Capital Markets & Public Companies Quarterly: Expanding Relief Under Smaller Reporting Company, Reg A+ And Rule 701, SEC Enforcement Of Cybersecurity Disclosures And Other News

Summary

During the previous quarter, the SEC acted to expand the number of companies that may rely on the “smaller reporting company” scaled disclosure regime and Congress directed revisions to the Regulation A+ and Rule 701 exemptions. The SEC also took enforcement action on a major cybersecurity breach, reinforcing its recent interpretive guidance on the subject. The director of the SEC Division of Corporation Finance also spoke on how blockchain assets may or may not constitute securities, and the 9th Circuit created a circuit split related to securities litigation after a tender offer.

In Depth

SEC Amends Definition of “Smaller Reporting Company” and Congress Directs Changes to Reg A+ and Rule 701

At its open meeting held on June 28, 2018, the US Securities and Exchange Commission (SEC) adopted amendments to raise the public float and revenue thresholds in the definition of “smaller reporting company” (SRC). Under the amended definition, a company will qualify as an SRC if it maintains a public float of less than $250 million. The amendments also expand the SRC definition to include a company that maintains a public float of less than $700 million and has annual revenues of less than $100 million during its most recently completed fiscal year.

The higher threshold will expand the number of companies that qualify for scaled disclosure accommodations that are available to SRCs. These accommodations include: (1) a shorter period covered by the company's audited financials and corresponding Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) disclosure; (2) modified disclosure requirements related to executive compensation; (3) exemption from quantitative or qualitative market risk disclosures; and (4) exemption from determinations on the effectiveness of internal controls over financial reporting.

In addition, on May 24, 2018, S. 2155, known as the “Economic Growth, Regulatory Relief, and Consumer Protection Act,” was signed into law. The law includes provisions that prompt the SEC to enact rulemaking to make certain changes to the Regulation A+ and Rule 701 of the Securities Act of 1933 (the Securities Act) exemptions from registered offerings.

With regard to Regulation A+, the law directs the SEC to remove the requirement that an issuer not be subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act) in order to rely on that exemption from registration. Such changes would allow publicly listed...