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SEC 2160 - Registration and reporting by smaller reporting companies
Publication date: 30 Jun 2023
us PwC SEC Volume 2160
.1 General
.11 What is a smaller reporting company?
The term smaller reporting company (SRC) is defined in S-K 10(f) as an issuer that meets both (i) and (ii) below:
(i) the issuer is not:
(a) an investment company;
(b) an asset-backed issuer; or
(c) a majority owned subsidiary of a parent that is not an SRC and
(ii) the issuer either:
(a) had a public float of less than $250 million or
(b) had annual revenues of less than $100 million and:
(1) no public float or
(2) a public float of less than $700 million.
However, once an issuer determines that it does not qualify for SRC status because it exceeded the relevant qualification threshold(s), it will remain unqualified unless, when making its annual determination, it meets one of criteria (i) or (ii) below:
(i) the issuer determines that its public float was less than $200 million; or
(ii) the issuer determines that its public float and its annual revenues meet the subsequent qualification requirements included in the chart presented in S-K 10(f)(iii)(B).
You can find additional information in the SEC staff’s “A Small Entity Compliance Guide for Issuers,” which can be found at https://www.sec.gov/corpfin/amendments-smaller-reporting-company-definition and SEC FRM Topic 5000.
[Editor’s note: SEC 2160 refers to S-K 10(f) for purposes of rule references. The SRC definition also appears in Exchange Act Rule 12b-2 and Securities Act Rule 405.]
[Editor’s note: A foreign private issuer is not eligible to use the requirements for smaller reporting companies unless it uses the forms and rules designated for US domestic issuers and provides financial statements prepared in accordance with US Generally Accepted Accounting Principles. See, for example, Instruction 2 to S-K 10(f) and SEC FRM 5110.5. However, we understand the SEC permits a registrant that files its annual report on Form 20-F to apply the SRC test to determine the transition date for disclosures under Item 16J of Form 20-F.]
.111 What are some of the accommodations available to SRCs?
The SEC’s rules and forms set forth a number of disclosure accommodations available to SRCs, including:
- SRCs are generally permitted to prepare their financial statements in accordance with S-X Article 8, which means, among other things, that they can present only two years of annual financial statements;
- SRCs are subject to reduced executive compensation disclosure requirements under S-K 402;
- SRCs may be able to use “forward incorporation” to keep the prospectus of a registration statement on Form S-1 current by incorporating by reference certain documents filed after the effective date of the registration statement (see Item 12(b) of Form S-1); and
- SRCs are exempt from the requirement to provide Risk Factor disclosure in annual and quarterly reports (see Item 1A of Forms 10-K and 10-Q).
[Editor’s note: S-K 10(f) identifies the elements of Regulation S-K which contain scaled disclosure requirements applicable to SRCs.]
See SEC 2160.901 and .906 for additional guidance.
.2 Guidance for applying the definition of a smaller reporting company
.21 When and how does an issuer that is an existing SEC registrant determine its SRC status?
An issuer that has a reporting obligation under Exchange Act Section 13(a) or 15(d) generally determines its SRC status annually on the last business day of its most recently completed second fiscal quarter.
- Public float is measured as of the last business day of the most recently completed second fiscal quarter and is computed by multiplying:
(i) the aggregate worldwide number of shares of voting and non-voting common equity held by non-affiliates by
(ii) the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity.
[Editor’s note: The determination of public float is premised on the existence of a public trading market for the issuer’s equity securities. Therefore, an entity with equity securities outstanding but not trading in any public trading market would not be able to qualify as an SRC on the basis of a public float test. See footnote 25 to SEC Release 33-10513, Smaller Reporting Company Definition (SEC Release 33-10513).]
- Annual revenue is revenue in the issuer’s annual audited financial statements for its most recent fiscal year completed before the last business day of the second fiscal quarter (i.e., public float test date).
[Editor’s note: A reporting company must assess the revenue test based on its annual audited financial statements as originally filed with the SEC for its most recent fiscal year (e.g., not restated for subsequent discontinued operations). See SEC FRM 5110.3a.]
See SEC 2160.902 - .905 for additional guidance.
.211 When does an existing SEC registrant transition between SRC and non-SRC status in its SEC filings?
As noted above, an existing SEC registrant (i.e., a company that is required to file reports under Exchange Act Section 13(a) or 15(d)) will determine whether it qualifies as a smaller reporting company annually as of the last business day of its second fiscal quarter.
- If an existing reporting company newly qualifies as a smaller reporting company on the last business day of its second fiscal quarter, it may elect to reflect that determination and use the scaled disclosure accommodations in its subsequent filings, beginning with its second quarter Form 10-Q. A company must reflect its SRC status no later than its Form 10-Q for the first fiscal quarter of the next year.
For instance, if Company Q, a calendar year-end reporting company that previously did not qualify as an SRC determined that its public float was $180 million as of June 30, 2023 (i.e., the last business day of its 2023 second fiscal quarter), then Company Q may begin to report as a smaller reporting company beginning with its Form 10-Q for the quarter ended June 30, 2023 (i.e., the Form 10-Q for the quarter that includes the determination date).
- If an existing reporting company ceases to qualify as a smaller reporting company on the last business day of its second fiscal quarter, then it must report as a non-SRC no later than the first fiscal quarter of its next fiscal year.
For instance, if Company X, a calendar year-end reporting company that previously qualified as an SRC, determined that its public float was $280 million as of June 30, 2023 (i.e., the last business day of its 2023 second fiscal quarter) and that its revenue for the year ended December 31, 2022 was $120 million, then Company X must begin to report as a non-SRC beginning no later than its Form 10-Q for the quarter ending March 31, 2024 (i.e., the first quarter of the next fiscal year).
Similarly, assume Company Y, a calendar year-end reporting company with $0 public float, qualified as an SRC as of June 30, 2022 (i.e., the last business day of its 2022 second fiscal quarter) based on its 2021 annual revenues of $20 million. If Company Y had annual revenues in 2022 of $105 million and continued to have no public float as of June 30, 2023 (i.e., the last business day of its 2023 second fiscal quarter), then Company Y must begin to report as a non-SRC beginning with its Form 10-Q for the quarter ending March 31, 2024 (i.e., the first quarter of the next fiscal year).
In either of the two examples immediately above, the annual report on Form 10-K for the year ended December 31, 2022 may continue to include scaled smaller reporting company disclosure, the due date for the annual reports will be based on the respective registrant’s accelerated filer status as of the last day of the fiscal year.
[Editor's note: A number of special considerations apply when an existing registrant no longer meets the definition of an SRC and subsequently files a new or amended registration statement or proxy/information statement before it is required to file its first Form 10-K as a non-SRC. See Topic IX.B from the Highlights of the March 2012 meeting of the CAQ SEC Regulations Committee.]
.22 When and how is SRC status determined by an issuer in connection with an initial registration statement?
A company filing its initial registration statement for shares of common equity will make its initial SRC determination in connection with the filing of its registration statement:
- Public float is measured as of a date within 30 days of the date of the filing of the initial registration statement and is computed by multiplying:
(i) the sum of:
(a) the aggregate worldwide number of shares of the issuer’s voting and non-voting common equity held by non-affiliates before the registration plus,
(b) in the case of a Securities Act registration statement, the number of shares of its voting and non-voting common equity included in the registration statement, by
(ii) the estimated public offering price of the shares.
[Editor's note: In the case of an initial registration under the Exchange Act (e.g., Form 10) where there is no public float, or the public float cannot be calculated because there is no market price for the issuer's common equity securities, the SRC determination should be made by reference to the revenue test. See Section III.E.2(b) of SEC Release 33-8876, Smaller Reporting Company Regulatory Relief and Simplification (SEC release 33-8876).]
- Annual revenue is revenue in the issuer’s most recent audited financial statements available on the initial public float calculation date.
[Editor’s note: If consideration of the pro forma effect of (i) businesses acquired during the latest fiscal year and (ii) consummation of business combinations identified as probable at the time of filing the initial registration statement would result in the issuer exceeding the revenue threshold, then the company would not qualify as a smaller reporting company based on the revenue test. See SEC FRM 5110.3b.]
.221 What happens if a public float calculation performed in connection with the filing of an initial registration statement changes during the registration process?
A bona fide calculation made in connection with the initial filing will govern the company's SRC status through the completion of the offering. This is true even if the company's status would have changed if the public float were re-calculated at some point during the pre-effective period or at the effective date. See Section III.E.2(b) of SEC Release 33-8876.
The company may reassess its status immediately following the completion of the offering (based on the actual offering price and number of shares included in the registration statement) in order to determine the company's SRC status for purposes of filing its first periodic report. The company must reassess its SRC status as of the end of its next second fiscal quarter.
For instance, assume:
- Company X is a calendar year-end private company with more than $100 million in revenue for the years ended December 31, 2020, 2021 and 2022.
- Company X decided to undertake an initial public offering of its common stock (to be registered on Form S-1).
- Company X had 20 million outstanding shares of common stock held by non-affiliates as of a date within 30 days of filing the initial Form S-1.
- Company X intends to sell two million shares of its common stock in connection with the S-1.
- Company X made its initial Form S-1 filing on March 17, 2023.
- Based on conversations with its underwriters, when Company X made its initial Form S-1 filing, it estimated the offering price for its shares would be $10 per share.
- Company X's Form S-1 was declared effective on June 23, 2023.
- When Company X's Form S-1 was declared effective, the actual offering price to the public was $12 per share.
At the time of filing the initial Form S-1, Company X would calculate its public float as follows:
Shares already outstanding |
20 million |
|
Shares to be offered |
2 million |
|
Total shares |
22 million |
|
Estimated offering price |
x $10 |
|
$220 million |
Based on this calculation, Company X would be permitted to use the scaled disclosure requirements applicable to smaller reporting companies in connection with its initial Form S-1 filing, as well as all subsequent filings up to and including the final Form S-1. Even though Company X's public float increased to $264 million when the Form S-1 was declared effective (as a result of the $2 per share increase in the offering price), Company X is not required to reassess its status during the registration process. Company X may (but is not required to) reassess its status at the completion of its offering for purposes of determining its status for purposes of filing its 2023 periodic reports. Company X will be required to reassess its smaller reporting company-status as of June 30, 2023 (the last business day of its 2023 second fiscal quarter). Assuming Company X's public float was $250 million or more as of June 30, 2023, Company X would be required to transition to the other reporting company requirements in connection with its Form 10-Q for the quarter ended March 31, 2024.
[Editor’s note: In connection with its reassessment, Company X’s revenue test is based on its revenues for the year ended December 31, 2022, which was more than $100 million.]
.9 Frequently asked questions
.901 Can an SRC elect to comply with the requirements applicable to non-SRCs in some areas but not others?
Yes. SRCs may elect to comply with the SEC's disclosure requirements on an "a la carte" basis. This means SRCs may elect to comply with the disclosure requirements applicable to non-SRCs on an item-by-item basis. This is true unless the requirements applicable to SRCs are more rigorous than those for non-SRCs. In that case, the company must follow the requirements applicable to SRCs. See SEC FRM 5340.
[Editor's note: S-K 404 is currently the only disclosure item which contains expanded requirements for smaller reporting companies as compared to larger reporting companies.]
The SEC has indicated that it expects its staff will evaluate an SRC’s compliance with Regulation S-K by reference to the requirements applicable to SRCs, even if the company were to voluntarily comply with the requirements applicable to non-SRCs.
.902 How should a bank or similar financial institution perform the revenue test?
The SEC staff has stated that banks and similar financial institutions must include all gross revenues from traditional banking activities. Banking activity revenues include interest on loans and investments, dividends on investments, fees from loan origination, fees from trust and investment services, commissions, brokerage fees, mortgage servicing revenues, and any other fees or income from banking or related services. See SEC FRM 5110.3c.
.903 Can an entity that is being spun-off from a non-SRC parent potentially qualify as an SRC?
Perhaps. An entity that is to be spun off from its parent coincident with or prior to its initial registration may register as an SRC if it will otherwise qualify as an SRC upon consummation of the spin-off. See SEC FRM 5110.4.
[Editor’s note: The SEC staff has indicated that the guidance in FRM 5110.4 is specific to a spin-off and should not be used by analogy for transactions with different facts and circumstances. For instance, this guidance would not extend to a merger with a SPAC. See Topic III.C of the Highlights of the March 31, 2022 meeting of the CAQ SEC Regulations Committee.]
.904 Does a company with no public float automatically qualify as an SRC irrespective of its annual revenue?
No. A company that has a $0 public float must qualify as an SRC by reference to its revenue (i.e., less than $100 million). The SRC qualification criteria which references a public float of less than $250 million is only available to an issuer that has a public float (i.e., not zero). See SEC FRM 5110.1 b.
.905 Is the determination of SRC status impacted by a reverse merger?
Possibly. There are a number of special considerations which apply in the case of a reverse merger. Refer to SEC 7050, SEC FRM 5230, Topic VII.F from the Highlights from the March 2011 meeting of the CAQ SEC Regulations Committee meeting, and Securities Act Forms CDI 125.11.
.906 Is an SRC required to comply with S-X 5-04 or S-X 4-08(e)?
Smaller reporting companies are not subject to S-X 5-04 or S-X 4-08(e). However, the SEC staff has indicated that when the restricted net assets of a smaller reporting company’s consolidated subsidiaries are a significant proportion of consolidated net assets as of the most recently completed fiscal year-end, the amount and nature of those restrictions may be important to understanding the smaller reporting company’s liquidity and its ability to pay interest and principal on debt or dividends. In these circumstances, the SEC staff has indicated that the smaller reporting company should fully discuss, in MD&A, the nature of the restrictions on its subsidiaries’ net assets, the amount of those net assets, and the potential impact on the company’s liquidity. Disclosures within MD&A similar to the parent company condensed financial information specified by S-X 5-04 and S-X 4-08(e) may be necessary to facilitate this discussion. See SEC FRM 5350.
.907 Are the reporting and disclosure accommodations available to an SRC the same as accommodations available to an emerging growth company (EGC)?
Not in all instances. In several instances, SRCs and EGCs are permitted to provide a similar level of disclosure. However, it is important to note that the SRC disclosure accommodations are not identical to the disclosure requirements applicable to a smaller reporting company. If the SRC is also an EGC, it may take advantage of both sets of accommodations. See SEC 2170 for further discussion of EGCs.
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