SEC posts new interps regarding "smaller reporting company" rules

By Cydney Posner

Today, the SEC posted several new compliance and disclosure interps of the new "smaller reporting company" rules.  (See postings on 1/3/08 and 1/16/08.)

• All current reporting companies will have an opportunity to determine if they qualify for treatment as a smaller reporting company applying the $75 million public float test as of the end of the second quarter in their first fiscal year ending after December 15, 2007 (or the alternative $50 million annual revenue test for companies that cannot calculate their public float). Paragraph (iii) of new Item 10(f)(2), which requires companies to have a public float below $50 million or revenues below $40 million to qualify for smaller reporting company status "[o]nce an issuer fails to qualify" for that status, will not apply in determining smaller reporting company status in the first year after the effective date of the new rules. The determination in the first year will be the initial determination for all current reporting companies and, accordingly, no issuer will have previously "failed to qualify" for smaller reporting company status within the meaning of paragraph (iii) of Item 10(f)(2). Consequently, all reporting companies will have the opportunity to qualify for smaller reporting company status based on the $75 million in public float or $50 million in annual revenue tests.
• By comparison, if a company does not qualify as a smaller reporting company this year, it will not be able to qualify as a smaller reporting company if its public float falls below $75 million at the end of its second fiscal quarter in a future fiscal year. Under Item 10(f)(2)(iii) of Reg S-K, if a reporting company does not qualify as a smaller reporting company this year, it will not qualify as a smaller reporting company in the future unless its public float falls below $50 million as of the last business day of its second fiscal quarter. This rule is consistent with the rule for exiting accelerated filer status. Companies that cannot calculate their public float would need to fall below $40 million in annual revenue to qualify as smaller reporting companies in the future.
• Here's a quiz: Can a company can be both an accelerated filer and a smaller reporting company at the same? Apparently so. For example, a company with a calendar-year fiscal year may have been an accelerated filer with respect to filings due in 2007, but, on the last business day of its second fiscal quarter of 2007, its public float may have fallen to $60 million. That company will then qualify as a smaller reporting company for filings in 2008 because fiscal 2007 is the initial year to determine if the company qualifies for smaller reporting company status and, as of the last business day of its second fiscal quarter, it had less than $75 million in public float. Since the company first determined it was an accelerated filer in an earlier year, however, it is required to have less than $50 million in public float on the last business day of its second fiscal quarter in 2007 to exit accelerated filer status in 2008, as provided in paragraph (3)(ii) of the definition of "accelerated filer" in Rule 12b-2. Because this company had a public float of $60 million on the last business day of its second fiscal quarter of 2007, it is unable to transition to non-accelerated filer status. A company in this circumstance may use the scaled disclosure rules for smaller reporting companies in its annual report on Form 10-K, but the report is due, on an accelerated basis, 75 days after the end of the its fiscal year and must include the SOX 404 auditor attestation report described in Item 308(b) of Reg S-K.
• The version of the adopting release currently posted on the SEC's website states that smaller reporting companies are not "required to provide an Audit Committee [Financial Expert]* Report until the first annual report after their initial registration statement is filed with the Commission and becomes effective." An asterisked footnote indicates that the bracketed language was inadvertently omitted from the release when initially published. This interp confirms that all smaller reporting companies are required to provide the audit committee report required by Item 407(d)(3) of Reg S-K. However, they are not required to provide the audit committee financial expert disclosure required in paragraph (d)(5) of Item 407 until their first annual report after their initial registration statement under the Securities Act or Exchange Act becomes effective.
• Where any schedule or form, including Schedule 14A, refers to a disclosure item in Reg S-K, a registrant that is a smaller reporting company may use the disclosure requirements available to smaller reporting companies under that item. If the requirements specify that smaller reporting companies must comply with those requirements, then the smaller reporting company must comply. For example, a smaller reporting company must furnish the more rigorous disclosure required by Item 404(d)(1) of Reg S-K, rather than the disclosure required by Item 404(a), even though Item 7(b) of Schedule 14A refers to Item 404(a) only. Item 404(d)(1) specifies that smaller reporting companies must provide certain information in order to comply with Item 404(a). For example, smaller reporting companies must provide Item 404 disclosure regarding a transaction where the amount exceeds the lesser of $120,000 or 1% of the average of the company’s total assets at year end for the last two completed fiscal years, even though, for larger companies, there is no assets test under Item 404.
• Smaller reporting companies are not required to furnish Item 404(b) disclosure related to their policies and procedures for review, approval or ratification of transactions with related persons even if a schedule or form requires the company to furnish the information. Smaller reporting companies comply with the requirements of Item 404 by furnishing the information called for by Item 404(d) of Reg S-K, which does not require Item 404(b) disclosure.

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