On the heels of congressional criticism that the Securities and Exchange Commission isn’t being friendly enough to small businesses, the regulator has proposed rule changes that would let an estimated 1,500 more companies take advantage of lighter disclosure rules first created for the smallest public companies.
The SEC published the proposed changes to its disclosure rules last week along with another proposal that would exempt private companies from registering their compensatory employee stock options with the commission. The SEC is collecting public comments on both proposals through mid-September.
The SEC has taken heat lately for not giving smaller companies another extension for complying with the internal-control provision of the Sarbanes-Oxley Act. Unless the SEC changes its mind, those companies with a public float of $75 million or less — known as “non-accelerated filers” — will start providing the management assessment of internal controls in 10-Ks filed on or after December 15.
If it’s approved, the new SEC proposal would eliminate the use of the term “non-accelerated filer” in much of the SEC’s lexicon and instead use “small reporting companies” for all companies below the $75 million threshold. The change would extend the right of more smaller businesses to use the rules previously designated for those companies with revenue below $25 million.
For example, the 1,500 companies the rules would cover could limit their filings with the SEC to only the latest fiscal year’s audited balance sheet and the audited statements of income, cash flow, and changes in stockholders’ equity for the latest two fiscal years. Currently, they must file the balance sheet for the past two fiscal years and the other statements for the latest three fiscal years.
Further, small companies could choose by item whether to use disclosure requirements meant for the smallest companies over those that are designed for their larger brethren. In effect, this “a la carte” allowance — as it’s called by the SEC — lets smaller companies switch between fulfilling a high level of disclosures on some items and a lower level for others. “While establishing a baseline of required disclosure, we want to encourage smaller reporting companies to determine for themselves the proper balance and mix of disclosure for the investors,” the SEC wrote in its proposal.
To add this flexibility to their financial reporting, smaller companies need to check a box on the cover page of each regulatory filing to identify themselves as having a public float below $75 million. Giving companies a choice in disclosure requirements takes a principles-based approach, the SEC claims, but it could “unduly stigmatize” smaller companies, the staff wrote in its proposal. However, the identification requirement will ensure that investors understand they may receive different information than they would from a larger company, according to the SEC.
To be sure, this allowance should not be viewed as giving “lesser disclosure” to investors, said Kevin O’Neill, a member of the SEC’s corporation finance division staff, during a May SEC hearing where the commissioners voted unanimously to propose these changes. Rather, the SEC is simply “scaling our requirements to the characteristics of the smaller companies, to assure that the burdens of regulations are commensurate with the benefits.”
Among the less technical changes to the proposal is an allowance for the nearly 5,000 smaller companies registered with the SEC to limit their disclosures of executive compensation to only the top three highest paid executives. Larger companies must list the top five, including the CEO and CFO.
In announcing the proposal’s release for public comment, the commissioners praised the changes as loosening smaller companies’ restrictions on raising capital and providing relief in reporting requirements, partly based on recommendations from the SEC Advisory Committee on Smaller Public Companies’ report released last year. “Today’s proposals go far towards promoting efficiency, competition, and capital without compromising investor protection,” said commissioner Paul Atkins.
E. David Coolidge, vice chairman of investment firm William Blair & Co. and a member of the small-business advisory group, acknowledges that the proposal would make “life a bit easier and more efficient for smaller companies” but believes the SEC should adopt more of his group’s suggestions. In particular, the group’s report asked that the smallest of public companies be exempt from Sarbox while other small companies should not have to provide an auditor’s attestation report. Doing so “would have no material, adverse effect on the markets as a whole,” he told CFO.com.
While the SEC has continually turned down requests to extend the deadline for small companies’ compliance with Sarbox — never mind full exemption — the regulator is proposing another one of the committee’s suggestions. Also released last week, the change would exempt some compensatory employee stock-option plans from registration. The exemptions would apply for private companies that are not registered with the SEC.
Under current rules, companies with 500 or more employees, directors, and consultants who receive compensatory stock options have to register if they have more than $10 million in assets — even if they are a private company. To meet repeated requests by private issuers to update this rule, since 1992 the SEC has been sending no-action letters to those companies that met certain conditions and did not register the securities.