On May 9, 2019, the Securities and Exchange Commission announced (available here) proposed changes to the accelerated filer and large accelerated filer definitions.. The proposed rules (available here) are intended to promote capital formation for smaller reporting issuers by modifying the types of issuers that are categorized as accelerated and large accelerated filers. While the proposed changes would result in more lenient filing deadlines for some issuers, a potentially more significant impact is that, by increasing the number of non-accelerated filers, the changes would increase the number of issuers that are exempt from the requirement to have an auditor attest to management's assessment of internal control over financial reporting (ICFR).
The proposed amendments would:
(1) exclude from the accelerated and large accelerated filer definitions an issuer that (a) is eligible to be a smaller reporting company, and (b) had an annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available;
(2) increase the transition thresholds for accelerated and large accelerated filers becoming non-accelerated filers from $50 million to $60 million;
(3) increase the transition thresholds for exiting large accelerated filer status from $500 million to $560 million; and
(4) add a revenue test to the transition thresholds for existing both accelerated and large accelerated filer status.
As a result of the proposed amendments, smaller reporting companies with less than $100 million in revenues would not be required to obtain an attestation of their assessment of ICFR from an independent outside auditor. Such issuers would still be required to establish, maintain, and assess the effectiveness of their ICFR, though. The proposed amendments would also not change other key protections from the Sarbanes-Oxley Act of 2002, such as independent audit committee requirements and the CEO and CFO certifications of financial reports.
In a public statement of dissent (available here), Commissioner Robert J. Jackson Jr. argued that the proposal to roll back the requirement that auditors attest to the adequacy of certain companies' internal controls had “no apparent basis in evidence," alleging that the analysis of the costs of attestation was based on data over a decade old. He also criticized the proposal for not attempting to assess the investor-protection benefits of gatekeepers in the market.
In separate public statements, Chairman Jay Clayton (available here), Commissioner Hester M. Peirce (available here), and Commissioner Elad L. Roisman (available here) defended the approval of the proposed amendments. Chairman Clayton emphasized the experience the Commission had with EGCs over the last six years and the additional benefits the proposed amendments will bring to the market, considering the shrinking size of the companies represented in the public markets. Commissioner Peirce supported the proposed amendments, but with reservations about their limited scope, alleging the proposed amendments do not solve the issue of small reporting companies that are also accelerated filers – and the remaining complex process of determining whether a company is either of those (or both). Commissioner Roisman pointed out that the cost of compliance with the auditor attestation requirement disproportionately affects smaller companies and noted that “there are many other protections in place to ensure accurate financial statements in the absence of a 404(b) ICFR auditor attestation requirement."
The proposal will have a 60-day public comment period following its publication in the Federal Register. Comments may be submitted via (1) e-mail to [email protected] (please include “File Number S7-06-19" on the subject line), using the SEC Internet comment form (https://www.sec.gov/rules/proposed.shtml); or (2) paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090 (please include reference to “File Number S7-06-19" in your written response).
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Special thanks to Rodrigo Surcan for his contribution to this post.