What Is a Small Reporting Company?
A small reporting company is a classification designated by the U.S. Securities and Exchange Commission (SEC) for publicly traded companies that meet specific thresholds regarding their public float or annual revenue. This designation falls under the broader category of Securities Regulation and allows these entities to comply with scaled-back disclosure requirements, aiming to reduce their regulatory burden and compliance costs. The goal is to make it easier for smaller businesses to access public capital markets without compromising essential investor protections49, 50.
History and Origin
The concept of providing regulatory relief for smaller public companies has evolved over time. The SEC initially created the "small business issuer" category in 1992, allowing for simplified disclosures. This was later replaced by the "smaller reporting company" category in 2008, which expanded the pool of eligible companies and streamlined the disclosure framework under Regulations S-K and S-X47, 48.
A significant development occurred with the passage of the Jumpstart Our Business Startups (JOBS) Act in 2012. While the JOBS Act primarily focused on creating the "Emerging Growth Company" (EGC) classification, it underscored the legislative intent to foster capital formation for smaller businesses by reducing regulatory hurdles45, 46. In line with this, the SEC further amended the definition of a small reporting company in June 2018, which became effective in September 2018. These amendments significantly increased the financial thresholds, making an estimated 966 additional companies eligible for this status and its corresponding scaled disclosure benefits42, 43, 44. This expansion aimed to further reduce the compliance costs for a broader range of smaller registrants40, 41.
Key Takeaways
- A small reporting company is a classification by the SEC that allows for scaled disclosure requirements.
- Eligibility is based on public float or annual revenues.
- The primary benefit is reduced compliance costs and a streamlined reporting process for financial information and narrative disclosures.
- This classification aims to encourage smaller companies to go public and raise capital.
Interpreting the Small Reporting Company Definition
The small reporting company definition is primarily a regulatory classification used by the SEC to determine the extent of disclosure required from a Public Company. For investors, knowing a company's small reporting company status signals that its Financial Statements and other reports may contain less detailed information compared to larger filers.
Specifically, the current definition states that an issuer qualifies as a small reporting company if, as of the last business day of its most recently completed second fiscal quarter, it meets one of the following criteria:
- It has a Market Capitalization (public float) of less than $250 million.37, 38, 39
- It has annual Revenue of less than $100 million in its most recently completed fiscal year, and either no public float or a public float of less than $700 million35, 36.
Once a company exceeds these thresholds, it must transition to full reporting requirements. Conversely, a company that no longer meets the thresholds may regain small reporting company status if its public float or revenue falls below specific lower thresholds33, 34.
Hypothetical Example
Imagine "GreenTech Innovations Inc." is considering an Initial Public Offering (IPO). As part of their preparation, they calculate their potential public float and projected annual revenues.
Scenario 1: GreenTech estimates its public float will be $150 million. Since this is less than $250 million, GreenTech Innovations Inc. would qualify as a small reporting company. This means they can take advantage of the scaled disclosure rules when filing their registration statement and subsequent periodic reports, potentially saving on legal and accounting fees.
Scenario 2: GreenTech has no public float yet but projects annual revenues of $75 million for its most recently completed fiscal year. Because its revenues are less than $100 million and it has no public float, GreenTech would also qualify as a small reporting company.
Scenario 3: After being public for several years, GreenTech's public float grows to $300 million, and its revenues reach $150 million. In this situation, GreenTech would no longer qualify as a small reporting company and would be subject to the full Disclosure Requirements of the SEC.
Practical Applications
The small reporting company designation has several practical applications within corporate finance and securities regulation:
- Reduced Disclosure: Small reporting companies are permitted to provide scaled disclosures under Regulation S-K and Article 8 of Regulation S-X. This includes less extensive narrative disclosure, particularly concerning executive compensation, and the requirement to provide Auditor-attested financial statements for two fiscal years instead of three30, 31, 32.
- Compliance Cost Savings: The scaled reporting requirements significantly reduce the costs associated with preparing and filing Form 10-K annual reports and Form 10-Q quarterly reports. This financial relief can be critical for smaller businesses with limited resources, helping them allocate capital more effectively towards growth and operations rather than regulatory compliance28, 29.
- SOX Exemption: Many small reporting companies are exempt from the requirement for an independent auditor's attestation of management's assessment of Internal Controls over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 200226, 27. This exemption can lead to substantial cost savings.
- Capital Formation: By lowering the barrier to entry and ongoing compliance costs for public markets, the small reporting company framework encourages more small businesses to go public and access capital for expansion, innovation, and job creation. This aligns with the broader goals of legislation like the Securities Act of 1933 which governs initial offerings. The SEC itself provides guidance on how smaller reporting companies can navigate these regulations and benefit from the available accommodations24, 25.
Limitations and Criticisms
While the small reporting company framework offers significant benefits, it also has limitations and has faced criticisms:
- Less Detailed Information for Investors: One primary criticism is that reduced disclosure means less information is publicly available to investors. This could potentially make it more challenging for investors to conduct thorough due diligence and make fully informed decisions compared to larger, fully reporting companies23. While the intent is to balance investor protection with regulatory burden, some argue that the scaled disclosures might not always provide a complete picture of a company's financial health or risks.
- Complexity of Qualification: The rules for qualifying as a small reporting company, especially when considering both public float and revenue thresholds, can be complex. Determining when a company transitions in or out of this status, particularly in dynamic market conditions, requires careful calculation and ongoing monitoring21, 22.
- Auditor Attestation Exemption Debate: The exemption from Section 404(b) of Sarbanes-Oxley for many small reporting companies (specifically those with less than $100 million in annual revenue) has been a point of debate. Proponents argue it saves costs, but critics contend that waiving this auditor attestation on internal controls might compromise the reliability of GAAP-based financial reporting and increase the risk of financial misstatements19, 20. SEC Commissioner Mark Uyeda has discussed these trade-offs, noting that while the exemption provides relief, companies still need strong internal controls18.
Small Reporting Company vs. Non-Accelerated Filer
The terms "small reporting company" and "Non-accelerated filer" are often used interchangeably or confused, but they represent distinct classifications by the SEC with different implications.
A small reporting company is defined by specific thresholds related to its public float and/or annual revenues, and this designation dictates the extent of disclosures required under Regulation S-K and S-X17. The primary benefit is access to scaled-back disclosure requirements, meaning less detailed information needs to be provided in SEC filings.
A non-accelerated filer, on the other hand, is defined solely by its public float. Historically, a company with a public float of less than $75 million was considered a non-accelerated filer16. This classification primarily affects the timing of filing annual and quarterly reports with the SEC14, 15. Non-accelerated filers have more time to submit their Annual Report on Form 10-K and Quarterly Report on Form 10-Q compared to accelerated filers or large accelerated filers.
While there can be overlap (a company can be both a small reporting company and a non-accelerated filer), qualifying as a small reporting company no longer automatically makes a registrant a non-accelerated filer, as was once the case. Companies with a public float between $75 million and $250 million, for example, could be a small reporting company but also an Accelerated Filer, subjecting them to shorter filing deadlines and auditor attestation requirements for internal controls over financial reporting12, 13. The SEC amended the definitions in 2018 and 2020 to refine these distinctions, particularly to ensure that low-revenue small reporting companies would not be subject to accelerated filing requirements or the Section 404(b) auditor attestation10, 11.
FAQs
What are the main benefits of being a small reporting company?
The main benefits include reduced disclosure requirements, lower compliance costs related to SEC filings, and, for many, an exemption from the auditor attestation on internal controls under Sarbanes-Oxley Act Section 404(b)8, 9. These accommodations aim to make it less burdensome for smaller businesses to operate as Public Company.
How often does a company's small reporting company status change?
Companies are required to assess their small reporting company status annually, typically as of the last business day of their most recently completed second fiscal quarter7. This ensures their regulatory obligations align with their current size.
Are all small companies eligible to be a small reporting company?
Not necessarily. The classification is specifically for public companies that meet the SEC's defined thresholds for public float or annual revenues. Private companies or those not subject to SEC reporting requirements would not be classified as a small reporting company, though they may operate on a small scale6.
Can a small reporting company still be an attractive investment?
Yes, small reporting companies can be attractive investments, especially for investors seeking growth opportunities. While they provide scaled disclosures, they are still subject to significant Disclosure Requirements and regulatory oversight by the SEC, which helps ensure transparency and investor protection.
Where can I find the official definition of a small reporting company?
The official definition of a "smaller reporting company" is set forth in Rule 12b-2 under the Securities Exchange Act of 1934 and Item 10(f) of Regulation S-K3, 4, 5. The SEC also provides compliance guides and interpretive guidance on its website1, 2.