SEC Reduces Burdens on Smaller Reporting Companies by Amending Accelerated Filer Definitions
The U.S. Securities and Exchange Commission has released final rules amending the definitions for accelerated filers and large accelerated filers, providing significant relief for smaller reporting companies in the technology and life sciences industries that would have previously qualified as both smaller reporting companies (SRCs) and accelerated or large accelerated filers. Most importantly, the final rules released March 12, 2020, exclude from the accelerated filer and large accelerated filer definitions an issuer that is eligible to be a SRC and that had annual revenues of less than $100 million in the most recent fiscal year. As a result, these qualifying SRCs will no longer be required to obtain a separate attestation of their internal control over financial reporting (ICFR) from an outside auditor. These amendments include the following additional changes to the definitions of accelerated and large accelerated filer and a change to the cover page of specified forms under the Securities Exchange Act of 1934 (Exchange Act):
The final amendments will become effective 30 days after publication in the Federal Register and apply to an annual report filing due on or after the effective date.
On June 28, 2018, the SEC amended the definition of SRC, resulting in more issuers that could utilize the scaled disclosure requirements available to SRCs. However, in conjunction with these amendments, the SEC also revised the accelerated filer and large accelerated filer definitions to remove the condition that for an issuer to be an accelerated filer or a large accelerated filer it must not be eligible to use the SRC accommodations. As a result, some issuers now are categorized as both SRCs and accelerated or large accelerated filers.
On May 9, 2019, the SEC proposed amendments to ease the burden on qualifying smaller companies by modifying the definitions of accelerated filers and large accelerated filers.
Under the existing definitions, in order to qualify as an accelerated filer or a large accelerated filer, a company must (1) in the case of accelerated filers, have a public float of $75 million to $700 million and, in the case of large accelerated filers, have a public float of $700 million or more; (2) have been subject to the requirements of Section 13(a) or 15(d) of the Exchange Act for a period of at least 12 months; and (3) have filed at least one annual report pursuant to Sections 13(a) or 15(d) of the Exchange Act. The final rules add a new condition to these definitions that excludes a company that is eligible to be an SRC and that had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available.
A company that is eligible to be an SRC and that meets the SRC revenue test will not be subject to the requirement of the Sarbanes-Oxley Act (SOX) Section 404(b) that the company’s independent auditor must attest to, and report on, management’s assessment of the effectiveness of the company’s ICFR.1 The SEC has extended this amendment to also exclude (1) foreign private issuers from the accelerated and large accelerated filer definitions if they meet the SRC revenue test and (2) business development companies from the accelerated and large accelerated filer definitions under analogous circumstances. While auditor attestation will not be required for qualifying companies, these companies will remain subject to the SOX Section 404(a) requirement to state in their annual report the responsibility of management for establishing and maintaining an adequate control structure and procedures for financial reporting, and for that report to contain an assessment of the effectiveness of that structure and its procedures. In addition, the principal executive and financial officers of these companies will continue to be required to provide certifications regarding their responsibility for establishing and maintaining ICFR and that they have evaluated and reported on the effectiveness of the disclosure controls and procedures.
Disclosure of the ICFR auditor attestation is currently required in the auditor’s report and management’s annual report on ICFR. In order to make this disclosure more prominent to investors, the SEC now requires a check box on the cover pages of Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing. The check box must be included in any of these reports filed on or after the effective date of the final rules.
The table below shows the relationships between SRCs and non-accelerated, accelerated and large accelerated filers under the final rules:
Status | Public Float | Annual Revenues |
SRC and Non-Accelerated | Less than $75 million | N/A |
$75 million to less than $700 million as of the last business day of its most recently completed second fiscal quarter | Less than $100 million | |
SRC and Accelerated Filer | $75 million to less than $250 million as of the last business day of its most recently completed second fiscal quarter | $100 million or more |
Accelerated Filer | $250 million to less than $700 million as of the last business day of its most recently completed second fiscal quarter | $100 million or more |
Large Accelerated Filer | $700 million or more as of the last business day of its most recently completed second fiscal quarter | N/A |
Under the rules previously in effect, a company would initially become an accelerated filer after it first met certain conditions, including a public float of $75 million or more but less than $700 million. A company would initially become a large accelerated filer after meeting certain conditions, including a public float of $700 million or more. A large accelerated filer would become an accelerated filer if its public float fell below $500 million, and an accelerated filer or large accelerated filer would become a non-accelerated filer if its public float fell below $50 million. These thresholds were designed to prevent situations in which a company would frequently enter and exit accelerated and large accelerated filer status due to small fluctuations in its public float.
The final rules revise the public float transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million. The final rules also add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.
1 In this context, it is worth noting that emerging growth companies (EGCs) are also exempted from the requirement of having their ICFR audited. A company generally qualifies as an EGC until the earlier of (1) the last day of the fiscal year ending after the fifth anniversary of its initial public offering; (2) the last day of the fiscal year in which its total annual gross revenues are $1.07 billion or more; or (3) the date that it becomes a large accelerated filer.