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Monday, July 11, 2016

Redefining “Small” for Public Companies


Do you feel overwhelmed by the regulatory red tape that comes with being publicly traded? Relief may be in the works for some companies. The Securities and Exchange Commission (SEC) is considering a recommendation from its Advisory Committee on Small and Emerging Companies to set a higher regulatory threshold for its small company exemptions. If the SEC follows through with the project, more companies will be eligible for the rule exemptions available to small companies.

Work in progress
The SEC’s Division of Corporation Finance recently started work on a proposed change to the definition of a “small company” that would increase the number of businesses eligible for regulatory exemptions, according to the Office of Management and Budget’s recent update on the SEC’s regulatory agenda. The notice says a proposal could be available by spring 2017.

The regulatory initiative comes from the SEC’s Advisory Committee on Small and Emerging Companies. This panel deals with issues for companies with stock market values of less than $250 million. It asked the SEC in February 2013 and again in September 2015 to amend Rule 405 of the Securities Act of 1933 and Rule 12b-2 of the Securities Exchange Act of 1934, which set $75 million in market value as the threshold for smaller reporting companies. The committee wants a higher threshold of $250 million, which would give more companies freedom to skip certain disclosure and reporting rules.

Small company exemptions
The SEC doesn’t require small companies to have an outside auditor attest to management’s statement of the company’s financial reporting controls. After 14 years, this controls attestation requirement remains one of the most controversial provisions from the Sarbanes-Oxley Act of 2002. Companies often complain that the Section 404(b) reviews are costly. Congress and the SEC have historically exempted the smallest public companies from the requirement because of their limited budgets.

Small companies also don’t have to include certain executive compensation disclosures in their proxy filings, such as the compensation discussion and analysis required by Regulation S-K. The disclosure calls on management to describe its executive pay policies and compensation packages for investors.

In addition, small companies are exempt from the so-called “pay-ratio disclosure” rule under the Dodd-Frank Act. Starting in 2018, this rule will require companies with more than $75 million in market value to disclose a ratio that compares their CEO’s compensation to that of the median employee in their proxy filings, annual reports and registration statements.

More small company rule exemptions coming soon
Additionally, the SEC has been working on broader disclosure reform aimed at cutting dated and redundant requirements while adding information that would be more useful to investors. As part of this disclosure effectiveness initiative, the SEC in April issued Release No. 33-10064, Business and Financial Disclosure Required by Regulation S-K, to solicit comments on a set of rules that would cover information outside the financial statements that companies provide in their periodic reports and offering documents. The preliminary rulemaking document has a comment deadline of July 21.

Among other things, Release No. 33-10064 solicits input about the relationship of disclosure requirements and company size. The SEC wants views about eliminating some of its disclosure rules or adjusting the required information based on company size.

Contact us
If your public company has between $75 million and $250 million in market value, much-needed regulatory relief may be in sight. Please contact us for the latest updates on the regulatory threshold for the SEC’s small company exemptions.

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