Overview
On March 12, 2020, the SEC, in its press release, announced the adoption of amendments to the definition of accelerated filers and large accelerated filers. These changes are adopted in congruence with the views of the SEC and Congress to promote capital formation, preserve capital, and reduce unnecessary burdens for small issuers and provide investor protection.
Who is Affected?
All domestic and foreign issuers who have registered their securities under the Securities Exchange Act and submit their financial statements per U.S. GAAP will benefit from the amendments. The amendment also includes a definition of “revenue” for Business Development Companies (BDCs) and a specific provision as BDCs do not fall under smaller reporting companies.
What Has Changed?
One important change that is effective now is that the small issuers do not require an external auditor’s attestation and report on, management’s assessment of the effectiveness of the issuer’s internal control over financial reporting (ICFR), as required by Section 404(b) of the Sarbanes-Oxley Act (“SOX”). There is also a revision in the transition thresholds for accelerated and large accelerated filers, and the issuers are required to include an ICFR auditor attestation checkbox to the cover pages of Forms 10-K, 20-F, and 40-F.
Adopted Amendments:
Change in the definition of accelerated and large accelerated filer definitions:
- Issuers who have not reached $100 million in revenues even after being public for more than 5 years are excluded from the definition of accelerated and large accelerated filers. Earlier, in the Jumpstart Our Business Startups (JOBS) Act of 2012, Congress had provided a safe period of 5 years to the Small Reporting Companies (SRC) from the regulations mentioned under Exchange Act Rule 12b-2
- BDC with investment income of less than $100 million in the most recent fiscal year and a public float of $75 million or more, but less than $700 million is excluded from the definition of accelerated and large accelerated filers
Change in the public float transition thresholds:
“Public Float” is calculated by multiplying the number of the company’s common shares held by non-affiliates by the market price and, in the case of an IPO, adding to that number the product obtained by multiplying the common shares covered by the registration statement by their estimated public offering price. Now, there is an increase in the public float transition threshold for accelerated and large accelerated filers to become a non-accelerated filer from $50 million to $60 million, and to increase the exit threshold in the large accelerated filer transition provision from $500 million to $560 million in public float. The following table summarises the new update:
| Amendments to the Public Float Thresholds | |||
| Old Standards | New Standards | ||
| Public Float | Filer Status | Public Float | Filer Status |
| $700 or more | Large Accelerated Filer | $560 million or more | Large Accelerated Filer |
| Less than $560 million but $60 million or more | Accelerated Filer | ||
| Less than $60 million | Non-Accelerated Filer | ||
| Less than $700 million but $75 million or more | Accelerated Filer | Less than $700 million but $60 million or more | Accelerated Filer |
| Less than $60 million | Non-Accelerated Filer | ||
Addition of Revenue Test:
A Revenue Test stated in the SRC definition is now added to the transition threshold for determining the status of the issuer.
Addition of a new Checkbox:
According to the amendments, a new checkbox disclosure should be included on the cover page of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is provided in the filing. Additionally, if the issuer is using Inline XBRL, it must also tag the cover page checkbox disclosure using iXBRL.
Following table demonstrates relationships between smaller reporting companies and non-accelerated, accelerated, and large accelerated filers under the amendments:
| Amendments to Filer Definitions | ||
| Status | Public Float | Annual Revenues |
| Smaller Reporting Company and Non-Accelerated Filer | Less than $75 million | N/A |
| $75 million to less than $700 million | Less than $100 million | |
| Smaller Reporting Company and Accelerated Filer | $75 million to less than $250 million | $100 million or more |
| Accelerated Filer (not a Smaller Reporting Company) | $250 million to less than $700 million | $100 million or more |
| Large Accelerated Filer (not a Smaller Reporting Company) | $700 million or more | N/A |
Conclusion
SEC Chairman Jay Clayton said, “The JOBS Act provided a well-reasoned exemption from the ICFR attestation requirement for emerging growth companies during the first five years after an IPO. These amendments would allow smaller reporting companies that have made it to that five-year point, but have not yet reached $100 million in revenues, to continue to benefit from that exemption as they build their businesses, while still subjecting those companies to important investor protection requirements.”
The final amendments are effective April 27, 2020 and apply to an annual report filing due on or after the effective date. The commission encourages issuers to contact them for assistance at:
The Commission’s Division of Corporation Finance at (202) 551-3400 or here
Office of Small Business Policy at (202) 551-3460 or smallbusiness@sec.gov
Investment Management’s Chief Counsel’s Office at 202-551-6825 or IMOCC@sec.gov
