# Smaller Reporting Company Regulatory Relief and Simplification

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URL: https://www.frixlaw.com/law-library/documents/fr%3AE7-24965

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** January 4, 2008
- **Citation:** 73 FR 934

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 228, 229, 230, 239, 240, 249, 260, and 269
[Release Nos. 33-8876; 34-56994; 39-2451; File No. S7-15-07]
RIN 3235-Aj86
Smaller Reporting Company Regulatory Relief and Simplification

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission is adopting amendments to its disclosure and reporting requirements under the Securities Act of 1933 and the Securities Exchange Act of 1934 to expand the number of companies that qualify for its scaled disclosure requirements for smaller reporting companies. Companies that have less than $75 million in public equity float will qualify for the scaled disclosure requirements under the amendments. Companies without a calculable public equity float will qualify if their revenues were below $50 million in the previous year. To streamline and simplify regulation, the amendments move the scaled disclosure requirements from Regulation S-B into Regulation S-K.

DATES:

Effective Date:
February 4, 2008, except for amendments § 249.308b and Form 10-QSB, which are effective October 31, 2008, and amendments Part 228, § 249.310b, and Form 10-KSB, which are effective March 15, 2009.

Compliance Dates:
For information on compliance, see the
SUPPLEMENTARY INFORMATION
section below.

FOR FURTHER INFORMATION CONTACT:

Kevin M. O'Neill, Special Counsel, or Johanna Vega Losert, Attorney-Advisor, Office of Small Business Policy, Division of Corporation Finance, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628, (202) 551-3460.

SUPPLEMENTARY INFORMATION:

After the effective date of the rule amendments, companies currently qualifying as “small business issuers” under Regulation S-B will have the option to file their next annual report for a fiscal year ending on or after December 15, 2007 on either Form 10-KSB, using the scaled disclosure requirements in Regulation S-B, or Form 10-K, using the new scaled disclosure requirements in Regulation S-K. After a “small business issuer” files that next annual report, it will be required to file quarterly reports on Form 10-Q and annual reports on Form 10-K, and may elect to comply with the new scaled disclosure requirements of Regulation S-K. Companies newly qualifying as “smaller reporting companies” will have the option to use the new scaled Regulation S-K requirements when filing their next periodic report due after the effective date of the amendments. These companies will determine eligibility for smaller reporting company status based on the last business day of their most recent second fiscal quarter, or based on the alternative initial registration statement calculation discussed in Section IV. If a registration statement was filed on an “SB” form before the effective date of the rule amendments, and the company seeks to amend it after the effective date of the rule amendments, the company must file the amendment on the appropriate form available to the issuer without an “SB” designation. As discussed in Section IV, to provide a transition period, these issuers will be able to continue using the disclosure format and content based on the “SB” form until six months after the effective date.

We are adopting amendments to Regulation S-K,
1

and rules and forms under the Securities Act of 1933,
2

Securities Exchange Act of 1934,
3

and Trust Indenture Act of 1939.
4

In Regulation S-K, we are adopting amendments to Items 10, 101, 102, 201, 301, 302, 303, 305, 401, 402, 404, 407, 503, 504, 512, 601, 701, and 1118.
5

We are adopting amendments to Securities Act Rules 110, 138, 139, 158, 175, 405, 415, 428, 430B, 430C, 455, and 502.
6

Further, we are rescinding Regulation S-B
7

and eliminating the forms associated with it, Forms SB-1, SB-2, 10-SB, 10-QSB, and 10-KSB.
8

We are amending Securities Act Forms 0-1, S-1, S-3, S-4, S-8, S-11, 1-A, and F-X,
9

Exchange Act Rules 0-2, 0-12, 3b-6, 10A-1, 10A-3, 12b-2, 12b-23, 12b-25, 12h-3, 13a-10, 13a-13, 13a-14, 13a-16, 13a-20, 14a-3, 14a-5, 14a-8, 14c-3, 14d-3, 15d-10, 15d-13, 15d-14, 15d-20, and 15d-21,
10

and Exchange Act Forms 0-1, 8-A, 8-K, 10, 10-Q, 10-K, 11-K, 20-F, and SE.
11

We are amending Schedules 14A and 14C.
12

In Regulation S-X,
13

we are amending Rules 210.3-01, 210.3-05, 210.3-10, 210.3-12, 210.3-14, 210.4-01, and 210.10-01 and adding a new Article 8 containing the financial statement requirements available to smaller reporting companies.
14

Finally, we are amending Trust Indenture Act Rules 0-11, 4d-9, and 10a-5
15

and Section 269.0-1 of the Trust Indenture Act Forms.
16

1
17 CFR 229.10-229.1123.

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

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

4
15 U.S.C. 77aaa
et seq.

5
17 CFR 229.10, 229.101, 229.102, 229.201, 229.301, 229.302, 229.303, 229.305, 229.401, 229.402, 229.404, 229.407, 229.503, 229.504, 229.512, 229.601, 229.701, and 229.1118.

6
17 CFR 230.110, 230.138, 230.139, 230.158, 230.175, 230.405, 230.415, 230.428, 230.430B, 230.430C, 230.455, and 230.502.

7
17 CFR 228.10-228.703.

8
17 CFR 239.9, 239.10, 249.210b, 249.308b, and 249.310b.

9
17 CFR 239.0-1, 239.11, 239.13, 239.25, 239.16b, 239.18, 239.90, and 239.42.

10
17 CFR 240.0-2, 240.0-12, 240.3b-6, 240.10A-1, 240.10A-3, 240.12b-2, 240.12b-23, 240.12b-25, 240.12h-3, 240.13a-10, 240.13a-13, 240.13a-14, 240.13a-16, 240.13a-20, 240.14a-3, 240.14a-5, 240.14a-8, 240.14c-3, 240.14d-3, 240.15d-10, 240.15d-13, 240.15d-14, 240.15d-20, and 240.15d-21.

11
17 CFR 249.0-1, 249.208a, 249.210, 249.308, 249.308a, 239.310, 249.311, 249.220f, and 249.444.

12
17 CFR 240.14a-101 and 240.14c-101.

13
17 CFR 210.3-01—210.12-29.

14
17 CFR 210.3-01, 210.3-05, 210.3-10, 210.3-12, 210.3-14, 210.4-01, 210.10-01, and new Article 8 210.8-01-8-08.

15
17 CFR 260.0-11, 260.4d-9, and 260.10a-5.

16
17 CFR 269.0-1.

Table of Contents

I. Background and Summary

II. Description of Proposed Amendments

III. Discussion of Amendments We Are Adopting

A. Moving Scaled Disclosure Item Requirements From Regulation S-B Into Regulation S-K

B. Moving Smaller Reporting Company Financial Statement Requirements From Item 310 of Regulation S-B Into New Article 8 of Regulation S-X; Additional Regulation S-X Changes

C. Adopting Scaled Disclosure Item Requirements in Regulation S-K

1. Overview

2. Electing Scaled Disclosure Standards on “A La Carte” Basis

D. Eliminating “SB” Forms Associated with Regulation S-B

E. Qualifying Standards for Treatment as “Smaller Reporting Company”

1. Eligibility and Exclusions

2. Determination Dates

a. Reporting Companies

b. Non-Reporting Companies Filing an Initial Registration Statement

c. Alternative Revenue Test for Reporting and Non-Reporting Companies

d. Entering and Exiting Smaller Reporting Company Status

F. Miscellaneous

1. Indexing for Inflation

2. Eliminating Transitional Small Business Issuer Format

3. Checking the “Smaller Reporting Company” Box

IV. Compliance Dates

V. Paperwork Reduction Act

A. Background

B. Summary of Comment Letters and Revisions to the Proposals

VI. Cost-Benefit Analysis

A. Background

B. Summary of Rules

C. Benefits

D. Costs

VII. Consideration of Impact on the Economy, Burden on Competition and Promotion of Efficiency, Competition and Capital Formation

VIII. Final Regulatory Flexibility Act Analysis

A. Reasons for and Objectives of Amendments

1. The Advisory Committee on Smaller Public Companies Recommended Scaled Federal Securities Regulation for Smaller Companies

2. Expanding Eligibility for Smaller Company Scaled Regulation Under Amended Regulation S-K

3. Integrating Substantive Requirements of Regulation S-B Into Regulations S-K and S-X

B. Significant Issues Raised by Public Comment

C. Small Entities Subject to the Final Amendments

D. Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action to Minimize Effect on Small Entities

IX. Statutory Basis and Text of Amendments

I. Background and Summary

At an open Commission meeting on May 23, 2007, we approved publication of eight releases designed to update and improve federal securities regulations that significantly affect smaller companies and their investors in today's capital markets.
17

These releases reflected our efforts during the past few years to provide responsive solutions addressing the special characteristics and needs of smaller companies and their investors. One of the releases (the “Proposing Release”) proposed rule amendments intended to provide general regulatory relief and simplification for smaller companies reporting under our rules.
18

In that release, we proposed a series of amendments to our scaled disclosure and reporting requirements for smaller reporting companies. The release had three stated objectives:

17
These releases included (1) Release No. 33-8812 (June 20, 2007) [72 FR 35118] (proposing to expand eligibility requirements of Forms S-3 and F-3 to permit registration of annual primary offerings of up to a specified percentage of public float by companies with a public float of less than $75 million). The Commission voted to approve this proposal at a December 11, 2007 open meeting (archived webcast available at
http://www.sec.gov/news/openmeetings.shtml
); (2) Release No. 33-8813 (June 22, 2007) [72 FR 36822] (proposing amendments to Rule 144 to revise the holding period for the resale of restricted securities, simplify compliance for non-affiliates, revise the Form 144 filing thresholds, and codify certain staff interpretations, as well as to amend Rule 145). This proposal was adopted in Release No. 33-8869 (Dec. 6, 2007) [72 FR 71546]; (3) Release No. 33-8814 (June 29, 2007) [72 FR 37376] (proposing revisions to Form D and to mandate electronic filing of Form D). The Commission voted to approve this proposal at the December 11, 2007 open meeting (archived webcast available at
http://www.sec.gov/news/openmeetings.shtml
); (4) Release No. 33-8819 (July 5, 2007) [72 FR 39670] (proposing to increase the number of companies eligible for our scaled disclosure and reporting requirements for smaller companies); (5) Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116] (proposing new Regulation D exemption for offers and sales of securities to a newly defined category of “large accredited investors,” as well as proposing revisions to the Regulation D definition of “accredited investor,” disqualification provisions, and integration safe harbor); (6) Release No. 34-56010 (July 5, 2007) [72 FR 37608] (proposing exemptions from requirement to register class of securities for compensatory stock options granted by reporting and non-reporting companies). This proposal was adopted in Release No. 34-56887 (Dec. 3, 2007) [72 FR 69554]; (7) Release No. 33-8810 (June 20, 2007) [72 FR 35324] (providing interpretive guidance regarding management's report on internal control over financial reporting under Section 13(a) or 15(d) of the Securities Exchange Act of 1934); and (8) Release No. 33-8811 (June 20, 2007) [72 FR 35346] (requesting additional comment on the definition of a significant deficiency). The last proposal was adopted in Release No. 33-8829 (Aug. 3, 2007) [72 FR 44927] (adopting definition of “significant deficiency”).

18
Release No. 33-8819 (July 5, 2007) [72 FR 39670].

• Expanding the number of smaller companies eligible to use scaled disclosure requirements;

• Reducing unnecessary complexity in our regulations by combining the category of “small business issuers” with the category of “non-accelerated filers” to the extent feasible; and

• Simplifying disclosure requirements by moving our scaled disclosure requirements for smaller companies from Regulation S-B into Regulation S-K, the integrated disclosure system for other companies.

Several of the amendments in the Proposing Release had their genesis in the recommendations made by the Advisory Committee on Smaller Public Companies in 2006. The Commission had chartered the Advisory Committee in March 2005 to assess the current regulatory system for smaller companies under the federal securities laws and make recommendations for changes.
19

Among the specific charges of the Committee was to consider the corporate disclosure and reporting requirements for smaller companies, including differing regulatory requirements based on market capitalization, and other measurements of size or market characteristics.
20

In its Final Report, the Advisory Committee made several recommendations relating to scaling securities regulation for smaller companies and labeled them as priority items.
21

In 2006, 3,395 reporting companies elected to take advantage of our current scaled disclosure and reporting requirements for small business issuers by filing their annual reports on Form 10-KSB.
22

We estimate that a total of 4,976 companies will be eligible to use our scaled disclosure requirements under today's amendments, a difference of 1,581 additional companies.
23

The 1,581 companies would represent about 13% of the total 11,898 reporting companies that filed annual reports with us in 2006.

19
See SEC Advisory Committee on Smaller Public Companies, Final Report (2006) (“Advisory Committee Final Report”), available at
http://www.sec.gov/info/smallbus/acspc.shtml.

20
Advisory Committee Final Report (p. 1).

21
Advisory Committee Final Report Recommendations II.P.1 (pp. 14-22), IV.P.1 (pp. 60-64), and IV.P.2 (pp. 65-68).

22
As stated in the Proposing Release, these statistics are based on 2006 data from the Commission's EDGAR (Electronic Data Gathering, Analysis and Retrieval) filing system.

23
As we noted in the Proposing Release, these statistics are based on Thomson Financial (Datastream). The data includes available information on registered public firms trading on the New York Stock Exchange, the American Stock Exchange, the Nasdaq, the Over-the-Counter Bulletin Board, and the Pink Sheets and excludes closed end funds, exchange traded funds, American depositary receipts, and direct foreign listings.

The amendments that we are adopting address the need to revisit and adjust the Commission's small company policies to reflect changes in our securities markets as well as changes to the regulatory landscape since 1992, when the Commission first adopted an integrated scaled disclosure system for small business in Regulation S-B.
24

The Commission adopted Regulation S-B and its associated Forms SB-1 and SB-2 based upon the success of Form S-18, which was a simplified registration form for smaller companies under the Securities Act that preceded Forms SB-1 and SB-2.
25

Regulation S-B was designed to reduce compliance costs and improve the ability of start-ups and other small businesses to obtain financing through the public capital markets.

24
See Release No. 33-6949 (July 30, 1992) [57 FR 36442].

25
The Commission adopted Forms SB-1 and SB-2 after 10 years of issuers using Form S-18, an experimental form the Commission created to benefit small issuers in raising capital. Release No. 33-6924, p. 40 (Mar. 20, 1992) [57 FR 9768].

The amendments we are adopting will result in the substantive changes highlighted below. The new provisions:

• Establish a category of “smaller reporting companies” eligible to use our scaled disclosure requirements. The primary determinant for eligibility will be that the company have less than $75 million in public float. When a company is unable to calculate public float, however, such as if it has no common equity outstanding or no

market price for its outstanding common equity exists at the time of the determination, the standard will be less than $50 million in revenue in the last fiscal year;

• Move 12 non-financial scaled disclosure item requirements from Regulation S-B into Regulation S-K.
26

These scaled requirements will be available only for smaller reporting companies. The remaining 24 item requirements of Regulation S-B
27

are substantially the same as their corresponding Regulation S-K item requirements. We therefore are not amending them except in one minor instance explained below;
28

26
The 12 scaled item requirements are: (1) Description of Business (Item 101); (2) Market Price of and Dividends on Registrant's Common Equity and Related Stockholder Matters (Item 201); (3) Selected Financial Data (Item 301); (4) Supplementary Financial Information (Item 302); (5) Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 303); (6) Quantitative and Qualitative Disclosures about Market Risk (Item 305); (7) Executive Compensation (Item 402); (8) Transactions with Related Persons, Promoters and Certain Control Persons (Item 404); (9) Corporate Governance (Item 407); (10) Prospectus Summary, Risk Factors, and Ratio of Earnings to Fixed Charges (Item 503); (11) Use of Proceeds (Item 504); and (12) Exhibits (Item 601).

27
We did not propose changes to the following items of Regulation S-K because we believe our analysis showed that the disclosure standards in these items currently are substantially the same as the Regulation S-B requirements: (1) Description of Property (Item 102); (2) Legal Proceedings (Item 103); (3) Description of Registrant's Securities (Item 202); (4) Changes In and Disagreements with Accountants on Accounting and Financial Disclosure (Item 304); (5) Disclosure Controls and Procedures (Item 307); (6) Internal Control Over Financial Reporting (Item 308); (7) Internal Control Over Financial Reporting (Item 308T); (8) Directors, Executive Officers, Promoters and Control Persons (Item 401); (9) Security Ownership of Certain Beneficial Owners and Management (Item 403); (10) Compliance with Section 16(a) of the Exchange Act (Item 405); (11) Code of Ethics (Item 406); (12) Forepart of Registration Statement and Outside Front Cover Page of Prospectus (Item 501); (13) Inside Front and Outside Back Cover Pages of Prospectus (Item 502); (14) Determination of Offering Price (Item 505); (15) Dilution (Item 506); (16) Selling Security Holders (Item 507); (17) Plan of Distribution (Item 508); (18) Interest of Named Experts and Counsel (Item 509); (19) Disclosure of Commission Position on Indemnification for Securities Act Liabilities (Item 510); (20) Other Expenses of Issuance and Distribution (Item 511); (21) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities (Item 701); (22) Indemnification of Directors and Officers (Item 702); and (23) Purchases of Equity Securities by the Issuer and Affiliated Purchasers (Item 703). In addition, although we proposed to amend Undertakings (Item 512), we are not adopting this change because we believe it is clear which undertakings may and may not apply to a smaller reporting company.

28
See the discussion of Description of Property (Item 102) below. In addition, we are making technical changes to numerous item requirements to remove references to Regulation S-B and its associated “SB” forms.

• Move the scaled financial statement requirements in Item 310 of Regulation S-B into new Article 8 of Regulation S-X, and amend these requirements to provide a scaled disclosure option for smaller reporting companies, requiring two years of balance sheet data instead of one year, and make other minor adjustments after considering comments we received;
29

29
The amendments also rescind Regulation S-B, since all of its substantive requirements will now be contained in Regulation S-K or new Article 8 of Regulation S-X.

• Permit smaller reporting companies to elect to comply with scaled financial and non-financial disclosure on an item-by-item or “a la carte” basis. As adopted, eligible companies may elect to follow scaled financial statement requirements or to provide the larger company financial statement presentation on a quarterly basis, rather than require companies to elect the full fiscal year's financial presentation in the first quarterly report of the fiscal year, as was proposed;

• Eliminate our current “SB” forms but allow a phase-out period for small business issuers transitioning to smaller reporting company status;

• Combine elements relating to the accelerated filer definition with qualifying standards for the smaller reporting company determination and transition provisions to promote uniformity and consistency with current regulations and, therefore, simplify regulation;

• Permit all foreign companies to qualify as “smaller reporting companies” if they otherwise qualify and choose to file on domestic company forms and provide financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”); and

• Eliminate the transitional small business issuer format.

II. Description of Proposed Amendments

We proposed an eligibility standard for our scaled disclosure requirements for “smaller reporting companies” to replace the “small business issuer” definition found in Item 10 of Regulation S-B.
30

Under the proposals, the new definition of “smaller reporting company” would have established eligibility for companies with less than $75 million in public common equity float. We provided an alternative revenue test for those companies unable to calculate public common equity float, basing eligibility on whether the company had annual revenues of less than $50 million in its last fiscal year. In contrast, our previous eligibility requirements for “small business issuer” status required that companies have both less than $25 million in public common equity float and less than $25 million in annual revenues.

30
17 CFR 228.10.

Under the proposals, which we are adopting in modified form, each company would determine its eligibility based on whether the company is: (1) A reporting company already filing periodic and annual reports;
31

(2) a non-reporting company filing a registration statement under either the Securities Act or Exchange Act; or (3) a reporting or non-reporting company that had no public float, such as if it had no public common equity outstanding or no market price for its common equity existed. A reporting company determining its eligibility as a smaller reporting company would calculate its public float as of the last business day of its most recently completed second fiscal quarter. Non-reporting companies filing a registration statement would calculate their public float as of a date within 30 days of the date of the filing of the registration statement.

31
A reporting company is required to file reports under Section 13(a) and 15(d) of the Exchange Act. 15 U.S.C. 78m and 15 U.S.C. 78o.

Under the proposals, investment companies and asset-backed issuers would be excluded from eligibility for smaller reporting company status, as was the case under the definition of “small business issuer” in Regulation S-B.
32

As proposed, foreign companies could qualify as smaller reporting companies and provide scaled disclosure if they elected to use domestic company forms and provide financial statements prepared in accordance with U.S. GAAP. Removing the exclusion of foreign companies would make scaled treatment available to additional smaller companies.
33

32
Item 10(a)(1)(iii) of Regulation S-B, 17 CFR 228.10(a)(1)(iii).

33
Item 10(a)(1)(ii) of Regulation S-B only permits U.S. or Canadian issuers to qualify as “small business issuers.”

We proposed that smaller reporting companies be required to exit the scaled disclosure system the fiscal year after their public float rose above $75 million as of the last business day of their second fiscal quarter.
34

Smaller reporting companies attempting to establish eligibility to enter the scaled disclosure system again would be required to determine that their public float fell below $50 million as of the last business day of their second fiscal quarter, and would be able to use scaled disclosure again in the next fiscal year following the determination, starting

with the first Form 10-Q of the next fiscal year.

34
The entering and exiting rules in the smaller reporting company system are modeled after the method of determining accelerated filer status set forth in Rule 12b-2. 17 CFR 240.12b-2.

An objective of our proposals was to simplify and improve our disclosure and reporting rules for smaller companies by moving the Regulation S-B disclosure requirements for smaller companies into Regulation S-K, as recommended by the SEC Advisory Committee on Smaller Public Companies. As a result of our rulemaking, we identified 13 item requirements in Regulation S-B that provided scaled disclosure for smaller companies.
35

We reasoned that consolidation of the Regulation S-K and S-B disclosure requirements would provide a more unified set of rules that would be easier to use. To accomplish this, we proposed to move item requirements in Regulation S-B containing substantive scaled non-financial disclosure requirements into Regulation S-K by adding a new paragraph to the items of Regulation S-K that would contain separate disclosure standards for smaller reporting companies. We did not propose any major substantive changes to the items we were moving from Regulation S-B into Regulation S-K, but sought comment from the public on substantive changes they would recommend.

35
See note 26 above.

One of the item requirements in Regulation S-B providing scaled disclosure requirements did not have a similar disclosure item requirement in Regulation S-K. Consequently, our specific proposals included adding a new Item 310 in Regulation S-K for financial statements. Item 310 of Regulation S-K would have set forth the alternative requirements on form and content of financial statements for smaller companies that formerly appeared in Item 310 of Regulation S-B.

The proposals also allowed a smaller reporting company to choose, on an item-by-item basis or “a la carte” basis, to comply with either the scaled disclosure and financial reporting requirements made available in Regulation S-K for smaller reporting companies or the requirements for other companies in Regulation S-K, when the requirements for other companies were more rigorous.

The proposal, like the amendments we are adopting, would rescind all of our forms designated with the letters “SB.” Smaller reporting companies would be eligible to file on Form S-1, rather than on Form SB-1 or SB-2 as before, to offer securities to the public. This would provide a smaller reporting company the ability to incorporate by reference its previously filed Exchange Act reports if the company meets the requirements set forth under General Instruction VII of Form S-1.
36

36
General Instruction VII of Form S-1 sets forth the eligibility criteria to qualify for incorporation by reference. The registrant must be required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 and must have filed all reports and materials during the preceding 12 months. The company must have filed an annual report for its most recently completed fiscal year. Section D of the instruction disqualifies companies that, in the past three years, were any of the following:

(a) A blank check company as defined in Rule 419(a)(2);

(b) A shell company, other than a business combination related shell company, each as defined in Rule 405; or

(c) A registrant for any offering of penny stock as defined in Rule 3a51-1 under the Exchange Act.

Finally, the proposals, like the amendments we are adopting, would eliminate the “transitional small business issuer format” associated with Form SB-1 and annual reports on Form 10-KSB.
37

A small business issuer using the transitional format followed disclosure based on Model A or B found in Regulation A. These two disclosure models were intended to ease transition from non-reporting to reporting status for small business issuers preparing disclosure on initial registration statements and annual reports. In our Proposing Release we noted, however, that the number of companies registering on Form SB-1 and following the disclosure format within Form 10-KSB had significantly declined over time.
38

37
See Proposing Release Release No. 33-8819, pp. 40-41 (July 5, 2007) [72 FR 39680].

38
For example, during the past five years, the Commission has received only 56 Form SB-1 registration statements. For years 2000 through 2005, two small business issuers out of 56 filed a Form 10-KSB using the transitional disclosure format.

We received 21 comment letters on the proposals,
39

including six from public accounting firms. We also received comment letters from professional and trade associations, a law firm, an associate professor of finance, two small business owners, and the Small Business Administration's Office of Advocacy. In general, the comment letters strongly supported our efforts to simplify our scaled disclosure requirements for smaller reporting companies and expand eligibility for them.

39
The public comments we received are available for inspection in our Public Reference Room at 100 F Street, NE, Washington, DC 20549 in File No. S7-15-07, or may be viewed at
http://www.sec.gov/comments/s7-15-07/s71507.shtml
.

III. Discussion of Amendments We Are Adopting

After considering the public comments, we are adopting the amendments substantially as we proposed them, with the modifications discussed below.

A. Moving Scaled Disclosure Item Requirements From Regulation S-B Into Regulation S-K

Many of the comment letters supported moving our scaled disclosure requirements from Regulation S-B into Regulation S-K.
40

In general, the comments in these letters viewed moving the requirements as having a positive impact by reducing complexity and promoting more streamlined regulation. One letter noted that combining the two disclosure systems would allow smaller reporting companies to more easily evaluate the extent of the differences between the requirements for smaller reporting companies and larger companies and consider which requirement better meets the needs of their investors.
41

40
See,
e.g.
, Letter from the American Bar Association, Section of Business Law (ABA).

41
See Letter from PricewaterhouseCoopers LLP.

A few comment letters opposed moving the scaled disclosure requirements into Regulation S-K, indicating that having all of the smaller company rules in one place was convenient for smaller companies.
42

These comment letters expressed concern that the migration into Regulation S-K would increase legal and accounting costs for smaller companies and make the rules more complex for smaller companies to understand. A few comment letters suggested providing the scaled smaller reporting company disclosure requirements in a separate section of Regulation S-K.
43

42
See,
e.g.
, Letters from the Chamber of Commerce and New York State Society of Certified Public Accountants (NYSSCPA).

43
See,
e.g.
, Letter from KPMG.

We are adopting our proposal to move our Regulation S-B scaled disclosure requirements into Regulation S-K. After considering the comments, we believe combining the two disclosure systems and setting out the smaller reporting company scaled item requirements in separate paragraphs within Regulation S-K is appropriate. We believe our amendments eliminate redundancies and provide a more streamlined disclosure system for smaller reporting companies. In response to the concern that moving the item requirements will create complexity for smaller companies, we are including an index of

scaled disclosure requirements in the definition of smaller reporting company at the beginning of Regulation S-K
44

to highlight items of the Regulation that contain the scaled disclosure requirements specific to smaller reporting companies.

44
See new Item 10(f) of Regulation S-K (Index of Scaled Disclosure Available to Smaller Reporting Companies).

Regulation S-B has 12 non-financial item requirements that provide scaled disclosure options to smaller reporting companies. Under this rulemaking, these 12 item requirements are being moved to separate paragraphs within Regulation S-K. In some cases, smaller reporting companies are not required to provide disclosures required of larger companies. For example, while larger companies are required to provide disclosure under Item 305 on quantitative and qualitative disclosures about market risk, smaller companies are not currently required to do so under the same item requirement in Regulation S-B. In cases like this, we include a paragraph in the relevant item of Regulation S-K indicating that smaller reporting companies are not required to respond to the item.

In addition to the Regulation S-B and S-K differences, the forms themselves may contain different disclosure requirements for smaller reporting companies. Currently, Forms 10-SB, 10-KSB and 10-QSB do not require risk factor disclosure from small business issuers. The amendments carry this difference in disclosure requirements over to Forms 10, 10-K and 10-Q by adding instructions indicating that smaller reporting companies are not required to provide risk factor disclosure in these Exchange Act forms.

B. Moving Smaller Reporting Company Financial Statement Requirements From Item 310 of Regulation S-B Into New Article 8 of Regulation S-X; Additional Regulation S-X Changes

Several comment letters recommended moving the rules on form and content of financial statements for smaller reporting companies now in Item 310 of Regulation S-B into Regulation S-X, rather than into a new Item 310 of Regulation S-K, as proposed. Several comment letters also agreed with the Advisory Committee recommendation to require smaller reporting companies to provide two years of comparative audited balance sheet data in annual financial statements under these rules, rather than one year, as is currently required under Regulation S-B.
45

The comment letters are persuasive that we should adopt these recommendations as part of our rule amendments. Accordingly, we are moving the financial statement rules for smaller reporting companies into a new Article 8 of Regulation S-X
46

and will require two years of comparative audited balance sheet data of smaller reporting companies. Comparative balance sheets will provide a much more meaningful presentation for investors without a significant additional burden on smaller reporting companies, since the earlier year data should be readily available for the purposes of preparing the other financial statements.
47

We also are making technical and language changes to the rules on form and content of financial statements for smaller public companies to facilitate their placement in Article 8 of Regulation S-X rather than in Regulation S-B or Regulation S-K.

45
We had specifically asked for comments on this recommendation in the Proposing Release. See Proposing Release Release No. 33-8819, p. 26 [72 FR 39676].

46
To be codified at 17 CFR 210.8-01—.8-08.

47
Although the earlier year data would be readily available, auditors must undertake appropriate audit procedures related to the prior fiscal year.

We also are adopting technical amendments to Rule 3-05(b)(2)(iv) of Regulation S-X that were tied conceptually to the small business issuer threshold in Regulation S-B that we are replacing with the definition of smaller reporting company in Regulation S-K. Rule 3-05 of Regulation S-X requires the inclusion of financial statements of businesses acquired or to be acquired, so-called “target companies,” in registration statements and Form 8-K reports. The number of years of audited financial statements to be included for a target company is determined using the conditions specified in the definition of significant subsidiary in Rule 1-02(w) of Regulation S-X. If the net revenues reported by the target company for the latest fiscal year are less than $25 million and three years of financial statements would otherwise be required, the earliest of the three fiscal years may be omitted pursuant to Rule 3-05(b)(2)(iv) of Regulation S-X.

Several comment letters noted that in light of the $50 million in revenues threshold proposed for determining a company's qualification as a smaller reporting company if a company is unable to calculate public float, the Commission should consider revising this rule to raise to $50 million the $25 million threshold currently used to limit to two the periods required for audited financial statements of an acquired business.
48

The $25 million threshold was based on the $25 million in revenues standard in Regulation S-B that we are rescinding.
49

We are amending this standard to increase the threshold to $50 million in revenues, as suggested by the commenters.

48
See,
e.g.
, Letter from Center for Audit Quality (CAQ).

49
In 1996, the Commission adopted revisions to rules that streamlined requirements with respect to financial statements of significant business acquisitions in filings made under the Securities Act and the Exchange Act. The $25 million threshold limit was intended to be consistent with criteria for small business issuers. Release No. 33-7355, p. 36 (Oct. 10, 1996).

C. Adopting Scaled Disclosure Item Requirements in Regulation S-K

1. Overview

The following is a list of item requirements we are amending in Regulation S-K to include the substance of the scaled standards for smaller reporting companies now in the same item number of Regulation S-B. The adopted amendments are substantially as described in the Proposing Release, but with the changes discussed below:

Item 101 (Description of Business).
We are adding a new paragraph (h) to this item to set forth the alternative disclosure standards for smaller companies that appeared in Item 101 of Regulation S-B. Generally, the different requirements for smaller reporting companies under Item 101 involve providing a less detailed description of the company's business. For example, the Regulation S-K standard for Item 101 requires financial information about segments, which the standard for smaller reporting companies does not require.
50

In addition, smaller reporting companies will be required to provide and disclose business development activities for only three years, instead of the five-year disclosure required of larger companies by Item 101 of Regulation S-K.

50
Application of U.S. GAAP (FAS 131) may, however, require segment information in the notes to the financial statements. 17 CFR 229.101(b).

We also are implementing additional minor revisions that replace the reference to Canadian issuers. Since we are making the smaller reporting company standards available to foreign issuers generally, we are requiring that these issuers provide disclosure on enforceability of civil liability against foreign persons. Previously, Item 101 of Regulation S-B had required this disclosure from Canadian issuers only because those were the only foreign issuers eligible for Regulation S-B disclosure standards. The item requirement applicable to smaller reporting companies also will no longer

refer to the foreign private issuer requirement to disclose whether the report will include a reconciliation of financial information with U.S. generally accepted accounting principles, because smaller reporting companies must provide financial statements prepared in accordance with U.S. GAAP.

Item 201 (Market Price of and Dividends on Registrant's Common Equity and Related Stockholder Matters).
We are revising Instruction 6 to paragraph (e) of this Regulation S-K item requirement to reflect that smaller reporting companies (instead of “small business issuers”) are not required to provide a performance graph.

Item 301 (Selected Financial Data); Item 302 (Supplementary Financial Information).
We are adding a new paragraph (c) to each item requirement, providing that smaller reporting companies are not required to present the information required by these item requirements.

Item 303 (Management's Discussion and Analysis of Financial Condition and Results of Operations).
As provided in new paragraph (d), this item sets forth the scaled requirements.
51

For example, under this item requirement, smaller reporting companies will:

51
As discussed below, we are also adding references to two Industry Guides to this item.

• Provide only two years of analysis if the company is presenting only two years of financial statements, instead of the three years of analysis required of larger companies that are required to provide three years of financial statements; and

• Not be required to provide tabular disclosure of contractual obligations.

Item 305 (Quantitative and Qualitative Disclosures about Market Risk).
New paragraph (e) in this item specifies that smaller reporting companies are not required to disclose Item 305 information.

Item 402 (Executive Compensation).
New paragraphs (
l
) through (r) set forth the alternative standards for smaller reporting companies for disclosure of compensation of executives and directors that were in Item 402 of Regulation S-B.
52

Smaller reporting companies will:

52
As proposed, the scaled disclosure for this item would have been in new paragraph (l), but in order to clarify the requirements, the adopted Item restates the requirements for smaller reporting companies in several paragraphs.

• Provide executive compensation disclosure for only three named executive officers (specifically including the principal executive officer but not the principal financial officer), rather than the five required of larger companies;

• Provide the Summary Compensation Table disclosure for only two years, rather than the three years required of larger companies;

• Not be required to provide a Compensation Discussion and Analysis;

• Provide only three of the seven tables
53

required of larger companies;

53
These are the Summary Compensation Table, the Outstanding Equity Awards at Fiscal Year End Table, and the Director Compensation Table.

• Provide alternative narrative disclosures; and

• Not be required to include footnote disclosure of the grant date fair value of equity awards in the Director Compensation Table.

Item 404 (Transactions with Related Persons, Promoters and Certain Control Persons).
We are making changes to the introductory text of paragraph (c)(1), and adding paragraph (d) before the instructions to this item to change the calculation of total assets for smaller reporting companies from 1% of their total assets based on the average of total assets at year end for the last
three
completed fiscal years to the last
two
completed fiscal years. We believe this standard is more consistent with the two years of financial statements required of smaller reporting companies. Under new Item 404(d) of Regulation S-K, smaller reporting companies will:
54

54
See Section III.C.2, clarifying that to the extent the smaller reporting company scaled disclosure requirement is more rigorous than the same larger company item requirement, smaller reporting companies will be required to comply with the more rigorous smaller reporting company requirement.

• Not be required to disclose policies and procedures for reviewing related person transactions, which is required of larger companies;

• Be required to provide disclosure regarding a transaction where the amount exceeds the lesser of 1% of a smaller company's total assets or $120,000;

• Be required to provide additional specific information about underwriting discounts and commissions, and corporate parents; and

• Be required to provide disclosure regarding promoters and certain control persons.

Item 407 (Corporate Governance).
New paragraph (g) to Item 407 of Regulation S-K specifies that smaller reporting companies are:

• Not required to provide Compensation Committee Interlock and Insider Participation disclosure or a Compensation Committee Report; and

• Not required to provide an Audit Committee Report until the first annual report after their initial registration statement is filed with the Commission and becomes effective.

Item 503 (Prospectus Summary, Risk Factors, and Ratio of Earnings to Fixed Charges).
New paragraph (e) to this item specifies that smaller reporting companies need not provide the information required by paragraph (d) of Item 503 regarding the ratio of earnings to fixed charges when a registrant issues debt, or the ratio of combined fixed charges and preference dividends to earnings when a registrant issues preference equity securities. In addition, we have added instructions to the risk factor disclosure requirements set forth in Exchange Act Forms 10, 10-K and 10-Q to indicate that smaller reporting companies are not required to provide Item 503 risk factor disclosure in these filings.
55

55
See Section III.A above. The Securities Offering Reform final rule amendments stated that the risk factor disclosure requirement did not apply to small business issuers filing on Form 10-KSB or Form 10-SB. The amendments we are adopting carry this difference in disclosure requirements over to the Forms 10, 10-K and 10-Q for smaller reporting companies. See Securities Offering Reform Release 33-8591 (July 19, 2005) [70 FR 44722, 44786-87].

Item 504 (Use of Proceeds).
We are revising Instruction 6 to this item to clarify that new Article 8 of Regulation S-X, rather than the other articles of Regulation S-X, will govern whether financial statements of businesses proposed to be acquired must be included in the filings of smaller reporting companies.

Item 601 (Exhibits).
New paragraph (c) reflects that smaller reporting companies need not provide Exhibit 12 (Statements re Computation of Ratios).

Other Regulation S-K Items.
We identified 24 item requirements in Regulation S-B that were substantially similar or identical to the same numbered item requirements in Regulation S-K. In these cases, we determined it was appropriate to require that smaller reporting companies follow the same item requirements as larger companies. In the Proposing Release, we identified Item 512 (Undertakings) as a scaled item requirement for smaller reporting companies; however, we now believe no change is needed because it is clear which undertakings may apply to a smaller reporting company's filings. We are, therefore, not including a new paragraph (m) in Regulation S-K, as proposed.

In addition, as described below, we are amending Item 102 (Description of Property) of Regulation S-K to include references to the Industry Guides
56

noted below and highlighting the requirements of Item 401 (Directors, executive officers, promoters and control persons). To further maintain consistency with references to other industry guides in the disclosure item requirements, we also are adding instructions to Item 303 directing companies' attention to:

56
The Industry Guides serve as expressions of the policies and practices of the Division of Corporation

Finance. They are of assistance to issuers, their counsel and others preparing registration statements and reports, as well as to the Commission's staff. The Industry Guides are not rules, regulations, or statements of the Commission. The Commission has neither approved nor disapproved these interpretations. See Release 33-6384 (Mar. 16, 1982).

• Industry Guide 3—Statistical disclosure by bank holding companies; and

• Industry Guide 6—Disclosure concerning unpaid claims and claim adjustment expenses of property-casualty insurance underwriters.

The Regulation S-B item requirement on the Description of Property in Item 102 included detailed instructions specific to small business issuers engaged in: (1) Significant mining operations; (2) oil and gas producing activities; and (3) real estate activities. Under Item 102 of Regulation S-B, mining companies are directed to the information called for in Industry Guide 7; oil and gas producing issuers are directed to the information called for in Industry Guide 2; and real estate companies are directed to the information called for in Industry Guide 5. Regulation S-K, however, does not include any references to these industry guides. Several commenters suggested that we revise Item 102 of Regulation S-K to include references to industry guides.
57

We agree, and are amending Item 102 of Regulation S-K to include references to the following industry guides:

57
See,
e.g.
, Letters from KPMG and Grant Thornton.

• Industry Guide 2—Disclosure of oil and gas operations;

• Industry Guide 4—Prospectus relating to interests in oil and gas programs;

• Industry Guide 5—Preparation of registration statements relating to interests in real estate limited partnerships; and

• Industry Guide 7—Description of property by issuers engaged or to be engaged in significant mining operations.

Item 401 of Regulation S-K (Directors, executive officers, promoters and control persons), differs from Regulation S-B in one respect. Under Regulation S-B, the disclosure pertaining to Federal bankruptcy laws or state insolvency laws related only to “any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.”
58

Under Regulation S-K, disclosure must be provided pertaining to any petitions filed under the Federal bankruptcy laws or any state insolvency laws filed by or against a director or officer of the company.
59

We believe it is appropriate to require disclosure about a personal bankruptcy petition filed by or against a director or officer of a smaller reporting company given that, in light of the generally smaller level of operations of smaller reporting companies, it may be material to an evaluation of the ability or integrity of any director or person to be nominated to become a director or executive officer of the smaller reporting company. Accordingly, smaller reporting companies now will be required to comply with the slightly different disclosure requirement of the Regulation S-K item.

58
See Item 401(d)(1) of Regulation S-B. 17 CFR 228.401(d)(1). Under Regulation S-B, issuers provide legal proceedings disclosure about promoters and control persons for the past five years. Regulation S-K requires disclosure on legal proceedings for control persons and promoters for registrants that have not been subject to the reporting requirements for Section 13(a) or 15(d) of the Exchange Act for the twelve months immediately before the filing of the registration statement, report or statement. 17 CFR 229.401(f) and (g).

59
See Item 401(f)(1) of Regulation S-K. 17 CFR 229.401(f)(1).

2. Electing Scaled Disclosure Standards on “A La Carte” Basis

Commenters generally supported the proposal to allow smaller reporting companies to choose compliance with either the smaller reporting company scaled disclosure requirements or the larger company disclosure requirements in Regulation S-K on an item-by-item or “a la carte” basis.
60

One comment letter expressed the view that the smaller reporting company disclosure requirements would serve as a baseline that would allow companies to provide any additional disclosure they deemed important to investors.
61

Another set of comments noted that the “a la carte” approach is already sanctioned by disclosure rules generally.
62

This letter explained that line-item disclosure requirements generally permit providing more disclosure than is required by the line items. Additionally, issuers are required to disclose all material facts that are necessary to make the statements included in the document not misleading, which may require disclosures in excess of line item requirements.
63

60
See,
e.g.
, Letter from Independent Community Bankers of America (ICBA).

61
See Letter from Deloitte & Touche LLP (Deloitte).

62
See Letter from ABA.

63
The ABA cited the following in support of this statement: Sections 11 and 12(a)(2) of the Securities Act and Rule 408 under the Securities Act, and Rules 10b-5 and 12b-20 under the Exchange Act.

Some accounting firms commenting on the a la carte approach requested that we address what one commenter referred to as the “lock-in” aspect of the proposal. In the Proposing Release, we explained that a smaller reporting company would have the option to take advantage of the smaller reporting company requirements for one, some, all or none of the item requirements, at its election, in any one filing. We proposed to require, however, that a smaller reporting company provide its financial statements on the basis of the scaled financial statement requirements or the larger company financial statement requirements for a single fiscal year, and not be permitted to switch back and forth from one to another in different filings within a single fiscal year.

One accounting firm noted that it was unclear how the a la carte approach would work if issuers were required to elect in the first quarterly report whether they would follow the scaled financial statement requirements or the larger company Regulation S-X requirements in that same fiscal year's annual report on Form 10-K.
64

According to this letter, making a determination in this manner would require a smaller reporting company that wants to preserve the option of following the smaller reporting company requirements in its annual report on Form 10-K to adhere to the smaller reporting company rules and not provide any additional information in the first quarterly report on Form 10-Q. Another accounting firm expressed the concern that a smaller reporting company might elect to provide more than the minimum disclosures only in periods when the additional disclosures tended to be favorable.
65

These comment letters agreed that the a la carte approach would work if the Commission clarified that although the smaller reporting company disclosure and financial statement requirements would appear to establish the minimum disclosure requirements, Rule 12b-20 under the Exchange Act
66

would require that a smaller reporting company provide any additional

information beyond those minimum disclosure requirements, in order to avoid a misleading presentation.
67

The accounting firms suggested that we encourage smaller reporting companies to provide consistent disclosures in succeeding periods in order to respond to investor expectations and allow period-to-period comparisons.

64
See Letter from BDO Seidman, LLP (BDO).

65
See Letter from Ernst & Young LLP (E&Y).

66
17 CFR 240.12b-20.

67
See Letters from E&Y and CAQ.

The proposals would have required companies to make the determination whether to report financial statement disclosure on a scaled basis in the first quarter due after the fiscal year covering the determination date. After reviewing the suggestions in several comment letters, however, we believe it is appropriate to permit smaller reporting companies to choose to comply with both the non-financial and financial item requirements on an item-by-item basis when these disclosures are provided consistently and when they are consistent with the legal requirements under the federal securities laws, including Securities Act Rule 408 and Exchange Act Rule 12b-20. Additionally, we stress the importance of providing disclosure that permits investors to make period-to-period comparisons, whether quarterly or annually.

We continue to expect that our staff will evaluate item-by-item compliance by smaller reporting companies with only the Regulation S-K requirements applicable to smaller reporting companies, and not with the requirements applicable to larger companies. This will be the case even if the company whose filing is being reviewed chooses to comply with the larger company requirements. Finally, as we noted in the Proposing Release, the a la carte approach will have no effect on the legal requirements and liabilities that apply to all disclosures made by issuers.
68

68
Release No. 33-8819, n. 76 p. 33 [72 FR 39678].

We are further clarifying that to the extent the smaller reporting company scaled item requirement is more rigorous than the same larger company item requirement, smaller reporting companies will be required to comply with the more rigorous, smaller reporting company item requirement. Also, we do not believe it is appropriate for a smaller reporting company to comply with a larger reporting company Regulation S-K item requirement if that requirement sets a higher threshold obviating the need for the smaller reporting company to provide disclosure. For example, unlike the larger company requirement under Item 404 of Regulation S-K, smaller reporting companies are required to disclose additional specific information about underwriting discounts and commissions and corporate parents.
69

In this case, a smaller reporting company would be required to provide the additional Item 404 disclosure.

69
See Instructions to Item 404(d) of Regulation S-K, 17 CFR 229.404(d).

Currently, the smaller reporting company requirements under Item 404 of Regulation S-K
70

present the only instance where the scaled requirements could be more rigorous than the larger company standard. This is because a smaller reporting company is required to provide disclosure on a related person transaction since the beginning of the company's last fiscal year if the amount involved in the transaction exceeds the lesser of $120,000 or 1% of the average of the company's total assets at year end for the last two completed fiscal years. In contrast, a larger company reporting under the same Item 404 Regulation S-K requirement is required to provide disclosure on a related person transaction since the beginning of the last fiscal year if the transaction exceeds $120,000.
71

A smaller reporting company's related person transaction may more easily exceed 1% of the average of the smaller reporting company's total assets than $120,000, as required for larger companies under the same item requirement. We believe this may be the case because 1% of a smaller company's total assets might be appreciably lower than $120,000.

70
New Regulation S-K Item 404(d)(1) related person disclosure requirement for smaller reporting companies.

71
17 CFR 229.404(a).

D. Eliminating “SB” Forms Associated With Regulation S-B

While some comment letters appeared to support the elimination of the forms designated with the letters “SB” associated with Regulation S-B,
72

along with moving the smaller reporting company requirements from Regulation S-B into Regulation S-K, others questioned whether this approach would reduce compliance burdens and lower costs for smaller companies.
73

Some of the letters questioning the elimination of the SB forms recommended a two-year phase-in period to help smaller companies adjust to the transition. Some letters expressed a general perception that eliminating the SB forms would lead to increased costs for smaller reporting companies because Forms 10, 10-K, 10-Q and S-1, which would be used by smaller companies if the SB forms were eliminated, appeared to have more item disclosure requirements.
74

One commenter stated, however, that eliminating the “SB” forms would provide both time and cost savings to smaller reporting companies that will be eligible to incorporate information from their previously filed Exchange Act periodic reports into a Form S-1 registration statement.
75

None of the comment letters explained how using Forms 10, 10-K, 10-Q, and S-1 would increase costs for smaller reporting companies. One letter noted, however, that a smaller company probably would take longer to go through Form 10-K and Form 10-Q to figure out exactly what applied to the company and what did not apply in terms of required disclosures.
76

In contrast, another comment letter noted that the elimination of “SB” forms would allow smaller reporting companies to incorporate information from their previously filed Exchange Act reports into a Form S-1 registration statement, which would result in time and cost savings to the smaller reporting company.
77

72
See,
e.g.
, Letter from ABA.

73
See,
e.g.
, Letter from Office of Advocacy of the U.S. Small Business Administration (SBA Advocacy Office).

74
See,
e.g.
, Letter from the International Association of Small Business Broker Dealers and Advisors (“IASBDA”).

75
See Letter from ABA.

76
See Letter from James J. Angel, Ph.D., CFA (“Prof. James Angel”).

77
See Letter from ABA.

Some of the comment letters apparently misperceived that the SB forms are simpler and shorter than forms larger companies use. This is not the case. The SB forms themselves are not necessarily simpler to use than the forms that larger companies use. The scaling and increased simplicity for smaller companies generally occurs in the item requirements of Regulation S-B, rather than the associated SB forms, and we are moving the item requirements into Regulation S-K with very few changes.
78

78
Moreover, the SB forms are not necessarily substantially shorter than the comparable forms for larger companies. Form 10-SB is actually longer, at 4
1/2
pages, than Form 10, which is less than 4 full pages long; Form 10-KSB is 11 pages long, while Form 10-K is 12; Form SB-2 is 5 pages long, while Form S-1 is just over 6 pages, not including instructions on summary prospectuses.

Nevertheless, after considering the comments, we have decided not to eliminate the Exchange Act reporting SB forms immediately, but to phase them out to ease the transition for smaller companies. We considered commenters' concerns regarding current small business issuers moving to the Forms 10-K and 10-Q, and concluded that our transition schedule will provide an

adequate period for these companies to continue to file reports on these forms, if they so desire.
79

Further, to help current small business issuers make the transition, the Division of Corporation Finance's Office of Small Business Policy plans to provide an informational brochure to assist their transition to the new smaller reporting company form requirements.

79
See Section IV below on compliance dates.

E. Qualifying Standards for Treatment as “Smaller Reporting Company”

Many of the comment letters in favor of our proposed definition of “smaller reporting company” agreed that combining the categories of non-accelerated filers with small business issuers for purposes of the definition provided a convenient and simple approach because it tracks the accelerated filer definition and reduces regulatory complexity.
80

In the Proposing Release, we reasoned that requiring only a public float test for most companies to qualify would provide additional simplicity, consistency and certainty. Eliminating a revenue test also would broaden the category of eligible companies. Our decision to focus on a company's non-affiliate common equity market capitalization or “public float” was also consistent with the Commission's current regulatory standards for purposes of Form 10-K, Form S-3, and the accelerated filer definition. Setting the public float ceiling at $75 million for smaller reporting companies further aligns the smaller reporting company definition with the non-accelerated filer definition.

80
See,
e.g.
, Letters from PricewaterhouseCoopers and E&Y.

The Advisory Committee recommended that we require companies to determine eligibility based on total equity market capitalization rather than public float. Although the Advisory Committee acknowledged that the Commission has historically and consistently used public float as a measurement in analogous regulatory contexts, it stated that equity market capitalization would better measure total financial exposure to investors.
81

The Advisory Committee recommended extending the Commission's non-financial scaled disclosure requirements, covering disclosure and reporting, to companies in the lowest 1% of market capitalization. Some of the comment letters we received on the Proposing Release agreed with the Advisory Committee equity market capitalization preference, stating that it was simpler and more widely understood than the calculation of public float. The majority of comment letters supported our proposals to require a public float standard only, agreeing we should require a revenue test only if a company is unable to calculate public float.

81
Advisory Committee Final Report 19.

Several comment letters opposed increasing the public float ceiling to a level higher than $75 million.
82

One comment letter explained that because smaller companies typically do not have a large analyst following, financial information provided by the company takes on greater importance in communicating results to investors.
83

Another letter noted that to balance protecting investors and promoting capital formation by small businesses, “reduced” disclosures should be limited to those public companies with relatively limited and less complex operations.
84

Most comment letters, however, supported a higher public float ceiling than $75 million.
85

Some of these comment letters argued that many companies with a public float greater than $75 million are still quite small. Several commenters suggested that the Commission provide scaled regulation to companies with up to $787 million in equity market capitalization, as they seemed to believe the Advisory Committee had recommended.
86

82
See Letters from PricewaterhouseCoopers and E & Y.

83
See Letter from PricewaterhouseCoopers.

84
See Letter from E&Y.

85
See,
e.g.
, Letters from SBA Advocacy Office and ABA.

86
The Advisory Committee recommended extending the Commission's scaled disclosure regime to the lowest 6% of total U.S. equity market capitalization, which would have included companies with less than $787 million in market capitalization as of March 31 and June 10, 2005. But the Advisory Committee only identified the rules on form and content of financial statements in Item 310 of Regulation S-B as appropriate for application to that category of companies. The Advisory Committee recommended extending the Commission's other scaled disclosure rules, covering disclosure and reporting, to companies in the lowest 1% of market capitalization, which, as explained in the Proposing Release at page 16 [72 FR 39673], is essentially the same group and proposal contained in the Proposing Release—reporting companies with less than $75 million in public equity float—which we are adopting with few changes today. As calculated from data obtained from Thomson Financial (Datastream), the overlap between reporting companies with $128 million in market capitalization and reporting companies with $75 million in public float is approximately 98%.

We are adopting, as proposed, a definition for “smaller reporting companies” that requires companies to have a public float of less than $75 million. We believe this standard is appropriately scaled in that it reduces costs to smaller companies caused by unnecessary information requirements, consistent with investor protection.

As adopted, the definition will make eligibility for smaller reporting company status contingent solely on public float for most companies. Alternatively, for companies that are unable to calculate public float, we are, as proposed, providing a revenue test. If a company has no common equity outstanding or no market price for its outstanding common equity exists at the time of its eligibility determination, the company would qualify as a smaller reporting company if it had less than $50 million in revenues in the last fiscal year. This is a departure from the dual eligibility test under the Regulation S-B system, which required separate calculations under public float and annual revenues. By eliminating the revenue test for most companies, the new definition of smaller reporting company simplifies and streamlines the definition while expanding the number of companies eligible to qualify.

As adopted, Item 10(f) of Regulation S-K will set forth the definition for “smaller reporting company.” We are further streamlining the definition and clarifying technical inconsistencies in the Proposing Release. We are also modifying the proposed introduction of Item 10, which indicated that smaller reporting companies would be permitted to choose to comply with either the requirements applicable to smaller reporting companies or the requirements applicable to other companies. Companies may make a choice on most of the scaled disclosure item requirements, unless the requirements for smaller reporting companies specify that smaller reporting companies must comply with the smaller reporting company requirements.
87

If the item requirement does not require specific compliance, then the smaller reporting company will be permitted to choose scaled or standard disclosure requirements.

87
See the discussion of Item 404 at the end of Part III.C.2.

1. Eligibility and Exclusions

Currently, under Item 10 of Regulation S-B, small business issuer eligibility is limited to U.S. and Canadian issuers. This has been the case since 1992, when we adopted Regulation S-B and its associated forms and maintained eligibility for small business issuer status for Canadian companies because these companies had been able to use the Form SB-2 precursor, Form S-18. As adopted, we are expanding eligibility for smaller reporting company status to non-U.S.

companies using domestic company forms. Foreign companies will qualify as smaller reporting companies if they are eligible to file on a form that permits disclosure based on the standards for smaller reporting companies, such as Forms S-1, S-3, S-4, 10-Q, and 10-K. Companies filing on forms available only to “foreign private issuers,” such as Forms F-1, F-3, F-4, and 20-F, will be ineligible for the smaller reporting company scaled disclosure requirements.

Several commenters objected to the proposal requiring that Canadian and other foreign private issuers provide financial statements prepared according to U.S. GAAP if they want to use the scaled rules available to smaller reporting companies, which they may use only if they file on a form available to U.S. domestic companies. Generally, these comment letters stated that the proposals would eliminate an accommodation already enjoyed by Canadian companies filing on Form SB-2. Currently, Canadian companies are permitted to provide Canadian GAAP financial statements that are reconciled to U.S. GAAP on domestic forms. Some of the comment letters urged that we consider allowing all foreign private issuers to provide their own country's GAAP with U.S. GAAP reconciliation.

To the extent that a foreign company qualifies as a smaller reporting company, it may make filings with us on forms available to domestic U.S. companies if it presents financial statements pursuant to U.S. GAAP. We continue to believe that because we are extending eligibility for scaled disclosure on domestic forms to all foreign issuers, it is important to require that this significantly larger group of foreign filers provide financial data in accordance with U.S. GAAP on domestic forms at this time. Other than in limited situations, foreign filers using domestic forms are required to prepare their financial statements in accordance with U.S. GAAP. Unlike our filing forms that are specifically designed for foreign private issuers that permit the use of financial statements prepared in accordance with bases of accounting other than U.S. GAAP so long as U.S. GAAP reconciling information is presented, the disclosure and other requirements under our domestic filing forms do not contemplate the use of accounting principles other than U.S. GAAP. We believe eligible foreign registrants that choose to avail themselves of the option to provide scaled disclosure should comply fully with the scaled disclosure and financial statement presentation requirements applicable to domestic issuers.
88

Finally, the regulatory scheme for foreign private issuers on the “F” forms is specifically tailored to address their special circumstances, and we believe the scheme provides the accommodations most useful to these companies.

88
We have published a concept release on whether U.S. companies should be permitted to use International Financial Reporting Standards as published by the International Accounting Standards Board in their filings with the Commission. If we proceed with proposed rules in this area, we may consider the impact of any proposal on filers that use scaled disclosure. See Release No. 33-8831 (Aug. 7, 2007) [72 FR 45600].

We will continue to exclude investment companies, including business development companies, and asset-backed issuers from eligibility for scaled treatment under our rules for smaller reporting companies. We requested comment on these exclusions and received none.

2. Determination Dates

The smaller reporting company determination dates we are adopting today are based on three categories of companies: reporting companies with a public float, non-reporting companies filing a registration statement, probably an initial registration statement, under either the Securities Act or the Exchange Act, and reporting or non-reporting companies without a public float.
89

We are amending the definition of smaller reporting company to remove the reference to an issuer having “no significant public common equity outstanding,” based on a commenter's belief that it was confusing. Instead, the definition will indicate that in the case of an issuer whose public float as calculated under the definition was zero, most likely because the issuer had no public common equity outstanding or no market price for its common equity existed, the issuer must have had annual revenues of less than $50 million in its last fiscal year.

89
See new Item 10(f) of Regulation S-K.

In the case of a reporting company, we are requiring the same public float calculation currently used to determine accelerated filer status, $75 million in public float 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.

a. Reporting Companies

To determine smaller reporting company eligibility, reporting companies will follow the accelerated filer determination date in Rule 12b-2 under the Exchange Act—the last business day of a company's second fiscal quarter.
90

We believe this approach simplifies regulation and promotes consistency and uniformity with current Commission rules. The public float of a reporting company will be calculated by using the price at which the shares of its common equity were last sold or the average of the bid and asked prices of such shares in the principal market for the shares as of the last business day of the company's second fiscal quarter, multiplied by the number of outstanding shares held by non-affiliates. We are adopting, as proposed, a rule providing that if a reporting company determines it qualifies as a larger reporting company rather than a smaller reporting company on the last day of its second fiscal quarter, it will be required to comply with the larger company disclosure standards when it files its first quarterly report in the fiscal year following the fiscal year of the determination date. We are permitting larger reporting companies, however, to opt for the scaled disclosure requirements beginning with the Form 10-Q covering the second fiscal quarter corresponding to the measurement date establishing eligibility as a smaller reporting company.
91

90
New Item 10(f)(2)(i) of Regulation S-K explains how the determination dates work for companies already filing reports under the Exchange Act.

91
See Section III.E.2.d below, explaining how a company enters and exits the smaller reporting company disclosure status.

b. Non-Reporting Companies Filing an Initial Registration Statement

Companies determining eligibility in connection with the filing of their initial registration statement with the Commission will have to choose a date within 30 days of filing to determine eligibility.
92

Under Regulation S-B, we had required companies to choose a public float calculation during a 60-day window before the filing. We believe requiring a 30-day window will lead to more accuracy and less uncertainty for filers, Commission staff, and investors.

92
See new Item 10(f)(1)(ii) of Regulation S-K.

The calculation methodology we are adopting for non-reporting companies varies slightly from the Regulation S-B standard we are rescinding. The Regulation S-K standards will require computing public float based on three components:

• Estimated offering price per share at the time of filing the registration statement;

• Number of shares of common stock outstanding that are held by non-affiliates before the offering; and

• Number of shares of common stock to be sold at the estimated offering price.

As adopted, the rule will require that non-reporting companies base the calculation on the estimated number of registered shares for offering to the public. For example, as we illustrated in the Proposing Release, a company that registers 7,000,000 shares in its initial public offering will be required to add that number to the total number of shares held by non-affiliates before the offering. If a company has 25,000,000 shares of common stock outstanding held by non-affiliates before the offering, it would add the 7,000,000 and 25,000,000 shares of common stock. The result would mean that the 32,000,000 shares of common stock outstanding would be multiplied by the estimated offering price per share in the initial public offering.

One commenter raised questions regarding the proposed method of calculation.
93

This commenter noted that the estimated public offering price and the number of shares being offered tends to change during the time between the initial filing of the registration statement and the final prospectus. The uncertainty raised by the final estimated public offering price and number of shares being offered caused the commenter to question whether an issuer would be required to switch midway through the process from using smaller reporting company disclosure standards to using more extensive regular disclosure standards. Conversely, this commenter noted that if the price range and/or the number of shares being offered decreased, the issuer will have satisfied a more extensive disclosure standard than it turns out it was required to satisfy.

93
See Letter from ABA.

We considered these comments, and believe it is appropriate to provide initial public offering registrants the option to recalculate their public float at the time the company completes the initial public offering. Our intention in providing this flexibility is to permit (but not require) these issuers to recalculate their eligibility based on the results of the initial public offering for purposes of filing the next periodic report. For example, if an issuer files an initial public offering registration statement under the Securities Act based on the larger company Regulation S-K item requirements but then determines after the close of the initial public offering that its public float is below $75 million, then this issuer would be a smaller reporting company and would be eligible to provide scaled disclosure in the first periodic report due after the initial public offering registration statement was declared effective.
94

94
See new Item 10(f)(2)(ii) of Regulation S-K.

To address the commenter's concern that a smaller reporting company would be required to transition its disclosure to the larger company requirements if its public float rose above $75 million during the pre-effective stage of the filing, we are clarifying that this would not be the case if the issuer made a bona fide eligibility determination at the time it filed the initial public offering registration statement. The issuer will continue to be a smaller reporting company until its next annual determination date—the end of its second fiscal quarter.

With regard to a company's initial registration statement under the Exchange Act covering a class of securities, the company would calculate its public float as of a date within a 30-day window of the registration statement being filed. Because such an Exchange Act registration statement would not directly affect the issuer's public float, if an issuer that files such an Exchange Act registration statement does not have a public float or its public float cannot be calculated because there is no market price for the issuer's equity securities, the issuer's eligibility for the scaled disclosure would be based on its revenue, as proposed.
95

95
See new Item 10(f)(1)(iii) of Regulation S-K.

c. Alternative Revenue Test for Reporting and Non-Reporting Companies

As we stated in the Proposing Release, situations may arise in which a reporting company would be unable to calculate public float because it has no public common equity outstanding or no market price for its common equity exists. As adopted, the definition provides a third eligibility category to qualify for smaller reporting company status—companies unable to calculate a public float. To qualify as smaller reporting companies, this group of companies will be required to have annual revenues of less than $50 million during the last fiscal year before filing the registration statement.
96

96

Id
.

d. Entering and Exiting Smaller Reporting Company Status

The rules we are adopting on entering and exiting smaller reporting company status in Item 10 of Regulation S-K are less restrictive than the Regulation S-B requirements of Item 10. Item 10 of Regulation S-B currently requires issuers to calculate eligibility based on public float and revenue levels for two consecutive fiscal years. The Regulation S-B system had a significantly longer transition period to enter or exit the smaller company disclosure system.

We are adopting transition rules for entering and exiting smaller reporting company status that track the accelerated filer definition. The Proposing Release suggested that the accelerated filer transition rules were the same as the smaller reporting company transition requirements to move back and forth from larger company disclosure standards to smaller reporting company standards. One comment letter requested clarification, pointing out that accelerated filers are required to change to their new status when determining the due date of the annual report covering the year of the status change, but, as proposed, the smaller reporting company determination would not take effect until the first fiscal quarter of the next fiscal year.

As adopted, the rules provide that a larger reporting company that determines it is a smaller reporting company as of the last business day of its most recently completed second fiscal quarter is permitted to transition to the scaled disclosure requirements in the Form 10-Q quarterly report corresponding to the determination date's second fiscal quarter rather than, as proposed, the following fiscal year's first quarterly report. A smaller reporting company required to transition to the larger reporting system after its determination date calculation will not be required to satisfy the larger reporting company disclosure requirements until the first quarter after the determination date fiscal year.
97

97
See new Item 10(f)(2)(i) of Regulation S-K.

To illustrate, a larger reporting company with a fiscal year end of December 31, 2008 that qualified as a smaller reporting company on the last business day of its most recently completed second fiscal quarter in 2008 would be able to provide scaled disclosure beginning with the Form 10-Q for the same second fiscal quarter in which the company determined its eligibility, which would be due in August 2008. Conversely, a smaller reporting company with a fiscal year end of December 31, 2008 that is required to transition out of the scaled disclosure system into the larger company disclosure system will be required to do so beginning with the

Form 10-Q for the first fiscal quarter of 2009, which would be due in May 2009.

As adopted, once an issuer fails to qualify for smaller company status, it will remain unqualified unless it determines that its public float, as calculated in accordance with the definition, was less than $50 million as of the last business day of its second fiscal quarter. Where an issuer does not have a public float or no public market for its common equity securities exists and it has less than $50 million in revenue, it will qualify to use the scaled disclosure item requirements until it exceeds $50 million in annual revenue. Once such an issuer fails to qualify as a smaller reporting company because its revenues exceed $50 million, that issuer will not become eligible for smaller reporting company status until it has annual revenues of less than $40 million in its last fiscal year.
98

98
See new Item 10(f)(2)(iii) of Regulation S-K. 17 CFR 229.10(f)(2).

F. Miscellaneous

99

99
In addition to the matters discussed in this release, we are amending a number of rules to eliminate references to Regulation S-B and the SB forms and to make other technical changes, such as providing the Commission's current mailing address.

1. Indexing for Inflation

Many comment letters favored the inflation adjustments to the public float levels and revenue ceilings in the definition of smaller reporting company, but noted that the accelerated filer definition also should be indexed in order to keep these two categories aligned. We are not adopting the indexing proposal, but will consider whether these suggestions should be the subject of a future rulemaking project to collectively index several thresholds in current Commission rules.

2. Eliminating Transitional Small Business Issuer Format

We are eliminating the transitional small business issuer format, as proposed. No commenters objected to this proposal.

3. Checking the “Smaller Reporting Company” Box

A company that qualifies as a smaller reporting company based on the appropriate eligibility test under the definition will be required to check the “smaller reporting company” box on the registration statement or periodic report filed, whether or not it chooses to rely on the scaled disclosure standards of the amended Regulation S-K requirements. Several comment letters supported this proposal.
100

100
See,
e.g.
, Letters from CAQ and ABA.

IV. Compliance Dates

Transition for Current Small Business Issuers.
We are providing current small business issuers the option to file their next annual report for a fiscal year ending on or after December 15, 2007 on either Form 10-KSB or Form 10-K. A small business issuer may continue to file its periodic reports using Regulation S-B and the “SB” forms until its next annual report is filed. After a small business issuer files that next annual report, subsequent periodic reports must be filed on a form that does not have the “SB” designation. This will provide an optional transition period for companies that were small business issuers as of the effective date.

As a result of this transition period, Regulation S-B, Form 10-QSB, and Form 10-KSB need to be maintained while eligible small business issuers may continue to use them. Accordingly, while most of the amendments are effective on February 4, 2008. Form 10-QSB will not be removed until October 31, 2008 and Regulation S-B and Form 10-KSB will not be removed until March 15, 2009.

We are making numerous changes to rules and forms to implement these rule amendments, including replacing references to small business issuers with references to smaller reporting companies. During the optional transition period, small business issuers have the same reporting obligations as they had before these rule amendments, except to the extent that they voluntarily move to the new smaller reporting company system before being required to do so.

The “SB” Securities Act and Exchange Act registration statement forms, SB-1, SB-2, and 10-SB, will be rescinded on the effective date. Companies filing a registration statement after this date will be required to file on the appropriate form without an “SB” designation. If a registration statement was filed on an “SB” form before the effective date, and the company seeks to amend it after the effective date, the company must file the amendment on a correct form without an “SB” designation, but may continue to use the disclosure format and content based on the “SB” form until six months after the effective date.
101

101
For example, a company that filed on Form SB-2 before the effective date would be required to file any pre-or post-effective amendments on Form S-1, but would be able to maintain the item requirement format of its Form SB-2 for up to six months after the effective date.

General Transition Provisions.
Companies that qualify as smaller reporting companies after the effective date, whether or not they currently are small business issuers, will have the option to comply with the scaled disclosure item requirements for smaller reporting companies in their registration statements and periodic reports filed after the effective date. To determine their status after the effective date, reporting companies will refer to their most recent second fiscal quarter to calculate public float. In these cases, reporting companies have already calculated public float for purposes of determining accelerated filer status and, therefore, no additional computation is necessary. Current small business issuers will be deemed to qualify as smaller reporting companies and need not make this calculation. Companies that recently became reporting companies before the effective date, but have not yet had a completed second fiscal quarter, will base eligibility on the public float calculated after the initial public offering. In all cases, companies that qualify for smaller reporting company status will continue to have this status until they make their annual determination at the end of the second fiscal quarter.

V. Paperwork Reduction Act

A. Background

The amendments contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).
102

As discussed in the Proposing Release, we submitted a request for approval of the “collection of information” requirements contained in the proposed amendments to the Office of Management and Budget in accordance with the PRA.
103

Some of the revisions that we are making to the original proposal affect these collections of information, but the revisions do not affect the burden estimates that we submitted to the OMB in connection with the Proposing Release. The titles of the collections of information are:
104

102
44 U.S.C. 3501
et seq.

103
44 U.S.C. 3507(d); 5 CFR 1320.11.

104
The paperwork burden from Regulation S-K and S-B is imposed through the forms that are subject to the requirements in those regulations and is reflected in the analysis of those forms. To avoid a Paperwork Reduction Act inventory reflecting duplicative burdens and for administrative convenience, we assign a one-hour burden to Regulations S-K and S-B.

(1) “Regulation S-B” (OMB Control No. 3235-0417);

(2) “Regulation S-K” (OMB Control No. 3235-0071);

(3) “Regulation C” (OMB Control No. 3235-0074);

(4) “Form SB-1” (OMB Control No. 3235-0423);

(5) “Form SB-2” (OMB Control No. 3235-0418);

(6) “Form S-1” (OMB Control No. 3235-0065);

(7) “Form S-3” (OMB Control No. 3235-0073);

(8) “Form S-4” (OMB Control No. 3235-0324);

(9) “Form S-8” (OMB Control No. 3235-0066);

(10) “Form S-11” (OMB Control No. 3235-0067);

(11) “Form 1-A” (OMB Control No. 3235-0286);

(12) “Form 10” (OMB Control No. 3235-0064);

(13) “Form 10-SB” (OMB Control No. 3235-0419);

(14) “Form 10-K” (OMB Control No. 3235-0063);

(15) “Form 10-KSB” (OMB Control No. 3235-0420);

(16) “Form 8-K” (OMB Control No. 3235-0060);

(17) “Form 8-A” (OMB Control No. 3235-0056);

(18) “Form 10-Q” (OMB Control No. 3235-0070);

(19) “Form 10-QSB” (OMB Control No. 3235-0416);

(20) “Form 11-K” (OMB Control No. 3235-0082); and

(21) “Form SE” (OMB Control No. 3235-0327).

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.

The hours and costs associated with preparing disclosure, filing information required by forms, and retaining records constitute reporting and cost burdens imposed by collection of information requirements. The information collections related to annual, periodic, and current reports and registration statements will be mandatory for larger reporting companies; some of the requirements, however, will be voluntary for smaller reporting companies. There is no mandatory retention period for the information disclosed, and the information disclosed will be made publicly available on the Commission's EDGAR filing system or in the Commission's public reference room in the case of a Form 1-A or Form SE filing.

For purposes of the Paperwork Reduction Act, as adopted, the burden changes are insignificant for companies that currently meet the small business issuer definition. We did not receive any comment letters providing data or other information concerning legal or accounting costs that would cause us to change our view.

We adopted existing Regulation S-B to provide an integrated disclosure system for small business issuers and Regulation S-K to provide an integrated disclosure system for larger reporting companies. Forms SB-1, SB-2, S-1, S-3, S-4, S-8, and S-11 are registration statements that are prepared by eligible issuers to provide investors with the information they need to make informed investment decisions in registered offerings. Form 1-A is the form required when a non-reporting company seeks to use the Regulation A exemption from the Securities Act. Regulation A is a conditional small issues exemption available to eligible issuers. Forms 10, 10-SB, 10-K, 10-KSB, 8-K, 8-A, 10-Q, 10-QSB, and 11-K are forms that set forth disclosure requirements for companies filing reports with the Commission pursuant to the Exchange Act. Finally, Form SE is a notice to the Commission by an EDGAR electronic filer that it is filing paper format exhibits.

Consistent with the information that we previously submitted to the OMB we estimate that the total increase in burden hours for Form 10-K, Form 10-Q, Form 10, Form S-1, and Form S-11 will be 7,857,948 and that the total increase in cost will be $1,114,044,563. These increases are offset by the total decrease in burden hours for Form 10-KSB, Form 10-QSB, Form 10-SB, Form SB-1, and Form SB-2 of 7,853,542.5 burden hours and a total decrease in cost of $1,108,787,363. The net difference between the increase and decrease is an increase of 4,405.5 burden hours and a cost of $5,257,200.
105

The net increase of 4,405.5 burden hours and costs of $5,257,200 is outweighed by the possible decrease of 356,290 burden hours and costs of $47,479,000 for the 1,581 newly eligible smaller reporting companies.

105
As explained in the Proposing Release, the net difference arises primarily from the increased burden on real estate companies that previously could use Form SB-2, but under these amendments would now be required to use Form S-11, the form tailored to issuers in the real estate industry.

The table below sets forth our current hourly and cost burden estimates for Forms 10-K, 10-Q, 10, S-1, and S-11 after these amendments.
106

106
Collection affected by the rulemaking, but not included in the table, were either rescinded or their estimated burden was not changed.

Form
Burden hours
Annual costs

10-K
23,430,170
$3,124,022,763

10-Q
4,583,290
513,829,600

10
11,725
14,070,000

S-1
167,912
201,493,800

S-11
37,069
44,484,000

B. Summary of Comment Letters and Revisions to the Proposals

We requested comment on the Paperwork Reduction Act analysis contained in the Proposing Release. One commenter
107

stated that the substitution of the Regulation S-K disclosure framework would only be beneficial to small issuers if there were no increase in legal and accounting costs. The commenter noted that the Commission does not guarantee that moving the current Regulation S-B disclosure requirements into Regulation S-K will be more cost effective. The commenter also disagreed with the Commission's average costs estimates, stating that costs vary between New York City and smaller communities throughout the country. Several other commenters
108

raised similar concerns that costs may increase as a result of these proposals. None of these commenters, however, provided any data or other information to show that legal and accounting costs will increase.

107
See Letter from the IASBDA.

108
See Letters from SBA Office of Advocacy, Center for Capital Markets (U.S. Chamber of Commerce), and Prof. James Angel.

Our estimates of the average number of hours each entity spends completing the affected forms, allocation of burden between outside counsel and internal personnel, and the average hourly rate for outside securities counsel were obtained by contacting a number of law firms and other persons regularly involved in completing the forms and reflect regional variances.

Commenters who raise a concern about the transition from Regulation S-B and the “SB” forms to Regulation S-K and the “SK” forms wanted us to consider a phase-in period. The amendments, as adopted, will allow a former “SB” filer a choice to file its first annual report on Form 10-K or Form 10-KSB during the transition period, but thereafter it will no longer be able to use the “SB” forms. For example, after the effective date of these amendments, an eligible calendar year company will be able to choose to file its first annual report on Form 10-K or Form 10-KSB. An eligible non-calendar company may file its quarterly reports on Form 10-Q or Form 10-QSB until its next annual report due after the effective date of the amendments. That next annual report may be filed on Form 10-K or Form 10-KSB, but thereafter the company may no longer use the “SB” forms.

We also received comment letters
109

expressing concern that legal and accounting costs will increase as a result of the proposals. We do not believe that legal or accounting costs should increase since, small business issuers generally will be providing the same disclosure as currently filed. In the case of a newly eligible smaller reporting company that previously filed under Regulation S-K using “SK” forms, the disclosure burden will decrease if the company elects to use the scaled disclosure available to smaller reporting companies. Otherwise the issuer may also file roughly the same information as it does currently. The Commission is providing an index to the scaled disclosure requirements in new Item 10(f) of Regulation S-K and plans to publish a brochure to assist smaller reporting companies in transitioning to the new scaled disclosure requirements.

109
See Letters from IASBDA, SBA Office of Advocacy, Center for Capital Markets (U.S. Chamber of Commerce), and Prof. James Angel.

In response to these comments, we decided to revise four items that were part of the original proposal.

First, we are persuaded by the letters of the public accounting firms
110

that Item 310 should be placed in a separate section within Regulation S-X, instead of creating a new Item 310 within Regulation S-K. We agree that having all financial information requirements within one Regulation seems logical and appropriate.

110
See Letters from Grant Thornton, BDO, KPMG, PricewaterhouseCoopers LLP, and CAQ.

Second, several commenters
111

cite the Advisory Committee's recommendation to require two years of balance sheets to go along with audited statements of income, cash flows, and changes in stockholders' equity for each of the latest two fiscal years, as required by Regulation S-X. We have been convinced by the comment letters and the Advisory Committee's report that two years of balance sheets will provide investors with valuable comparative information with minimal additional costs.

111
See Letters from Grant Thornton, BDO, PricewaterhouseCoopers, and CAQ.

A third revision will allow a smaller reporting company to provide its financial statements on an “a la carte” basis like the other non-financial statement disclosure items. This revision differs from the Proposing Release, where the Commission proposed to require a smaller reporting company to provide its financial statements on the basis of Item 310 of Regulation S-K or Regulation S-X for an entire fiscal year, and not be permitted to switch back and forth from one to the other in different filings within a single fiscal year. A commenter
112

pointed out that this inflexibility within the “a la carte” system and requiring a smaller reporting company to “lock in” to one approach or the other when it files its first Form 10-Q for a year seems contrary to the proposed “a la carte” approach. As we proposed, if a smaller reporting company wanted to preserve the option of following the smaller reporting company rules in its filings, it perhaps could not provide the additional information required of larger companies in its first quarterly report or risk losing the ability to use the scaled disclosure requirements for the year. As adopted, we will allow “a la carte” disclosure for financial statements so that smaller reporting companies can provide additional information over and above the financial disclosure required by Article 8 of Regulation S-X.

112
See Letter from BDO.

The fourth revision requested by commenters
113

is to amend Rule 3-05 of Regulation S-X. Rule 3-05 provides the requirements for Financial Statements of Businesses Acquired or to be Acquired, and paragraph (b)(2)(iv) allows issuers to omit the financial statements for the earliest of three fiscal years required if the net revenues of the business to be acquired are less than $25 million. We agree with the commenters that the $25 million ceiling was related to the small business issuer definition, and since we are creating a new definition of smaller reporting company to replace the small business issuer definition that contains a $50 million revenue ceiling, it is appropriate to raise the Rule 3-05 ceiling to $50 million.

113
See Letters from Grant Thornton, KPMG, and CAQ.

For purposes of the Paperwork Reduction Act, as adopted, the burden changes are insignificant for companies that currently meet the small business issuer definition. We did not receive any comment letters providing data or other information concerning legal or accounting costs that would cause us to change our view.

VI. Cost-Benefit Analysis

A. Background

We have adopted amendments to eliminate our “SB” forms and move the Regulation S-B item requirements into amended Regulations S-K and S-X. The amendments will amend all relevant rules and forms under the Securities Act, the Exchange Act, and the Trust Indenture Act to replace the existing references to “small business issuer” to reference to “smaller reporting company.” The new “smaller reporting company” definition will replace the current “small business issuer” eligibility standards to allow a greater number of public companies to provide disclosure based on the scaled disclosure requirements. The new definition for smaller reporting company will include companies with a public float of less than $75 million and will therefore be a significant increase from the $25 million levels for public float and revenue under the current “small business issuer” definition. For companies without a public float, we are requiring an alternative ceiling of below $50 million in revenue in the previous year.

B. Summary of Rules

As noted above, the amendments will eliminate the separate disclosure framework of Regulation S-B by moving those requirements into Regulation S-K and the financial disclosure into Regulation S-X. The new definition for “smaller reporting company” will expand the number of filers that will qualify to provide disclosure under the scaled item requirements of the current Regulation S-B framework. Smaller reporting companies and non-accelerated filers will both be subject to Regulation S-K, but smaller reporting companies will have the option to provide disclosure on an item-by-item basis according to the scaled item requirements of amended Regulation S-K. The newly adopted amendments will allow eligible smaller reporting companies to do the following:

• Provide three years rather than five years of business development activities, and not be required to

provide segment disclosure under amended Item 101 of Regulation S-K;

• Not provide disclosure required by Items 301 and 302 relating to selected financial data and supplementary financial information;

• Provide more streamlined disclosure for management's discussion and analysis of financial condition and results of operations found in Item 303 by requiring only two years of analysis if the company is presenting only two years of financial statements, instead of three years currently required of larger companies;

• Provide audited balance sheets, audited statements of income, cash flows and changes in stockholders' equity for each of the last two fiscal years in new Article 8 of Regulation S-X instead of an audited balance sheet as of the end of the last two fiscal years and audited statement of income, cash flows and changes in stockholders' equity for each of the last three fiscal years as required by other parts of Regulation S-X;

• Provide disclosure about the chief executive officer and two other highly compensated executive officers only, rather than the information for the Chief Executive Officer, Chief Financial Officer and three other executive officers required of larger registrants;

• Not provide a Compensation Discussion and Analysis required of larger reporting companies;

• Provide only three of the seven tables (Summary Compensation, Outstanding Equity Awards, and Director Compensation) required of larger reporting companies; and

• Not provide disclosure regarding the company's policies and procedures for approving related person transactions. Smaller reporting companies will be required, however, to provide disclosure regarding a transaction where the amount exceeds the lesser of 1% of a smaller company's total assets or $120,000. They also will be required to provide additional specific information about underwriting discounts and commissions and corporate parents. Additionally, smaller reporting companies will be required to provide disclosure regarding promoters and certain control persons.

C. Benefits

As discussed above, the amendments adopted today will promote regulatory simplification by eliminating all “SB” forms and consolidating the Regulation S-B disclosure item requirements into Regulation S-K. The integrated Regulation S-K regime will enable a larger category of public companies to have more flexibility in tailoring disclosure standards to fit the need of investors and the realities of their company. We believe investors will benefit from the scaled disclosure amendments to Regulation S-K because the amendments allow issuers to make disclosure based on the size, business operations, and financial condition of the smaller reporting company. Allowing smaller reporting companies to choose scaled disclosure on an item-by-item basis allows companies to tailor their disclosure to reduce costs and thereby benefit shareholders. The increased public float standards in the definition of smaller reporting company will allow more companies the flexibility to choose between scaled item requirements such as financial statement information and executive compensation disclosure. By doing so, these newly eligible companies can appropriately determine the information needs of their investors in light of the costs of providing that information. Thus, moving the scaled disclosure requirements of Regulation S-B into Regulations S-K and S-X will provide regulatory flexibility that gives companies the ability to allocate resources to increased disclosure only in instances where they believe doing so would provide a benefit to shareholders.

Eliminating the “SB” forms will mitigate any perceived notion that smaller companies are currently reporting under a completely different and inferior disclosure framework. If current Regulation S-B filers are inappropriately penalized by the market for this perceived notion, as some commenters have suggested, then integrating Regulation S-B and Regulation S-K should benefit shareholders by decreasing the company's cost of capital. To the extent that these amendments eliminate the perceived notion of an inferior disclosure framework, we believe that these amendments will increase the benefits and in some instances, reduce the costs of being a public company and will benefit the capital markets by encouraging private companies to consider offerings that are registered under the Securities Act or to enter the Exchange Act reporting system.

As amended, an integrated disclosure system for all companies filing forms using Regulation S-K will promote efficiency because practitioners and investors will refer to one disclosure framework. Filers and their practitioners will have one consolidated regulation to find all relevant disclosure item requirements, which will reduce complexity and improve regulatory efficiencies. Although some commenters
114

were concerned that finding the scaled disclosure provisions in Regulation S-K would be inefficient, the index of scaled disclosure in new Item 10(f) should mitigate this concern. For some smaller reporting companies, legal and accounting costs may decrease.

114
See
e.g.
Letters from Grant Thornton and BDO.

As discussed earlier in this release, we estimate that approximately 1,581 new companies will have an opportunity to use the restructured scaled disclosure requirements for smaller reporting companies and may experience significant burden and cost savings if they use them.
115

We assume that approximately 50% of the 1,581 companies (or 790 companies) will use the scaled disclosure requirements. For purposes of the Paperwork Reduction Act, we estimate that these 790 smaller reporting companies may save 356,290 internal burden hours and costs in the amount of $47,479,000 by using the scaled disclosure requirements.
116

115
We estimate that 1,227 companies would be newly eligible to use the scaled disclosure available to smaller reporting companies in addition to another 354 companies that currently are eligible for scaled disclosure but do not use it, resulting in a total of 1,581 companies. Approximately 1,227 companies have a public float between $25 and $75 million, in addition to approximately 354 companies with a public float below $25 million that currently use the “SK” forms rather than the “SB” forms.

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This estimate of a decrease in the compliance burden by 356,290 hours is based upon 790 responses by companies using regular Regulation S-K disclosure × 1,723 internal hours per company = 1,361,170 hours minus 790 responses by companies × 1,272 internal hours per company = 1,004,880 hours for smaller reporting companies and a decrease in the annual cost by $47,479,000 (574.25 professional hours × $400 per hour = $229,700 cost per response using regular Regulation S-K disclosure × 790 responses minus 424 professional hours × $400 per hour = $169,600 cost per response using the scaled disclosure × 790 annual responses).

Finally, another benefit to smaller reporting companies is that by using Registration Statement Form S-1, a company may be permitted to incorporate by reference its previously filed periodic reports. We believe that this will result in some cost savings and efficiencies in preparing registration statements for smaller reporting companies.

D. Costs

In our view, the elimination of the “SB” forms and moving the Regulation S-B disclosure standards into Regulation S-K and financial disclosure into Regulation S-X will not significantly increase the costs of complying with the Commission's rules.

The disclosure requirements will not change except in minor ways for current small business issuers that previously

filed under Regulation S-B, so we do not anticipate any increase in costs due to the change in disclosure requirements.
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For current “SB” filers, we estimate the net difference of reporting under Regulation S-K will be an increase of 4,405.5 burden hours and a cost of $5,257,200 for purposes of the Paperwork Reduction Act.

Four commenters
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stated that these proposals may have unintended consequences, such as extra legal and accounting costs. One of these commenters
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expressed concern that moving the disclosure requirements of Regulation S-B into Regulation S-K would only benefit small issuers if the legal and accounting costs do not increase. The commenter did not provide any data or information to support its position that costs could increase. The amount of disclosure a former small business issuer will provide on the “SK” forms should not increase unless the issuer chooses to provide additional disclosure above the required disclosure. We have added a heading entitled “Smaller Reporting Companies” to Items where scaled disclosure is available for smaller reporting companies. This will alleviate the concern that small issuers need guidance in determining what disclosure requirements apply to them.
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Thus, we do not believe that there should be any significant additional out-of-pocket costs associated with compliance.

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See Letters from IASBDA, SBA Office of Advocacy, Center for Capital Markets (U.S. Chamber of Commerce), and Prof. James Angel.

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See Letter from IASBDA.

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See Letter from Prof. James Angel.

We recognize that some of the 1,581 companies may choose to avail themselves of the scaled disclosure requirements when they have complied with standard Regulation S-K previously. In addition, the amount of disclosure reviewed by the Commission's staff may change for these companies. The staff will now evaluate compliance with Regulation S-K on the scaled disclosure requirements available to smaller reporting companies even if the company previously chose to comply with the larger company Regulation S-K disclosure requirements. If the amount of disclosure and corresponding SEC review under the prior reporting standard was valued by investors, using scaled disclosure may increase a company's cost of capital. Because the differences in smaller and larger company disclosure standards are small, however, we believe that any such costs will be minimal.

Investors may face additional costs in determining whether a newly eligible smaller reporting company has changed the amount of disclosure it provides to investors or whether the company continues to provide the maximum required disclosure. Allowing smaller reporting companies to choose financial statement items on an “a la carte” basis in a quarterly report may create additional costs for investors to determine whether the company has changed the type of disclosure from quarter to quarter. Since smaller reporting companies will be required to check a box indicating they qualify as such, however, investors will be alerted that these issuers are eligible to use the scaled disclosure requirements.

Another possible cost is requiring Canadian issuers, who seek to use the new scaled disclosure requirements, to provide their financial statements using U.S. GAAP rather than home country GAAP reconciled to U.S. GAAP. Based upon the Form 10-KSB filings received from Canadian issuers on the Commission's EDGAR filing system we estimate that under 50 Canadian issuers will be affected by this change. This change could increase audit costs for these companies if they chose to continue to file on the domestic forms which will now require financial statements in accordance with U.S. GAAP. Other cost increases could include staff training, administrative costs, and minor transition costs.

VII. Consideration of Impact on the Economy, Burden on Competition and Promotion of Efficiency, Competition and Capital Formation

Section 23(a)(2) of the Exchange Act requires us to consider the impact that any new rule will have on competition.
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Section 23(a)(2) also prohibits us from adopting any rule that will impose a burden on competition not necessary or appropriate to carry out the purposes of the Exchange Act.

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15 U.S.C. 78w(a)(2).

Furthermore, when engaging in rulemaking that requires us to consider or determine whether an action is necessary or appropriate in the public interest, Section 2(b) of the Securities Act and Section 3(f) of the Exchange Act require the Commission to consider whether the action will promote efficiency, competition and capital formation.

We expect that the amendments adopted today will result in regulatory simplification and efficiency by removing the duplicative sections of Regulation S-B and consolidating the scaled item requirements of Regulation S-B, such as executive compensation, into amended Regulation S-K. As adopted, the financial statement requirements for small business issuers previously found in Item 310 will be in a separate section of Regulation S-X. As amended, Regulations S-K and S-X will consolidate these requirements into a simplified framework applicable to all filers that are subject to the reporting requirements of Sections 13 and 15 of the Exchange Act and companies filing registration statements under the Securities Act. To comply with disclosure item requirements, practitioners and companies will no longer need to refer to two disclosure frameworks. Practitioners and companies will benefit from the ease of reference that a single disclosure framework will provide.

It is expected that the amendments will promote capital formation for smaller reporting companies and improve their ability to compete with larger companies for capital. For example, we believe capital formation will be improved by providing flexibility to more smaller reporting companies to tailor their disclosure to their investors' needs. In addition, the costs to raise capital may be reduced to the extent compliance costs, but not benefits, are reduced as a result of the scaled disclosure requirements. If smaller reporting companies allocate the capital they raise and save as a result of our scaled disclosure requirements to business development in an effective manner, these companies will be more competitive. More companies will be able to take advantage of more scaled disclosure item requirements, such as those contained currently in Item 310 and Item 402 of Regulation S-B. Smaller reporting companies that avail themselves of the scaled disclosure requirements will provide tailored disclosure that may better meet the needs of their investors.

VIII. Final Regulatory Flexibility Act Analysis

This Final Regulatory Flexibility Analysis has been prepared in accordance with the Regulatory Flexibility Act.
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It relates to amendments to the rules and forms under the Securities Act and Exchange Act, which include a new definition of “smaller reporting company” under Regulation S-K. The new definition will expand the group of smaller companies that qualify to provide disclosure in accordance with the scaled

requirements of the current Regulation S-B disclosure framework.

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5 U.S.C. 604.

As adopted, a smaller reporting company is defined as a company that meets all of the following criteria: Is not an investment company, an asset-backed issuer, or the majority-owned subsidiary of a parent that was not a smaller reporting company

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE7-24965. Public record. Not legal advice.