Last week, amidst the focus on the coronavirus, the Securities and Exchange Commission made progress on its short-term rulemaking agenda by amending the definitions of “accelerated filer” and “large accelerated filer.” The amendments exempt a greater number of smaller public companies from the requirement to obtain a separate auditor attestation report over their internal control over financial reporting (ICFR).
Specifically, the new relief exempts companies that (a) qualify as a “smaller reporting company” and (b) have less than $100 million in revenues in the most recent fiscal year for which audited financial statements are available. For current accelerated filers and large accelerated filers, the amendments adjust the public float transition thresholds to exit to a lower filing status. The new threshold for accelerated filers to become non-accelerated filers is $60 million, up from $50 million, and for large accelerated filers to become accelerated filers is $560 million, up from $500 million. The revenue test for determining smaller reporting company status has also been added to the tests for transitioning out of accelerated or large accelerated filer status. A new check box will be added to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing.
In response to concerns that these latest amendments might increase the risk of internal control failures, the adopting release underscores the presence of other investor protections that continue to apply to companies exempted from the ICFR auditor attestation requirement. On balance, and among other protections noted in the adopting release, non-accelerated filers that qualify as smaller reporting companies remain subject to the requirements in Section 404(a) of the Sarbanes-Oxley Act to establish and maintain ICFR and have their management assess the effectiveness of the company’s ICFR.
Per the adopting release, an estimated 527 companies, many concentrated in the “pharmaceutical products” and “medical equipment” industries, are expected to benefit from this latest relief, which is estimated to save each affected company approximately $210,000 annually. As the adopting release acknowledges, “the amendments could be a positive factor in the decision of additional companies to enter public markets, but it may not be the decisive factor, and the direct impact of the amendments on the number of public companies may be limited to the extent that companies may be more focused on other factors associated with the decision to go public.” It will remain to be seen whether the amendments prompt an uptick in companies going public, but in the meantime these changes will decrease the burden of being public for currently-reporting smaller companies.
The amendments will become effective 30 days after publication in the Federal Register and will apply to annual report filings due on or after the effective date.
