SEC Adopts Amendments Providing Relief for Smaller Reporting Companies
SEC Adopts Amendments to Expand Form S-3 Eligibility for Primary Securities Offerings
SEC Adopts Amendments Providing Relief for Smaller Reporting Companies
In December 2007, the Securities and Exchange Commission (SEC) adopted amendments to its disclosure rules by expanding the number of companies that qualify for its reduced disclosure requirements for smaller reporting companies. These new SEC rules generally provide for the following
• replacing the current “small business issuer” category with a new expanded category of “smaller reporting companies”;
• expanding availability of scaled disclosure and reporting requirements to companies having a public equity float of less than $75 million (if a company does not have a calculable public equity float, it can be a smaller reporting company if it had revenues of less than $50 million in its last fiscal year);
• moving disclosure requirements in Regulation S-B to Regulation S-K and eliminating Regulation S-B and its various reporting and registration forms, including Form SB-2; and
• allowing smaller reporting companies to choose scaled disclosure on an item-by-item, or “a la carte” basis. You can access the final rule (Release No. 33-8876) on the SEC’s Web site at http://sec.gov/rules/final.shtml.
Eligibility for Smaller Reporting Company Status
For a reporting company (i.e., one that files periodic reports under Section 13(a) or 15(d) of the Securities Exchange Act) to be eligible for the scaled smaller reporting company disclosure requirement, the company must have a public equity float1 of less than $75 million and must not be an investment company or asset-backed issuer. A reporting company will calculate its public float as of the last business day of its most recently completed second fiscal quarter. A non-reporting company filing an initial registration statement under the Securities Act of 1933 or the Securities Exchange Act of 1934 will calculate its public float based on its choice of a date within 30 days of the filing date of the registration statement. The public float for such a non-reporting company will be determined based on the number of shares of common stock outstanding that are held by non-affiliates before the registration – plus, in the case of a Securities Act registration, the estimated offering price per share at the time of filing the registration statement and the number of shares to be sold at the estimated offering price.
Reporting and non-reporting companies that are unable to calculate a public float (i.e., no public common equity is outstanding or the common equity is not priced by the market) may rely on a revenue test to qualify as a smaller reporting company. These companies must have annual revenues of less than $50 million during the last fiscal year for which audited financial statements are available to be eligible for smaller reporting company status.
The designation of smaller reporting company is also available to foreign companies. Accordingly, this new definition has expanded the availability of scaled disclosure requirements to a larger group of companies, as previously only U.S. or Canadian companies with a public float of less than $25 million were eligible to be small business issuers.
Comparison of Selected Disclosure Requirements*
The chart below compares the most significant disclosure differences between the scaled smaller reporting company requirements and the larger reporting company requirements.
||Item of Regulation S-K (unless otherwise noted)
||Larger Reporting Company Disclosure Requirements
||Smaller Reporting Company Disclosure Requirements
|Description of Business
||Describe key elements of the business (in greater depth such as financial information about segments) for the past five years.
||Describe key elements of the business for the past three years.
||Provide a graph showing five-year total share-holder returns of issuer’s stock versus a broad market index and an industry-specific index.
|Selected Financial Data
||Provide selected financial data for the past five years (e.g., net sales, net income, total assets)
|Supplementary Financial Information
||Provide data on net sales, gross profit, income (loss) before extraordinary items, per-share data based upon such income (loss) and net income (loss), for each full quarter within the two most recent fiscal years.
||• Describe financial and operating condition for
the last three years.
• The disclosure is significantly more in-depth,
including a chart of contractual obligations.
|• Describe financial and operating
condition for the last two years if only two years of financial statements are
• Not required to disclose contractual obligations chart.
||Provide audited balance sheet for past two years and audited statements of income, cash flow and changes in stockholders’ equity for past three years.
||Audited statements of income, cash flow and changes in stockholders’ equity required for only the past two years.
|Quantitative and Qualitative Disclosures About Market Risk
||Provide, in the issuer’s reporting currency, quantitative information about market risk as of the end of the latest fiscal year.
||• Provide “clear, concise and understandable
disclosure” of all plan and non-plan compensation awarded to, earned by or paid
1. all principal executive and financial officers
(PEOs and PFOs) serving in the last fiscal
2. the three most highly compensated officers
(other than PEO and PFO) serving in the
last fiscal year.
• Provide disclosure in Summary Compensation
Table (SCT) and other tables for three years.
• Provide a Compensation Discussion and
• Provide seven tables of disclosure to
supplement and explain the CD&A and SCT.
|Same requirement as for larger reporting companies to provide “clear, concise and understandable disclosure” of all
types of compensation, but with the following key differences:
• provide disclosure for only three
named executive officers (specifically including the PEO but not the PFO)
instead of five.
• provide the SCT and other tables for only two years instead of three.
• CD&A is not required; and
• only provide three tables instead of
seven (excludes Grant of Plan-Based Awards, Option Exercises and Stock Vested, Pension Benefits, and Nonqualified Deferred Compensation
|Transactions With Related Persons, Promoters and Certain Control Persons
||Same as scaled disclosure, except that disclosure is only required for transactions since the beginning of the last fiscal year and there is no alternative one percent test to
meet (i.e., only need to exceed $120,000
and satisfy the other requirements).
|Disclose related-party transactions in the last two fiscal years or any proposed transactions in which the amount involved exceeds the lesser of $120,000 or one percent of the average of the issuer’s total assets at year end for the last two completed fiscal years.
* Some disclosure requirements were omitted from this chart because they were very similar for both smaller and larger reporting companies.
Relocation of Disclosure and Financial Statement Requirements
The amendments move disclosure requirements in Regulation S-B to Regulation S-K and the financial statements required by Item 310 of Regulation S-B into the new Article 8 of Regulation S-X.
Regulation S-B sets forth 12 scaled disclosure requirements for small business issuers. These requirements will now be set out in separate paragraphs within Regulation S-K for smaller reporting companies. This move makes all non-financial disclosure requirements for all reporting companies available in a single location (i.e., Regulation S-K). The new amendments eliminate all SB forms, and smaller reporting companies will now file Forms 10-K, 10-Q and S-1, among others.
Item 310 of Regulation S-B sets forth the requirements for preparation of financial statements for small business issuers that must be prepared in accordance with the U.S. Generally Accepted Accounting Principles. With the elimination of the small-business issuer, the financial statement requirements in Item 310 will now apply to smaller reporting companies, but will now appear in Article 8 of Regulation S-X. It should be noted, however, that the financial statement requirements for smaller reporting companies under Article 8 of Regulation S-X will now require two years of comparative audited balance sheet data, which was formerly a one-year requirement under Regulation S-B.
Electing Scaled Disclosure Standards on an “A La Carte” Basis
Smaller reporting companies will be able to choose on an item-by-item basis whether to disclose information according to the scaled requirements available to smaller reporting companies or the requirements for larger reporting companies. The SEC staff will evaluate Regulation S-K compliance by smaller reporting companies solely with respect to the scaled disclosure requirements available to smaller reporting companies, even if a smaller reporting company decides to comply with the larger company requirements.
The only exception to this “a la carte” system is a case in which the disclosure requirement for smaller reporting companies is more rigorous than the same requirement for a large reporting company item (e.g., Item 404 of Regulation S-K may be more rigorous). In such a case, the smaller reporting company is required to comply with the more rigorous item requirement of the smaller reporting company.
These new rules will become effective on Feb. 4, 2008, and companies may use the scaled disclosure when filing their next periodic report due after this effective date. Companies that are current small-business issuers have the option of filing their next annual report for a fiscal year ending on or after Dec. 15, 2007, on either Form 10-KSB or Form 10-K, along with filing periodic reports using the SB forms until such annual report is filed. After the small-business issuer files its next annual report, all subsequent periodic reports must be filed on a form that does not contain the “SB” designation.
The rules provide that a larger reporting company that determines it qualifies as a smaller reporting company as of the last business day of its most recently completed second fiscal quarter is permitted to transition to a smaller reporting company in its quarterly report for such quarter. On the other hand, a smaller reporting company that is required to transition to the larger reporting system after its determination date calculation (e.g., the end of the second fiscal quarter) will not be required to satisfy the larger company reporting requirements until the first quarter after the determination date fiscal year. This means that a company with a fiscal year ending Dec. 31, 2008, that exceeded the $75 million public float as of June 30, 2008, would have to transition up into larger company disclosure beginning with its Form 10-Q for the first fiscal quarter of 2009, but could still file its Form 10-K for the 2008 fiscal year using the scaled disclosure requirements for a smaller reporting company.
Once an issuer fails to qualify for smaller reporting company status, however, it will remain unqualified unless it determines that its public float was less than $50 million on the last day of its second fiscal quarter. Where an issuer that does not have a public float fails to qualify as a smaller reporting company because its revenues exceed $50 million, that issuer will not become eligible for smaller reporting company status again until it has annual revenues of less than $40 million in its most recent fiscal year.
Companies should promptly analyze their public float as of the determination date to assess whether they are eligible for the scaled disclosure for smaller reporting companies. If so, the company should assess the time and cost savings involved with the reduced disclosure obligations against the expectation of investors and others to review these materials. Given the option to disclose on an “a la carte” basis, companies may choose to disclose only a few items that they believe investors find important. Going forward, companies will also need to monitor their public float to assess when they may be required to transition in or out of being a small reporting company.
1 The public float of a reporting company will be calculated by using the price at which the shares of its common equity were last sold or the average of the bid and asked prices of such shares in the principal market for the shares as of the last business day of the company’s second fiscal quarter, multiplied by the number of outstanding shares held by non-affiliates.
SEC Adopts Amendments to Expand Form S-3 Eligibility for Primary Securities Offerings
In December 2007, the Securities and Exchange Commission (SEC) adopted amendments to the eligibility requirements of Form S-3 to allow certain issuers to conduct primary securities offerings on Form S-3 without regard to the size of the public float or the rating of debt being offered, so long as certain other conditions are met. These new SEC rules expand the group of issuers that may conduct a primary securities offering on Form S-3.1 The new rules became effective on Jan. 28, 2008. You can access the final rule (Release No. 33-8878) on the SEC’s Web site at http://sec.gov/rules/final.shtml.
The current eligibility requirements:
Currently, under the Securities Act of 1933, as amended (the “Securities Act”), the “short-form” registration statement on Form S-3 may be used only for primary2 offerings by companies that (i) have been public for one year; (ii) have timely filed all their reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the past 12 months; and (iii) have a “public float” of at least $75 million. The public float is the market value of a company’s common stock held by non-affiliates.
The advantages of using Form S-3:
An issuer using Form S-3 can incorporate by reference periodic reports filed under the Exchange Act, both before and after the effective date of its registration statement, which can reduce the length of the registration statement considerably and eliminate the need for post-effective amendments to address developments after the effective date. In addition, an issuer using Form S-3 may conduct primary “shelf offerings” under Rule 415 of the Securities Act and may offer securities in one or more tranches. As a result, companies using Form S-3 may expeditiously take down debt, equity and other securities.
The New Rules
The new rules will allow domestic companies with a public float of less than $75 million to conduct primary offerings on Form S-3 without regard to the public float requirement,3 as long as the following requirements are met:
(a) the issuer must not be a “shell company” (which includes so-called “special purpose acquisition companies” or SPACs), as defined in Rule 405 of the Securities Act, either at the time of filing the registration statement or in the 12-month period prior to filing;
(b) the issuer must have a class of equity securities listed on a national securities exchange, such as the New York Stock Exchange, the NASDAQ Stock Market or the American Stock Exchange. Issuers that trade only in the “pink sheets” or on the “Over-the-Counter Bulletin Board” will not be able to use Form S-3 for these primary offerings;
(c) the amount of securities that can be offered will be subject to a cap of one-third of the issuer’s public float4 over any period of 12 calendar months; and
(d) the other eligibility requirements of Form S-3 are met (e.g., class of securities registered under Section 12(b) or 12(g) of the Exchange Act and has timely filed all periodic reports for 12 months preceding the filing of Form S-3).
To ascertain the amount of securities that may be sold pursuant to Form S-3 by an issuer with a public float below $75 million at the time of filing its registration statement, the new rules require a two-step calculation of: (i) the issuer’s public float immediately prior to the intended sale;5 and (ii) the aggregate amount of all sales of the issuer’s securities pursuant to primary offerings sold under Form S-3 in the previous 12 months, whether debt or equity. Based on these calculations, issuers will be allowed to sell securities with a value up to, but not greater than, the difference between one-third of their public float and the value of securities sold in primary offerings on Form S-3 in the prior period of 12 calendar months.6
Due to the fact that the one-third cap is calculated by reference to the issuer’s public float immediately prior to a contemplated sale, as opposed to at the time of the initial filing of the registration statement, the amount of securities that may be sold may increase over time if the issuer’s float increases and may decrease if the float decreases. The one-third cap will be removed if the issuer’s public float increases to $75 million after the effective date of the registration statement. However, if the public float of the issuer falls below $75 million at the time an amendment to Form S-3 is filed (e.g., amendment deemed filed when an Annual Report on Form 10-K is filed), the one-third cap will be reimposed. By contrast, issuers that satisfy the $75 million threshold at the time Form S-3 is filed will not be subject to the one-third cap, even if their public float falls below $75 million after the effective date.
The new rules will allow eligible smaller public companies to both conduct shelf offerings and incorporate by reference Exchange Act filings made after the effective date of the registration statement. This will provide these companies with additional flexibility in capital raising, including more control over the timing and cost of their offerings, the securities to be offered and the ability to respond to changing market conditions.
1 Comparable changes to Form F-3 for foreign private issuers have also been made under the new rules.
2 A primary offering means that securities are offered by or on behalf of the issuer for its own account.
3 Or without regard to the rating of debt that an issuer is offering.
4 Companies that seek to exceed this cap would still be able to utilize other SEC forms, such as Form S-1.
5 The new rules require issuers to compute their public float by reference to the price at which their common equity was last sold, or the average of the bid and asked prices of their common equity, in the principal market for the common equity as of a date within 60 days prior to the date of sale.
6 For purposes of calculating the aggregate market value of securities sold during the preceding 12 calendar months, the rule requires registrants to add together the gross sales price for all primary offerings pursuant to new General Instruction I.B.6 to Form S-3 during the preceding period of 12 calendar months. There are also special provisions of the new rules for making this calculation with regard to securities that are convertible into or exercisable for equity shares.