Smaller reporting companies

What Are Smaller Reporting Companies?

Smaller reporting companies (SRCs) are a classification of publicly traded entities defined by the U.S. Securities and Exchange Commission (SEC) under its securities regulation. This designation allows these businesses to comply with scaled disclosure requirements when filing their annual report and quarterly report with the SEC. The primary purpose of the SRC status is to reduce the compliance burden and costs for smaller public companies, encouraging capital formation while still maintaining essential investor protections.³³

The criteria for qualifying as a smaller reporting company generally revolve around a company's public float or annual revenues. Companies that meet these thresholds are afforded certain accommodations in their financial reporting, allowing them to provide less extensive narrative disclosures and fewer years of audited financial statements compared to larger entities.³¹, ³²

History and Origin

The concept of scaled disclosure for smaller companies has evolved over time, reflecting the Securities and Exchange Commission's efforts to balance investor protection with the economic realities faced by small business entities seeking to access public capital. The specific "smaller reporting company" designation was formally established by the SEC in 2008, replacing earlier categories like "small business issuers."²⁹, ³⁰ This initiative aimed to provide a more tailored regulatory framework for smaller entities, recognizing that a one-size-fits-all approach to public company regulation could be overly burdensome.²⁸

A significant expansion of the smaller reporting company definition occurred in 2018, allowing a greater number of companies to qualify for the scaled disclosure requirements.²⁷ The SEC revised the thresholds, significantly increasing the public float and revenue limits. For instance, the public float threshold was raised from less than $75 million to less than $250 million, or alternatively, less than $100 million in annual revenues with a public float of less than $700 million.²⁶ This amendment was widely anticipated to provide regulatory relief to approximately 1,000 additional companies, making public markets more attractive and potentially fostering greater capital markets activity for smaller firms.²⁴, ²⁵ SEC Chair Jay Clayton emphasized that this expansion would provide "Main Street investors" with more options by better aligning the regulatory structure with the size and scope of smaller companies.²³

Key Takeaways

• Smaller reporting companies (SRCs) are a class of public companies with scaled SEC disclosure requirements.
• Eligibility is primarily based on public float and/or annual revenues.
• The SRC designation aims to reduce the compliance burden and costs for smaller public entities.
• SRCs are permitted to provide less extensive narrative and financial disclosures in their SEC filings.
• The definition of SRCs was significantly expanded in 2018 to include more companies.

Interpreting Smaller Reporting Companies

The classification of a business as a smaller reporting company has direct implications for its public reporting obligations and, consequently, how investors might evaluate it. For an investor, understanding that a company is an SRC means that the financial statements and narrative sections of its public filings, such as the Form 10-K and 10-Q, may contain less detail than those of larger, non-SRC public company. For example, SRCs are generally required to provide only two years of audited financial statements, as opposed to three for larger reporting companies.²² They also have relaxed requirements regarding executive compensation disclosure, such as needing to name fewer executive officers and providing fewer years of summary compensation.²¹ This streamlined reporting is intended to reduce administrative costs for the company, but it also means that analysts and investors might need to conduct more independent research to gain a comprehensive understanding of the firm's operations and financial health.

Hypothetical Example

Imagine "GreenTech Innovations Inc." is a company considering an initial public offering (IPO). Before going public, GreenTech's management team evaluates the company's financials to determine its potential reporting status under SEC rules.

As of the last business day of its most recently completed second fiscal quarter, GreenTech Innovations has a public float of $200 million. Its annual revenues for the most recently completed fiscal year were $75 million.

Based on these figures, GreenTech Innovations Inc. would qualify as a smaller reporting company. This is because its public float of $200 million is less than the $250 million threshold for SRC status. Consequently, GreenTech would be eligible to use the scaled disclosure requirements in its registration statement (e.g., Form S-1) and subsequent periodic reports filed with the SEC. This scaled approach could significantly reduce the legal and accounting costs associated with becoming and remaining a public company, potentially making the IPO process more feasible for GreenTech. The company's underwriting process might also be streamlined due to the reduced disclosure burden.

Practical Applications

The smaller reporting company designation finds its primary application in the realm of SEC filings and corporate governance for publicly traded entities. This status directly affects a company's regulatory burden, influencing several key areas:

• Public Offerings and Registration: When a company first registers its securities with the SEC, such as through an IPO, its SRC status dictates the specific disclosure forms and the level of detail required in the prospectus. This can make the process of going public more accessible for smaller entities.
• Ongoing Periodic Reporting: SRCs benefit from scaled disclosures in their ongoing annual reports (Form 10-K) and quarterly reports (Form 10-Q). This includes less extensive narrative descriptions, particularly concerning executive compensation and related-party transactions, and the requirement for fewer years of financial statements.¹⁹, ²⁰
• Compliance Costs: By streamlining reporting, the SRC status helps reduce the legal, accounting, and auditing costs associated with being a public company. This reduction in compliance expenses is a significant benefit, freeing up resources that can be reinvested in growth and operations.¹⁸
• Investor Relations: While providing less detailed information, SRCs still provide sufficient data for investors to make informed decisions, albeit with the understanding that the level of granularity may differ from larger filers. Companies often communicate their SRC status transparently to stakeholders. The SEC itself provides resources explaining the scaled disclosure requirements for these entities.¹⁷

Limitations and Criticisms

While the smaller reporting company status offers significant benefits by reducing the regulatory burden on smaller public entities, it is not without its limitations and criticisms. One primary concern stems from the reduced disclosure requirements themselves. Critics argue that less detailed information, particularly in areas like executive compensation and financial statement footnotes, could potentially limit the transparency available to investors. This reduced transparency might make it more challenging for investors to conduct thorough due diligence or for financial analysts to perform in-depth evaluations of the company's true financial health and operational risks.

Another point of contention has been the interaction of SRC status with other regulatory classifications. For instance, a company can qualify as a smaller reporting company while simultaneously being classified as an "accelerated filer" (a category requiring faster filing deadlines and an auditor's attestation of internal controls over financial reporting under Sarbanes-Oxley Section 404(b)). This overlap means that some SRCs might still face certain stringent compliance obligations that seemingly contradict the spirit of reduced burden.¹⁶ While the SEC has acknowledged these concerns and continues to review regulatory frameworks to ensure proportionality, the potential for complex compliance situations remains for some firms.¹⁵ For some small business entities, the benefits of scaled disclosure might be offset by other regulatory requirements, necessitating careful strategic planning for compliance.

Smaller Reporting Companies vs. Non-accelerated Filers

Smaller reporting companies (Smaller reporting companies) and non-accelerated filers are both classifications used by the SEC that offer certain scaled regulatory relief, but their definitions and the specific benefits they confer differ.

The key distinction lies in what each classification primarily impacts: SRC status eases the content of required disclosures, while non-accelerated filer status primarily impacts the timing of filings and exemption from the Sarbanes-Oxley Act's internal control auditor attestation. Historically, qualifying as an SRC automatically made a company a non-accelerated filer, but the 2018 SEC rule changes decoupled these definitions, meaning an SRC with a higher public float could still be an accelerated filer.⁷, ⁸ This distinction is important for public company compliance teams to understand.

FAQs

How does a company qualify as a Smaller Reporting Company?

A company generally qualifies as a smaller reporting company if, as of the last business day of its most recently completed second fiscal quarter, it has a public float of less than $250 million. Alternatively, if it cannot calculate its public float or has no public common equity outstanding, it may qualify if it has less than $100 million in annual revenues and a public float of less than $700 million.⁶

What are the main benefits of being a Smaller Reporting Company?

The primary benefits include scaled disclosure requirements for SEC filings, which translates to reduced legal, accounting, and compliance costs. For example, SRCs need to provide fewer years of audited financial statements and less extensive details regarding executive compensation compared to larger public companies.⁴, ⁵

Can a company lose its Smaller Reporting Company status?

Yes, a company can lose its smaller reporting company status if its public float or annual revenues exceed the specified thresholds on a subsequent annual determination date. Once lost, a company must meet lower "subsequent qualification" thresholds to regain the status, typically set at 80% of the initial qualification thresholds.², ³

Do Smaller Reporting Companies still have to comply with other SEC rules?

Yes, smaller reporting companies must still comply with all other applicable SEC rules and federal securities regulation. The SRC designation provides scaled disclosure relief, but does not exempt them from fundamental obligations such as anti-fraud provisions, proxy rules, or the requirement to file periodic reports (e.g., annual report and quarterly report).¹

Are Smaller Reporting Companies considered "small cap" companies?

While many smaller reporting companies are indeed "small cap" companies based on their market capitalization or public float, the terms are not interchangeable. "Small cap" is a general industry term for companies with a smaller market valuation, whereas "smaller reporting company" is a specific regulatory classification by the SEC with precise eligibility criteria that determine reporting obligations. A company can be small cap without being an SRC, or vice-versa, depending on its specific financials and public float.