United States: SEC Proposes Changing Definitions Of Accelerated Filer And Large Accelerated Filer To Provide Relief To Smaller Reporting Companies

Last Updated: June 6 2019
Article by Suzanne K. Hanselman and Michael L. Lawhead

On May 9, 2019, the U.S. Securities and Exchange Commission (SEC) proposed amendments, available here, to the accelerated filer and large accelerated filer definitions to "reduce costs for certain lower-revenue companies by more appropriately tailoring the types of companies that are categorized as accelerated and large accelerated filers while maintaining effective investor protections." The proposed definitions align with the SEC's 2018 changes to the definition of "smaller reporting company." Specifically, the proposed amendments would:

  • Exclude from the accelerated filer and large accelerated filer definitions an issuer that 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;
  • Increase the transition thresholds for accelerated filers and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million, and for exiting large accelerated filer status from $500 million to $560 million; and
  • Add a revenue test to the transition thresholds for exiting both accelerated filer and large accelerated filer status.

Under the proposed amendments, smaller reporting companies with less than $100 million in revenues would not be subject to the accelerated filing deadlines or be required to obtain an independent auditor attestation of their assessment of the effectiveness of internal control over financial reporting. However, such companies would continue to be required to establish, maintain, and assess the effectiveness of internal control over financial reporting.

Background to the Proposed Amendments

Under the Sarbanes-Oxley Act of 2002, the SEC created a reporting system that categorized companies subject to Exchange Act reporting requirements as non-accelerated filers, accelerated filers and large accelerated filers. Under this system, accelerated and large accelerated filers are subject to shorter filing deadlines for quarterly and annual reports and are subject to some disclosure and other requirements that do not apply to non-accelerated filers. A significant requirement that applies to accelerated filers and large accelerated filers but not to non-accelerated filers is the requirement that such companies obtain an independent auditor attestation of their assessment of the effectiveness of internal control over financial reporting.

Initially, smaller reporting companies did not fall within the definitions of accelerated filer or large accelerated filer and thus did not have to comply with the accelerated filer or large accelerated filer filing deadlines or the auditor attestation requirement. However, in June 2018, the SEC adopted amendments to the definition of a smaller reporting company that expanded the number of companies that qualified as smaller reporting companies, resulting in some companies being categorized as both smaller reporting companies and accelerated filers or large accelerated filers. Such companies have some, but not all, of the benefits of scaled disclosure and are required to comply with the auditor attestation requirement. At that time, the SEC Chairman directed the Staff to recommend possible rule amendments that, if adopted, would reduce the number of companies that qualify as accelerated filers in order to "promote capital formation by reducing compliance costs for certain registrants, while maintaining appropriate investor protections."

Summary of Proposed Amendments

Exclusion of Low-Revenue Smaller Reporting Companies

The proposed amendments would revise the accelerated filer and large accelerated filer definitions to exclude companies that are eligible to be a smaller reporting company under the smaller reporting company revenue test. Those companies targeted by the proposed amendment would not incur the costs associated with auditor attestation of internal control over financial reporting until they exceed the smaller reporting company revenue test.

Under the existing rules, a company must satisfy the following three conditions to be deemed an accelerated filer:

  • The company must have a public float of $75 million or more, but less than $700 million, as of the last business day of the company's most recently completed second fiscal quarter;
  • The company must have been subject to the requirements of Exchange Act Section 13(a) or 15(d) for a period of at least twelve calendar months; and
  • The company must have filed at least one annual report pursuant to Exchange Act Section 13(a) or 15(d).

Under the existing rules, to be a large accelerated filer, a company must satisfy the second and third conditions described above and have a public float of $700 million or more as of the last day of the company's most recently completed second fiscal quarter.

The proposed amendments would add a new condition to the definitions of accelerated filer and large accelerated filer that would exclude from those definitions a company eligible to be a smaller reporting company under the smaller reporting company revenue test (currently $100 million or less). Consequently, companies that are eligible to be a smaller reporting company based on the public float test would be accelerated filers if their annual revenues are $100 million or more, and as a result they would remain subject to all requirements applicable to accelerated filers.

According to the SEC, the proposed amendments would increase the number of issuers that are exempt from the requirement to obtain auditor attestation of internal control over financial reporting by increasing the number of non-accelerated filers. However, the proposed amendments would not change other investor protections under the Sarbanes-Oxley Act, such as the requirement for an independent audit committee and PEO and PFO certifications of financial reports, or the requirement to establish, maintain and assess the effectiveness of internal control over financial reporting. The SEC believes that eliminating the requirement for an independent auditor attestation will reduce compliance costs and promote capital formation for smaller reporting companies.

Transition Provisions in the Accelerated Filer and Large Accelerated Filer Definitions

The proposed amendments would also change the transition thresholds for companies exiting accelerated filer and large accelerated filer status. Under current rules, once a company is an accelerated filer or a large accelerated filer, it will not become a non-accelerated or accelerated filer until its public float falls below a specified lower threshold than the public float threshold it needed to become an accelerated filer or large accelerated filer initially. The purpose of this lower threshold is to avoid situations in which a company frequently enters and exits accelerated filer and large accelerated filer status because of small fluctuations in its public float. Under current rules, a company initially becomes an accelerated filer after it first meets certain conditions as of the end of its fiscal year, including that it had a public float of $75 million or more but less than $700 million as of the last business day of its most recently completed second fiscal quarter. A company initially becomes a large accelerated filer in a similar manner, including that it had a public float of $700 million or more as of the last business day of its most recently completed second fiscal quarter. Once a company becomes an accelerated filer, it will not become a non-accelerated filer unless it determines at the end of a fiscal year that its public float had fallen below $50 million on the last business day of its most recently completed second fiscal quarter. A large accelerated filer will remain one unless its public float had fallen below $500 million on the last business day of its most recently completed second fiscal quarter. If the large accelerated filer's public float falls below $500 million but is $50 million or more, it becomes an accelerated filer. Alternatively, if the company's public float falls below $50 million, it becomes a non-accelerated filer.

The proposed amendments would amend the transition thresholds as follows:

  • Increase the transition threshold for becoming a non-accelerated filer from $50 million to $60 million; and
  • Increase the transition threshold for leaving large accelerated filer status from $500 million to $560 million.

The SEC believes that it would be appropriate to increase these transition thresholds because "doing so would make the public float transition thresholds 80% of the initial thresholds, which would be consistent with the percentage used in the transition thresholds for [smaller reporting company] eligibility." Further, these revised thresholds would limit those instances in which a company could be both an accelerated filer and a smaller reporting company or a large accelerated filer and a smaller reporting company.

The proposed amendments would also add the smaller reporting company revenue test to the public float transition thresholds for accelerated and large accelerated filers. Under the proposed amendments, a company that is already an accelerated filer will remain one unless either its public float falls below $60 million or it becomes eligible to use the smaller reporting company accommodations under the revenue test in paragraphs (2)1 or (3)(iii)(B)2 of the smaller reporting company definition. A company that is initially applying the smaller reporting company definition or previously qualified as a smaller reporting company would apply paragraph (2) of the smaller reporting company definition. Once a company determines that it does not qualify for smaller reporting company status, it would apply paragraph (3)(iii)(B) of the smaller reporting company definition at its next annual determination. Accordingly, under the proposed amendments, an accelerated filer would remain an accelerated filer until its public float falls below $60 million or its annual revenues fall below the applicable revenue threshold ($80 million or $100 million), at which point it would become a non-accelerated filer.

Similarly, under the proposed amendments, for a company to transition out of large accelerated filer status, such company would need to have a public float below $560 million as of the last business day of its most recently completed second fiscal quarter or satisfy the revenue test in paragraph (2) or (3)(iii)(B), as applicable, of the smaller reporting company definition. A large accelerated filer would become an accelerated filer at the end of its fiscal year if its public float fell to $60 million or more but less than $560 million as of the last business day of its most recently completed second fiscal quarter and its annual revenues are not below the applicable revenue threshold ($80 million or $100 million). A large accelerated filer would become a non-accelerated filer at the end of its fiscal year if its public float fell below $60 million or it meets the revenue test in paragraph (2) or (3)(iii)(B), as applicable, of the smaller reporting company definition. For a large accelerated filer to meet the smaller reporting company revenue test, its public float would need to fall below $560 million as of the last business day of its most recently completed second fiscal quarter and its annual revenues would need to fall below the applicable revenue threshold ($80 million or $100 million).

Footnotes

[1] Paragraph (2) states that a company qualifies as a smaller reporting company if its annual revenues are less than $100 million and it has no public float or a public float of less than $700 million.

[2] Paragraph (3)(iii)(B) states, among other things, that a company that initially determines it does not qualify as a smaller reporting company because its annual revenues are $100 million or more cannot become a smaller reporting company until its annual revenues fall below $80 million.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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