A recent proposal from the Securities and Exchange Commission (SEC) aims to lower compliance costs for smaller public companies. The SEC's proposed amendments would affect qualifications for the scaled disclosure requirements, which companies beneath set revenue and public float thresholds can use. Changes would increase the thresholds so that more companies could take advantage of the streamlined approach to disclosures, an update that the SEC says will have a statistically significant impact on smaller companies' bottom lines.

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S-K study as required by the Jumpstart Our Business
Startups (JOBS) Act. It also analyzed the definition as
part of the Fixing America’s Surface Transportation
(FAST) Act of 2015.
After evaluating the recommendations, the SEC drew
up changes designed to address both the concerns
about compliance cost and the information provided to
investors.
Resetting the smaller reporting company thresholds
involved an analysis of several factors, including whether
inflation could be used. The SEC decided against it, as
inflation did not produce a meaningful enough change for
small filers. Regulators also considered whether to use
thresholds based on the emerging growth companies
(EGC) criteria, because these companies often have
larger public floats and revenues than other smaller
reporting companies. Ultimately, the SEC decided
against basing its changes on the EGC definitions
because the EGC thresholds generally phase out by the
fifth year after the first registered sale of equity.
Instead, the SEC decided to base its thresholds
off comments received as part of the Disclosure
Effectiveness Initiative. Although the numbers have
changed, the SEC retains the provisions that registrants
that qualify would still be liable for their disclosures and
would need to provide additional information about their
financial position if so required. Their review process
also would not change, nor would the scaled disclosure
requirements in Regulation S-K and Regulation S-X.
Summary of Proposed Changes
Thresholds would change for all companies qualifying
for the smaller reporting company designation.
A recent proposal from the Securities and Exchange
Commission (SEC) aims to lower compliance costs
for smaller public companies. The SEC’s proposed
amendments would affect qualifications for the scaled
disclosure requirements, which companies beneath set
revenue and public float thresholds can use. Changes
would increase the thresholds so that more companies
could take advantage of the streamlined approach to
disclosures, an update that the SEC says will have a
statistically significant impact on smaller companies’
bottom lines.
All Roads Point to Change
The impetus for changing the smaller reporting
company thresholds comes from several SEC initiatives
to improve reporting requirements. Two small business
advisory groups that work with the SEC, its Advisory
Committee on Small and Emerging Companies, and
its Governmental-Business Forum on Small Business
Capital Formation, have asked that the threshold be
expanded to reduce compliance costs. Commenters
on the SEC’s Disclosure Effectiveness Initiative also
highlighted the smaller reporting company threshold as
an area to be changed.
Federal acts brought their share of attention to the mater
as well. The SEC had to examine the smaller reporting
company definition when performing its Regulation
August 2016
SEC Proposes Expansion of Smaller Reporting Company Definition

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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
Currently, reporting registrants must have less than $75
million of public float at the end of the second quarter
in order to meet the definition of a smaller reporting
company. Under the proposed definition, the threshold
would increase to $250 million. The SEC made the
decision because currently, about 32 percent of all
registrants have less than $75 million in public float,
which is less than the 42 percent of registrants who had
met the public float threshold when the standard was
created. Increasing the threshold to $250 million would
mean that 42 percent of registrants would qualify for the
scaled disclosures.
The threshold would also be raised for registrants
filing initial registration statements. Currently, initial
registrants must have less than $75 million in public
float within the first 30 days of filing in order to qualify
for scaled disclosures. That would increase to $250
million.
For companies that no longer qualify as smaller reporting
companies, the proposed standard suggests that those
companies should not be able to requalify as smaller
reporting companies until they meet a lower public float
amount. The proposal suggests that the threshold to
requalify as a smaller reporting company would be set
at a public float of less than $200 million, which is an
increase over the current requirement of less than $50
million of public float at the end of their second fiscal
quarter. Currently, companies that no longer qualify as
smaller reporting companies that have zero public float
will not requalify as smaller reporting companies until
they have less than $40 million of revenues in the most
recent fiscal year, and that threshold would increase to
$80 million under the proposal. The SEC expects this
will affect only a very small percentage of companies,
but would reduce frequency of situations in which small
fluctuations of revenue cause a company to enter and
exit smaller reporting company status.
Accelerated Filer Status
Amendments were also made to the accelerated filer
definition to maintain the status quo.
Accelerated filer and large accelerated filer definitions
essentially pick up where the smaller reporting company
definition leaves off in current practice. Entities qualify
as accelerated filers if they have at least $75 million
in public float. By definition, any smaller reporting
companies would be excluded, and there is a rule that
reiterates the exclusion. The proposed amendments
would preserve the $75 million public float threshold for
accelerated filers but would eliminate the exclusion of
smaller reporting companies from the accelerated filer
definition. This would allow companies in the $75-$250
million public float range to continue taking advantage
of the accelerated filer definition even though the
companies would now be considered smaller reporting
companies in the proposed amendments’ expanded
definition.
Large accelerated filers, entities with more than $700
million in public float, would not be affected by the
proposed amendments.
Stay Tuned
The SEC is accepting comments on the proposal via
its website, email and mail through August 30, 2016.
We will keep you up-to-date as developments become
available. For specific comments, questions or concerns
about the proposed amendments, please contact Rich
Howard of MHM’s Professional Standards Group. Rich
can be reached at rhoward@cbiz.com or 949.450.4402.