Key Takeaways

On May 19, the U.S. Securities and Exchange Commission (SEC) announced two proposals that serve as the largest potential change in more than two decades to expand disclosure accommodations and streamline filer reporting categories and the public capital markets registered offering framework.
Per the proposal on filer status changes, public filers would be bifurcated into Large Accelerated Filers (LAFs) and Non-Accelerated Filers (NAFs).
The public float threshold for LAFs would be increased from $700 million to $2 billion and be measured over two years, as of the end of the second fiscal quarter of each year.
The majority of public filers would be reclassified as NAFs and would gain access to accommodations previously reserved for Emerging Growth Companies (EGCs), including streamlined and reduced financial statement preparation and executive compensation disclosure as well as exemptions from auditor attestations to internal control over financial reporting (ICFR) and shareholder advisory votes.
Per the proposal on registered offering reform, many more issuers would be eligible to file shelf and short-form registration statements with the goal of providing greater access to the public capital markets.
The proposed changes would replace the current well-known seasoned issuer (WKSI) status for domestic issuers and instead provide for two new categories, Eligible Listed Issuers (ELI) and Seasoned Eligible Listed Issuers (SELI), with tiered benefits tied to each status.
If the proposed changes are adopted, the preemption of state securities law would apply to all registered offerings, not solely those registered offerings for securities that are listed or approved for listing on a national securities exchange.

Overview

The SEC announced on May 19 two sets of proposals that would serve as the largest reform in more than two decades of the filer status system and the registered offering framework. In one proposal, the SEC seeks to streamline filer statuses for reporting companies by bifurcating filers into two principal categories: LAF and NAF. The proposed rules would consolidate the current multitiered system, effectively eliminating Accelerated Filer (AF) and Smaller Reporting Company (SRC) categories and extending certain existing SRC and EGC accommodations and scaled disclosures to all NAFs. Reporting companies that qualify as LAFs under the new thresholds would continue to comply with non-scaled disclosure, but all other filers would have their reporting obligations pared back considerably. The SEC further proposed to extend deadlines for filing periodic reports for the smallest NAFs, creating a new subcategory of “small NAFs.” In the other proposal, the SEC would amend a package of rules to allow for further access by issuers to the shelf registration and short-form registration statements on Form S-3, allow for further use of incorporation by reference on Form S-1 and replace the WKSI definition that has afforded qualifying companies access to streamlined offering processes.

Large Accelerated Filer Public Float Updates

Under the existing system, registrants become LAFs once they meet several criteria, including having a public float of at least $700 million and qualifying above the revenue-based test for SRCs. Under the proposed reforms, the SEC would raise the public float threshold from $700 million to $2 billion and remove the other criteria, except to require that the company has been a reporting company for at least the preceding 60 consecutive months (which would be an increase from the current requirement of 12 months). The SEC explained that this target for public float was proposed in order to capture an approximate percentage of total market float comparable to the figure used when the SEC first adopted LAF filer status in 2005. The percentage of public companies subject to LAF status would be reduced from 35.4% to approximately 20%, and total public float subject to LAF status would be pared back from 98.8% to 93.5%, which is closer to the 95% target espoused by the SEC when the LAF designation was originally adopted.

The SEC has further proposed revising the public float calculation to provide a more stable measurement that would be unaffected by short bursts of price volatility. Rather than using the closing price on the last business day of the second fiscal quarter, the public float would be calculated by multiplying the number of shares held by non-affiliates on the last day of the second fiscal quarter by the average price over the last 10 trading days of the second fiscal quarter. The revised threshold would also use a two-year lookback period for qualifying for LAF status, meaning that a company would only transition into or out of such status based on whether the public float was above or below the $2 billion threshold in each of the past two years.

Apart from updating the qualification criteria, the SEC is not proposing any other changes to the LAF reporting requirements.

Non-Accelerated Filer Amendments

Under the existing framework, a public company that does not qualify as an LAF is either categorized as an AF with a public float of $75 million up to $700 million or an NAF with a public float of less than $75 million. Overlapping with these filer designations, a public company may also qualify as an SRC if public float is below $250 million (or revenue is under $100 million) and as an EGC for up to five years following its initial public equity offering (if the company stays below certain revenue and debt thresholds). SRC and EGC status and each tier below LAF provide certain filing accommodations.

Under the proposed framework, every company that does not qualify as an LAF would fall into the NAF category, effectively removing the tiered public float subcategories and broadening access to filing accommodations to a significantly greater number of public companies. Removing AF and lowering the LAF threshold will effectively reclassify the majority of public filers as NAFs. The proposed rules also provide a gradual on-ramp for newly public companies as, regardless of public float, a public company will qualify as an NAF for at least the first five years following the company’s initial public offering.

Among other things, the significant changes to NAF reporting obligations would include the following:

Article 8 of Regulation S-X for financial statements. NAFs would be able to prepare financial statements using Article 8 of Regulation S-X, which is only available to SRCs under the existing framework. NAFs would only provide two years (rather than three) of audited financial statements and corresponding MD&A disclosure.
No auditor attestation of ICFR. NAFs would not need to obtain an auditor’s attestation on the effectiveness of ICFR under Section 404(b) of the Sarbanes-Oxley Act.
Scaled executive compensation disclosure. NAFs would only be required to provide compensation disclosure for three (instead of five) named executive officers and two years (instead of three years) of summary compensation table disclosure. NAFs would further be exempt from providing Compensation Discussion and Analysis disclosure, pay versus performance disclosure, pay ratio disclosure, several compensation-related tables and disclosure regarding risks of compensation policies and practices.
Exemption from risk factors disclosure. NAFs would not be required to provide risk factors disclosure in Forms 10-K and 10-Q.
More limited disclosure under other items of Regulation S-K. NAFs would be permitted to provide a more limited description of business (Item 101) and omit performance graph disclosure (Item 201(e)) (except for investment companies), quantitative and qualitative disclosures about market risk (Item 305), and policies and procedures for review and approval of related-party transactions (Item 404(b)).
Exemption from shareholder advisory votes. NAFs would be exempt from the requirements to conduct nonbinding, advisory votes on say-on-pay, frequency of say-on-pay, and golden parachute compensation.
Delayed accounting standards adoption. Consistent with the current reporting accommodations available to EGCs, NAFs may defer compliance with certain new or revised accounting standards issued by the Financial Accounting Standards Board for a period of five years following the NAF’s initial registration with the SEC.
Material unresolved SEC staff comments. NAFs would be required to disclose in their Form 10-K the substance of material unresolved SEC staff comments received at least 180 days before fiscal year-end. This new obligation previously applied only to LAFs and AFs and, as proposed, would now be applied to all registrants. As the concurrent offering reform proposal makes Form S-3 and shelf offering eligibility available to significantly more issuers, the SEC reasons that investors in issuers conducting offerings should be made aware of any material unresolved comments incorporated by refer...

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