statement by the estimated public offering price of the
shares;
(B) Annual revenues are as of the most recently completed fiscal year for which
audited financial statements are available; and
(C) The issuer must reflect the determination of whether it came within the definition
of smaller reporting company in the registration statement and must appropriately indicate on the
cover page of the filing, and subsequent filings for the fiscal year in which the filing is made,
whether it is a smaller reporting company. The issuer must re-determine its status at the end of its
second fiscal quarter and then reflect any change in status as provided in paragraph (3)(i)(C) of
this definition. In the case of a determination based on an initial Securities Act registration
statement, an issuer that was not determined to be a smaller reporting company has the option to
re-determine its status at the conclusion of the offering covered by the registration statement
based on the actual offering price and number of shares sold.
101
--- page 102 ---
(iii) Once an issuer determines that it does not qualify for smaller reporting company
status because it exceeded one or more of the current thresholds, it will remain unqualified unless
when making its annual determination either:
(A) It determines that its public float was less than $200 million; or
(B) It determines that its public float and its annual revenues meet the requirements for
subsequent qualification included in the following chart:
Prior Public Float
Prior Annual
Revenues None or less than $700 million $700 million or more
Public float Less than $560
million; and
Less than $100
Neither threshold exceeded.
million
Revenues Less than $100
million.
Public float None or less than Public float Less than $560
$100 million or $700 million; and million; and
more Revenues Less than $80 Revenues Less than $80
million. million.
Instruction 1 to definition of “smaller reporting company”: A registrant that qualifies as a
smaller reporting company under the public float thresholds identified in paragraphs (1) and
(3)(iii)(A) of this definition will qualify as a smaller reporting company regardless of its
revenues.
*****
PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934
15. The authority citation for part 249 continues to read in part as follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C.
1350; Sec. 953(b), Pub. L. 111-203, 124 Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat.
102
--- page 103 ---
309 (2012); Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001, Pub. L. 114-94,
129 Stat. 1312 (2015), unless otherwise noted.
*****
16. Amend Form 10 (referenced in §249.210) by revising the text and check boxes on
the cover page immediately before the text “If an emerging growth company, indicate by check
mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.” The revisions read as follows:
Note: The text of Form 10 does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
103
--- page 104 ---
Emerging growth company
*****
17. Amend Form 10-Q (referenced in §249.308a) by revising the text and check
boxes on the cover page immediately before the text “If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act.” The revisions read as follows:
Note: The text of Form 10-Q does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
104
--- page 105 ---
18. Amend Form 10-K (referenced in §249.310) by revising the text and check boxes
on the cover page immediately before the text “If an emerging growth company, indicate by
check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.” The revisions read as follows:
Note: The text of Form 10-K does not, and this amendment will not, appear in the
Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
*****
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
*****
By the Commission.
Dated: June 28, 2018.
Brent J. Fields,
Secretary.
105