# Accelerated Filer and Large Accelerated Filer Definitions

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2020-05546

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** March 26, 2020
- **Citation:** 85 FR 17178

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 230, 240, and 249
[Release No. 34-88365; File No. S7-06-19]
RIN 3235-AM41
Accelerated Filer and Large Accelerated Filer Definitions

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is adopting amendments to the accelerated filer and large accelerated filer definitions to more appropriately tailor the types of issuers that are included in the categories of accelerated and large accelerated filers and promote capital formation, preserve capital, and reduce unnecessary burdens for certain smaller issuers while maintaining investor protections. The amendments exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company and that had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. The amendments also include a specific provision excluding business development companies from the accelerated and large accelerated filer definitions in analogous circumstances. In addition, the amendments increase the transition thresholds for accelerated and large accelerated filers becoming non-accelerated filers from $50 million to $60 million, and for exiting large accelerated filer status from $500 million to $560 million. Further, the amendments add a revenue test to the transition thresholds for exiting from both accelerated and large accelerated filer status. Finally, the amendments add a check box to the cover pages of Forms 10-K, 20-F, and 40-F to indicate whether an internal control over financial reporting (“ICFR”) auditor attestation is included in the filing. As a result of the amendments, certain low-revenue issuers will remain obligated, among other things, to establish and maintain ICFR and have management assess the effectiveness of ICFR, but they will not be required to have their management's assessment of the effectiveness of ICFR attested to, and reported on, by an independent auditor.

DATES:

This final rule is effective April 27, 2020.

FOR FURTHER INFORMATION CONTACT:

John Fieldsend, Special Counsel, in the Division of Corporation Finance, at (202) 551-3430, and Brian Johnson, Assistant Director, in the Division of Investment Management, at (202) 551-6792, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION:

We are amending 17 CFR 229.10(f) (“Item 10(f)”) under Regulation S-K;
1

17 CFR 230.405 (“Rule 405”) under the Securities Act of 1933;
2

and 17 CFR 12b-2 (“Rule 12b-2”), 17 CFR 249.220f (“Form 20-F”), 17 CFR 249.240f (“Form 40-F”), and 17 CFR 249.310 (“Form 10-K”) under the Securities Exchange Act of 1934 (“Exchange Act”).
3

1
15 U.S.C. 229.10 through 229.1305.

2
15 U.S.C. 77a
et seq.

3
15 U.S.C. 78a
et seq.

Table of Contents

I. Introduction

II. Discussion of the Final Amendments

A. Background

B. Amendments to Exclude Low-Revenue SRCs From the Accelerated and Large Accelerated Filer Definitions

1. Proposed Amendments

2. Comments on the Proposed Amendments

a. Comments on Using Revenue for Determining Accelerated and Large Accelerated Filer Status

b. Comments on the Proposed Amendments' Effect on Capital Formation and the Number of Public Issuers

c. Comments on the Proposed Amendments' Effect on Investor Protection

d. Comments on the Disproportionate Costs and Benefits of the ICFR Auditor Attestation Requirement to Small and Low-Revenue Companies

e. Comments on the Relationship Between Non-Accelerated Filers and SRCs

f. Other Comments

3. Final Amendments

a. Using Revenue for Determining Accelerated and Large Accelerated Filer Status

b. Effect on Capital Formation and the Number of Public Companies

c. Effect on Investor Protection

d. Disproportionate Costs and Benefits of the ICFR Auditor Attestation for Small and Low-Revenue Companies

e. Relationship Between Non-Accelerated Filers and SRCs

f. Effect on Business Development Companies

g. Effect on Foreign Private Issuers

h. Requiring ICFR Auditor Attestation Less Frequently Than Annually

i. Check Box Indicating Whether an ICFR Auditor Attestation Is Included in a Filing

C. Amendments To Increase the Public Float Transition Thresholds From $50 million to $60 million and $500 million to $560 million and To Add the SRC Revenue Test to the Transition Threshold

1. Proposed Amendments

2. Comments

3. Final Amendments

D. Transition Issues

III. Other Matters

IV. Economic Analysis

A. Introduction

B. Baseline

1. Regulatory Baseline

2. Characteristics of Accelerated Filer Population

3. Timing of Filings

4. Internal Controls and Restatements

C. Discussion of Economic Effects

1. Affected Issuers

2. Potential Benefits of Expanding the Exemption From the ICFR Auditor Attestation Requirement for Affected Issuers

a. Evidence on Possible Indirect Costs of the ICFR Auditor Attestation Requirement

b. Evidence on Net Costs of the ICFR Auditor Attestation Requirement

i. Studies Involving Avoidance Behavior

ii. Studies Based on Comparative Analysis or Market Reactions

iii. Other Evidence on Net Costs

c. Potential Reduction in Audit Fees

d. Additional Potential Compliance Cost Savings

e. Implications of the Cost Savings

3. Potential Costs of Expanding the Exemption From the ICFR Auditor Attestation Requirement for Affected Issuers

a. Broad Considerations and Evidence Regarding the Effects of ICFR Auditor Attestations on Financial Reporting

b. Estimated Effects on ICFR, the Reliability of Financial Statements, and Potential Fraud

i. Effects on the Prevalence of Ineffective ICFR

ii. Effects on the Detection and Disclosure of Material Weaknesses in ICFR

iii. Effects on Restatements

iv. Effects on Fraudulent Financial Reporting

v. Timing of the Effects

c. Implications for Investor Decision-Making

d. Potential Economic Costs of Effects on ICFR, the Reliability of Financial Statements, and Potential Fraud

i. Computation of Monetized Estimates of Costs

ii. Discussion of Economic Costs

4. Potential Benefits and Costs Related to Other Aspects of the Amendments

a. Filing Deadlines

b. Disclosures Required of Accelerated Filers

c. Transition Thresholds

d. Disclosure

5. Alternatives to the Amendments

a. Exclude All SRCs From Accelerated Filer Category

b. Include or Exclude Certain Issuer Types

c. Alternative Threshold

V. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Burden and Cost Estimates Related to the Final Amendments

1. ICFR Auditor Attestation Requirement

2. Filing Deadlines, Disclosure Regarding Filing Availability, and Unresolved Staff Comments

3. Check Box Disclosure

4. Total Burden Reduction

VI. Regulatory Flexibility Act Analysis

A. Need for, and Objectives of, the Final Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Amendments

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

Statutory Authority and Text of Rule Amendments

I. Introduction

On May 9, 2019, we proposed amendments
4

to the “accelerated filer” and “large accelerated filer” definitions in Rule 12b-2.
5

We proposed these amendments to promote capital formation for certain smaller issuers while maintaining investor protections by more appropriately tailoring the types of issuers that are included in the categories of accelerated and large accelerated filers and revising the transition thresholds for accelerated and large accelerated filers. Specifically, we proposed to exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller reporting company (“SRC”)
6

and that has annual revenue of less than $100 million in the most recent fiscal year for which audited financial statements are available (“SRC revenue test”), with the effect that such an issuer would not need to satisfy the requirements applicable to an accelerated or large accelerated filer. We also proposed to increase the public float transition threshold for accelerated and large accelerated filers to become a non-accelerated filer from $50 million to $60 million, and to increase the exit threshold in the large accelerated filer transition provision from $500 million to $560 million in public float. Finally, we proposed to add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.

4

Amendments to the Accelerated and Large Accelerated Filer Definitions,
Release No. 34-85814 (May 9, 2019) [84 FR 24876 (May 29, 2019)] (“Proposing Release”).

5
Although Rule 12b-2 defines the terms “accelerated filer” and “large accelerated filer,” it does not define the term “non-accelerated filer.” If an issuer does not meet the definition of accelerated filer or large accelerated filer, it is considered a non-accelerated filer.

6

See
Item 10(f), Rule 405, and Rule 12b-2 (defining SRC).

We received over 60 comment letters on the proposal, including over 40 unique letters and approximately 20 letters that were substantially similar. Many of the commenters generally supported the proposed amendments
7

while other commenters generally opposed them or suggested the need for further empirical study.
8

In addition, the SEC's Small Business Capital Formation Advisory Committee (“SBCFAC”) adopted a recommendation supporting the proposed amendments,
9

and the 2019 SEC Government-Business Forum on Small Business Capital Formation (“SEC Small Business Forum”) provided a recommendation on the accelerated filer definition.
10

After taking into consideration these recommendations and the public comments, we are adopting the amendments substantially as proposed. The final amendments are consistent with our historical practice of providing scaled disclosure and other accommodations for smaller issuers and with recent actions by Congress to reduce unnecessary burdens on new and smaller issuers.
11

7

See, e.g.,
letters from Adamas Pharmaceuticals, Inc. (July 19, 2019) (“Adamas”); Advanced Medical Technology Association Accel (July 26, 2019) (“AdvaMed”); Aequor, Inc. (July 18, 2019) (“Aequor”); Ardelyx, Inc. (July 18, 2019) (“Ardelyx”); American Securities Association (July 29, 2019) (“ASA”); Biotechnology Innovation Organization (July 29, 2019) (“BIO”); Broadmark Capital (July 29, 2019) (“Broadmark”); California Life Sciences Association (Jun. 10, 2019) (“CLSA”); Catalyst Biosciences, Inc. (July 29, 2019) (“Catalyst”); Cerecor Inc. (July 3, 2019) (“Cerecor”); Chiasma, Inc. (July 11, 2019) (“Chiasma”); Coalition of Four Small Businesses and their Investors (July 24, 2019) (“AdvaMed
et al.”
); Concert Pharmaceuticals, Inc. (July 1, 2019) (“Concert”); Corvus Pharmaceuticals, Inc. (July 19, 2019) (“Corvus”); Council of State Bioscience Associations (July 25, 2019) (“CSBA”); CSB Bancorp, Inc. (July 26, 2019) (“CSB”); CymaBay Therapeutics, Inc. (July 24, 2019) (“CymaBay”); Daré Bioscience, Inc. (July 10, 2019) (“Daré”); Darian B. Andersen, General Counsel, PC (Jun. 5, 2019) (“Andersen”); Equillium, Inc. (July 22, 2019) (“Equillium”); Evoke Pharma, Inc. (July 17, 2019) (“Evoke”); Gritstone Oncology Inc. (July 24, 2019) (“Gritstone”); Guaranty Federal Bancshares, Inc. (July 23, 2019) (“Guaranty”); Independent Community Bankers of America (July 24, 2019) (“ICBA”); Kezar Life Sciences, Inc. (July 17, 2019) (“Kezar”); Kyle Carver (May 25, 2019) (“Carver”); Marinus Pharmaceuticals, Inc. (July 17, 2019) (“Marinus”); Millendo Therapeutics, Inc. (July 29, 2019) (“Millendo”); MSB Financial Corp. (July 19, 2019) (“MSB”); Nasdaq, Inc. (July 29, 2019) (“Nasdaq”); Organovo, Inc. (July 18, 2019) (“Organovo”); Pieris Pharmaceuticals, Inc. (July 11, 2019) (“Pieris”); Revance Therapeutics, Inc. (July 22, 2019) (“Revance”); SI-BONE, Inc. (July 19, 2019) (“SI-BONE”); South Carolina Bankers Association (July 26, 2019) (“SCBA”); Summit State Bank (May 28, 2019) (“Summit”); Sutro Biopharma, Inc. (July 8, 2019) (“Sutro”); Syros Pharmaceuticals, Inc. (July 22, 2019) (“Syros”); Teligent, Inc. (July 23, 2019) (“Teligent”); Terra Tech Corp. (May 29, 2019) (“Terra Tech”); The Bank of South Carolina (July 26, 2019) (“BSC”); U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (July 29, 2019) (“Chamber”); Xenon Pharmaceuticals Inc. (Jun. 19, 2019) (“Xenon”); and Zynerba Pharmaceuticals, Inc. (July 8, 2019) (“Zynerba”).

8

See, e.g.,
letters from BDO USA, LLP (July 29, 2019) (“BDO”); Better Markets, Inc. (July 29, 2019) (“Better Markets”); Center for Audit Quality (July 29, 2019) (“CAQ”); CFA Institute, in consultation with its Corporate Disclosure Policy Council (Aug. 22, 2019) (“CFA Inst.”); Colleen Honigsberg, Associate Professor of Law, Stanford Law School,
et al.
(July 22, 2019) (“Prof. Honigsberg
et al.”
); Consumer Federation of America (July 29, 2019) (“CFA”); Council of Institutional Investors (July 25, 2019) (“CII”); Crowe LLP (July 29, 2019) (“Crowe”); Deloitte & Touche LLP (July 26, 2019) (“Deloitte”); Grant Thornton LLP (July 17, 2019) (“Grant Thornton”); John Hassell, Indiana University (May 19, 2019) (“Prof. Hassell”); Mary Barth, Stanford University, Wayne Landsman, University of North Carolina, Joseph Schroeder, Indiana University, and Daniel Taylor, University of Pennsylvania (July 11, 2019) (“Prof. Barth
et al.”
); RSM US LLP (July 29, 2019) (“RSM”); and Weili Ge, University of Washington; Allison Koester, Georgetown University; and Sarah McVay, University of Washington (July 26, 2019) (“Prof. Ge
et al.”
).

9

See
U.S. Sec. and Exch. Comm'n Small Bus. Capital Formation Advisory Comm.,
Recommendation on the Commission's Proposal to Amend the Accelerated and Large Accelerated Filer Definitions
(Aug. 23, 2019) (“SBCFAC Recommendations”), available at
https://www.sec.gov/spotlight/sbcfac/recommendations-rule-3-05-and-accelerated-filer-definition.pdf
. Although it supported the proposed amendments, the SBCFAC stated that it “would welcome the Commission to explore additional further amendments” to the accelerated and large accelerated filer definitions and recommended exploring raising the revenue threshold to be a non-accelerated filer to one higher than $100 million, basing the revenue test for an issuer to qualify as a non-accelerated filer on a three-year rolling average instead of basing it on the revenue in the most recent fiscal year, and looking at whether all SRCs should be non-accelerated filers.

10

See
U.S. Sec. and Exch. Comm'n Gov't-Bus. Forum on Small Bus. Capital Formation,
Report on the 38th Annual Government-Business Forum on Small Business Capital Formation
(Aug. 14, 2019) (“SEC Small Business Forum”), available at
https://www.sec.gov/files/small-business-forum-report-2019.pdf. The SEC Small Business Forum
recommended aligning the definition of non-accelerated filer with the definition of SRC to include issuers with a public float less than $250 million or with annual revenues less than $100 million (and either no public float or a public float less than $700 million).

11
For example, Title I of the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) amended Section 404(b) of the Sarbanes-Oxley Act (“SOX”), 15 U.S.C. 7262(b), which relates to an issuer's ICFR to exempt emerging growth companies (“EGCs”) from the requirement of SOX Section 404(b). In particular, SOX Section 404(b) requires that an issuer's independent auditor attest to, and report on, management's assessment of the effectiveness of the issuer's ICFR (“ICFR auditor attestation”).
See
Public Law 112-106, Sec. 103, 126 Stat. 306 (2012). In addition, Section 72002 of the Fixing America's Surface Transportation Act of 2015 requires the Commission to revise Regulation S-K to further scale or eliminate requirements to reduce the burden on EGCs, accelerated filers, SRCs, and other smaller issuers, while still providing all material information to investors.
See
Public Law 114-94, 129 Stat. 1312 (2015).

II. Discussion of the Final Amendments

A. Background

In June 2018, the Commission adopted amendments
12

to the SRC

definition
13

to expand the number of issuers that qualify for scaled disclosure accommodations. The amended SRC definition allows an issuer to use either a public float
14

test or the SRC revenue test to determine whether it is an SRC. The amendments increased the threshold in the public float test for an issuer to initially qualify as an SRC from less than $75 million to less than $250 million.
15

The Commission also expanded the revenue test to include issuers with annual revenues
16

of less than $100 million if they have no public float or a public float of less than $700 million.
17

The Commission intended the amendments to promote capital formation for smaller issuers by reducing compliance costs for the newly eligible SRCs while maintaining appropriate investor protections.
18

12

See Smaller Reporting Company Definition,
Release No. 33-10513 (June 28, 2018) [83 FR 31992 (July 10, 2018)] (“SRC Adopting Release”).

13

See
note 6 above.

14
Public float is defined in paragraph (3)(i)(A) of the SRC definition in Rule 12b-2, which states that public float is measured as of the last business day of the issuer's most recently completed second fiscal quarter and computed by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity.
See also
Item 10(f) (2)(i)(A) and Rule 405. An entity with no public float because, for example, it has equity securities outstanding but is not trading in any public trading market would not be able to qualify on the basis of a public float test alone. That entity must look to the SRC revenue test to determine whether it qualifies as an SRC.

15
To avoid situations where an issuer frequently enters and exits SRC status, each test includes two thresholds—one for initially determining whether an issuer qualifies as an SRC and a subsequent transition threshold that is lower for issuers that did not initially qualify as an SRC, or that no longer qualify as an SRC because they exceeded the initial thresholds.

16
Annual revenues are measured as of the most recently completed fiscal year for which audited financial statements are available.
See
Item 10(f)(2)(i)(B), Rule 405, and Rule 12b-2.

17

See
Item 10(f)(1), Rule 405, and Rule 12b-2. The prior revenue test included issuers with no public float and annual revenues of less than $50 million.
See
SRC Adopting Release, note 12 above, at 31995. The lower transition thresholds under the revenue test for an issuer that did not initially qualify as an SRC, or that no longer qualifies as an SRC because it exceeded the initial thresholds, were revised from less than $40 million of annual revenues and no public float to less than $80 million of annual revenues and either no public float or a public float of less than $560 million.
See
Item 10(f)(2)(iii)(B), Rule 405, and Rule 12b-2.

18
SRC Adopting Release, note 12 above, at 31992.

In conjunction with these amendments, the Commission also revised the accelerated filer and large accelerated filer definitions in Rule 12b-2 to remove the condition that, for an issuer to be an accelerated filer or a large accelerated filer, it must not be eligible to use the SRC accommodations.
19

One result of these amendments is that some issuers now are categorized as both SRCs and accelerated or large accelerated filers.
20

These issuers have some, but not all, of the benefits of scaled regulation. In particular, issuers that are categorized as both SRCs and accelerated or large accelerated filers must comply with the earlier filing deadlines required of accelerated and large accelerated filers for annual and quarterly reports and the requirement of SOX Section 404(b).
21

19
This amendment, among other things, preserved the existing thresholds in those definitions and did not change the number of issuers subject to the ICFR auditor attestation requirement.

20
Although rare, under our existing rules, some issuers that meet the large accelerated filer definition may be eligible to be an SRC because of the expanded revenue test in the SRC definition.
See
Proposing Release, note 4 above, at 24877, n. 25. As discussed below, in Section II.B.3., we are adopting the proposed amendment to the “large accelerated filer” definition so that an issuer that is eligible to be an SRC under the SRC revenue test would not also qualify as a large accelerated filer.

21
15 U.S.C. 7262(b).

Prior to the SRC amendments, the SRC category of filers generally did not overlap with either the accelerated or large accelerated filer categories.
22

Now, however, as illustrated in Figure 1 of this section, because the public float tests in the SRC and accelerated filer definitions partially overlap, and the accelerated and large accelerated filer definitions no longer specifically exclude an issuer that is eligible to be an SRC, an issuer meeting the accelerated filer definition will be both an SRC and an accelerated filer
23

if it has:

22

See
SRC Adopting Release, note 12 above, at 32001.

23
The thresholds provided below are based on the initial thresholds of each definition; however, due to the transition provisions of the accelerated and large accelerated filer definitions, additional issuers may also be both an SRC and an accelerated or large accelerated filer.

• A public float of $75 million or more, but less than $250 million, regardless of annual revenues; or

• Less than $100 million in annual revenues, and a public float of $250 million or more, but less than $700 million.

ER26MR20.000

B. Amendments To Exclude Low-Revenue SRCs From the Accelerated and Large Accelerated Filer Definitions

1. Proposed Amendments

Under the existing accelerated filer and large accelerated filer definitions in Rule 12b-2, an issuer must satisfy three conditions to be an accelerated filer or large accelerated filer.
24

We proposed to

add a new condition to the definitions of accelerated filer and large accelerated filer that would exclude from those definitions an issuer that is eligible to be an SRC and that meets the SRC revenue test. The most notable effect of the proposed amendments
25

would be that an issuer that is eligible to be an SRC and that meets the SRC revenue test would not be subject to the requirement of SOX Section 404(b) that an issuer's independent auditor must attest to, and report on, management's assessment of the effectiveness of the issuer's ICFR.
26

The final amendments do not change an auditor's role in a financial statement audit.
27

24
The three existing conditions for qualifying as an accelerated filer are that an issuer: (1) Had an aggregate worldwide public float of $75 million or more, but less than $700 million, as of the last business day of the issuer's most recently completed second fiscal quarter; (2) has been subject to the requirements of 15 U.S.C. 78m (Exchange Act Section 13(a)) or 15 U.S.C. 78o(d) (Exchange Act Section 15(d)) for a period of at least twelve calendar months; and (3) has filed at least

one annual report pursuant to those sections. For a large accelerated filer, conditions (2) and (3) are the same, but condition (1) is that an issuer had an aggregate worldwide public float of $700 million or more, as of the last business day of the issuer's most recently completed second fiscal quarter. Also, as discussed in note 20 above, some issuers that meet the “large accelerated filer” definition may be eligible to be an SRC.

25
The issuer also would not have to abide by the filing deadlines of an accelerated or large accelerated filer, provide the disclosure required by Item 1B of Form 10-K and Item 4A of Form 20-F about unresolved staff comments on its periodic and/or current reports, or provide the disclosure required by Item 101(e)(4) of Regulation S-K about whether it makes filings available on or through its internet website.
See
17 CFR 229.101(e)(4).

26

See
17 CFR 240.13a-15(f) and 17 CFR 240.15d-15(f) (defining ICFR).

27

See
letter from Deloitte (suggesting that the Commission explain how an auditor's role in a financial statement audit will change as a result of the amendments).

SOX Section 404(a)
28

requires almost all issuers, including SRCs, that file reports pursuant to Exchange Act Section 13(a) or 15(d)
29

to establish and maintain ICFR and have their management assess the effectiveness of their ICFR.
30

SOX Section 404(b) subjects certain issuers not otherwise exempted to the ICFR auditor attestation requirement.
31

The most significant exemption from the ICFR auditor attestation requirement is the exemption provided to EGCs pursuant to Title I of the JOBS Act (“JOBS Act Exemption”). Generally, an EGC is a company that has total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year end and that has not sold common equity securities under a registration statement.
32

The JOBS Act Exemption provides EGCs with a five-year exemption from the ICFR auditor attestation requirement. We estimate that the JOBS Act Exemption applies to issuers with an aggregate market capitalization of about $585 billion, compared to about $95 billion in aggregate for the issuers that are newly exempt from the ICFR auditor attestation requirement under the amendments.
33

28
15 U.S.C. 7262(a).

29

See
17 CFR 240.13a-15 and 17 CFR 240.15d-15.

30
Investment companies registered under Section 8 of the Investment Company Act of 1940, 15 U.S.C 80a-8, are specifically exempted from SOX Section 404 by SOX Section 405, 15 U.S.C. 7263. Notwithstanding the exemption pursuant to SOX Section 405, these registered investment companies are subject to other requirements regarding internal controls.
See
Proposing Release, note 4 above, at 24879, n. 44.

31
For example, SOX Section 404(c) exempts from Section 404(b) any issuer that is neither a large accelerated filer nor an accelerated filer.
See
15 U.S.C. 7262(c).

32

See
15 U.S.C. 77(b)(a)(19).

33
These estimates are based on staff analysis of data on market values from Compustat for annual reports in calendar year 2018.
See
note 298 below for details on the identification of the population of different filer types.
See
note 336 below for details on the identification of the population of affected issuers. Out of the 1,430 issuers who qualified as EGCs in 2018, 1,097 are also non-accelerated filers. The remaining EGCs are still exempt from the ICFR auditor attestation requirement solely due to the JOBS Act Exemption, and those issuers are significantly larger in terms of aggregate market capitalization (approximately $145 billion) than the issuers newly exempted under the amendments (approximately $95 billion). This estimate excludes 41 EGCs with an aggregate of approximately $20 billion in market capitalization for which we are unable to determine non-accelerated filer status, the majority of which are Canadian issuers filing on Form 40-F.

2. Comments on the Proposed Amendments

Many commenters supported the portion of the proposed amendments that would exclude an issuer that is eligible to be an SRC and that meets the SRC revenue test from the accelerated and large accelerated filer definitions.
34

Other commenters opposed the proposed amendments or suggested the need for further analysis.
35

Commenters' views on different aspects of the proposal, as well as its effects, are discussed topically, below.

34

See, e.g.,
letters from Adamas, AdvaMed, AdvaMed
et al.,
Aequor, Andersen, Ardelyx, Ardelyx's slides from its presentation to the SBCFAC Meeting (Aug. 13, 2019) (“Ardelyx Presentation”), ASA, BIO, Broadmark, BSC, Carver, Catalyst, Cerecor, Chamber, Chiasma, CLSA, Concert, Corvus, CSB, CSBA, CymaBay, Daré, Equillium, Evoke, Gritstone, Guaranty, ICBA, Institute of Management Accountants' Financial Reporting and Small Business Committees (July 16, 2019) (“IMA”), Kezar, Marinus, Millendo, MSB, National Association of Manufacturers (July 26, 2019) (“NAM”), Nasdaq, Organovo, Pieris, Revance, SCBA, SI-BONE, Summit, Sutro, Syros, Teligent, Terra Tech, Xenon, and Zynerba.

35

See, e.g.,
letters from BDO, Better Markets, CAQ, CFA, CFA Inst., CII, Crowe, Deloitte, Grant Thornton, Prof. Barth
et al.,
Prof. Ge
et al.,
Prof. Hassell, Prof. Honigsberg
et al.,
and RSM.

a. Comments on Using Revenue for Determining Accelerated and Large Accelerated Filer Status

A number of commenters stated explicitly that they supported using revenue as a measure to determine whether an issuer should be subject to the ICFR auditor attestation requirement.
36

These commenters suggested that using a revenue measurement is preferable to using a public float measurement
37

because public float is often affected by industry or economic trends not specific to any particular issuer,
38

and that revenue is more predictable,
39

a better indicator of an issuer's complexity,
40

and a better indicator of an issuer's ability to absorb the burdens of the ICFR auditor attestation requirement.
41

Other commenters questioned whether revenue is an appropriate measure for determining whether an issuer should be a non-accelerated filer in all cases.
42

One commenter asserted that low-revenue companies may have less sophisticated or experienced accounting functions and some aspects of their business may be associated with accounting complexities.
43

This commenter also suggested that issuers may recognize revenue in ways that could result in them frequently transitioning in and out of non-accelerated filer status.
44

Another commenter indicated that an issuer could have a relatively low amount of revenue but still have a large market capitalization and thus “greater investor exposure.”
45

36

See, e.g.,
letters from BIO, Broadmark, Chamber, Concert, Corvus, and MSB.

37

See, e.g.,
letters from Broadmark, Chamber, Concert, Corvus, and MSB.

38

See
letter from MSB.

39

See
letter from Broadmark.

40

See, e.g.,
letters from Concert and Corvus.

41

See
letter from Broadmark.

42

See
letter from Ernst & Young LLP (July 29, 2019) (“EY”), Grant Thornton, and National Association of State Boards of Accountancy (July 23, 2019) (“NASBA”).

43

See
letter from EY.

44

Id.

45

See
letter from Grant Thornton.

b. Comments on the Proposed Amendments' Effect on Capital Formation and the Number of Public Issuers

Commenters expressed mixed views on the effect that the proposed amendments would have on capital formation, the cost of capital, and the decisions of companies as to whether to enter the public capital markets. Some commenters agreed with the view expressed in the Proposing Release that, by expanding the JOBS Act Exemption, the proposed amendments would enhance capital formation or allow affected issuers to preserve capital
46

while also maintaining investor

protection.
47

One commenter, questioning the benefits, if any, of the ICFR auditor attestation requirement, asserted that there is no correlation between a smaller issuer's compliance with the ICFR auditor attestation requirement and stronger markets in general.
48

Additionally, some commenters suggested that eliminating the ICFR auditor attestation requirement would encourage certain companies to enter the public markets.
49

46

See, e.g.,
letters from Andersen, CLSA, Concert, ICBA, and NASBA.

47

See, e.g.,
letters from ICBA and NASBA.

48

See
letter from BIO.

49

See, e.g.,
letters from AdvaMed, AdvaMed
et al.,
Broadmark, Cerecor, and ICBA.

Conversely, other commenters asserted that the proposed amendments would not enhance capital formation, and some indicated they could even reduce capital formation.
50

Two of these commenters expressed the view that eliminating the ICFR auditor attestation requirement could increase the cost of capital for certain issuers because investors would require a premium to invest in issuers due to the heightened risk of ineffective internal controls.
51

In addition, some commenters maintained that the ICFR auditor attestation requirement does not prevent companies from entering the public markets.
52

For example, one commenter suggested that the Proposing Release's statement about the significant decline in the number of issuers listed on major exchanges implied that the cost of compliance with the ICFR auditor attestation requirement has contributed materially to that decline.
53

This commenter and some others asserted that the decline can be attributed to many other factors.
54

Some commenters stated that confidence in the U.S. capital market system, likely stems, at least in part, from financial reporting safeguards, including the ICFR auditor attestation requirement, and contended that the proposed amendments would thereby reduce investor confidence in issuers' financial reporting.
55

50

See, e.g.,
letters from Better Markets, CII, CFA, CFA Inst., and Prof. Ge
et al.

51

See
letters from Better Markets and CFA.

52

See, e.g.,
letters from CFA, CFA Inst., CII, and Crowe.

53

See
letter from CFA.

54

See, e.g.,
letters from CII, CFA, CFA Inst., and Crowe. Other factors commenters cited include the expansion of exemptions to registration that increase companies' ability to raise funds privately,
see, e.g.,
letters from CFA, CII, and Crowe; corporate consolidations,
see, e.g.,
letters from CFA and CII; market conditions,
see
letter from CFA; and the general regulatory environment,
see
letter from Crowe.

55

See, e.g.,
letters from CAQ and CII.

Several commenters indicated that the ICFR auditor attestation requirement is not necessary because issuers are permitted to voluntarily obtain an ICFR auditor attestation if they believe it is in their interest to do so.
56

Some instances in which commenters suggested that issuers may choose to voluntarily obtain an ICFR auditor attestation include when their investors demand it,
57

when not obtaining it would have a negative impact on investment analysts' coverage,
58

or when issuers otherwise deem it a good use of their capital resources.
59

In this regard, one commenter suggested clarifying that it is the authority and responsibility of the issuer's audit committee to determine whether the issuer should voluntarily obtain an ICFR auditor attestation.
60

56

See, e.g.,
letters from ASA, BIO, Broadmark, Chamber, Guaranty, and Nasdaq.

57

See, e.g.,
letters from BIO and Guaranty.

58

See
letter from Guaranty.

59

Id.

60

See
letter from EY.

c. Comments on the Proposed Amendments' Effect on Investor Protection

Commenters' views as to the effect of the proposed amendments on investor protection were also mixed. Many commenters asserted that, even if the ICFR auditor attestation requirement did not apply, other existing requirements would provide investors in these issuers with sufficient protection.
61

Commenters cited a number of these other requirements, including SOX Section 404(a);
62

Nasdaq's listing standards, surveillance, and enforcement;
63

the required management certifications;
64

and the obligation of an independent auditor to consider ICFR when conducting a financial statement audit.
65

61

See, e.g.,
letters from ASA, Broadmark, BSC, Carver, Cerecor, Guaranty, ICBA, MSB, NAM, Nasdaq, Pieris, SCBA, and Xenon.

62

See, e.g.,
letters from ASA, Broadmark, Carver, ICBA, MSB, Nasdaq, and Xenon.

63

See
letter from Nasdaq.

64

See
17 CFR 229.601(31)(i), 17 CFR 240.13a-14(a), and 17 CFR 240.15d-14(a).
See, e.g.,
letters from MSB, Nasdaq, and Xenon.

65

See, e.g.,
letters from ASA, Carver, Cerecor, MSB, NAM, and Xenon.

For example, several commenters noted that, when conducting a financial statement audit, the auditor is required to obtain an understanding of each component of ICFR,
66

which a few of these commenters asserted would provide investors with sufficient protection absent the ICFR auditor attestation requirement.
67

Other commenters noted that the requirement that an auditor communicate to the issuer's management and its audit committee any significant deficiencies or material weaknesses related to ICFR in a financial statement audit would provide a certain level of protection for investors in the affected issuers.
68

Some commenters expressed a view that the ICFR auditor attestation requirement is not important or material to investors generally.
69

A few of these commenters asserted that investors rarely ask an issuer that is exempt from the ICFR auditor attestation requirement to voluntarily obtain such an attestation.
70

One commenter
71

cited a study
72

that found no statistically significant market response on average to disclosures of material weaknesses in disclosure controls, which suggests, according to the commenter, that investors do not significantly change their long-term value assessment of an issuer based on these disclosures.

66

See, e.g.,
letters from ASA, CAQ, CFA Inst., Crowe, EY, Grant Thornton, Guaranty, NASBA, Nasdaq, PricewaterhouseCoopers LLP (July 25, 2019) (“PWC”), and RSM.

67

See, e.g.,
letters from ASA, Guaranty, and Nasdaq.

68

See
letter from Nasdaq.

69

See, e.g.,
letters from Adamas; Ardelyx; Ardelyx Presentation, ASA, BIO, Carver, Catalyst, Chiasma, Corvus, CymaBay, Equillium, Evoke, Gritstone, Kezar, Marinus, Millendo, Organovo, Pieris, Revance, SI-BONE, Syros, Teligent, and Zynerba. Some of these commenters and others asserted that the ICFR auditor attestation requirement is not material for, or important to, investors based on the results of a study and their own experience.
See, e.g.,
letters from Adamas, Ardelyx, Catalyst, Chiasma, Corvus, CymaBay, Equillium, Evoke, Gritstone, Kezar, Marinus, Millendo, Organovo, Pieris, Revance, SI-BONE, Syros, Teligent, and Zynerba (citing Craig Lewis and Joshua White,
Science or Compliance: Will Section 404(b) Compliance impede Innovation by Emerging Growth Companies in the Biotech Industry,
(Feb. 2019) (“BIO Study”), available at
https://www.bio.org/sites/default/files/BIO_EGC_White_Paper_02_11_2019_FINAL.pdf
).

70

See, e.g.,
letters from Ardelyx Presentation and BIO.

71

See
letter from BIO.

72
Jacqueline Hammersley, Linda Myers, and Catherina Shakespeare,
Market Reactions to the Disclosure of Internal Control Weaknesses and to the Characteristics of those Weaknesses under Section 302 of the Sarbanes Oxley Act of 2002
(Mar. 2008), available at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=979538
.

In addition to these broader points, several commenters in the banking sector pointed out that community banks and bank holding companies are subject to extensive supervision and regulation by federal and state banking regulators, which they stated would protect investors in this industry even if the affected issuers were not subject to the ICFR auditor attestation requirement.
73

73

See, e.g.,
letters from BSC, Guaranty, ICBA, and SCBA.

Conversely, other commenters asserted that the ICFR auditor attestation requirement is an important investor protection and that eliminating it would undermine such protection.

74

One commenter disputed the contention in the Proposing Release that eliminating the ICFR auditor attestation requirement for low-revenue issuers would not significantly affect the ability of investors to make informed investment decisions.
75

Some commenters stated that the ICFR auditor attestation requirement increases investor confidence generally
76

and that investors view the requirement as beneficial.
77

74

See, e.g.,
letters from Better Markets, Grant Thornton, and Prof. Barth
et al.

75

See
letter from Prof. Barth
et al.

76

See, e.g.,
letters from Better Markets, CAQ, CFA Inst., and EY.

77

See, e.g.,
letters from CII, CFA Inst., and EY.

Some commenters asserted that the SOX Section 404(a) requirement would not provide investors in low-revenue SRCs with sufficient protection if they were not also subject to the ICFR auditor attestation requirement
78

because, as one commenter stated, the ICFR auditor attestation requirement acts as an effective check on SOX Section 404(a).
79

Another commenter asserted that management's assessment is weakened when management knows that it will not be challenged by an ICFR auditor attestation.
80

A third commenter claimed that investors would place undue reliance on management's report when not accompanied by an ICFR auditor attestation.
81

78

See, e.g.,
letters from Better Markets, CFA Inst., Crowe, Grant Thornton, and Prof. Barth
et al.

79

See
letter from Better Markets.

80

See
letter from CFA Inst.

81

See
letter from Grant Thornton.

A few commenters noted that a financial statement audit does not provide the same level of assurance as an integrated audit
82

because a financial statement audit's objective is different from that of an integrated audit as it relates to ICFR.
83

Therefore, some commenters asserted that, without the ICFR auditor attestation requirement, the requirement for auditors to obtain an understanding of each component of ICFR when conducting a financial statement audit would not provide sufficient investor protection.
84

Similarly, other commenters suggested that some testing of ICFR conducted as part of a financial statement audit would not provide sufficient investor protection.
85

One commenter asserted that the control testing performed by a financial statement auditor would not be as extensive as testing performed in an ICFR auditor attestation and that it is more difficult for a financial statement auditor to challenge the design of ICFR.
86

Another commenter noted that, despite the requirement that a financial statement auditor communicate any significant deficiencies or material weaknesses related to ICFR to the issuer's management and its audit committee, a financial statement audit is not designed to identify such significant deficiencies or material weaknesses.
87

82

See, e.g.,
letters from CFA Inst., Crowe, and EY.

83

See, e.g.,
letters from CAQ, CFA Inst., and RSM (noting that a financial statement audit's objective is for the auditor to obtain an understanding of the issuer's ICFR that is sufficient to assess the factors that affect the risks of material misstatement and to design further audit procedures, whereas an integrated audit's objective is to test and express an opinion on the effectiveness of the issuer's ICFR).

84

See, e.g.,
letters from CAQ, CFA Inst. Crowe, EY, and RSM.

85

See, e.g.,
letters from EY, Grant Thornton, and NASBA.

86

See
letter from EY.

87

Id.

Some commenters indicated that the ICFR auditor attestation requirement promotes effective ICFR and more accurate disclosures related to ICFR,
88

including the likelihood and timeliness of disclosing ineffective ICFR.
89

Also, a number of commenters noted that, as discussed in the Proposing Release, effective ICFR, generally, and the ICFR auditor attestation requirement, more specifically, enhances transparency;
90

increases the quality and reliability of issuers' financial statements,
91

corporate governance,
92

audits,
93

and analyst forecasts;
94

and reduces the number of issuers' restatements, misstatements,
95

the instances of fraud,
96

and occurrences of insider trading.
97

88

See, e.g.,
letters from Better Markets, CFA, CII, Crowe, Grant Thornton, Prof. Barth
et al.,
and PWC.

89

See, e.g.,
letters from Better Markets, CFA, Crowe, and Prof. Barth
et al.

90

See
letter from EY.

91

See, e.g.,
letters from Better Markets, CAQ, CFA, CII, Deloitte, EY, Grant Thornton, Prof. Barth
et al.,
PWC, and RSM.

92

See
letter from Deloitte.

93

See
letter from CAQ.

94

See
letter from CFA.

95

See, e.g.,
letters from CAQ, CFA, CFA Inst., Crowe, Deloitte, EY, Grant Thornton, and Prof. Barth
et al.

96

See, e.g.,
letters from Better Markets and Deloitte.

97

See
letter from CFA.

A few commenters expressed concern about the effect that the amendments could have on the reliability of key performance indicators and other measures. One commenter indicated that investors in certain issuers that would become non-accelerated filers under the amendments rely on key performance indicators that are derived from their financial statements, such as backlog, sales orders, and number of customers, and asserted that eliminating the ICFR auditor attestation requirement could reduce the reliability of those indicators.
98

Another commenter noted that investors in those issuers rely on non-GAAP financial measures, key performance indicators, and other disclosures and stated that the Commission may wish to consider auditor involvement with that information to address potential risks related to completeness and accuracy.
99

98

See
letter from NASBA.

99

See
letter from CAQ.

d. Comments on the Disproportionate Costs and Benefits of the ICFR Auditor Attestation Requirement to Small and Low-Revenue Companies

A number of commenters stated that the ICFR auditor attestation requirement is quite costly.
100

One of these commenters indicated that the ICFR auditor attestation requirement “is the most costly aspect of being an [a]ccelerated [f]iler.”
101

Several commenters asserted more specifically that the ICFR auditor attestation requirement is disproportionally costly to small and/or low-revenue issuers.
102

Some of these commenters indicated that the reason for the disproportionate costs is that there are fixed costs associated with the ICFR auditor attestation requirement that are not scalable for smaller issuers.
103

Other commenters stated that the benefits of the ICFR auditor attestation requirement do not outweigh the costs,
104

including the costs associated with ICFR auditor attestation fees,
105

issuer personnel time,
106

and outside consultants.
107

100

See, e.g.,
letters from BIO, Broadmark, Carver, Guaranty, ICBA, MSB, Summit, and Syros.

101
Letter from Guaranty.

102

See, e.g.,
letters from AdvaMed
et al.,
Andersen, BIO, Broadmark, Chamber, CLSA, CSB, Guaranty, and NAM.

103

See, e.g.,
letters from Broadmark and Guaranty.

104

See, e.g.,
letters from ICBA, MSB, and Syros.

105

See, e.g.,
letters from MSB and Summit.

106

See, e.g.,
letters from Carver, MSB, and Summit.

107

See, e.g.,
letters from MSB and Summit.

Some commenters asserted that eliminating the ICFR auditor attestation requirement would not substantially reduce costs to issuers.
108

A few of these commenters noted that ICFR auditor attestations have become less expensive and more effective because auditors are more experienced in conducting them.
109

Some commenters stated that potential compliance cost reductions may be negated if there is a loss of investor confidence and protection,
110

if ICFR deficiencies go undetected,
111

if there is an increase in restatements and misstatements,
112

or if there are higher

costs of capital.
113

Additionally, some commenters stated that any cost reductions would vary widely among issuers
114

and would be hard to quantify.
115

108

See, e.g.,
letters from BDO, Better Markets, CFA, CFA Inst., EY, Grant Thornton, and RSM.

109

See, e.g.,
letters from CFA Inst. and Deloitte.

110

See, e.g.,
letters from Better Markets and CII.

111

See
letter from CFA Inst.

112

See, e.g.,
letters from BDO, CFA, and CFA Inst.

113

See, e.g.,
letters from CFA and CFA Inst.

114

See, e.g.,
letters from EY, Grant Thornton, and PWC.

115

See, e.g.,
letters from Grant Thornton, PWC, and RSM.

Other commenters asserted that the benefits of the ICFR auditor attestation requirement are not as great for low-revenue and smaller issuers as they are for other issuers.
116

These commenters expressed the view that the issuers that would be exempt from the ICFR auditor attestation requirement under the proposed amendments are less likely to have ineffective ICFR than other issuers. One commenter cited a study that concluded that biotech EGCs are less likely to have ineffective ICFR than other issuers.
117

Another commenter noted that ineffective ICFR is less of a concern for banking issuers because of the “federal and state regulatory oversight and internal control audits of community banks.”
118

116

See, e.g.,
letters from BIO and Guaranty.

117

See
letter from BIO (citing the BIO Study). Note that the BIO Study investigates only the incremental effect of being in the category of biotech EGCs after accounting for the association of ineffective ICFR with the other characteristics of these issuers (such as their size and return on assets). It is unclear from the study whether these issuers have a higher or lower rate of ineffective ICFR on average, when considering all of their characteristics.

118

See
letter from Guaranty.

Conversely, a number of other commenters contended that the benefits of the ICFR auditor attestation requirement are greater for low-revenue and smaller issuers than for other issuers.
119

Some of the commenters discussed how those issuers are more likely to have ineffective ICFR.
120

Commissioner Robert J. Jackson Jr.'s dissent from the Proposing Release (“Commissioner Jackson's Statement”)
121

asserted that investors care most about ICFR auditor attestations at those issuers that would not be subject to the ICFR auditor attestation requirement under the proposed amendments, and that high-growth companies, which potentially would include some of the affected issuers, are those in which the risk and consequences of fraud are the greatest.
122

Some commenters referred to statistics cited in the Proposing Release to argue that issuers not subject to the ICFR auditor attestation requirement have higher levels of ineffective ICFR compared with issuers subject to that requirement.
123

Additionally, commenters observed that some low-revenue issuers or smaller companies may still have complex financial statements that require sophisticated accounting.
124

119

See, e.g.,
letters from Better Markets, CAQ, CFA, CFA Inst., CII, Crowe, EY, Grant Thornton, IMA, NASBA, Prof. Barth
et al.,
Prof. Hassell, and RSM.

120

See, e.g.,
letters from Better Markets, CAQ, CFA, CII, Grant Thornton, IMA, NASBA, Prof. Barth
et al.,
and Prof. Hassell.

121
Commissioner Robert J. Jackson Jr.,
Statement on Proposed Amendments to Sarbanes Oxley 404(b) Accelerated Filer Definition
(May 9, 2019), available at
https://www.sec.gov/news/public-statement/jackson-statement-proposed-amendments-accelerated-filer-definition
. A few commenters cited Commissioner Jackson's Statement.
See, e.g.,
letters from CFA, CFA Inst., and CII.

122
We address Commissioner Jackson's Statement in the Economic Analysis.
See
Section IV.C.3.c. below.

123
Commenters cited the statistics in the Proposing Release, note 4 above, that over 40 percent of non-accelerated filers that are not subject to the ICFR auditor attestation requirement have ineffective ICFR, compared to less than approximately nine and five percent of accelerated and large accelerated filers, respectively. As noted in the Proposing Release, note 4 above, over 68 percent of non-accelerated filers have reported two consecutive years of ineffective ICFR and over 38 percent have reported four consecutive years of ineffective ICFR in their annual reports.
See, e.g.,
letters from Better Markets and Grant Thornton.

124

See, e.g.,
letters from BDO and RSM.

Finally, some commenters maintained that the risks of fraud
125

and financial statement restatements or misstatements
126

are greater for the issuers that would not be subject to the ICFR auditor attestation requirement under the proposed amendments than they are for other issuers. Other commenters cited research that concludes that, since 2003, non-accelerated U.S. filers accounted for 62 percent of the total U.S. financial statement restatements.
127

Some commenters contended that issuers that would not be subject to the ICFR auditor attestation requirement under the proposed amendments have fewer resources and personnel,
128

which could result in increased misstatements,
129

unidentified material weaknesses,
130

and ineffective ICFR.
131

125

See, e.g.,
letters from Better Markets, CFA, CII, and Prof. Barth
et al.

126

See, e.g.,
letters from Better Markets, CAQ, EY, Grant Thornton, IMA, Prof. Barth
et al.,
and RSM.

127

See, e.g.,
letters from CAQ and CFA Inst.

128

See, e.g.,
letters from CAQ, Crowe, EY, and Grant Thornton.

129

See, e.g.,
letter from Crowe.

130

See, e.g.,
letter from EY.

131

See, e.g.,
letters from CAQ and Grant Thornton.

e. Comments on the Relationship Between Non-Accelerated Filers and SRCs

A number of commenters discussed the relationship between the non-accelerated filer and SRC definitions.
132

Some commenters noted the current relationship is incongruent, which results in complexity.
133

Several commenters indicated that the proposed amendments would reduce some of this complexity by more closely aligning the definitions.
134

In contrast, other commenters asserted that the proposed amendments would increase the complexity of determining filer status.
135

132

See, e.g.,
letters from ASA, BDO, BIO, Broadmark, CFA, CFA Inst., Chamber, EY, Grant Thornton, Guaranty, KPMG LLP (July 29, 2019) (“KPMG”), NAM, Nasdaq, PWC, and RSM.

133

See, e.g.,
letters from BDO, BIO, Broadmark, CFA, and Nasdaq.

134

See, e.g.,
letters from BIO, Grant Thornton, KPMG, and Nasdaq.

135

See, e.g.,
letters from BDO, CFA Inst., EY, PWC, and RSM.
See also
SBCFAC Meeting Transcript (Aug. 13, 2019), available at
https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-081319.pdf
.

While supporting the proposed amendments, some commenters recommended that the final amendments completely align the SRC and non-accelerated filer definitions.
136

Additionally, one commenter recommended further extending the relief from the ICFR auditor attestation requirement to issuers with a public float that exceeds $700 million if their annual revenues are less than $100 million.
137

136

See, e.g.,
letters from ASA, Guaranty, NAM, and Nasdaq.

137

See
letter from Corvus.

f. Other Comments

We received a variety of other comments on the Proposing Release. Some commenters noted that it is difficult for investors to easily determine whether an issuer's filing includes an ICFR auditor attestation.
138

These commenters suggested requiring issuers to disclose whether they are exempt from the ICFR auditor attestation requirement
139

and/or have voluntarily obtained an ICFR auditor attestation
140

either on a filing's cover page,
141

such as with a check box,
142

or in management's report on ICFR.
143

Two commenters recommended that the Commission engage in a post-implementation review of the impact of the final amendments,
144

with one of these commenters recommending that

the final amendments require a review of the impact of the changes on the affected registrants five years after adoption of the amendments.
145

Some commenters requested that we allow sufficient time and notice for auditors and issuers to prepare for compliance with the final amendments,
146

whereas other commenters noted that some issuers may be subject to the ICFR auditor attestation requirement for only a short time
147

and requested the Commission adopt final amendments quickly.
148

One commenter asserted that the measurement date for non-accelerated filer status and the timing of the start of the auditor's attestation of ICFR is burdensome to small biotech registrants.
149

138

See, e.g.,
letters from CAQ, CFA Inst., and Grant Thornton.

139

See, e.g.,
letters from CFA Inst., CII, and Grant Thornton.

140

See, e.g.,
letters from CFA Inst. and KPMG.

141

See, e.g.,
letters from CAQ, CFA Inst., CII, and Grant Thornton.

142

See, e.g.,
letters from CAQ and Grant Thornton.

143

See
letter from Grant Thornton.

144

See
letters from IMA and PWC.

145

See
letter from IMA.

146

See, e.g.,
letters from BDO, CAQ, Crowe, EY, KPMG, PWC, and RSM.

147

See, e.g.,
letters from Concert, MSB, Nasdaq, and Xenon.

148

See, e.g.,
letters from MSB and Summit.

149

See
letter from Corvus. Public float for both SRC status and accelerated and large accelerated filer status is measured on the last business day of the issuer's most recently completed second fiscal quarter, and revenue for purposes of determining SRC status is measured based on annual revenues for the most recent fiscal year completed before the last business day of the second fiscal quarter. Therefore, an issuer will be aware of any change in SRC status or accelerated or large accelerated filer status as of that date. Although an issuer that determines it will no longer be eligible to be an SRC is permitted to continue to use the SRC accommodations for the Form 10-K for the year in which it fails the measurement test, an issuer that becomes an accelerated or large accelerated filer on that same measurement date would be required to include the ICFR auditor attestation in that Form 10-K.
See
Rule 12b-2, Item 10(f)(2)(i)(C), and Rule 405. Although the transition provisions apply differently, the measurement dates for SRC status and accelerated and large accelerated filer status each provide an issuer with at least six months to prepare for a change in its status, and we continue to believe that this is an adequate amount of time to prepare for the transition.

Additionally, although we did not propose amendments to the accelerated and large accelerated filer definitions that would specifically address foreign private issuers (“FPI”) or business development companies (“BDC”), we solicited comment on these points and a few commenters requested we do so.
150

One commenter asserted that there should be no disparity between an FPI that presents its financial statements in accordance with International Financial Reporting Standards (“IFRS”) and a domestic issuer or FPI that presents its financial statements in accordance with U.S. GAAP.
151

The commenter noted that an FPI that presents its financial statements in accordance with IFRS cannot be an SRC, so such an FPI cannot rely on the proposed amendments. Another commenter recommended that the Commission extend the benefits of non-accelerated filer status to BDCs if they have total investment income of less than $80 million in their most recently completed fiscal year for which audited financial statements are available and have either no public float or public float of less than $700 million.
152

The commenter stated that allowing BDCs to qualify as non-accelerated filers under this modified SRC revenue test would reduce regulatory asymmetry between BDCs and operating companies, consistent with recent congressional mandates to allow BDCs to use the same offering rules as operating companies. The commenter also suggested that allowing smaller BDCs to benefit from non-accelerated filer status would ease regulatory costs and burdens, which could encourage more BDCs to enter public markets, creating greater access to capital for small operating companies and expanding investment opportunities for retail investors.
153

150

See, e.g.,
letters from Dorsey & Whitney LLP (Aug. 16, 2019) (“Dorsey & Whitney”) and Proskauer Rose LLP (July 26, 2019) (“Proskauer”).

151

See
letter from Dorsey & Whitney.

152

See
letter from Proskauer.

153

Id.

3. Final Amendments

After considering the comments, we are adopting the final amendments substantially as proposed. The final amendments add a new condition to the accelerated and large accelerated filer definitions in Rule 12b-2 that excludes an issuer that is eligible to be an SRC and that had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. The amendments also allow BDCs to qualify for this exclusion if they meet the requirements of the SRC revenue test using their annual investment income as the measure of annual revenue, although BDCs would continue to be ineligible to be SRCs.
154

The final amendments are consistent with our historical practice of providing scaled disclosure and other accommodations for smaller issuers
155

and with recent actions by Congress to reduce burdens on new and smaller issuers.
156

The table below summarizes the conditions required to be considered an accelerated and large accelerated filer under the final amendments to Rule 12b-2.

154

See
Section II.B.3.f. below.

155

See, e.g., Smaller Reporting Company Regulatory Relief and Simplification,
Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan. 4, 2008)];
Smaller Reporting Company Regulatory Relief and Simplification,
Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan. 4, 2008)] (“2007 SRC Adopting Release”); and SRC Adopting Release, note 12 above.

156

See
note 11 above.

Table 1—Accelerated Filer and Large Accelerated Filer Conditions Under the Final Amendments

Final accelerated filer conditions
Final large accelerated filer conditions

The issuer has a public float of $75 million or more, but less than $700 million, as of the last business day of the issuer's most recently completed second fiscal quarter
The issuer has a public float of $700 million or more, as of the last business day of the issuer's most recently completed second fiscal quarter.

The issuer has been subject to the requirements of Exchange Act Section 13(a) or 15(d) for a period of at least twelve calendar months
Same.

The issuer has filed at least one annual report pursuant Exchange Act Section 13(a) or 15(d)
Same.

The issuer is not eligible to use the requirements for SRCs under the revenue test in paragraph (2) or (3)(iii)(B), as applicable, of the “smaller reporting company” definition in Rule 12b-2 or, in the case of a BDC, does not meet the requirements of the revenue test in those paragraphs using annual investment income as the measure of its annual revenues
Same.

Below we discuss specific aspects of the final amendments about which we received significant public comment and our response to those comments. In many cases, our responses reflect analysis and data that is more comprehensively presented in the Economic Analysis.
157

157

See
Section IV. below.

a. Using Revenue for Determining Accelerated and Large Accelerated Filer Status

As discussed above,
158

several commenters supported the use of revenue in the proposal, providing a variety of reasons that a revenue measurement is preferable to using a public float measurement.
159

Others, however, questioned whether revenue is an appropriate measure for determining whether an issuer should be considered a non-accelerated filer.
160

One of these commenters asserted that low-revenue issuers may have less sophisticated or experienced accounting functions and some aspects of their business may be associated with accounting complexities.
161

Also, the commenter suggested that these issuers may recognize revenue in ways that could result in them frequently transitioning in and out of non-accelerated filer status.
162

158

See
Section II.A.2.a. above.

159

See, e.g.,
letters from Broadmark, Chamber, Concert, Corvus, and MSB.

160

See, e.g.,
letters from EY and Grant Thornton, and NASBA.

161

See
letter from EY.

162

Id.

As we discuss in more detail below,
163

we continue to believe, as a general matter, that there may be greater costs and relatively lower benefits to including low-revenue issuers, as compared to other issuers, in the accelerated and large accelerated filer definitions. While we recognize that the circumstances of individual issuers and their accounting systems and processes may vary, we believe that low-revenue issuers may, on average, be less susceptible to the risk of certain types of restatements, such as those related to revenue recognition.
164

We also note that the revisions to the transition thresholds included in the final amendments may help minimize the risk of frequent reclassifications of issuer status.
165

For these reasons, we continue to believe that revenue is an appropriate measure for determining whether an issuer should be considered a non-accelerated filer.

163

See
Sections II.B.3.d. and Section IV.C.2.d. below.

164

See
Section IV.C.3. below.

165

See
Section II.C. below.

b. Effect on Capital Formation and the Number of Public Companies

Under the final amendments, an issuer that is eligible to be an SRC and that meets the SRC revenue test will not be required to comply with accelerated or large accelerated filer requirements and, thereby, will not be subject to the ICFR auditor attestation requirement. Not subjecting these affected issuers to the ICFR auditor attestation requirement should reduce their compliance costs. As discussed in the Economic Analysis,
166

we estimate that, consistent with the proposal, an issuer no longer subject to the ICFR auditor attestation requirement would save approximately $210,000 per year comprised of approximately $110,000 per year reduction in audit fees and an additional reduction in non-audit costs of approximately $100,000.

166

See
Section IV.C.2.b. below.

Some commenters stated that eliminating the ICFR auditor attestation requirement would enhance capital formation or allow those issuers to preserve capital.
167

We note, however, that a number of other commenters asserted that these cost savings would be small,
168

and may not help capital formation.
169

As we discuss in the Economic Analysis,
170

we continue to believe that the expected savings are likely to represent a meaningful cost savings for many of the affected issuers and, therefore, may have a positive effect on capital preservation and formation. Although the average annual cost savings may represent a small percentage of the average affected issuer's revenues and market capitalization, we believe those savings may be meaningful given that affected issuers have, on average, negative net income and negative net cash flows from operations.
171

More generally, low-revenue issuers are likely to face financing constraints because they do not have access to internally generated capital.
172

Therefore, the average savings of $210,000 per year for these issuers may be put to productive use
173

such as developing the company.
174

167

See, e.g.,
letters from Andersen, CLSA, Concert, ICBA, and NASBA.

168

See
letters from CFA, CFA Inst., CII, and Prof. Barth
et al.

169

See
note 50 above.

170

See
Section IV.C.2.d. below.

171

See
note 362 below.

172
This information is based on staff analysis of data from Compustat.
See
Section IV.C.2.d. below.

173
For example, in a survey of issuers in the biotech industry, among 11 biotech EGCs that responded to a question regarding how an extension of the exemption from the ICFR auditor attestation requirement would affect them given the costs associated with the requirement, eight out of the 11 issuers indicated that they expected a positive impact on investments in research and development and six out of the 11 issuers indicated that they expected a positive impact on hiring employees.
See
BIO Study, note 423 above.

174

See, e.g.,
letters from Adamas, Aequor, Andersen, Ardelyx, Catalyst, Chiasma, CLSA, Concert, Corvus, CymaBay, Daré, Evoke, Equillium, Gritstone, ICBA, Kezar, Marinus, Millendo, NASBA, Organovo, Pieris, Revance, SI-BONE, Sutro, Syros, Teligent, and Zynerba.

As we noted in the Proposing Release,
175

the affected issuers are a type of smaller issuer whose representation in public markets has decreased relative to the years before SOX. Over the past two decades, the number of issuers listed on major exchanges has decreased by about 40 percent,
176

but the decline has been concentrated among smaller size issuers. For example, the number of listed issuers with a market capitalization below $700 million has decreased by about 65 percent,
177

and the number of issuers with less than $100 million in revenue has decreased by about 60 percent.
178

Although factors other than the ICFR auditor attestation requirement may have contributed to the decline,
179

we believe that the described cost reductions associated with the final amendments could be a positive factor in encouraging additional small companies to register their securities offerings or a class of their securities, which would provide an increased level of transparency and investor protection with respect to those companies.
180

175

See
Section III.C.1. of the Proposing Release, note 4 above. Staff extracted information regarding whether issuers reported having securities registered under Section 12(b) of the Exchange Act from the cover page of annual report filings using a computer program supplemented with hand collection.
See
note 336 below for details on the identification of the population of affected issuers.

176
This estimate is based on staff analysis of data from the Center for Research in Security Prices database for December 1998 versus December 2018. The estimate excludes RICs and issuers of ADRs.

177

Id.

178
This estimate is based on staff analysis of data from Standard & Poor's Compustat and Center for Research in Security Prices databases for fiscal year 1998 versus fiscal year 2017. The estimate excludes RICs and issuers of ADRs.

179

See
note 54 above.

180

See, e.g.,
letters from AdvaMed, AdvaMed
et al.,
Broadmark, Cerecor, and ICBA.

c. Effect on Investor Protection

We continue to believe that the amendments are not likely to have a significant effect on the overall ability of investors in the affected issuers to make informed investment decisions and note that many commenters agreed with this assessment.
181

As discussed in greater detail in the Proposing Release,
182

issuers have a number of other obligations that we believe will provide sufficient protections for investors in the affected issuers and allow investors in those issuers to make informed investment decisions. These responsibilities derive from the Foreign Corrupt Practices Act (“FCPA”)

requirements with respect to internal accounting controls
183

as well as a number of different changes to financial reporting that were introduced by SOX.
184

181

See
note 61 to 68 above and accompanying text.

182

See
Section II.B. of the Proposing Release, note 4 above.

183
The FCPA added Section 13(b)(2)(B) to the Exchange Act, 15 U.S.C 78m(b)(2)(B) (referring to “internal accounting controls” rather than ICFR).

184

See, e.g.,
SOX Sections 302, 15 U.S.C. 7241, and 404(a) and related rules.
See
17 CFR 229.308, 17 CFR 240.13a-15, 17 CFR 240.15d-15, Form 20-F, Form 40-F, 17 CFR 270.30a-2, and 17 CFR 270.30a-3.

For example, although a non-accelerated filer that is eligible to be an SRC and that meets the SRC revenue test will not be subject to the ICFR auditor attestation requirement, it will remain subject to the SOX Section 404(a) requirement to state in its annual report the responsibility of management for establishing and maintaining an adequate control structure and procedures for financial reporting, and for that report to contain an assessment of the effectiveness of that structure and its procedures. In addition, affected issuers are required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit the preparation of financial statements in conformity with GAAP.
185

Also, the principal executive and financial officers of certain issuers are required to certify that, among other things, they are responsible for establishing and maintaining ICFR, have designed disclosure controls and procedures to ensure material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, and have evaluated and reported on the effectiveness of the issuer's disclosure controls and procedures.
186

185
15 U.S.C. 78m(b)(2)(B).

186

See
17 CFR 240.13a-14 or 17 CFR 240.15d-14 (requiring certification) and 17 CFR 229.601(b)(31) (prescribing certification content). These rules were adopted pursuant to SOX Section 302.
See
15 U.S.C. 7241.

Furthermore, the issuers that are subject to the final amendments will remain subject to a financial statement audit by an independent auditor, which will help maintain appropriate investor protections. Even without an ICFR auditor attestation requirement, an independent auditor is required to consider ICFR in the performance of a financial statement audit.
187

We acknowledge, as stated by some commenters,
188

that the objective of a financial statement audit and the level of control testing performed is different from an ICFR audit. However, we believe that the requirements of a financial statement audit, among other requirements, provide some additional protections and that, for low-revenue SRCs, this and the other protections and factors associated with these issuers described above sufficiently mitigate the risk that the final amendments will adversely affect the ability of investors to make informed investment decisions.
189

187

See
Public Company Accounting Oversight Board (“PCAOB”) Accounting Standard (“AS”) 2110,
Identifying and Assessing Risks of Material Misstatement,
paragraphs .18 through .40 (“PCAOB AS 2110”), paragraphs .18 through .40.

188

See
note 83 above.

189

See
Section IV.C.3.b. below (stating that, in the Proposing Release, note 4 above, we noted that low-revenue issuers may be less likely than other issuers to fail to detect and disclose material weaknesses in the absence of an ICFR auditor attestation, perhaps because they have less complex financial systems and controls).

For example, the auditor in a financial statement audit is required to identify and assess the risks of material misstatements, which is similar to the risk assessment evaluation required in an ICFR auditor attestation. Additionally, the auditor engaged in a financial statement audit often may test the operating effectiveness of certain internal controls even if not performing an integrated audit to reduce the extent of substantive testing required to issue an opinion on the financial statements. Moreover, even if an auditor decides not to rely on internal controls to reduce the extent of substantive testing, the auditor may still identify internal control deficiencies during such substantive testing in a financial statement audit.

Under PCAOB standards, the evaluation and communication of significant deficiencies and material weaknesses in ICFR to management and the issuer's audit committee is required in both a financial statement audit and an ICFR auditor attestation.
190

The evaluation of the severity of a control deficiency identified by the auditor is the same for a financial statement audit and an ICFR auditor attestation. Further, a financial statement auditor has the responsibility to review management's disclosure for any misstatement of facts, such as a statement that ICFR is effective when there is a known material weakness.
191

Therefore, we continue to believe significant deficiencies and material weaknesses that an ICFR auditor attestation may uncover also may be uncovered as a part of the financial statement audit of a low-revenue SRC. As discussed above,
192

because of these requirements, a number of commenters agreed that an auditor of the financial statements of a low-revenue issuer that would be exempt from the ICFR auditor attestation requirement under the final amendments would still be required to consider ICFR and therefore this process would provide sufficient investor protection.

190

See
Section II.C. of the Proposing Release, note 4 above.

191

Id.

192

See
notes 61 to 68 above and accompanying text.

Other developments may serve to reinforce these existing investor protections. In 2010, the PCAOB adopted enhanced auditing standards related to the auditor's assessment of, and response to, risk that, in part, clarify and augment the extent to which internal controls are to be considered in a financial statement audit.
193

In particular, these risk assessment standards require auditors in both an integrated and financial statement audit to evaluate the design of certain controls.
194

The PCAOB has expressed concern about the number and significance of deficiencies in auditing firm compliance with these risk assessment auditing standards, but it has also noted promising improvements in their application.
195

193

See Auditing Standards Related to the Auditor's Assessment of and Response to Risk and Related Amendments to PCAOB Standards,
PCAOB Release No. 2010-004 (Aug. 5, 2010) (“PCAOB Release No. 2010-004”).
See also Public Company Accounting Oversight Board; Order Approving Proposed Rules on Auditing Standards Related to the Auditor's Assessment of and Response to Risk and Related Amendments to PCAOB Standards,
Release No. 34-63606, File No. PCAOB 2010-01 (Dec. 23, 2010) [75 FR 82417 (Dec. 30, 2010)] (“PCAOB Release No. 2010-01”). These auditing standards are discussed in further detail in the Economic Analysis.
See
Section IV.B.1. below.

194

See
AS 2110, paragraphs .18 through .40, note 187 above.

195

See Inspection Observations Related to PCAOB “Risk Assessment” Auditing Standards (No. 8 through No.15),
PCAOB Release No. 2015-007 i through iii (Oct. 15, 2015) (“PCAOB Release No. 2015-007”).

Additionally, recent settled charges against four public companies for failing to maintain effective ICFR for seven to 10 consecutive annual reporting periods
196

may have a deterrent effect on issuers failing to remediate material weaknesses, which could reduce the overall rate of persistence of material weaknesses in ICFR. Also, if management elects to obtain and use automated controls testing and process automation,
197

this may result in

improvements in ICFR regardless of the ICFR auditor attestation requirement if their increased application results in more robust financial reporting with fewer opportunities for ICFR deficiencies and/or in an increase by management in their testing and related improvements of controls. In Section IV.C.3.b.5, we note, as an example, that issuers may have made investments in systems, procedures, or training to explain how control improvements may persist for certain affected issuers. Finally, we note that auditors have had many years of experience with the 2010 risk assessment standards, and therefore auditors may be more likely to test ICFR, even if an ICFR auditor attestation is not required, as a means of enhancing auditing efficiency.
198

196

See SEC Charges Four Public Companies with Longstanding ICFR Failures,
press release (Jan. 29,2019) (“SEC Press Release”), available at
https://www.sec.gov/news/press-release/2019-6
.

197

See, e.g.,
Kevin Moffitt, Andrea Rozario, & Miklos Vasarhelyi (2018),
Robotic Process Automation for Auditing,
Journal of Emerging Technologies, 15(1) Acct. 1 (“Robotic Process Automation”) (describing how, for example, a robotic process automation program can be “set up to automatically match purchase orders, invoices, and shipping documents [and] can check that the

price and quantity on each of the documents match [to] help auditors validate the effectiveness of preventive internal controls . . . .”).

198

See Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 For Issuers With Public Float Between $75 and $250 Million
at 106 (Apr. 2011) (“2011 SEC Staff Study”), available at
https://www.sec.gov/news/studies/2011/404bfloat-study.pdf
(stating that “. . . once effective controls are in place at the issuer, the auditor is more likely to continue to test them even if [it is] not issuing an auditor attestation during a particular year in order to rely on them for purposes of reducing substantive testing in the audit of the financial statements, particularly for issuers that are larger and more complex”).

We recognize that some commenters disagreed with this assessment and asserted that investor protections other than the ICFR auditor attestation requirement would not be sufficient because, among other reasons, a financial statement audit has a different objective than an integrated audit,
199

testing of ICFR in a financial statement audit is not as extensive,
200

it is more difficult for a financial statement auditor to challenge the design of ICFR,
201

and a financial statement audit is not designed to identify significant ICFR deficiencies or material weaknesses.
202

As discussed in the Economic Analysis, we acknowledge that the amendments may be associated with some adverse effects on the effectiveness of ICFR and the reliability of financial statements for the affected issuers.
203

However, the Proposing Release presented evidence that suggests that these effects and their impact on investor protection are likely to be mitigated in the case of the affected issuers as compared to other accelerated filers. The Economic Analysis provides further related analysis in response to commenter feedback and does not find evidence that leads us to alter this view.
204

199

See, e.g.,
letters from CAQ, CFA Inst., and RSM.

200

See
letter from EY.

201

Id.

202

Id.

203

See
Section IV.A. below.

204

Id.

One commenter indicated that a low-revenue issuer could have a large market capitalization and thus “greater investor exposure.”
205

As discussed in the Economic Analysis,
206

we agree that, as capitalization increases, there is more investor capital at risk. We note, however, that relative to higher-revenue issuers, on average, risk among these issuers is likely more associated with their future prospects than their current financial statements.
207

Therefore, exempting low-revenue issuers from the ICFR auditor attestation requirement is less likely to affect investor protections with respect to those issuers.

205

See
letter from Grant Thornton.

206

See
Section IV.C.3.d. below.

207
Also, the affected parties are limited to issuers with no more than $700 million in public float. Further, as discussed in Section IV.C.3.d below, we estimate that in aggregate the affected issuers that will be newly exempt from all ICFR auditor attestation requirements represent 0.2 percent of the total equity market capitalization of issuers.

One commenter noted its concern that certain issuers that would no longer be subject to the ICFR auditor attestation requirement are conducting large initial public offerings (“IPOs”) based on key performance indicators that are derived from financial systems, and that eliminating the ICFR auditor attestation requirement could result in potentially less robust internal controls and unreliable data.
208

To the extent the commenter is primarily concerned with the information available to investors at the time of an IPO, we note that the affected issuers that would be newly exempt from the ICFR auditor attestation requirement are generally more mature firms that are not within five years of their IPO.

208

See
letter from NASBA.

Also, we believe the risk for those low-revenue issuers for which key performance indicators are material to investors and that are derived from financial systems is mitigated by the requirement to maintain, evaluate, and disclose effectiveness of disclosure controls and procedures
209

on a quarterly basis.
210

Key performance indicators or non-GAAP measures disclosed within a report filed or submitted to the Commission generally are within the scope of disclosure controls and procedures. The financial systems from which an issuer derives the key performance indicator or non-GAAP measure would normally be included in ICFR and, therefore, within the scope of management's assessments as well. Further, the Commission recently issued disclosure guidance on key performance indicators and metrics and reminded issuers of the importance of effective controls and procedures when disclosing material key performance indicators or metrics that are derived from their own information.
211

209
Although there is substantial overlap between an issuer's disclosure controls and procedures and ICFR, there are elements of each that are not subsumed by the other.
See
17 CFR 240.13a-15 and 17 CFR 240.15d-15.

210

See
17 CFR 240.13a-14 and 17 CFR 240.15d-14.

211

See
Commission Guidance on Management's Discussion and Analysis of Financial Condition and Results of Operations, Release No. 34-88094 (Jan. 30, 2020).

d. Disproportionate Costs and Benefits of the ICFR Auditor Attestation for Small and Low-Revenue Companies

Not only is the ICFR auditor attestation requirement costly in general, as discussed above, a number of commenters asserted that the ICFR auditor attestation requirement is disproportionally costly to small and low-revenue issuers.
212

We agree that the costs of the ICFR auditor attestation requirement may be particularly burdensome for these issuers because they include fixed costs that are not scalable for smaller issuers, as also noted by several commenters.
213

Further, low-revenue issuers have limited access to internally generated capital, and so the costs may more directly impact their ability to spend on investments or hiring.
214

We therefore expect that reducing these costs would have a more beneficial impact on small and low-revenue issuers than it would for other issuers. Some commenters similarly expressed the view that the amendments would enhance these issuers' ability to preserve capital without significantly affecting the ability of investors to make informed investment decisions based on the financial reporting of those issuers.
215

212

See
note 102 above and accompanying text.

213

See
letters from ASA, Broadmark, Chamber, and Guaranty.

214

See, e.g.,
letters from Daré, Summit and Xenon.

215

See
letters from Andersen, CLSA, Concert, ICBA, and NASBA.

As discussed above, other commenters claimed that eliminating the ICFR auditor attestation requirement would not substantially reduce costs to issuers
216

and that there would be other negative impacts of this change.
217

We acknowledge that the magnitude of these cost savings likely will vary among issuers depending upon their

particular facts and circumstances
218

and, as some commenters asserted,
219

ICFR auditor attestations have become less expensive over time because auditors are more experienced in conducting them. However, based on the comments received and our own analysis of available data,
220

we believe the cost reductions from not being subject to the ICFR auditor attestation requirement could be substantial for affected issuers.

216

See
note 108 above and accompanying text.

217

See
notes 110 to 113 above and accompanying text.

218

See, e.g.,
letters from EY, Grant Thornton, and PWC.

219

See, e.g.,
letters from CFA Inst. and Deloitte.

220

See
Section IV.C.2.d.

We believe the benefits of the ICFR auditor attestation requirement likely are fewer for low-revenue SRCs than for other issuers, an assessment supported by some commenters.
221

As a result, obtaining the ICFR auditor attestation is likely, on average, to be less meaningful for these issuers, and not obtaining one should have less of an impact on investor protection than for other types of issuers. First, we note that low-revenue SRCs may be less susceptible to the risk of certain kinds of misstatements, such as those related to revenue recognition. As discuss in the Economic Analysis,
222

10 to 20 percent of restatements and about 60 percent of financial disclosure fraud cases in recent times have been associated with improper revenue recognition,
223

which is less of a risk, for example, for issuers that currently have little to no revenue.

221

See
notes 116 to 118 above and accompanying text.

222

See
Section IV.C.3. below.

223

See
Audit Analytics,
2017 Financial Restatements: A Seventeen Year Comparison,
(May 2018)
,
and Committee of Sponsoring Organizations of the Treadway Commission, (“COSO”),
Fraudulent Financial Reporting 1998-2007: An Analysis of U.S. Public Companies
(2010).) (“COSO 2010 Fraud Study”), available at
http://www.coso.org/documents/COSO-Fraud-Study-2010-001.pdf
.

Second, as we noted in Table 14 of the Proposing Release,
224

issuers with revenues of less than $100 million have, on average, restatement rates that are three to nine percentage points lower than those for higher-revenue issuers. Moreover, certain low-revenue SRCs likely have less complex financial systems and controls and, therefore, may be less likely than other issuers to fail to detect and disclose material weaknesses in the absence of an ICFR auditor attestation.

224

See
Section III.C.4.b. of the Proposing Release, note 4 above.

Third, we believe that those issuers' financial statements may be less critical to assessing their valuation given, for example, the relative importance of their future prospects. We recognize that other commenters disagreed and asserted that benefits of the ICFR auditor attestation requirement are greater for lower-revenue and smaller issuers than for other issuers.
225

We carefully considered these comments and, as discussed in the Economic Analysis, investigated the claims by conducting supplemental analysis, but we did not find evidence that led us to alter our views.
226

225

See
notes 119 to 124 above and accompanying text.

226

See
Section IV.C.3.a. below.

e. Relationship Between Non-Accelerated Filers and SRCs

Under the final amendments, some, but not all, SRCs would become non-accelerated filers. We are not adopting an alternative suggested by some commenters of fully aligning the SRC and non-accelerated filer definitions. As we note in the Economic Analysis,
227

although full alignment of the two definitions could provide several benefits, including greater regulatory simplicity, reducing any frictions or confusion associated with issuers' determination of their filer status or reporting regime, and expanding the number of issuers that qualify as non-accelerated filers, fully aligning the two definitions also could result in costs that are greater than those for the amendments we are adopting. For example, the mitigating factors associated with exempting low-revenue issuers, such as a potential lower susceptibility to the risks of certain kinds of misstatements and a greater role of future prospects relative to current financial statements in driving market valuations for these issuers as compared to other issuers,
228

may not be present or may be more limited, for other types of SRCs.

227

See
Section IV.C.5.a. below.

228

See
Section IV.C.3. below.

As a result, fully aligning the SRC and non-accelerated filer thresholds could have adverse effects on the reliability of the financial statements of the issuers with higher revenues and the ability of investors to make informed investment decisions about those issuers.
229

Therefore, we do not believe it would be appropriate at this time to increase the public float threshold for non-accelerated filers to align that definition with the SRC definition. Additionally, we note that many non-accelerated filers remain eligible for the JOBS Act Exemption for their first five years as a public company. The table below summarizes the relationships between SRCs and non-accelerated and accelerated filers under the final amendments.

229

Id.

Table 2—Relationships Between SRCs and Non-Accelerated, Accelerated, and Large Accelerated Filers Under the Final Amendments

Relationships between SRCs and non-accelerated, accelerated, and large accelerated filers under the final amendments
Status
Public float
Annual revenues

SRC and Non-Accelerated Filer
Less than $75 million
N/A.

$75 million to less than $700 million
Less than $100 million.

SRC and Accelerated Filer
$75 million to less than $250 million
$100 million or more.

Accelerated Filer (not SRC)
$250 million to less than $700 million
$100 million or more.

Large Accelerated Filer (not SRC)
$700 million or more
N/A.

f. Effect on Business Development Companies

In a change from the proposal, the final amendments also exclude BDCs from the accelerated and large accelerated filer definitions under circumstances that are analogous to the exclusions for other issuers under the amendments. The amendments include a specific provision applicable to BDCs, because BDCs are not eligible to be SRCs and to provide a definition of “revenue” for BDCs to use for this purpose.
230

Specifically, a BDC will be excluded from the accelerated and large

accelerated filer definitions in Rule 12b-2 if the BDC: (1) Has a public float of $75 million or more, but less than $700 million; and (2) has investment income of less than $100 million.
231

The amendments to Rule 12b-2 provide that, for this purpose, a BDC's revenue is the BDC's investment income, as defined in Rule 6-07.1 of Regulation S-X.
232

BDCs are subject to the same transition provisions for accelerated filer and large accelerated status that apply to other issuers under the amendments, except that the amendments' BDC-specific “revenue” definition will apply to these transition provisions as well.
233

230
Although a BDC is considered to be eligible to use the requirements for SRCs under the revenue test in paragraph (2) or (3)(iii)(B) of the “smaller reporting company” definition in Rule 12b-2 for purposes of the amended accelerated filer and large accelerated filer definitions, BDCs will continue to be ineligible to be SRCs under the final amendments.

231

See
paragraphs (1)(iv), (2)(iv), and (4) of the amended definitions of accelerated filer and large accelerated filer in Rule 12b-2. Consistent with the current definitions of these terms, a BDC with public float of less than $75 million is already a non-accelerated filer, regardless of the amount of its annual investment income.

232

See
17 CFR 210.6-07.1.

233

See
Section II.C. below (discussing the amended transition provisions more generally).

Although the Commission did not propose to exclude BDCs from the accelerated and large accelerated filer definitions using the SRC revenue test, the Commission did solicit comment on such an approach and discussed the relative costs and benefits of this alternative in the Proposing Release.
234

In response, one commenter urged that we adopt such an approach, stating that, among other reasons, the policy reasons that support providing regulatory relief to smaller reporting companies should apply equally to smaller BDCs.
235

This commenter suggested that the Commission expand the proposed amendment to the definition of accelerated filer and large accelerated filer to exclude BDCs with total investment income of less than $80 million in the most recently completed fiscal year for which audited financial statements are available and either no public float or public float of less than $700 million.

234

See
Sections II.C., II.E., and III.C.6. of the Proposing Release, note 4 above.

235

See
letter from Proskauer.

Although we observed in the Proposing Release that the SRC revenue test would not be meaningful for BDCs because BDCs prepare financial statements under Article 6 of Regulation S-X and generally do not report revenue, the final amendments' definition of “revenue” for purposes of the BDC-specific provisions incorporate information that BDCs report in their financial statements. A BDC's investment income includes income from dividends, interest on securities, and other income.
236

We recognize, as stated in the Proposing Release, that investors in BDCs generally may place greater significance on the financial reporting of BDCs relative to low-revenue non-investment company issuers and BDC financial statements will continue to be audited by an independent auditor. As the commenter supporting this approach observed, however, the policy considerations supporting the final amendments generally apply to BDCs.
237

Moreover, BDCs that are excluded from the accelerated and large accelerated filer definitions will remain obligated, among other things, to establish and maintain internal control over financial reporting and have management assess the effectiveness of internal control over financial reporting. The final amendments also are consistent with other rulemaking initiatives in which we have sought to provide BDCs parity with other reporting companies in appropriate circumstances.
238

236
A BDC's annual investment income is equivalent to annual revenues solely for purposes of the accelerated filer and large accelerated filer definitions. These amendments do not affect the meaning of “revenue” or “investment income” in other Commission rules or provisions of the securities laws.

237

See
letter from Proskauer.

238

See Securities Offering Reform for Closed-End Investment Companies,
Release No. 33427 (Mar. 20, 2019) [84 FR 14448 (Apr. 10, 2019)].

g. Effect on Foreign Private Issuers

Under the proposed amendments, an FPI would be excluded from the accelerated and large accelerated filer definitions if it qualifies as an SRC
239

under the SRC revenue test in Exchange Act Rule 12b-2. One commenter asserted that the final amendments should permit an FPI that presents its financial statements using IFRS to qualify for the exemption based on the low-revenue test.
240

We note that foreign issuers that qualify as FPIs or SRCs are permitted to avail themselves of special accommodations unique to each reporting regime, but must select one reporting regime or the other. The final amendments provide an exemption from the ICFR auditor attestation requirement for low-revenue SRCs. Issuers that qualify as FPIs and elect to use the FPI reporting regime have other accommodations available to them, such as the ability to disclose material changes in their ICFR and effectiveness of disclosure controls and procedures on an annual basis, as compared to the quarterly basis required of U.S. issuers, including SRCs.
241

239

See
2007 SRC Adopting Release, note 155 above, Section II, and
Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to U.S. GAAP,
Release No. 33-8879 (Dec. 21, 2007) [73 FR 985 (Jan. 4, 2008)], Section III.E.4. (stating that an FPI is not an SRC unless it makes its filings on forms available to U.S. domestic issuers and otherwise qualifies to use the SRC scaled disclosure accommodations). We are adding instructions to the SRC definitions in Item 10(f), Rule 405, and Rule 12b-2 clarifying our position that an FPI is not eligible to use the requirements for SRCs unless it uses the forms and rules designated for domestic issuers and provides financial statements prepared in accordance with U.S. GAAP.

240

See
letter from Dorsey & Whitney.

241

See
Rule 13a-15(d), Rule 15d-15(d), Item 15(d) of Form 20-F, and General Instruction B(6)(e) of Form 40-F.

h. Requiring ICFR Auditor Attestation Less Frequently Than Annually

The final amendments do not revise our rules to require an ICFR auditor attestation requirement less frequently than annually. Issuers that are accelerated or large accelerated filers will be required to obtain an ICFR auditor attestation every year, unless they qualify as EGCs, as under our current rules. We did not propose to revise this requirement, but requested comment on this matter, and every commenter that discussed the subject
242

asserted that issuers that are subject to the ICFR auditor attestation requirement should obtain one annually. A few of these commenters asserted that requiring the ICFR auditor attestation only once every three years would not decrease costs significantly because auditors consider prior year audit results when planning and performing the current year audit, so performing an audit of ICFR every three years would reduce efficiencies gained from performing audits annually and add complexity and costs.
243

Also, one commenter indicated that auditors in many instances may continue to test internal controls in the financial statement audit, which potentially limits any resulting cost reduction.
244

242

See, e.g.,
letters from Crowe, KPMG, and NASBA.

243

See, e.g.,
letters from Crowe and KPMG.

244

See
letter from KPMG.

i. Check Box Indicating Whether an ICFR Auditor Attestation Is Included in a Filing

Although we did not propose a requirement that issuers report whether they have obtained an ICFR auditor attestation, we requested comment on whether we should do so. As discussed above,
245

some commenters recommended that the final rule include a requirement for an issuer to prominently disclose in its filing whether an ICFR auditor attestation is included. This type of disclosure was also recommended by the Government Accountability Office (“GAO”) in a

2013 study of internal controls requirements.
246

No commenters opposed such a requirement. Disclosure of the ICFR auditor attestation is currently required within the auditor's report on the financial statements and management's annual report on ICFR.
247

After reviewing these comments, we are persuaded to add a check box to the cover pages of Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing because we agree that more prominent and easily accessible disclosure of this information would be useful to investors and market participants while imposing only minimal burdens on issuers.

245

See
notes 138 to 143 above and the accompanying text.

246

See
U.S. Gov't Accountability Office, GAO-13-582,
Internal Controls: SEC Should Consider Requiring Companies to Disclose Whether They Obtained an Auditor Attestation
(July 2013) (“2013 GAO Study”).

247

See
Item 308 of Regulation S-K and PCAOB AS 3101.

Under the new rule, issuers will be required to include the check box on their cover pages in any annual report filed on or after the final amendments' effective date. Once issuers are required to tag the cover page disclosure data using Inline eXtensible Business Reporting Language (“Inline XBRL”), they will also be required to tag this cover page check box disclosure in Inline XBRL because Item 406 of Regulation S-T (“Item 406”),
248

Item 601(b)(104),
249

paragraph 104 to “Instructions as to Exhibits” of Form 20-F, and paragraph B.17 under the “General Instructions” of Form 40-F require those issuers to tag every data point on the cover pages of Form 10-K, Form 20-F, and Form 40-F.
250

We do not expect the incremental compliance burden associated with tagging the additional cover page information to be significant, given that registrants already are being required on a phased-in basis to tag other cover page information as well as information in their financial statements.
251

248
17 CFR 232.406.

249
17 CFR 229.601(b)(4).

250
Item 406 mandates that companies required to tag their financial statements in Inline XBRL must also tag their cover page data in Inline XBRL. Operating companies are required to tag their financial statements in Inline XBRL on a phase-in basis.
See Inline XBRL Filing of Tagged Data,
Release No. 33-10514 (June 28, 2018) [83 FR 40846 (July 10, 2018)] and 17 CFR 232.405.

251
Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) filers that are required by Item 406 to provide cover page Inline XBRL data tagging will be required to tag the ICFR data element only after a revised Document Entity Identifier taxonomy has been posted to
SEC.gov
and the Commission has adopted a new EDGAR Filer Manual that reflects appropriate changes to the submission of Forms 10-K, 20-F and 40-F.

C. Amendments To Increase the Public Float Transition Thresholds From $50 Million to $60 Million and $500 Million to $560 Million and To Add the SRC Revenue Test to the Transition Threshold

1. Proposed Amendments

An issuer initially becomes an accelerated filer after it first meets certain conditions as of the end of its fiscal year, including that it had a public float of $75 million or more but less than $700 million as of the last business day of its most recently completed second fiscal quarter. An issuer initially becomes a large accelerated filer in a similar manner, including that it had a public float of $700 million or more as of the last business day of its most recently completed second fiscal quarter. Once the issuer becomes an accelerated filer, it will not become a non-accelerated filer unless it determines at the end of a fiscal year that its public float had fallen below $50 million on the last business day of its most recently completed second fiscal quarter. Similarly, a large accelerated filer will remain one unless its public float had fallen below $500 million on the last business day of its most recently completed second fiscal quarter. If the large accelerated filer's public float falls below $500 million but is $50 million or more, it becomes an accelerated filer. Alternatively, if the issuer's public float falls below $50 million, it becomes a non-accelerated filer.
252

The purpose of these transition thresholds is to avoid situations in which an issuer frequently enters and exits accelerated and large accelerated filer status due to small fluctuations in its public float.

252
For example, under the rules prior to these amendments, if an issuer that is a non-accelerated filer determines at the end of its fiscal year that it had a public float of $75 million or more, but less than $700 million, on the last business day of its most recently completed second fiscal quarter, it will become an accelerated filer. On the last business day of its next fiscal year, the issuer must re-determine its public float to re-evaluate its filer status. If the accelerated filer's public float fell to $70 million on the last business day of its most recently completed second fiscal quarter, it would remain an accelerated filer because its public float did not fall below the $50 million transition threshold. Alternatively, if the issuer's public float fell to $49 million, it would then become a non-accelerated filer because its newly determined public float is below $50 million. As another example, an issuer that has not been a large accelerated filer but had a public float of $700 million or more on the last business day of its most recently completed second fiscal quarter would then become a large accelerated filer at the end of its fiscal year. If, on the last business day of its subsequently completed second fiscal quarter, the issuer's public float fell to $600 million, it would remain a large accelerated filer because its public float did not fall below $500 million. If, however, the issuer's public float fell to $490 million at the end of its most recently completed second fiscal quarter, it would become an accelerated filer at the end of the fiscal year because its public float fell below $500 million. Similarly, if the issuer's public float fell to $49 million, the issuer would become a non-accelerated filer.

In the SRC Adopting Release,
253

we amended the SRC rules so that the SRC transition thresholds were set at 80 percent of the corresponding initial qualification thresholds. In the Proposing Release, we proposed to revise the accelerated and large accelerated filer transition thresholds to be 80 percent of the corresponding initial qualification thresholds to align the transition thresholds across the SRC, accelerated filer, and large accelerated filer definitions. Additionally, we indicated that revising these thresholds would limit the cases in which an issuer could be both an accelerated filer and an SRC or a large accelerated filer and an SRC, thereby reducing regulatory complexity.

253

See
note 12 above.

We proposed to revise the transition threshold for becoming a non-accelerated filer from $50 million to $60 million and the transition threshold for leaving the large accelerated filer status from $500 million to $560 million. We also proposed to add the SRC revenue test to the public float transition thresholds for accelerated and large accelerated filers. If the SRC revenue test were not added to the accelerated filer and large accelerated filer transition provisions, an issuer's annual revenues would never factor into determining whether an accelerated filer could become a non-accelerated filer, or whether a large accelerated filer could become an accelerated or non-accelerated filer. We proposed that an issuer that is already an accelerated filer would remain one unless either its public float falls below $60 million or it becomes eligible to use the SRC accommodations under the revenue test in paragraph (2) or (3)(iii)(B) of the SRC definition,
254

as applicable.
255

Therefore, under the proposed amendments, an accelerated filer would remain an accelerated filer until its public float falls below $60 million or its annual revenues fall below the

applicable revenue threshold ($80 million or $100 million), at which point it would become a non-accelerated filer.

254
Paragraph (2) of the SRC definition states that an issuer qualifies as an SRC if its annual revenues are less than $100 million and it has no public float or a public float of less than $700 million. Paragraph (3)(iii)(B) of the SRC definition states, among other things, that an issuer that initially determines it does not qualify as an SRC because its annual revenues are $100 million or more cannot become an SRC until its annual revenues fall below $80 million.

255
An issuer that is initially applying the SRC definition or previously qualified as an SRC would apply paragraph (2) of the SRC definition. Once an issuer determines that it does not qualify for SRC status, it would apply paragraph (3)(iii)(B) of the SRC definition at its next annual determination.

Similarly, we proposed conforming amendments to the large accelerated filer transition provisions for when an issuer that is already a large accelerated filer transitions to either accelerated or non-accelerated filer status. To transition out of large accelerated filer status at the end of the issuer's fiscal year, an issuer would need to have a public float below $560 million as of the last business day of its most recently completed second fiscal quarter or meet the revenue test in paragraph (2) or (3)(iii)(B), as applicable, of the SRC definition. A large accelerated filer would become an accelerated filer at the end of its fiscal year if its public float fell to $60 million or more but less than $560 million as of the last business day of its most recently completed second fiscal quarter and its annual revenues are not below the applicable revenue threshold ($80 million or $100 million). The large accelerated filer would become a non-accelerated filer if its public float fell below $60 million as of the last business day of its most recently completed second fiscal quarter or its annual revenues fell below the applicable revenue threshold ($80 million or $100 million).
256

256
One exception to this requirement is that an issuer that was a large accelerated filer whose public float had fallen below $700 million (but remained $560 million or more) but became eligible to be an SRC under the SRC revenue test in the first year the SRC amendments became effective would become a non-accelerated filer even though its public float remained at or above $560 million.
See
SRC Adopting Release, note 12 above, at n. 31 (“For purposes of the first fiscal year ending after effectiveness of the amendments, a registrant will qualify as a SRC if it meets one of the initial qualification thresholds in the revised definition as of the date it is required to measure its public float or revenues (the `measurement date'), even if such registrant previously did not qualify as a SRC.”).

2. Comments

We received very few comments regarding the proposed changes to the transition thresholds. The commenters who discussed the proposed amendments to increase the public float transition thresholds supported them.
257

One commenter also suggested that the Commission consider indexing the thresholds to inflation in a manner similar to the indexing that applies to the EGC definition.
258

Only two commenters addressed the proposed amendments to add the SRC revenue test to the transition thresholds, and these commenters supported that proposal.
259

257

See, e.g.,
letters from CLSA, Nasdaq, and RSM.

258

See
letter from RSM.

259

See
letters from CLSA and Nasdaq.

3. Final Amendments

After considering the comments, we are adopting the final amendments as proposed. As discussed in greater detail in the Economic Analysis,
260

transition thresholds in Rule 12b-2 are lower than entry thresholds to keep issuers from frequently needing to reclassify their filer status. The frequent reclassifications that would result without the transition thresholds may cause confusion for issuers and investors as to the issuer's status. Also, such frequent reclassifications may increase issuers' costs because they would frequently need to revise their disclosure schedules and continually consider the impact of whether they are subject to the ICFR auditor attestation requirement from one year to the next, and may increase investors' incremental costs of evaluating the reliability of the issuer's financial disclosures. Therefore, we believe a transition threshold is appropriate. However, we recognize that providing a transition threshold results in some issuers remaining in their filer status even though their public float or revenues are below that filer status's entry threshold.

260

See
Section IV.C.4.c below.

The final amendments revise the public float transition threshold for accelerated and large accelerated filers to become a non-accelerated filer from $50 million to $60 million and revise the public float transition threshold for a large accelerated filer to lose its large accelerated filer status from $500 million to $560 million. Prior to the final amendments, the public float threshold for an accelerated and large accelerated filer to become a non-accelerated filer was $50 million and the public float transition threshold for a large accelerated filer to lose its large accelerated filer status was $500 million. We believe these threshold amounts are too low and result in more issuers than intended being classified as an accelerated or large accelerated filer. However, we believe there should be some transition threshold so as to avoid some volatility. The amendments would make the public float transition thresholds 80 percent of the initial thresholds, which is consistent with the percentage used in the transition thresholds for SRC eligibility. We believe this approach appropriately balances the risk of frequent reclassifications resulting from a higher percentage threshold against the risk of delaying appropriate transitions due to a lower threshold. The table below summarizes how an issuer's filer status will change based on its subsequent public float determination.

Table 3—Subsequent Determination of Filer Status Based on Public Float Under Final Amendments

Final amendments to the public float thresholds
Initial public float determination
Resulting filer status

Subsequent public float
determination

Resulting filer status

$700 million or more
Large Accelerated Filer
$560 million or more
Large Accelerated Filer.

Less than $560 million but $60 million or more
Accelerated Filer.

Less than $60 million
Non-Accelerated Filer.

Less than $700 million but $75 million or more
Accelerated Filer
Less than $700 million but $60 million or more
Accelerated Filer.

Less than $60 million
Non-Accelerated Filer.

The final amendments also add the SRC revenue test to the transition threshold for accelerated and large accelerated filers. As we noted in the Proposing Release, if we do not add the SRC revenue test to the accelerated filer and large accelerated filer transition provisions, an issuer's annual revenues would never factor into determining whether an accelerated filer could become a non-accelerated filer, or whether a large accelerated filer could become an accelerated or non-accelerated filer. We note that one commenter stated that the manner in which issuers may recognize revenue could cause them to frequently lose and gain non-accelerated filer status.
261

We believe that providing transition thresholds should mitigate any such concern.

261

See
letter from EY.

Under the final amendments, an accelerated filer with revenues of $100 million or more that is eligible to be an SRC based on the public float test contained in paragraphs (1) and (3)(iii)(A) of the SRC definition can transition to non-accelerated filer status in a subsequent year if it has revenues of less than $100 million. For example, an issuer with a December 31 fiscal year end that did not exceed the public float threshold in the prior year and that has a public float, as of June 30, 2020, of $230 million and annual revenues for the fiscal year ended December 31, 2019 of $101 million will be eligible to be an SRC under the public float test; however, because the issuer would not be eligible to be an SRC under the SRC revenue test, it will be an accelerated filer (assuming the other conditions described in Table 1 are also met). At the next determination date (June 30, 2021), if its public float, as of June 30, 2020, remains at $230 million and its annual revenues for the fiscal year ended December 31, 2019 are less than $100 million, the issuer will be eligible to be an SRC under the SRC revenue test (in addition to the public float test) and thus it will become a non-accelerated filer.

On the other hand, an issuer with a December 31 fiscal year end that has a public float, as of June 30, 2020, of $400 million and annual revenues for the fiscal year ended December 31, 2019 of $101 million will not be eligible to be an SRC under either the public float test or the SRC revenue test and will be an accelerated filer (assuming the other conditions described in Table 1 also are met). At the next determination date (June 30, 2021), if its public float, as of June 30, 2021, remains at $400 million, that issuer will not be eligible to be an SRC under the SRC revenue test unless its annual revenues for the fiscal year ended December 31, 2020 are less than $80 million, at which point it will be eligible to be an SRC under the SRC revenue test and to become a non-accelerated filer.

D. Transition Issues

The final amendments will become effective 30 days after they are published in the
Federal Register
. The final amendments will apply to an annual report filing due on or after the effective date. Even if that annual report is for a fiscal year ending before the effective date, the issuer may apply the final amendments to determine its status as a non-accelerated, accelerated, or large accelerated filer. For example, an issuer that has a March 31, 2020 fiscal year end and that is due to file its annual report after the effective date of the amendments may apply the final amendments to determine its filing status even though its fiscal year end date precedes the effective date. An issuer that determines it is eligible to be a non-accelerated filer under the final amendments will not be subject to the ICFR auditor attestation requirement for its annual report due and submitted after the effective date of the amendments and may comply with the filing deadlines that apply, and other accommodations available, to non-accelerated filers.

III. Other Matters

If any of the provisions of these amendments, or the application of these provisions to any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions or application of such provisions to other per

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2020-05546. Public record. Not legal advice.