On June 28, 2018, the Securities and Exchange Commission (the SEC or the Commission) amended the definition of "smaller reporting company" (SRC) to expand the number of smaller companies eligible to comply with current scaled disclosure requirements. The SEC proclaimed that both SRCs and Main Street investors should benefit from the amended definition, as SRCs will have a greater opportunity to join public markets and Main Street investors will have a wider variety of investment options. 

Under the new definition, smaller companies with a public float of less than $250 million (formerly $75 million) will qualify as SRCs, and a company with no public float or with a public float of less than $700 million will qualify as a SRC if it has annual revenues of less than $100 million (formerly $50 million) during its most recently completed fiscal year. The SEC estimates that nearly 1,000 additional companies will qualify for SRC status in the first year under the revised definition. While newly eligible SRCs may elect whether to take advantage of the scaled disclosure accommodations (which are unchanged by the amendments), they will be required to comply with the potentially more stringent disclosure requirement relating to related person transactions.

The Commission also amended Rule 3-05(b)(2)(iv) of Regulation S-X to increase the revenue threshold from $50 million to $100 million under which acquirers may omit the earliest of the three fiscal years of audited financial statements of certain acquired businesses. Finally, the Chairman of the SEC directed staff to formulate recommendations to the Commission to change the definitions of "accelerated filer" and "large accelerated filer" in Rule 12b-2 to encourage capital formation and reduce compliance costs for SRCs while preserving sufficient protections for investors. In the meantime, the SEC preserved the existing definitions of these terms.

The new rules – effective 60 days after publication in the Federal Register – present new opportunities for middle market companies, which may benefit from expanded capital resources on more favorable terms, as well as fewer disclosure requirements, which may enable such companies to achieve a more cost-efficient allocation of resources.

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