Chapter 9
Reporting by Smaller Public Companies

Learning objectives

  • Identify the rules for reporting by smaller public companies.
  • Recognize whether a company meets the definition of a smaller reporting company and is therefore eligible to take advantage of the scaled disclosure and reporting options for these types of issuers.
  • Recall the principal differences between the scaled and the non-scaled disclosure and reporting requirements in Regulations S-X and S-K.

The Jumpstart Our Business Startups (JOBS) Act created a new category of filers called emerging growth companies, which are entitled to certain reporting relief. Some of the disclosure relief available to emerging growth companies is not available to smaller reporting companies. Some small business advocates have suggested converging the rules to allow those benefits for smaller reporting companies as well as emerging growth companies, but to date, the SEC has not taken any action.

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Smaller reporting company regulatory relief rules

The basic rules that distinguish smaller reporting companies from other companies include the following:

  • Initial Qualification: The following table summarizes the initial qualification thresholds for smaller reporting companies, as amended:
Criteria Threshold1
Public Float Less than $250 million of public float at end of second fiscal quarter
Revenues Less than $100 million of revenues in most recent fiscal year and no public float or less than $700 million in public float at the end of the second fiscal quarter
  • Subsequent Qualification: The following table summarizes the subsequent qualification thresholds for smaller reporting companies, as amended:
Criteria Threshold2
Subsequent Qualification Based on Public Float Less than $200 million of public float at end of second fiscal quarter
Subsequent Qualification Based on Revenues Less than $80 million of revenues in most recent fiscal year, if it 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*

* A registrant must satisfy a lower threshold only with respect to the threshold it previously exceeded. For example, if a registrant with less than $700 million of public float lost smaller reporting company status because its annual revenues exceeded $100 million, it can re-enter smaller reporting company status if its revenues drop below $80 million (i.e., public float does not also need to be below $560 million for the registrant to re-enter smaller reporting company status).

  • Scaled disclosures. Smaller reporting companies are permitted to use scaled disclosure requirements and can apply them on an “a la carte” basis.

All financial and nonfinancial scaled disclosure item requirements for smaller reporting companies are contained within Regulations S-K and S-X (the scaled disclosure requirements are available only to smaller reporting companies). Foreign companies can qualify as “smaller reporting companies” only if they choose to file on domestic company forms and provide financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP).

The financial thresholds in the definition of accelerated and large accelerated filer and the related filing requirements remain unchanged. Therefore, companies with public floats of $75 million or more, but less than $250 million, that qualify as smaller reporting companies under the amended definition would still be subject to the accelerated filing requirements, including the accelerated timing of filing periodic reports and the requirement to provide the auditor’s attestation on management’s assessment of internal control over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.

Note: In May 2019, the SEC proposed to amend the definitions of an accelerated and large accelerated filer. As proposed, smaller reporting companies with less than $100 million in annual revenue would not be required to obtain an audit of their internal control over financial reporting. The initial qualification thresholds for accelerated and large accelerated filer status based on public float would remain the same (i.e., $75 million or more but less than $700 million in public float for an accelerated filer and more than $700 million in public float for a large accelerated filer). Examples of registrants that will no longer qualify as accelerated filers under the proposed definitions include:

  • Registrants with annual revenue of less than $100 million and public float between $75 million and $250 million; and
  • Registrants with no revenue and public float between $75 million and $700 million.

Conversely, registrants with more than $100 million in annual revenue and between $75 million and $250 million in public float would still qualify as accelerated filers under the proposed rules. The public float transition thresholds for exiting accelerated and large accelerated filer status would be 80% of the initial qualification thresholds. The proposal is subject to a 60-day public comment period after it is published in the Federal Register.

Knowledge check

  1. The current public float threshold for “smaller reporting company” is
    1. $250 million.
    2. $50 million.
    3. $700 million.
    4. $25 million.
  2. A smaller reporting company is defined as a company that has less than
    1. $75 million in public float as of a date within 60 days of its fiscal year-end.
    2. $200 million in public float as of the last business day of its second fiscal quarter.
    3. $150 million of revenue in the latest fiscal year if its public float is zero.
    4. $100 million of revenue in the latest fiscal year if its public float is zero.
  3. Non-U.S. issuers can qualify for smaller reporting company status only if they
    1. Are Canadian.
    2. Comply with certain requirements.
    3. Are non-U.S. companies that include financial statements prepared according to IFRS as issued by the IASB.
    4. Are Mexican.

Qualifying standards for treatment as a smaller reporting company

Reporting companies

The definition of smaller reporting company makes eligibility contingent on either public float or revenues. Item 10(f) of Regulation S-K defines smaller reporting company as an issuer (that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company) that had a

  • public float of less than $250 million
  • annual revenues of less than $100 million and either
    • no public float; or
    • a public float of less than $700 million.

Public float is measured as of the last business day of its most recently completed second fiscal quarter, computed by multiplying the aggregate worldwide number of shares of voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average bid and ask prices of common equity, in the principal market for the common equity.

Annual revenues are as of the most recently completed fiscal year for which audited financial statements are available.

A company may have no public float because it has no public common equity outstanding or no market price for its common equity exists.

Non-reporting companies filing an initial Securities Act registration statement

Companies determining eligibility in connection with the initial filing of their initial Securities Act registration statement must choose a date within 30 days of filing to determine eligibility. The public float calculation should be based on (1) the estimated offering price per share at the time of filing the registration statement, (2) the number of shares of common stock outstanding that are held by non-affiliates before the offering; and the number of shares of common stock to be sold at the estimated offering price.

Initial public offering registrants have the option to recalculate their public float (and therefore redetermine their eligibility for smaller reporting company status) based on the results of the initial public offering for purposes of filing their next periodic report. For example, if an issuer files an initial public offering registration statement based on the larger company Regulation S-K item requirements but then determines after the close of the initial public offering that its public float is below $250 million, then this issuer would be a smaller reporting company and would be eligible to provide scaled disclosure in the first periodic report due after the initial public offering registration statement was declared effective.

A company filing its initial registration statement for common equity that does not qualify under the “public float” test would determine whether it qualifies as a smaller reporting company based on its annual revenues in its most recent audited financial statements available on the initial public float calculation date.

Once the issuer has made a bona fide eligibility determination at the time it files its initial registration statement, it will not have to redetermine its filing status until its next annual determination date — the end of its second fiscal quarter. Thus, a smaller reporting company is not required to transition its disclosure to the larger company requirements if its public float rose above $250 million during the pre- effective stage of the filing.

Foreign private issuer eligibility

Smaller reporting company status is available to non-U.S. companies that use domestic company forms (that is, Forms S-1, S-3, S-4, 10-Q, and 10-K) and that include financial statements prepared according to U.S. GAAP (financial statements that are prepared in accordance with bases of accounting other than GAAP and reconciled to U.S. GAAP are not acceptable for smaller company reporting).

Companies filing on forms available only to foreign private issuers, such as Forms F-1, F-3, F-4, and 20-F, are ineligible for the smaller reporting company scaled disclosure requirements.

Entering and exiting the small business reporting company status

The rules on entering, exiting, and reentering smaller reporting company status are as follows:

  • Entering by reporting companies. A larger reporting company that determines it is a smaller reporting company as of the last business day of its most recently completed second fiscal quarter can report as a smaller reporting company on its Form 10-Q for the just completed second quarter. In other words, the company can file as a smaller reporting company immediately.
  • Exiting. A smaller reporting company that determines it is no longer a smaller reporting company as of the last business day of its most recently completed second fiscal quarter will not be required to satisfy the larger reporting company disclosure requirements until the first quarter after the end of the fiscal year. That is, the smaller reporting company can wait until after its annual report is filed and then begin complying with the larger reporting company disclosure requirements. As discussed in the following text, if the company becomes an accelerated filer, it would need to comply with the accelerated filer rules.
  • Reentering. A smaller reporting company that moves into larger reporting company status will remain a larger reporting company until it has met its financial threshold, which is set at 80% of the initial qualification thresholds. For example, a company may enter smaller reporting company status when its public float falls below $200 million at the measurement date. In addition, a company that is not a smaller reporting company — because it exceeded either or both of the $100 million annual revenue and $700 million public float thresholds — may enter smaller reporting company status when it meets 80% of 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 and $700 million of public float).

The amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions. As a result, a company with $75 million or more of public float that qualifies as a smaller reporting company will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.

There are timing differences in the rules for entering and exiting smaller reporting company and accelerated filer status.

  • A company entering accelerated filer status must do so at the time it files its next annual report. A company entering larger reporting company status is not required to comply with the larger reporting company disclosure requirements until the first quarter after the end of the fiscal year in which its status changed. Thus a calendar year-end smaller reporting company whose public float exceeded $250 million on June 30, 20X8, would be permitted to file its 20X8 annual report in accordance with the smaller reporting company disclosure requirements but must file it within 75 days of December 31, 20X8 (that is, the Form 10-K due date for accelerated filers) and include auditor attestation on internal controls unless otherwise exempt.
  • The tests to determine whether a company is an accelerated filer are not made until year-end. Therefore, a company whose public float was less than $50 million as of the end of its second fiscal quarter cannot exit accelerated filer status until it files its next annual report. In contrast, a company entering smaller reporting company status may do so immediately. Thus, a calendar year-end company accelerated filer whose public float dropped below $50 million on June 30, 20X8, would be permitted to file its June 30 and September 30, 20X8, interim reports on Form 10-Q in accordance with the smaller reporting company disclosure requirements but must file them within 40 days of quarter-end (that is, the Form 10-Q due date for accelerated filers).

Exiting smaller reporting company status and reporting a significant business acquisition

In March 2012, the Center for Audit Quality’s SEC Regulations Committee and the SEC staff discussed certain reporting and disclosure requirements for companies that have recently exited smaller reporting company status. The SEC staff addressed the situation where an existing registrant no longer meets the definition of a smaller reporting company, and prior to filing its first annual report as an “other reporting company,” files a registration statement or a Form 8-K to report a significant business acquisition. The following fact pattern illustrated the staff’s views:

  • Company Z, a smaller reporting company with a calendar year-end, reassessed its smaller reporting company status as of June 30, 2012, and determined that it no longer meets the definition of a smaller reporting company. Accordingly, Company Z must transition to the other reporting company disclosure requirements beginning with its March 31, 2013, Form 10-Q filing.
    • Question 1: If Company Z files a registration statement prior to filing its March 31, 2013, 10-Q filing, should the company follow the smaller reporting company requirements or the other reporting company requirements?

    The level of disclosure required for registrants in this situation depends on the Form’s requirements. Form S-3 (and Form S-4 for an S-3 eligible issuer) requires a registrant to incorporate its most recently filed periodic reports by reference and does not otherwise prescribe the form and content of the registrant’s financial statements. Accordingly, Company Z may incorporate its 2012 Form 10-K (prepared under the smaller reporting company disclosure requirements) by reference into a Form S-3; however, Form S-1 (and Form S-4 for a non-S-3 eligible issuer) contains specific disclosure requirements, including financial statements meeting the requirements of Regulation S-X. Therefore, if the registrant initially files a registration statement on Form S-1 after December 31, 2012, the registrant must include or incorporate by reference the disclosures applicable to another reporting company (that is, presenting financial statements for three years, meeting the more rigorous presentation and disclosure requirements or Rule 3-05 of Regulation S-X, and providing expanded Regulation S-K disclosures).

    • Question 2: If Company Z reports a discontinued operation in its March 31, 2013, 10-Q filing and subsequently files a registration statement, what are the applicable reporting requirements for the historical financial statements that must be recast if the effect of the discontinued operation is material?

    The disclosure requirements for the recast financial statements also depend on the form’s requirements. Accordingly, if Company Z files on Form S-1 (or S-4 and is not S-3 eligible), the financial statements should be recast as if Company Z were another reporting company. Conversely, if Company Z files on Form S-3 (or S-4 and is S-3 eligible), the financial statements may be recast as if Company Z were a smaller reporting company. This position applies to recast financial statements whether they are presented in the registration statement or filed in a Form 8-K and incorporated by reference.

    • Question 3: If Company Z files an Item 2.01 Form 8-K for a significant business acquisition after December 31, 2012, but before its March 31, 2013, Form 10-Q filing, what are the applicable reporting requirements for the acquiree’s financial statements in the Form 8-K?

    Only a registrant meeting the definition of a smaller reporting company can take advantage of the reduced disclosure requirements in Rules 8-01 to 8-10 of Regulation S-X Article 8. Consequently, if Company Z initially files the Form 8-K after December 31, 2012, the acquiree’s financial statements cannot be prepared in accordance with Rules 8-01 to 8-10. If the initial Form 8-K is filed on or before December 31, 2012, the acquiree’s financial statements can be prepared in accordance with Rules 8-01 to 8-10.

Knowledge check

  1. A larger reporting company that has determined it meets the criteria for smaller reporting company status can transition to the scaled disclosure requirements for smaller reporting companies
    1. In the same quarter that it makes this determination.
    2. Beginning with the first quarter of the fiscal year after it makes this determination.
    3. Beginning with the next quarter after it makes this determination.
    4. Beginning with the first Form 10-K filed for the fiscal year in which it makes this determination.
  2. A smaller reporting company that is required to transition to the larger reporting company disclosure system
    1. Must do so in the same quarter in which it determines that it no longer qualifies as a smaller reporting company.
    2. Can wait until the following fiscal year before transitioning to the larger reporting company disclosure system.
    3. Must do so with the next Form 10-Q filed for the fiscal year in which it makes this determination.
    4. Must do so with the first Form 10-K filed for the fiscal year in which it makes this determination.
  3. Once an issuer fails to qualify for smaller reporting company status, it will remain unqualified until
    1. It determines that its public float has fallen below $200 million, if it has a public float, and its revenues are more than $100 million.
    2. It determines that its public float has fallen below $75 million, if it has a public float.
    3. It determines that its revenues have fallen below $150 million and public float have fallen below the required threshold.
    4. It determines that its revenues, public float, and assets have fallen below the required threshold.

Scaled disclosure item requirements in Regulation S-K

The nonfinancial item requirements that provide scaled disclosure options to smaller reporting companies are in separate paragraphs within Regulation S-K. In cases where smaller reporting companies are not required to provide disclosures required of larger companies (for example, the disclosure required under Item 305 of Regulation S-K on quantitative and qualitative disclosures about market risk) a paragraph in the relevant item of Regulation S-K has been included indicating that smaller reporting companies are not required to respond to the item.

The forms for smaller reporting companies are the same as for other registrants, but the forms include different disclosure requirements for smaller reporting companies (for example, risk factors required by Forms 10, 10-K, and 10-Q are not required for smaller reporting companies). Instructions in the forms indicate that smaller reporting companies do not have to provide certain disclosure.

The following is an index of items in Regulation S-K that includes the substance of the scaled standards for smaller reporting companies. This index is in Item 10 of Regulation S-K.

Item 101 Description of business
Item 201 Market price of and dividends on registrant’s common equity and related stockholder matters
Item 301 Selected financial data
Item 302 Supplementary financial information
Item 303 Management’s discussion and analysis of financial condition and results of operations
Item 305 Quantitative and qualitative disclosures about market risk
Item 402 Executive compensation
Item 404 Transactions with related persons, promoters and certain control persons
Item 407 Corporate governance
Item 503 Prospectus summary and risk factors
Item 504 Use of proceeds
Description of business (Item 101 of Regulation S-K)

Paragraph (h) of Item 101 sets forth the alternative disclosure standards for smaller companies. Generally, the different requirements for smaller reporting companies under Item 101 involve providing a less detailed description of the company’s business (no disclosure is required regarding backlog orders, and amounts spent on research and development must be provided for only two years, instead of the three years required of regular issuers). Smaller reporting companies are not required to include segment information or information about foreign operations; however, because those items are required by GAAP, a smaller reporting company that has multiple segments or foreign operations would still have to include these disclosures in its financial statements. In addition, smaller reporting companies are required to provide and disclose business development activities for only three years, instead of the five-year disclosure required of regular issuers.

Market price of and dividends on registrant’s common equity and related stockholder matters (Item 201 of Regulation S-K)

Paragraph (e) of Item 201 requires issuers to provide a performance graph that compares the performance of the company’s common stock with that of a market index and a peer group.

Instruction 6 to paragraph (e) of this Regulation S-K item indicates that smaller reporting companies are not required to provide a performance graph.

Selected financial data and supplementary financial information (Items 301 and 302 of Regulation S-K)

Paragraph (c) of Regulation S-K Items 301 and 302, provides that smaller reporting companies are not required to present the information required by these items.

Management’s discussion and analysis of financial condition and results of operations (Item 303 of Regulation S-K)

Paragraph (d) of Item 303 sets forth the scaled disclosure options for smaller reporting companies. For example, under this item requirement, smaller reporting companies must provide only two years of analysis if the company is presenting only two years of financial statements, instead of the three years of analysis required of regular issuers, and are not be required to provide tabular disclosure of contractual obligations.

Smaller reporting companies are not allowed to provide a “plan of operation” instead of the disclosures required in a discussion and analysis of operations; however, a discussion in the liquidity section of the expected sources of cash for the liquidity needs for the next year would need to be included.

Quantitative and qualitative disclosures about market risk (Item 305 of Regulation S-K)

Paragraph (e) of this Item specifies that smaller reporting companies are not required to disclose Item 305 information.

Internal control over financial reporting (Item 308 of Regulation S-K)

The disclosure requirements of Item 308 are no different for smaller reporting companies than for accelerated issuers. Non-accelerated filers have been subject to the requirement for management to report on internal control over financial reporting (ICFR) since 2007. The requirement to evaluate changes in ICFR on a quarterly basis (under Exchange Act Rule 13a-15(d) or 15d-15(d)) is effective for a smaller reporting company’s first quarterly report after the first annual report required to include a management report on ICFR.

Although management is required to report on internal controls, smaller reporting companies that are not accelerated filers would not be required to include auditor attestation on internal controls, because the Dodd-Frank Act permanently exempted smaller reporting companies.

Executive compensation (Item 402 of Regulation S-K)

Paragraphs (l) through (r) set forth the alternative standards for smaller reporting companies for disclosure of compensation of executives and directors. Smaller reporting companies

  • provide executive compensation disclosure for only three named executive officers (specifically including the principal executive officer but not the principal financial officer), rather than the five required of regular issuers;
  • provide the summary compensation table disclosure for only two years, rather than the three years required of regular issuers;
  • are not required to provide a compensation discussion and analysis (CD&A);
  • provide only three of the seven tables required of regular issuers (the Summary Compensation Table, the Outstanding Awards at Fiscal Year-End Table and the Director Compensation Table);
  • provide alternative narrative disclosures addressing defined benefit plans, defined contribution plans, and other post-employment arrangements for named executive officers;
  • are not required to include footnote disclosure of the grant-date fair value of equity awards in the Director Compensation Table; and
  • are exempt from providing pay ratio disclosures.

The executive compensation disclosures include (a) a requirement to provide narrative disclosure of a company’s compensation policies and practices as they relate to the company’s risk management, (b) a requirement to report the aggregate grant-date fair value of stock and option awards, computed in accordance with FASB Accounting Standards Codification (ASC) 718, Compensation—Stock Compensation, in the Summary Compensation Table and Director Compensation Table, (c) director and nominee qualifications, including the disclosure of diversity consideration in identifying nominees for director, (d) board leadership structure and the board’s role in the company’s risk management process, and (e) potential conflicts of interests of compensation consultants. Item (a) does not apply to smaller reporting companies.

Say-on-pay rules

Section 951 of the Dodd-Frank Act added Section 14A to the Exchange Act, which requires companies to conduct a separate shareholder advisory vote at least once every three years to approve the compensation of a company’s named executive officers. Section 14A also requires companies to conduct a separate shareholder advisory vote to determine whether the issuer will conduct the shareholder advisory vote on executive compensation every one, two, or three years.

The rules do not change the scaled disclosure requirements for smaller reporting companies. Because smaller reporting companies are exempt from the requirement to provide a CD&A, they will not be required to provide a CD&A in order to comply with the disclosure requirements of Rule 14a-21; however, the rule release notes that pursuant to Regulation S-K Item 402(o), smaller reporting companies are required to provide a narrative description of any material factors necessary to an understanding of the information disclosed in the Summary Compensation Table. If consideration of prior say-on-pay votes is such a factor for a smaller reporting company, disclosure would be required pursuant to Item 402(o). These rules are discussed in the chapter on “Transactions with Related Persons, Promoters, and Certain Control Persons” (Item 404 of Regulation S-K).

Paragraph (d) of this Item provides scaled disclosure requirements for smaller reporting companies. The instructions require disclosure of related party transactions that have occurred since the beginning of the issuer’s latest fiscal year (or any currently proposed transaction) where the amount exceeds the lesser of $120,000 or 1% of their average total assets at year-end for the last two completed fiscal years.

In addition, under Item 404(d) of Regulation S-K, smaller reporting companies are required to provide

  • specific information about underwriting discounts and commissions, and corporate parents; and
  • disclosure regarding promoters and certain control persons.

Smaller reporting companies are not required to disclose policies and procedures for reviewing related person transactions, which is required of regular issuers.

Corporate governance (Item 407 of Regulation S-K)

Paragraph (g) of Item 407 of Regulation S-K specifies that smaller reporting companies are not required to provide

  • compensation committee interlock and insider participation disclosure;
  • a compensation committee report; or
  • disclosure regarding an audit committee financial expert until the first annual report after their initial registration statement is filed with the SEC and becomes effective.
Risk factors

Instructions to Forms 10, 10-K, and 10-Q indicate that smaller reporting companies are not required to provide Item 503 risk factor disclosure in these filings.

For the remaining item requirements in Regulation S-K that do not contain scaled disclosure options, smaller reporting companies must follow the same item requirements as larger companies.

In 2017, the SEC adopted final rules requiring hyperlinks to exhibits. The rules are applicable to all forms for which exhibits are required under Item 601. The rules become effective for smaller reporting companies for filings submitted on or after September 1, 2017.

Financial statement requirements (Rules 8-01 to 8-08 of Regulation S-X)

The financial statement rules for smaller reporting companies are set forth in Rules 8-01 to 8-10 of Regulation S-X and require two years of comparative audited balance-sheet data of smaller reporting companies. The significant differences that exist for smaller reporting companies compared to regular issuers relate to the number of years for which financial statements must be presented and the level of certain disclosures.

  • Under the rules in Rules 8-01 to 8-10, statements of income and cash flows for only the two most recent years are required (changes in other stockholder’s equity for each of the last two years may be presented in a note or similar statement). The Regulation S-X rules for regular issuers require two years of balance sheets and three years of income, cash flow, and equity statements.
  • Unlike the Regulation S-X rules for regular issuers, the rules in Rules 8-01 to 8-10 for smaller reporting companies do not contain any requirements for financial statement disclosures beyond those required by GAAP. This also eliminates the need for smaller reporting companies to file financial statement schedules; however, the SEC staff, on the basis of SAS No. 69, views Staff Accounting Bulletins and Financial Reporting Releases to be interpretations of GAAP, and, in most cases, these should be considered. Additionally, Rules 8-01 to 8-10 specifically require compliance with Rule 4-08(n) of Regulation S-X, which requires an accounting policy for certain derivative instruments (that is, derivative financial instruments and derivative commodity instruments).

The other significant differences between the financial statement requirements of smaller reporting companies and those of regular issuers are as follows:

  • Financial statements of businesses acquired or to be acquired. The tests of the materiality of an acquisition under Rule 8-04(b) for smaller reporting companies are the same as those for regular issuers. Because Rules 8-01 to 8-10 limit the need for financial statements to two years, only two years must be presented for acquisitions that are material above the 40% level. (Regular issuers must provide two years for acquisitions greater than 40% and less than 50% and three years for acquisitions that are material at above the 50% level.)
  • Interim financial statements. The rules for the inclusion and updating of interim financial statements for smaller reporting companies are the same as those for regular issuers, except that the thresholds for combining captions in condensed financial statements are different, as follows:
    • Balance sheet. Must disclose separately any item that represents 10% or more of total assets.
    • Income statements. Must disclose each cost and expense that exceeds 20% of sales.
    • Cash flow statements. May not be abbreviated (that is, displaying a single figure for net cash flows from operations).
    • Form 10-Q. Additionally, smaller reporting companies, as well as regular issuers, are required to have their interim financial statements filed on Form 10-Q reviewed by an independent auditor prior to filing.
  • Year-end updating requirements. Rule 8-08 of Regulation S-X makes it easier for smaller reporting companies to make initial public offerings. All 1933 Act filings for IPOs of regular issuers have to be updated to include year-end financial statements if they become effective after 45 days after year- end. Rule 8-08(b) allows smaller reporting companies to defer the updating requirement until 90 days after year-end if certain tests relating to profitability over the prior three years are met. (These profitability tests are the same profitability tests as included in Regulation S-X Rule 3-01(c).)
  • Significant equity investees. Sales, gross profit, and income from continuing operations and net income must be disclosed for equity investees that represent 20% or more of a registrant’s consolidated assets, equity, or income from continuing operations (smaller reporting companies are not required to file separate audited financial statements that may be required by regular issuers under Regulation S-X Rule 3-09).

The form and content requirements of Regulation S-X do not apply to smaller reporting companies except as indicated under the “Notes” section of Rules 8-01 to 8-10 of Regulation S-X (Article 8). Additionally, the requirements for pro forma financial statements (including those in filings of smaller reporting companies) are found in Rules 11-01 to 11-03 of Regulation S-X (Article 11). Smaller reporting companies should be aware that the guidance provided in SABs, SLBs, and FRRs also should be considered.

XBRL

Issuers are required to provide an exhibit containing financial statements and schedules in interactive data format using XBRL. The data provided in XBRL format is filed and subject to correspondingly increased liability. The XBRL data is not subject to auditor reporting.

In 2018, the SEC amended its XBRL reporting requirements to require the use of “inline” XBRL. The amendments will require issuers to embed XBRL tags directly in their financial statements in lieu of providing tagged data in a separate exhibit.

The inline XBRL requirements take effect based on filing status as follows:

  • June 15, 2019 — Large accelerated filers that prepare their financial statements in accordance with U.S. GAAP
  • June 15, 2020 — Accelerated filers that prepare their financial statements in accordance with U.S. GAAP
  • June 15, 2021 — All other filers

Electing scaled disclosure standards on an “a la carte” basis

Smaller reporting companies can choose to comply with both the nonfinancial and financial scaled disclosure options on an item-by-item basis each quarter, when these disclosures are provided consistently and when they are consistent with the legal requirements under the federal securities laws, including Securities Act Rule 408 and Exchange Act Rule 12b-20.3 The SEC staff has stressed the importance of providing disclosure that permits investors to make period-to-period comparisons, whether quarterly or annually.

To the extent that the smaller reporting company scaled item requirement is more rigorous than the same larger company item requirement, smaller reporting companies must comply with the smaller reporting company item requirement. Currently, the smaller reporting company requirements under Item 404 of Regulation S-K present the only instance where the scaled requirements could be more rigorous than the larger company standard. This is because the smaller reporting company is required to provide disclosure on a related person transaction since the beginning of the company’s last fiscal year if the amount involved in the transaction exceeds the lesser of $120,000 or 1% of the average of the company’s total assets at year-end for the last two complete fiscal years. In contrast, the larger company threshold for reporting related party transactions under Item 404 is transactions that exceed $120,000. Also, unlike the larger company requirement under Item 404, smaller reporting companies are required to disclose additional specific information about underwriting discounts and commissions and corporate parents. In this case, a smaller reporting company would be required to provide the additional Item 404 disclosure.

Designation on SEC forms as “smaller reporting company”

A company that qualifies as a smaller reporting company based on the appropriate eligibility test under the definition is required to check the “smaller reporting company” box on the registration statement or periodic report filed, whether or not it chooses to rely on the scaled disclosure standards in Regulations S-K and S-X. A company should check the “non-accelerated filer” box only if it does not meet the criteria for any other filing category. Most companies that qualify as non-accelerated filers also qualify as smaller reporting companies; however, a company can be a non-accelerated filer but not a smaller reporting company if as of the end of its most recently completed second fiscal quarter, it has a public float of more than $250 million, but has not been subject to the 1934 Act reporting requirements for 12 months, or has not yet filed an annual report with the SEC.

Knowledge check

  1. An issuer with public float of more than $250 million, but has not filed an annual report with the SEC qualifies as
    1. A smaller reporting company.
    2. An accelerated filer.
    3. A non-accelerated filer.
    4. A non-accelerated filer that would still be able to take advantage of certain smaller reporting company reporting relief.
  2. A calendar year accelerated filer company whose public float fell below $200 million on June 30, 20X0, would be
    1. Permitted to follow the smaller reporting company disclosure rules when it files its June 30, 20X0, Form 10-Q.
    2. Required to follow the larger company reporting rules until it files its 20X0 annual report.
    3. Required to file its 20X0 annual report within 75 days of its fiscal year-end.
    4. Permitted to files its June 30, 20X0, Form 10-Q 45 days after quarter-end.

Disclosure requirements applicable to smaller reporting companies

Mine safety disclosure (Item 104 of Regulation S-K)

The SEC adopted amendments to implement Section 1503 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1503 (a) of the Dodd-Frank Act requires issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine to disclose information regarding specific health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities are subject to the final amendments.

All companies, including smaller reporting companies and regardless of whether they have mine safety disclosures to make, should update the description for Item 4 and indicate “not applicable” if the company is not subject to the new rules.

Conflict minerals

In 2012, the SEC adopted Rule 13p-1 under the Securities Exchange Act of 1934, which requires disclosures mandated by Section 1502 of the Dodd-Frank Act. The rule requires companies to determine and publicly disclose on an annual basis (on Form SD) whether their products were manufactured using certain minerals, designated as “conflict minerals,” and whether those minerals originated in the Democratic Republic of the Congo (DRC) or adjoining countries (collectively, the “covered countries”). If so, an issuer is required to provide a report on Form SD describing the measures taken to determine whether the minerals financed or benefited armed groups in the region and its conclusions. The process surrounding the assertions made on the report is required to be audited. Reporting is required on a calendar year basis regardless of an issuer’s fiscal year-end and is due by May 31 of the following year. Transitional relief was provided for the first four years for smaller reporting companies. Under the transition relief provision, if a smaller reporting company was unable to determine whether the minerals originated in the covered countries or financed or benefited armed groups, it was permitted to categorize the related products as “DRC conflict-undeterminable” for up to four years (products categorized as undeterminable do not need to be audited). In addition, Form SD provides delayed implementation periods for reporting on activities of newly acquired businesses and applying new due diligence frameworks that become available. As previously discussed, the conflict minerals rule has been the subject of debate in the courts since it was first issued in 2012. Although a federal court judge upheld the rule in 2013, a court of appeals ruled that certain aspects of the rule violated a company’s constitutional right to free speech in 2014. Consequently, the SEC issued guidance to clarify how registrants should comply with the rule in light of the court’s ruling. Unless there are future developments in the court or otherwise, the guidance specifies that conflict minerals reports need not describe any of the products as being “DRC conflict-free,” having “not been found to be DRC conflict-free,” or “DRC conflict- undeterminable.”

On April 3, 2017, a U.S. District Court entered a final judgment in the ongoing lawsuit related to the SEC’s conflict minerals rule. The final judgment upholds a U.S. Court of Appeals decision that a portion of the conflict minerals rule infringes upon a company’s constitutional right of free speech. More specifically, the courts determined that the requirement for a company to describe its products as “having not been found to be ‘DRC conflict-free’ ” violates the company’s constitutional rights. The SEC now needs to determine how to address the court’s decision. In light of the final judgment, the SEC staff issued updated guidance on how a company should comply with aspects of the conflict minerals rule not affected by the court’s decision. The guidance clarifies that the SEC staff will not enforce compliance with Item 1.01(c) of Form SD, the specialized disclosure form used for conflict minerals reporting. Item 1.01(c) requires companies to conduct due diligence on the source and chain of custody of conflict minerals.

Listing standards for compensation committee and advisers

In 2012, the SEC adopted a rule addressing the structure and activities of compensation committees as mandated by Section 952 of the Dodd-Frank Act. The new Rule 10C-1 amended SEC proxy disclosure rules. The amendment included revisions to Item 407 of Regulation S-K to require the following disclosures in an issuer’s proxy or solicitation material for annual meetings at which directors are elected:

  • Whether the company retained or obtained the advice of a compensation adviser
  • Whether the compensation adviser’s work has raised any conflict of interest
  • The nature of any identified conflict of interest and how that conflict is being addressed (if applicable)

The revisions to Item 407 of Regulation S-K apply to all companies subject to SEC’s proxy rules including smaller reporting companies.

The New York Stock Exchange (NYSE) and the NASDAQ Stock Market (NASDAQ) implemented the rule changes required by Rule 10C-1. NASDAQ requires that all listed companies, including smaller reporting companies, have a standing compensation committee comprised solely of two or more independent directors. Smaller reporting companies may codify the responsibilities and authority of the compensation committee either in a formal committee charter or a board resolution, and would not be required to review this resolution or committee charter annually. The NYSE and NASDAQ rules also include independence requirements for the compensation committee. Both the NYSE and NASDAQ proposals exempt smaller reporting companies from the requirement to conduct this independence analysis.

Small business compliance guides

The SEC has released a number of guides that summarize and explain rules adopted by the SEC as they apply to smaller public companies. These guides are available on the Small Business Compliance Guides page at www.sec.gov/info/smallbus/secg.shtml. Here are examples of a few of the guides found on the web page.

The SEC staff provided access to its presentation covering common financial reporting issues it encounters in reviewing filings made by smaller issuers. The presentation is available at www.sec.gov/news/speech/2012/spch020912co.pdf, but it has not been updated in several years. The staff also provides its observations in the review of smaller reporting company IPOs at www.sec.gov/divisions/corpfin/guidance/cfsmallcompanyregistration.htm.

COSO guidance for smaller public companies

In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued an update to the 1992 Internal Control—Integrated Framework. The 2013 framework includes a volume of Illustrative Tools for Assessing Effectiveness of a System of Internal Control. COSO simultaneously issued Internal Control over External Financial Reporting: A Compendium of Approaches and Examples (the compendium), which it developed to assist users when applying the framework to external financial reporting objectives. The compendium superseded the 2006 Guidance on Internal Control over Financial Reporting—Guidance for Smaller Public Companies.

The SEC’s rules require an issuer to evaluate the effectiveness of its internal control using “a suitable, recognized control framework.”

Review questions

  1. What is the purpose of the smaller reporting company rules?

     

     

  2. In terms of their organization, how does a smaller public company determine what S-K and S-X rules it must follow?

     

     

  3. Smaller reporting companies are exempt from the evaluation and reporting requirements for internal control over financial reporting.
    1. True.
    2. False.
  4. How many years of analysis must a smaller reporting company include in its Management’s discussion and analysis of financial condition and results of operations?

     

     

  5. A smaller reporting company does not have to file interim statements with the SEC.
    1. True.
    2. False.
  6. Are smaller reporting companies required to have timely quarterly reviews?

Notes

  1. 1   Effective September 10, 2018. Prior to the amendment, smaller reporting companies were those companies with less than $75 million public float or if a company did not have a calculable public equity float, revenues of less than $50 million in the last fiscal year.
  2. 2   Effective September 10, 2018. Prior to the amendment, a smaller reporting company that moved into larger reporting company status would remain a larger reporting company until its public float was less than $50 million as of the last business day of its second fiscal quarter. If the company did not have public float, it would move back to smaller reporting company status when its revenue dropped below $40 million for its last fiscal year.
  3. 3   Rule 408 requires that, in addition to the information expressly required to be included in a registration statement, further material information, if any, must be added as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. Rule 12b-20 contains the same requirement for Exchange Act reports.
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