On June 28, 2018, the SEC met and adopted new rulesincreasing the public float threshold for use of the smaller reporting company (SRC) system from $75 million to $250 million. These new rules also contain a significant change that will allowcompanies with revenues of less than $100 million to use the SRC system if their public float is less than $700 million.
About this expansion of the SRC system Chair Jay Clayton commented“I want our public capital markets to be a place where smaller companies can thrive and thereby provide our Main Street investors with more access to investing options where our public company disclosure rules and protections apply…”
The old SRC rules were based on the requirement of having a public float of less than $75 million. The old rules included a test that applied only to companies with a public float of zero. Under this old test, if a company had public float of zero, (for example a debt only issuer), then the company could use the SRC system if their revenues were less than $100 million. This test accomplished goals such as keeping large companies with public debt and hence zero float from using the SRC system.
The new SRC definition changes this revenue test to require that revenues must be less than $100 million and that public float must be zero or below $700 million. Under this new version of the test companies such as bio-tech entities with a large public float but zero or small revenues may still be eligible to use the SRC system.
According to the press release announcing the change:
“Commission staff estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition. These include: 779 companies with a public float of $75 million or more and less than $250 million; 161 companies with a public float of $250 million or more and less than $700 million and revenues of less than $100 million; and 26 companies with no public float and revenues of $50 million or more and less than $100 million.”
If you are not familiar with the SRC system you can find out more in S-K Item 10(f)and S-X Article 8. Two of the significant disclosure simplifications are in the executive compensation disclosures (including only three named executive officers and no CD&A) and the financial statement requirements (only two years of financial statements with only US GAAP disclosures).
At the meeting where the change to the definition of an SRC was approved there were no changes to the definition of accelerated filer definition and the requirements for the auditor’s ICFR attestation required by SOX 404(b) and S-K Item 308(b), but the commission requested the staff to develop recommendations for such a change.
We will discuss the rule change to require the use of inline XBRL, the elimination of the separate XBRL exhibits and the removal of the requirement for website posting requirements for XBRL next week.
As always, your thoughts and comments are welcome!