WTP Client Alert March 2008 Intrductin and Overview SEC ADOPTS SCALED DISCLOSURE REQUIREMENTS FOR SMALLER REPORTING COMPANIES With the adptin f SEC Release N. 33-8876 1, the Securities and Exchange Cmmissin, r SEC, recently amended its disclsure and reprting requirements fr smaller public cmpanies. Effective February 4, 2008, the new rules significantly expand the number f cmpanies that are able t take advantage f reduced disclsure requirements and: replace the small business issuer categry f cmpanies with the new smaller reprting cmpanies categry; expand the cmpanies that can take advantage f the scaled disclsure requirements t cmpanies with public cmmn equity flat f less than $75 millin, r, if a cmpany is unable t calculate public equity flat, less than $50 millin in revenue in the last fiscal year; 2 permit all freign cmpanies t qualify as smaller reprting cmpanies prvided they therwise meet the requirements f the new rules; phase ut the Regulatin S-B scaled disclsure requirements and the current S-B frms and replace them with reduced and streamlined reprting requirements fr small business issuers relcated t Regulatin S-K; 1 Release 34-56994, Smaller Reprting Cmpany Regulatry Relief and Simplificatin, 73 Fed. Reg. 3 (Jan. 4, 2008). 2 Previusly, small business issuers were defined as cmpanies with bth less than $25 millin in public cmmn equity flat and less than $25 millin in annual revenues.
mve financial statement requirements frm Item 310 f Regulatin S-B t a new Article 8 f Regulatin S-X; and permit smaller reprting cmpanies t chse scaled disclsure requirements n an a la carte basis. Smaller Reprting Cmpanies The new rules establish a categry f reprting cmpanies called smaller reprting cmpanies, which effectively cmbines the categries f nn-accelerated filers and smaller business issuers. A cmpany qualifies as a smaller reprting cmpany if it has less than $75 millin in public equity flat (i.e., the market value f cmmn equity held by the public) r, if it is unable t calculate its public equity flat, 3 it has revenues f less than $50 millin in the last fiscal year. Additinally, freign cmpanies can qualify as smaller reprting cmpanies if they meet the freging criteria, file n dmestic cmpany frms and submit financial statements in accrdance with U.S. GAAP. A cmpany s public equity flat will be calculated as f the last business day f its mst recently cmpleted secnd fiscal quarter. If a smaller reprting cmpany determines that it is n lnger eligible fr smaller reprting cmpany status, it will nt be required t satisfy the larger cmpany disclsure requirements until the first quarterly reprt f the fiscal year after the year in which it determines that it is n lnger eligible fr smaller reprting cmpany status. Cnversely, if a cmpany that had been subject t the larger cmpany reprting requirements determines that it has becme eligible fr smaller reprting cmpany status, it will be able t use the scaled disclsure requirements fr the quarter in which it determines such eligibility. Once an issuer determines that it des nt qualify fr smaller reprting cmpany status, it remains unqualified, and thus subject t larger cmpany reprting requirements, until it determines that
its public equity flat was less than $50 millin as f the last business day f its mst recently cmpleted secnd fiscal quarter. A cmpany withut calculable public equity flat will qualify as a smaller reprting cmpany until its revenues exceed $50 millin. Once an issuer fails t qualify under this revenue test, it will nt becme eligible fr smaller reprting cmpany status again until its annual revenues are less than $40 millin. Phase-ut and Relcatin f Disclsure Requirements The amendments mve 12 nn-financial Regulatin S-B disclsure requirements t Regulatin S-K and mve the financial statement requirements f Item 310 f Regulatin S-B t a new Article 8 f Regulatin S-X. Regulatin S-B previusly cntained 12 nn-financial scaled disclsure requirements. 4 The amendment mves these disclsure requirements t new paragraphs in Regulatin S-K that specify the disclsure requirements fr smaller reprting cmpanies where these differ frm the standard Regulatin S-K disclsures. By cnslidating these disclsure requirements, the SEC hpes t eliminate redundancies and make the disclsure system easier t use. The amendments als eliminate the current frms used fr smaller cmpany reprting. Prir t the amendments, small business issuers used frms 10-SB, 10-KSB and 10-QSB. After the amendments, smaller reprting cmpanies will file frms 10, 10-K and 10-Q. As is discussed in mre detail belw, smaller reprting cmpanies will have the ptin t chse, n an a la carte basis, whether t cmply with either the Regulatin S-K 3 A cmpany may be unable t calculate its public equity flat if it has n cmmn equity utstanding r there is n readily determinable market price fr its utstanding cmmn equity. 4 The 12 scaled item requirements are: (1) Descriptin f Business (Item 101); (2) Market Price f and Dividends n Registrant's Cmmn Equity and Related Stckhlder Matters (Item 201); (3) Selected Financial Data (Item 301); (4) Supplementary Financial Infrmatin (Item 302); (5) Management's Discussin and Analysis f Financial Cnditin and Results f Operatins (Item 303); (6) Quantitative and Qualitative Disclsures abut Market Risk (Item 305); (7) Executive Cmpensatin (Item 402); (8) Transactins with Related Persns, Prmters and Certain Cntrl Persns (Item 404); (9) Crprate Gvernance (Item 407); (10) Prspectus Summary, Risk Factrs, and Rati f Earnings t Fixed Charges (Item 503); (11) Use f Prceeds (Item 504); and (12) Exhibits (Item 601).
disclsure requirements fr smaller reprting cmpanies r the Regulatin S-K reprting requirements fr larger cmpanies. The amendments add a new Article 8 t Regulatin S-X, which sets frth the financial statement reprting requirements fr smaller public cmpanies that, prir t the amendments, were prvided in Item 310 f Regulatin S-B. The financial statement reprting requirements nw cntained in Article 8 f Regulatin S-X require smaller reprting cmpanies t disclse tw years f audited balance sheet data as ppsed t ne year, as was previusly required by Item 310 f Regulatin S-B. Filing as Smaller Reprting Cmpany Once a cmpany determines that it qualifies fr smaller reprting cmpany status, it will be required t check the new bx fr smaller reprting cmpanies n a registratin statement r peridic reprt (e.g., Frm 10-K and 10-Q) whether r nt it chses t use the scaled disclsure standards. Electing Scaled Disclsure Standards n an A La Carte Basis Under the new rules, smaller reprting cmpanies can chse t cmply with either the scaled disclsure requirements available t smaller reprting cmpanies r the larger cmpany disclsure requirements in Regulatin S-K n an item-by-item basis. Ntwithstanding the flexibility permitted by the a la carte apprach, smaller reprting cmpanies must cmply with the disclsure mandates f Securities Act Rule 408 and Exchange Act Rule 12b-20, which require registrants t disclse all material facts that are necessary t make the statements included in a registratin statement r reprt nt misleading. The requirements f these rules may require disclsures in excess f the line item requirements. In additin, in situatins where there is an applicable scaled disclsure standard that is mre rigrus than the larger reprting cmpany equivalent, a smaller reprting cmpany is required
t cmply with the mre rigrus scaled disclsure requirement. Currently, the nly example where there may be a mre rigrus standard fr smaller reprting cmpanies is under Item 404 f Regulatin S-K. Transitining t the New Rules The new rules utlined in this summary became effective n February 4, 2008. A cmpany chsing t use these new rules may d s when filing its next peridic reprt fllwing the effective date. Cmpanies that qualified as small business issuers prir t the amendments have the ptin t file their next annual reprt fr fiscal years ending n r after December 15, 2007 n either Frm 10- KSB, using Regulatin S-B disclsure requirements, r Frm 10-K, using the new scaled disclsure requirements. A small business issuer may als cntinue t use the S-B frms when filing peridic reprts until its next annual reprt is filed. After a cmpany files its next annual reprt, subsequent peridic reprts must be filed n nn-s-b frms.