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Securities Regulation and Corporate Governance > Posts > The Changes Keep Coming: SEC Updates C&DIs and NYSE Updates Rules for Revised “Smaller Reporting Company” Definition
The Changes Keep Coming: SEC Updates C&DIs and NYSE Updates Rules for Revised “Smaller Reporting Company” Definition

On November 7, 2018, the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff") released four updated, and withdrew six, Compliance and Disclosure Interpretations (“C&DIs") in light of the June 2018 amendments to the definition of a smaller reporting company (“SRC").  We summarized the amendments to the SRC definition in our previous blog post here.

The updated C&DIs provide guidance regarding the implementation of the revised definition.  Similarly, the New York Stock Exchange (“NYSE") has proposed corresponding changes to Section 303A.00 of the Listed Company Manual to scale several of the NYSE listing requirements based on the revised definition of SRC. A summary of the new guidance and proposed rule changes follows.

Regulation S-K

Question 102.01

In this C&DI, the Staff confirmed that a company can be both a “smaller reporting company" and an “accelerated filer".  For example, if an issuer qualifies as both a SRC and an accelerated filer, such issuer may use the scaled disclosure requirements available to SRCs in its annual report on Form 10-K, but as an accelerated filer, must comply with the accelerated filer deadline and include the Sarbanes-Oxley Section 404 auditor attestation report. 

Question 102.02

This C&DI clarifies when a reporting company that initially fails to qualify as a SRC may subsequently be eligible for SRC status, assuming that its revenues or public float have sufficiently declined on the annual determination date (for example, in the case of a reporting company with a December 31 fiscal year that failed to meet the amended SRC definition criteria as of June 30, 2018 or thereafter ceases to qualify as a SRC as of a subsequent annual determination date).  For these reporting companies to qualify as a SRC, on the last day of the second fiscal quarter of the applicable year, the reporting company must either (1) have a public float of less than $200 million, or (2)(a) “for any threshold that it previously exceeded, [the reporting company] is below the subsequent annual determination threshold (public float of less than $560 million and annual revenues of less than $80 million)" and (b) “for any threshold that it previously met, it remains below the initial determination threshold (public float of less than $700 million or no public float and annual revenues of less than $100 million)."  The Staff provided the following example: “A company has a December 31 fiscal year end. Its public float as of June 28, 2019 was $710 million and its annual revenues for the fiscal year ended December 31, 2018 were $90 million. It therefore does not qualify as a smaller reporting company. At the next determination date, June 30, 2020, it will remain unqualified unless it determines that its public float as of June 30, 2020 was less than $560 million and its annual revenues for the fiscal year ended December 31, 2019 remained less than $100 million."

For additional information regarding qualifying as a SRC under the amended definition, please see our more detailed discussion, available here.

Question 202.01

This C&DI explains that an issuer should include all annual revenues on a consolidated basis when measuring annual revenues for purposes of the definition of SRC.

Exchange Act Forms

Question 104.13

This C&DI explains that if an issuer, which could have used reduced SRC disclosure for Part III of its Form 10-K, instead incorporates by reference such information from its proxy statement pursuant to General Instruction G(3), the issuer may still rely on the scaled SRC disclosure in the proxy statement, even if such issuer would not qualify as a SRC in the year in which the proxy statement is to be filed.

NYSE Proposed Rule Change to Section 303A.00

Section 303A.00 exempts SRCs from certain listing requirements relating to the independence of compensation committee members and the analysis of the independence of any compensation consultant, legal counsel or other adviser to the compensation committee.  The proposed amendment conforms the language of this rule to the recent changes to the definition of SRC.

 

Special thanks to Jessica Annis, Erick Haitz and Henry Pruitt for their work on this post.

 

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