What Is a Smaller Reporting Company?
A smaller reporting company is a specific classification established by the Securities and Exchange Commission (SEC) that allows eligible public companies to provide scaled disclosure requirements in their filings. This classification falls under the broader umbrella of Corporate Finance and Securities Regulation, aiming to balance the need for investor information with the compliance burden on smaller entities. Companies designated as smaller reporting companies benefit from reduced burdens in their financial reporting, making it potentially easier for them to access the capital markets.
History and Origin
The concept of scaled disclosure for smaller public entities has evolved over time, reflecting efforts by the SEC to balance regulatory oversight with capital formation incentives for smaller businesses. The category of "smaller reporting company" was formally established by the SEC in 2008, replacing the previous "small business issuer" system. This initial framework aimed to provide regulatory relief for smaller companies by allowing them to present less extensive disclosures under specific regulations.9
A significant expansion of the definition occurred in 2018, when the SEC amended the thresholds for qualifying as a smaller reporting company. These amendments substantially increased the number of companies eligible for reduced disclosure requirements, thereby aiming to further reduce compliance costs and promote capital formation while maintaining appropriate investor protection. The SEC stated that these changes were intended to expand the number of registrants that qualify as smaller reporting companies.8,7
Key Takeaways
- A smaller reporting company is a public entity permitted by the SEC to provide scaled disclosure in its filings.
- The classification aims to reduce compliance costs for smaller businesses.
- Qualification depends primarily on a company's public float or annual revenue.
- Smaller reporting companies face less extensive narrative and financial reporting requirements compared to larger registrants.
- The rules are designed to facilitate access to capital markets for smaller firms.
Formula and Calculation
A company qualifies as a smaller reporting company if it meets specific thresholds related to its public float or annual revenue. Public float is generally defined as the aggregate worldwide market capitalization of a company's voting and non-voting common equity held by non-affiliates.
As of recent amendments, a company can qualify as a smaller reporting company if, as of the last business day of its most recently completed second fiscal quarter, it has either:
- A public float of less than
OR - Annual revenues of less than for its most recently completed fiscal year and either no public float or a public float of less than .6
For companies with no public float (e.g., those without publicly traded common equity), the revenue threshold is the primary determinant. These thresholds are determined annually based on the specific measurement date.5
Interpreting the Smaller Reporting Company Status
Being classified as a smaller reporting company signifies that the entity is subject to a modified set of regulatory obligations designed to alleviate the burden of extensive disclosure requirements typically imposed on larger public company entities. This status does not imply a lack of transparency, but rather a tailored approach to reporting. For instance, a smaller reporting company may provide audited financial statements for two fiscal years instead of the three years typically required of larger companies.4 Understanding this designation is crucial for investors and analysts, as it informs the scope and depth of information available in filings such as annual reports on Form 10-K and quarterly reports on Form 10-Q.
Hypothetical Example
Consider "Alpha Tech Inc.," a newly public software company. As of the last business day of its second fiscal quarter, Alpha Tech has a public float of $200 million. Its annual revenues for the most recently completed fiscal year were $75 million.
Based on the criteria, Alpha Tech Inc. would qualify as a smaller reporting company because its public float of $200 million is less than the $250 million threshold. This allows Alpha Tech to utilize the scaled disclosure provisions in its SEC filings, such as reduced details in executive compensation disclosures and fewer years of financial statement data required under Regulation S-X. This helps Alpha Tech manage its compliance costs as it continues to grow after its initial public offering.
Practical Applications
The smaller reporting company designation has several practical applications across the financial landscape. For companies, it offers significant relief from the complex and costly financial reporting obligations that apply to larger filers. This includes reduced requirements for executive compensation disclosures, simplified management's discussion and analysis (MD&A), and fewer years of audited financial statements.3,2
This scaled approach is particularly beneficial for companies considering an Initial public offering or those navigating their early years as a public entity, allowing them to allocate more resources to growth and operations rather than extensive regulatory compliance. The relief provided is a direct result of rules adopted by the Securities and Exchange Commission under the Exchange Act.1
Limitations and Criticisms
While the smaller reporting company designation provides valuable regulatory relief, it is not without potential limitations or criticisms. One concern sometimes raised is whether the reduced disclosure requirements provide investors with sufficient information to make fully informed decisions. Critics might argue that less comprehensive data, particularly in areas like executive compensation or certain financial footnotes, could potentially hinder thorough analysis by investors.
Additionally, companies approaching or crossing the thresholds for smaller reporting company status face a "cliff effect," where they must abruptly transition to more extensive and costly reporting requirements. This transition can present significant operational and financial challenges. Despite these considerations, the framework aims to strike a balance, acknowledging that overly burdensome regulations can deter smaller companies from going public or impede their growth, ultimately affecting the vibrancy of capital markets.
Smaller Reporting Company vs. Emerging Growth Company
The terms smaller reporting company and emerging growth company are often confused, but they represent distinct classifications under SEC regulations, though there can be overlap. A smaller reporting company is defined by its public float and/or annual revenue, allowing for scaled financial reporting and narrative disclosures under Regulations S-K and S-X. This status offers ongoing relief to qualifying public companies. An emerging growth company (EGC), conversely, is a category created by the Jumpstart Our Business Startups (JOBS) Act of 2012, defined primarily by having total annual gross revenues of less than $1.235 billion in its most recently completed fiscal year. The EGC status provides temporary regulatory relief for up to five years after an Initial public offering, including scaled disclosure, exemptions from certain Sarbanes-Oxley provisions, and confidential submission of registration statements. While an EGC may also qualify as a smaller reporting company, the EGC benefits are generally broader and temporary, designed to ease the transition for new public companies, whereas the smaller reporting company status is continuous for as long as a company meets the size thresholds.
FAQs
What are the main benefits of being a smaller reporting company?
The primary benefits include less extensive disclosure requirements in SEC filings, such as reduced narrative disclosures for executive compensation, streamlined management's discussion and analysis (MD&A), and the ability to provide two years of audited financial statements instead of three.
How often is a company's smaller reporting company status determined?
A company determines its status as a smaller reporting company annually, based on its public float and/or annual revenue as of the last business day of its most recently completed second fiscal quarter.
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 revenue exceeds the established thresholds. Once a company fails to qualify, it generally must transition to standard SEC reporting requirements, though there are specific re-qualification thresholds for regaining the status.
Do smaller reporting companies still need to file all standard SEC forms?
Yes, smaller reporting companies are still required to file the standard SEC forms, such as annual reports on Form 10-K and proxy statements. However, the content within these filings can be "scaled" or reduced according to the specific provisions applicable to smaller reporting companies.