2008 Stock Market Decline Could Make Some June 30 Fiscal Year Companies Eligible for Eased Disclosure Requirements
Corporate & Finance Alert
February 3, 2009
The significant decline in stock prices during the fourth quarter of 2008 may offer companies having a June 30 fiscal year the opportunity to transition to “non-accelerated filer” status and take advantage of the “scaled” reporting rules available to “smaller reporting companies” if the market value of their public float declined to under $50 million at December 31, 2008.
Accelerated filers are required to file quarterly reports on Form 10-Q within 40 days after the end of the first three fiscal quarters and an annual report on Form 10-K within 75 days after the end of the fiscal year. The filing deadlines for 10-Qs and 10-Ks by non-accelerated filers are 45 days and 90 days after the end of the applicable fiscal period, respectively.
Rule 12b-2(iv) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) provides: “The determination at the end of the issuer’s fiscal year for whether an accelerated filer becomes a non-accelerated filer, or a large accelerated filer becomes an accelerated filer or a non-accelerated filer, governs the deadlines for the annual report to be filed for that fiscal year, the quarterly and annual reports to be filed for the subsequent fiscal year and all annual and quarterly reports to be filed thereafter while the issuer remains an accelerated filer or non-accelerated filer.”
While the determination of filer status is made at year end, the determination is based upon a look-back to the end of second quarter of the fiscal year. Thus, a June 30 fiscal year company may transition out of accelerated filer status commencing with its annual report for the year ended June 30, 2009, if the worldwide market value of its common equity held by non-affiliates was less than $50 million as of December 31, 2008.
Once an issuer transitions out of accelerated filer status, it does not become an accelerated filer again until its public float is $75 million or more as of the last business day of a second fiscal quarter. Issuers with a public float of $700 million or more are “large accelerated filers.”
The Securities and Exchange Commission’s smaller reporting company regulatory relief and simplification rules became effective on February 4, 2008. These rules eliminated the old category of “small business issuers” pursuant to which issuers were entitled to file reports on forms 10-KSB and 10-QSB, established a new category of “smaller reporting companies” eligible to use scaled disclosure requirements; eliminated Regulation S-B and SB forms; moved the non-financial scaled disclosure requirements into Regulation S-K, available only for smaller reporting companies; and moved the scaled financial statement requirements in Item 310 of Regulation S-B into new Article 8 of Regulation S-X, available only for smaller reporting companies.
In order to qualify as a smaller reporting company at the effective date of the new rules, an issuer’s public float (securities held by non-affiliates) had to be less than $75 million. An issuer having a June 30, 2009 fiscal year end not previously a smaller reporting company will qualify as a smaller reporting company if its public float was less than $50 million at December 31, 2008. Thus, in essence, the categories of non-accelerated filers and small business issuers have been combined.
The newly-qualified smaller reporting company will be eligible to utilize the scaled disclosure beginning with the report on form 10Q due for December 31, 2008.
The scaled disclosure requirements under amended Regulation S-K allow smaller reporting companies to:
- Provide three years rather than five years of business development activities, and not be required to provide segment disclosure under amended Item 101;
- 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 the three years 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 statements 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 compensation 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.