Such a qualification will make public companies eligible for less-stringent disclosure standards
By Ezequiel Minaya | Posted on the Wall Street Journal
The Securities and Exchange Commission on Thursday voted to ease financial reporting requirements for nearly 1,000 companies by expanding the definition of which firms qualify as smaller sized and therefore are eligible for less stringent disclosure requirements.
Newly adopted amendments define a “smaller reporting company” as one with less than $250 million in publicly traded shares, up from the previous definition of $75 million. The agency also expanded the definition to include companies with less than $100 million in annual revenue if they also have less than $700 million in publicly held shares.
The previous revenue test allowed so-called “scaled disclosure” of a company with no publicly traded shares and less than $50 million in annual revenues. The SEC estimates that the move will allow an additional 966 to be eligible for smaller reporting company status over the first year under the new definition.
Companies that qualify as smaller reporting companies can provide less detailed disclosures required of other reporting companies, particularly in the description of executive compensation, according to the SEC website. The SEC also allows smaller reporting companies to provide audited financial statements for two fiscal years as opposed to three years.
“Expanding the smaller reporting company definition recognizes that a one size regulatory structure for public companies does not fit all,” said SEC Chairman Jay Clayton, in a statement.
In considering the proposal, the SEC had said that it was seeking to reduce compliance costs for more companies and boost business formation. Critics have said that the move weakens investor protections by potentially holding back material information.
The SEC added that the amendments didn’t change the thresholds for its “accelerated filer” definition. Such filers, with a public float of $75 million or more, are required to independently audit their internal controls over financial reporting.
The SEC staff has begun drawing up recommendations for changes to the accelerated-filers definition in order to “reduce the number of companies that qualify as accelerated filers in order to further reduce compliance costs for those companies,” according to the SEC release.
An agency spokeswoman declined to comment beyond the press release.
Even as more companies qualify as smaller reporting companies, they will still face the requirements of accelerated filers including the timing of periodic reports and the audit of internal controls.
Cindy Fornelli, executive director of the Center for Audit Quality, which represents public-company auditors, said leaving the audit requirement unchanged was a good move.
“U.S. capital markets are the largest and most attractive in the world, and effective investor protections contribute greatly to this success,” she said.