Defining Issues. SEC Proposes Raising Limit to Qualify as a Smaller Reporting Company. July 2016, No Key Facts.

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1 Defining Issues July 2016, No Contents Smaller Reporting Companies Today and How the Definition Would Change... 2 Smaller Reporting Companies That Also Are Accelerated Filers... 3 Transition... 3 Appendix of Reduced Disclosures. 4 SEC Proposes Raising Limit to Qualify as a Smaller Reporting Company The SEC proposed rules that would make it easier for smaller companies to qualify for reduced reporting requirements that currently are only available to companies with a public float below $75 million. 1 Key Facts The proposed rules would allow a public company with less than $250 million of public float to qualify as a smaller reporting company. If a company does not have public float, it would qualify if its revenue is less than $100 million. If a company loses its smaller reporting company status by exceeding these limits, it would regain its status if its public float falls below $100 million or, if it does not have public float, if its revenues fall below $80 million. The SEC is not proposing to increase the $75 million threshold in the accelerated filer definition. Key Impacts More public companies would qualify for reduced reporting under Regulations S-X and S-K, which would allow them to: Present two (instead of three) years of annual statements of income, cash flows, and changes in stockholders equity in Form 10-K; Reduce or eliminate historical and pro forma financial information for acquired businesses, equity investees, and some transactions; and Significantly reduce disclosures about executive compensation. More public companies would become both smaller reporting companies and accelerated filers, which subjects them to shorter filing deadlines and requires them to obtain an audit of their internal controls over financial reporting. 1 SEC Release No , Amendments to Smaller Reporting Company Definition, June 27, 2016, available at Public float is the market value of the company s outstanding common equity held by non-affiliates.

2 The SEC s proposed rule responds to requests from Congress, small companies, and other constituents for fewer disclosure requirements for a larger group of public companies. Smaller Reporting Companies Today and How the Definition Would Change A smaller reporting company is an issuer that is not an investment company (including a business development company), an asset-backed issuer, or a majority-owned subsidiary of a parent company and has: Public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter; or No public float (e.g., a company with only public debt outstanding), with annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available. Smaller reporting companies may comply selectively with reduced disclosures available to them, which are summarized in the Appendix. The proposal would raise the public float threshold to $250 million and raise the revenue threshold to $100 million, if there is no public float. As is the case today, a company filing its initial registration statement calculates its public float as of a date within 30 days of filing its registration statement. The following table compares the proposed changes with the current smaller reporting company definition. Registrant Category Reporting Registrant Registrant Filing Initial Registration Statement Registrant with Zero Public Float Non-Smaller Reporting Company That Seeks to Qualify as a Smaller Reporting Company Based on Public Float Non-Smaller Reporting Company with Zero Public Float That Seeks to Qualify as a Smaller Reporting Company Current Definition Less than $75 million of public float at end of second fiscal quarter Less than $75 million of public float within 30 days of filing Less than $50 million of revenues in most recent fiscal year Less than $50 million of public float at end of second fiscal quarter Less than $40 million of revenues in most recent fiscal year Proposed Definition Less than $250 million of public float at end of second fiscal quarter Less than $250 million of public float within 30 days of filing Less than $100 million of revenues in most recent fiscal year Less than $200 million of public float at end of second fiscal quarter Less than $80 million of revenues in most recent fiscal year 2

3 Comments on the proposed rules are due August 30. Smaller Reporting Companies That Also Are Accelerated Filers A company can qualify as a smaller reporting company and also be an accelerated filer. For example, under the proposal, a company with public float of $150 million would be a smaller reporting company but it also would be an accelerated filer. Accelerated filers that are smaller reporting companies may take advantage of the reduced reporting requirements under Regulations S-K and S-X, but they have shorter deadlines for filing annual and interim reports and are required to have an audit of internal control over financial reporting. A public company is an accelerated filer when it first meets the following conditions at its fiscal year-end: The aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of the registrant (public float) is $75 million or more but less than $700 million, as of the last business day of the most recently completed second fiscal quarter; The registrant has been subject to the requirements of Section 13(a) or 15(d) of the 1934 Act for a period of at least 12 calendar months; The registrant has filed at least one annual report pursuant to Section 13(a) or 15(d) of the 1934 Act; and The registrant is not eligible to use the requirements for smaller reporting companies for its annual and quarterly reports. Transition The proposal does not include a date for implementation, or specific transition provisions. Current rules permit an existing reporting company that newly qualifies as a smaller reporting company to provide reduced disclosures beginning with the report covering the period that includes the determination date (i.e., Form 10-Q for the quarter ended June 30 for a calendar-year company). Contact us: This is a publication of KPMG s Department of Professional Practice Contributing author: Melanie F. Dolan Earlier editions are available at: kpmg.com/us/frn Legal The descriptive and summary statements in this newsletter are not intended to be a substitute for the potential requirements of any proposed rules or any other potential or applicable requirements of the accounting literature or SEC regulations. Companies applying U.S. GAAP or filing with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and consult their accounting and legal advisors. Defining Issues is a registered trademark of KPMG LLP. 3

4 Appendix of Reduced Disclosures The following table summarizes the reduced disclosures under Regulations S-K and S-X for smaller reporting companies. Regulation S-K Item 101 Description of Business 201 Market Price of and Dividends on the Registrant s Common Equity and Related Stockholder Matters 301 Selected Financial Data 302 Supplementary Financial Information 303 Management s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 305 Quantitative and Qualitative Disclosures about Market Risk Reduced Disclosures May satisfy disclosure obligations by describing the development of its business during the last three years rather than five years Business development description requirements are less detailed than disclosure requirements for non-smaller reporting companies Stock performance graph not required Not required Not required Two-year MD&A comparison rather than three-year comparison Two-year discussion of impact of inflation and changes in prices rather than three years Tabular disclosure of contractual obligations not required Not required 4

5 Regulation S-K Item 402 Executive Compensation 404 Transaction with Related Persons, Promoters, and Certain Control Persons 407 Corporate Governance 503 Prospectus Summary, Risk Factors, and Ratio of Earnings to Fixed Charges Reduced Disclosures Three named executive officers rather than five Two years of summary compensation table information rather than three Not required: Compensation discussion and analysis Grants of plan-based awards table Option exercises and stock vested table Pension benefits table Nonqualified deferred compensation table Disclosure of compensation policies and practices related to risk management Pay ratio disclosure Description of policies/procedures for the review, approval, or ratification of related party transactions not required Audit committee financial expert disclosure not required in first year Compensation committee interlocks and insider participation disclosure not required Compensation committee report not required No ratio of earnings to fixed charges disclosure required No risk factors required in Exchange Act filings 601 Exhibits Statements about computation of ratios not required 5

6 Regulation S-X Rule 8-02 Annual Financial Statements 8-03 Interim Financial Statements 8-04 Financial Statements of Businesses Acquired or to Be Acquired 8-05 Pro forma Financial Information 8-06 Real Estate Operations Acquired or to Be Acquired 8-08 Age of Financial Statements Reduced Disclosures Two years of income statements rather than three years Two years of cash flow statements rather than three years Two years of changes in stockholders equity statements rather than three years Permits certain historical financial data in lieu of separate historical financial statements of equity investees Maximum of two years of acquiree financial statements rather than three years Fewer circumstances under which pro forma financial statements are required Maximum of two years of financial statements for acquisition of properties from related parties rather than three years Less stringent age of financial statements requirements 6