Expanded Analysis: SEC Amends Accelerated Filer and Large Accelerated Filer Definitions, Provides SOX 404(b) Relief
On March 12, 2020, the Securities and Exchange Commission adopted long-awaited amendments to the accelerated filer and large accelerated filer definitions with the stated goal of “reduc[ing] unnecessary burdens for certain smaller issuers while maintaining investor protections.” The final rules closely track the initially proposed version of the rules which were released following the split vote of the Commissioners in May 2019.
The final rules:
- Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company (“SRC”) and that has annual revenue of less than $100 million in the most recent fiscal year for which audited financial statements are available (“SRC revenue test”);
- Exempt issuers meeting the SRC revenue test from the requirements applicable to an accelerated or large accelerated filer including, most notably, the required auditor attestation of management’s assessment of internal controls over financial reporting (“ICFR”);
- Include a specific provision excluding business development companies from the accelerated and large accelerated filer definitions;
- Add a new check box to annual filings on Form 10-K, 20-F and 40-F to indicate the inclusion of an auditor attestation over ICFR;
- Increase the public float transition threshold for accelerated and large accelerated filers to become a non-accelerated filer from $50 million to $60 million;
- Increase the exit threshold in the large accelerated filer transition provision from $500 million to $560 million in public float; and
- Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.
Relief from SOX 404(b) for certain SRCs and BDCs
In June 2018, the Commission adopted amendments to the SRC definition (as discussed here) to expand the number of issuers that qualify for scaled disclosure accommodations thereunder by increasing the applicable thresholds under the “public float test” (from less than $75 million to less than $250 million) and the “revenue test” (to include issuers with annual revenues of less than $100 million if they have no public float or a public float of less than $700 million). In conjunction with these amendments, the Commission also revised the accelerated filer and large accelerated filer definitions in Rule 12b-2 to remove the condition that, for an issuer to be an accelerated filer or a large accelerated filer, it must not be eligible to use the SRC accommodations. One result of these amendments is that issuers can now be categorized as both SRCs and accelerated or large accelerated filers. The expansion of the SRC accommodations in 2018 did not, however, extend similar relief to SRCs from the requirement to have an independent auditor attest to, and report on, management’s assessment of the effectiveness of the issuer’s under SOX Section 404(b).
The Commission’s newest amendments exclude from the definitions of accelerated filer and large accelerated an issuer that is eligible to be an SRC and has annual revenue of less than $100 million in the most recent fiscal year thereby meeting the SRC revenue test. The most notable effect of the amendments would be that an issuer that is eligible to be an SRC and that meets the SRC revenue test would not be subject to the requirements of SOX Section 404(b). The amendments also allow business development companies (“BDCs”) to qualify for this exclusion if they meet the requirements of the SRC revenue test using their annual investment income as the measure of annual revenue, although BDCs would continue to be ineligible for the other scaled disclosures available to SRCs.
The final rules release highlights that that the ICFR auditor attestation requirement is disproportionally costly to small and low-revenue issuers and notes the Commission’s expectation that reducing these costs would have a more beneficial impact on small an low-revenue issuers than it would for other issuers. In addition, the final rules cite the following as additional factors supporting relief from the SOX 404(b):
- Low-revenue SRCs may be less susceptible to certain misstatements, such as those related to revenue recognition.
- Issuers with revenues of less than $100 million have lower restatement rates than those for higher-revenue issuers and are likely have less complex financial systems and controls.
- Applicable issuers’ financial statements may be less critical to assessing their valuation.
Modifications to Applicable Forms (Form 10-K, Form 20-F, Form 40-F)
The final amendments include a requirement for an issuer to prominently disclose in its filing whether an ICFR auditor attestation is included. As such, upon effectiveness of the final rules, a new check box will be added to the cover pages of Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in an annual report filing. Once issuers are required to tag the cover page disclosure data using Inline XBRL, they will also be required to tag this cover page check box disclosure pursuant to Item 406 of Regulation S-T.
Increase to Public Float Transition Threshold for Accelerated and Large Accelerated Filers
The new rules also revise the transition threshold for becoming a non-accelerated filer from $50 million to $60 million and provide a transition threshold for leaving the large accelerated filer status from $500 million to $560 million reflecting the Commission’s belief that the prior thresholds were too low and result in more issuers than intended being classified as an accelerated or large accelerated filer. Additionally, the SRC revenue test will be added to the public float transition thresholds for accelerated and large accelerated filer such that an issuer’s annual revenues will factor into determining whether an accelerated filer could become a non-accelerated filer, or whether a large accelerated filer could become an accelerated or non-accelerated filer.
The final amendments become effective 30 days after they are published in the Federal Register and will apply to an annual report filing due on or after the effective date. However, even if an annual report is for a fiscal year ending before the effective date, the issuer may apply the new rules to determine its status as a non-accelerated, accelerated, or large accelerated filer. As such, an issuer that determines it is eligible to be a non-accelerated filer under the final amendments will not be subject to the ICFR auditor attestation requirement for its annual report due and submitted after the effective date of the amendments and may comply with the filing deadlines that apply, and other accommodations available, to non-accelerated filers.