SEC Adds Revenue Test for Public Companies to be Considered an “Accelerated Filer”
The Securities and Exchange Commission recently adopted amendments to the definitions of “accelerated filer” and “large accelerated filer” that will allow more public companies to qualify as non-accelerated filers, providing them with longer filing deadlines for periodic reports and no requirement for an auditor attestation of their internal controls.
Why are these definitions important for public companies?
Every public company qualifies as one of the following: an accelerated filer, large accelerated filer or non-accelerated filer, with such designation based on certain thresholds set forth in SEC rules. Prior to the amendments, the category for which a company qualified was primarily determined based on a company’s “public float.” Public float is the total market value of a company’s registered securities (e.g., common stock) held by the public while excluding the value of those securities held by affiliates, who are insiders such as executive officers, directors and certain large shareholders and related parties. This determination is made at the end of each fiscal year, but the calculation is based on the public float as of the end of the prior second fiscal quarter. Prior to the amendments, and subject to being public for 12 months, an accelerated filer was defined to have at least a $75 million public float and a large accelerated filer was defined to have at least a $700 million public float. (Non-accelerated filer is not technically defined but is by negative implication deemed to be defined as a filer with below a $75 million public float or a filer public for less than 12 months).
Whichever category a company falls into dictates, among other things, the filing deadlines for annual and quarterly reports for domestic companies and whether or not a company’s internal control over financial reporting must be attested to (i.e., audited) by an independent registered public accounting firm for both domestic companies and foreign private issuers. Non-accelerated filers have the longest deadlines to file their periodic reports and are exempt from the requirement to have their internal controls audited, which is also the case for all emerging growth companies under the JOBS Act that are either non-accelerated filers or accelerated filers. Notably, after an initial transition period after becoming a public company, all companies must still provide an annual report regarding management’s assessment of internal control over financial reporting.
According to the SEC, the changes to the definitions described below, which will be effective 30 days after publication in the Federal Register (expected soon), are designed to “tailor the types of issuers that are included in the definitions, thereby reducing unnecessary burdens and compliance costs for certain smaller issuers while maintaining investor protections.” The amended definition of non-accelerated filer will now more closely (but not completely) align with the definition of “smaller reporting company, which was revised in 2018 (see our advisory: https://www.sullivanlaw.com/news-SEC-Amends-Smaller-Reporting-Company-Definition.html). Smaller reporting companies are companies with a public float less than $250 million and companies with less than $100 million in annual revenues that also have either no public float or a public float that is less than $700 million. A smaller reporting company is eligible to provide scaled disclosure in its registration statements and periodic reports in a number of areas such as reduced requirements for financial statements and executive compensation. However, due to the different definition of non-accelerated filer, a company can currently be a smaller reporting company while at the same time still being an accelerated filer required to have its internal controls audited and file its periodic reports on an accelerated basis. Many companies complained about this disconnect, arguing that the definitions should be more parallel to both avoid confusion and also to provide further relief to small companies.
What are the new thresholds for the definitions?
Under the amended definition, a company is excluded from the accelerated and large accelerated filer definitions if it is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. While this will help many companies with lower revenues, the SEC did not go all the way in aligning the smaller reporting company and non-accelerated filer definitions. A company with a public float between $75 million to $250 million that had $100 million or more of revenue in the prior year will qualify as a smaller reporting company but unfortunately will still be an accelerated filer.
The amendments also made some other changes, including (1) increased the transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer and for exiting large accelerated filer status, making it easier to become a non-accelerated filer or accelerated filer, as the case may be, due to not needing to have the company’s public float decrease as much when determined each year, (2) added a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status, for companies that might not have otherwise qualified to exit based solely on decreases in public float, and (3) added a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an internal control auditor attestation is included in the filing.
What should companies do now?
As companies evaluate their filer status each year in the ordinary course, they should be aware of the revisions and adjust their planning accordingly. For companies that were previously accelerated filers that will now qualify as non-accelerated filers, they can reallocate the resources and budget related to an audit of internal controls to other needs. This does not, however, relieve the duty to dedicate the required resources and budget to maintain effective internal controls. Further, domestic companies that newly qualify as non-accelerated filers can adjust their disclosure controls and procedures and any related periodic reporting timelines to allow for five extra days for quarterly reports on Form 10-Q and 15 more days for annual reports on Form 10-K. Lastly, when companies next file their annual reports they should make sure to update the covers to include the new box regarding auditor attestation.
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If you would like further information regarding the impact of the changes related to the definition of accelerated filer, please contact the lawyer at Sullivan & Worcester LLP with whom you regularly consult, or the lawyer listed above.