SEC Disclosure Requirements
Today is the second Lawcast in a series discussing SEC disclosure requirements. As mentioned in the last Lawcast in this series in September 2015 the SEC Advisory Committee on Small and Emerging Companies met and finalized its recommendation to the SEC regarding changes to the disclosure requirements for smaller publicly traded companies.
In formulating its recommendations, the Advisory Committee gave specific consideration to the following facts:
- The SEC has provided for simplified disclosure for smaller reporting companies for over 30 years. Under the current rules a “smaller reporting company” is defined as one that, among other things, has a public float of less than $75 million in common equity, or if unable to calculate the public float, has less than $50 million in annual revenues. Similarly, a company is considered a non-accelerated filer if it has a public float of less than $75 million as of the last day of the most recently completely second fiscal quarter. This is the reason that a Form 10-K asks for the value of the public float – i.e. non-affiliated shares – as of the last day of the most recently completely second fiscal quarter.
- The JOBS Act, enacted on April 5, 2012, created a new category of company called an “emerging growth company” for which certain scaled-down disclosure requirements apply for up to 5 years after an initial IPO. An emerging growth company is one that has total annual gross revenues of less than $1 billion during its most recent completed fiscal year; and
- Emerging growth companies are provided with a number of other accommodations with respect to disclosure requirements that would also be beneficial to smaller reporting companies.
The Advisory Committee then made the following specific recommendations:
- The SEC should revise the definition of “smaller reporting company” to include companies with a public float of up to $250 million. This will increase the class of companies benefitting from a broad range of benefits to smaller reporting companies, including (i) exemption from the pay ratio rule; (ii) exemption from the Rule 404 auditor attestation requirements; and (iii) exemption from providing a compensation discussion and analysis.
- The SEC should revise its rules to align disclosure requirements for smaller reporting companies with those for emerging growth companies. These include (i) exemption from the requirement to conduct shareholder advisory votes on executive compensation and on the frequency of such votes; (ii) exemption from rules requiring mandatory audit firm rotation; (iii) exemption from pay versus performance disclosure; and (iv) allowing delayed compliance with new accounting standards to the date that private companies are required to comply.
- The SEC should revise the definition of “accelerated filer” to include companies with a public float of $250 million or more but less than $700 million. As a result, the auditor attestation report under Rule 404(b) would no longer apply to companies with a public float between $75 million and $250 million.
- The SEC should exempt smaller reporting companies from XBRL tagging; and
- The SEC should exempt smaller reporting companies from filing immaterial attachments to material contracts.