[Federal Register Volume 83, Number 132 (Tuesday, July 10, 2018)]
[Rules and Regulations]
[Pages 31992-32022]
[FR Doc No: 2018-14306]

Vol. 83

Tuesday,

No. 132

July 10, 2018

Part II

Securities and Exchange Commission

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17 CFR Parts 210, 229, 230, et al.

Smaller Reporting Company Definition; Rules

Federal Register / Vol. 83 , No. 132 / Tuesday, July 10, 2018 / Rules
and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 239, 240, and 249

[Release Nos. 33-10513; 34-83550; File No. S7-12-16]
RIN 3235-AL90

Smaller Reporting Company Definition

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: We are adopting amendments to the definition of ``smaller
reporting company'' as used in our rules and regulations. The
amendments expand the number of registrants that qualify as smaller
reporting companies and are intended to reduce compliance costs for
these registrants and promote capital formation, while maintaining
appropriate investor protections. We are amending the definition of
``smaller reporting company'' to include registrants with a public
float of less than $250 million, as well as registrants with annual
revenues of less than $100 million for the previous year and either no
public float or a public float of less than $700 million. We also are
amending other rules and forms in light of the new definition of
``smaller reporting company,'' including amendments to the definitions
of ``accelerated filer'' and ``large accelerated filer'' to preserve
the existing thresholds in those definitions. Qualifying as a ``smaller
reporting company'' will no longer automatically make a registrant a
non-accelerated filer. The Chairman, however, has directed the staff to
formulate recommendations to the Commission for possible additional
changes to the ``accelerated filer'' definition that, if adopted, would
have the effect of reducing the number of registrants that qualify as
accelerated filers.

DATES: The final rules are effective September 10, 2018.

FOR FURTHER INFORMATION CONTACT: Amy Reischauer or Jennifer Riegel,
Office of Small Business Policy, Division of Corporation Finance, at
(202) 551-3460, U.S. Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are adopting amendments to 17 CFR 230.405
(``Rule 405'') and Forms S-1,\1\ S-3,\2\ S-4,\3\ S-8,\4\ and S-11 \5\
under the Securities Act of 1933 (``Securities Act''); \6\ 17 CFR
240.12b-2 (``Rule 12b-2'') and Forms 10,\7\ 10-Q,\8\ and 10-K \9\ under
the Securities Exchange Act of 1934 (``Exchange Act''); \10\ 17 CFR
210.3-05 (``Rule 3-05'' of Regulation S-X); \11\ and 17 CFR 229.10(f)
(``Item 10(f)'' of Regulation S-K).\12\
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    \1\ 17 CFR 239.11.
    \2\ 17 CFR.239.13.
    \3\ 17 CFR 239.25.
    \4\ 17 CFR 239.16b.
    \5\ 17 CFR 239.18.
    \6\ 15 U.S.C. 77a et seq.
    \7\ 17 CFR 249.210.
    \8\ 17 CFR 249.308a.
    \9\ 17 CFR 249.310.
    \10\ 15 U.S.C. 78a et seq.
    \11\ 17 CFR 210.1-01 through 210.12-29.
    \12\ 17 CFR 229.10 through 229.1208.
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Table of Contents

I. Introduction
II. Final Amendments
    A. Amendments to Smaller Reporting Company Definition
    1. Public Float Test
    2. Revenue Test
    B. Amendments to Rule 3-05(b)(2)(iv) of Regulation S-X
    C. Amendments to Accelerated Filer and Large Accelerated Filer
Definitions
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
III. Other Matters
IV. Economic Analysis
    A. Baseline
    B. Potential Economic Effects
    1. Introduction
    2. Impact on Eligibility for Smaller Reporting Company Status
    3. Estimation of Potential Costs and Benefits
    4. Affiliated Ownership and Adverse Selection
    5. Effects on Efficiency, Competition and Capital Formation
    C. Possible Alternatives
V. Paperwork Reduction Act
    A. Background
    B. Summary of the Final Amendments
    C. Summary of Comment Letters
    D. Revisions to Burden and Cost Estimates
    1. Form 10-K
    2. Form 10-Q
    3. Form 8-K
    4. Schedule 14A
    5. Schedule 14C
    6. Form 10
    7. Form S-1
    8. Form S-3
    9. Form S-4
    10. Form S-11
VI. Final Regulatory Flexibility Analysis
    A. Need for, and Objectives of, the Final Rules
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Final Rules
    D. Projected Reporting, Recordkeeping and Other Compliance
Requirements
    E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Amendments and Text of Final Rules

I. Introduction

    On June 27, 2016, the Commission proposed amendments that would
increase the financial thresholds in the ``smaller reporting company''
(``SRC'') definition and would have the effect of expanding the number
of companies that benefit from the scaled disclosure accommodations
available to SRCs.\13\ In developing final rules, we considered comment
letters received in response to the Proposing Release,\14\ as well as
recommendations made by the Securities and Exchange Commission Advisory
Committee on Small and Emerging Companies (``ACSEC'') \15\ and the SEC
Government-Business Forum on Small Business Capital Formation (``Small
Business Forum'').\16\ The

Commission last revised the SRC definition in 2008.\17\ Our amendments
reflect the need to solicit input and retrospectively review our rules
in order to determine whether they are outdated or are not functioning
as intended. Today, we are amending the SRC definition in an effort to
promote capital formation and reduce compliance costs for specified
registrants by expanding the number of registrants that are eligible to
provide scaled disclosure while maintaining appropriate investor
protections.
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    \13\ See Amendments to Smaller Reporting Company Definition,
Release No. 33-10107 (Jun. 27, 2016) [81 FR 43130 (Jul. 1, 2016)]
(``Proposing Release''). As the Commission noted in the Proposing
Release, raising the financial thresholds in the SRC definition
would be responsive to the Fixing America's Surface Transportation
Act of 2015 (``FAST Act'') because it would reduce the burden on the
specified registrants by increasing the number of registrants
eligible for scaled disclosure. See Public Law 114-94, 129 Stat.
1312 (2015).
    \14\ The comment letters received in response to the Proposing
Release are available at https://www.sec.gov/comments/s7-12-16/s71216.htm.
    \15\ In September 2015 and March 2013, the ACSEC recommended
revising the SRC definition to include registrants with a public
float of up to $250 million. The recommendations made by ACSEC in
March 2013 also included a recommendation to revise the SRC
definition for registrants that are unable to calculate their public
float to include registrants with less than $100 million in annual
revenues. ACSEC Recommendations about Expanding Simplified
Disclosure for Smaller Issuers (Sept. 23, 2015), available at
https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-expanding-simplified-disclosure-for-smaller-issuers.pdf and ACSEC
Recommendations Regarding Disclosure and Other Requirements for
Smaller Public Companies (Mar. 21, 2013), available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-032113-smaller-public-co-ltr.pdf. Both of these recommendations also included a
recommendation that the Commission revise the ``accelerated filer''
definition to include registrants with a public float of $250
million or more, but less than $700 million. The accelerated filer
definition currently includes registrants with a public float of $75
million or more, but less than $700 million. See Exchange Act Rule
12b-2. See Section II.C for a discussion of the accelerated filer
definition.
    \16\ The 2017 Small Business Forum recommended that the SRC
definition be revised to include registrants with a public float of
less than $250 million or registrants with annual revenues of less
than $100 million, excluding large accelerated filers. See Final
Report of the 2017 SEC Government Business Forum on Small Business
Capital Formation (Mar. 2018), available at https://www.sec.gov/files/gbfor36.pdf. Registrants with a public float of $700 million
or more generally qualify as large accelerated filers. See Exchange
Act Rule 12b-2. Prior Small Business Forums made the same or similar
recommendations. Final Small Business Forum reports are available at
https://www.sec.gov/info/smallbus/sbforumreps.htm. Information about
the Small Business Forum is available at http://www.sec.gov/info/smallbus/sbforum.shtml. These recommendations also included a
recommendation that the Commission revise the ``accelerated filer''
definition consistent with the recommended changes to the SRC
definition. See Section II.C for a discussion of the accelerated
filer definition.
    \17\ See Smaller Reporting Company Regulatory Relief and
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan.
4, 2008)] (``SRC Adopting Release'').
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    We are adopting the amendments generally as proposed with two
changes. As proposed, we are amending the SRC definition to include
registrants with a public float of less than $250 million, as well as
registrants with annual revenues of less than $100 million for the
previous year and no public float. In a change from the proposal, the
SRC definition in the final rules also includes registrants with annual
revenues of less than $100 million for the previous year and a public
float of less than $700 million. Specifically, we are amending
Securities Act Rule 405, Exchange Act Rule 12b-2, and Item 10(f) of
Regulation S-K to effect these changes. In another change from the
proposal, we are amending Rule 3-05(b)(2)(iv) of Regulation S-X to
increase the revenue threshold under which certain acquirers may omit
the earliest of the three fiscal years of audited financial statements
of certain targets. Finally, we are adopting amendments to the
``accelerated filer'' and ``large accelerated filer'' definitions in
Exchange Act Rule 12b-2, as proposed, to preserve the application of
the current public float thresholds in those definitions.\18\ The
Chairman, however, has directed the staff to formulate recommendations
to the Commission for possible additional changes to the ``accelerated
filer'' definition that, if adopted, would have the effect of reducing
the number of registrants that qualify as accelerated filers in order
to promote capital formation by reducing compliance costs for certain
registrants, while maintaining appropriate investor protections. As
part of the staff's consideration of possible recommended amendments,
the Chairman has directed the staff to consider, among other things,
the historical and current relationship between the SRC and
``accelerated filer'' definitions. The staff has begun work to prepare
these recommendations.
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    \18\ The definitions of accelerated filer and large accelerated
filer are based on public float, but currently contain a provision
excluding registrants that are eligible to use the SRC requirements
in Regulation S-K for their annual and quarterly reports. As a
result, raising the SRC public float threshold without eliminating
that provision effectively would raise the accelerated filer public
float threshold. See Section II.C for a discussion of the amendments
to the accelerated filer and large accelerated filer definitions.
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    Consistent with the proposal, we are not amending any of the scaled
disclosure accommodations available to SRCs in Regulation S-K and
Regulation S-X.\19\ SRCs may comply with the scaled disclosure
requirements available to them on an item-by-item basis.\20\ The
following table summarizes these scaled disclosure accommodations.\21\
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    \19\ Several of these scaled disclosure accommodations, such as
the scaled executive compensation disclosures under Item 402(l)
through (r) of Regulation S-K [17 CFR 229.402(l) through (r)], are
similar to the disclosure accommodations available to an emerging
growth company (``EGC''). See Securities Act Rule 405 [17 CFR
230.405] and Exchange Act Rule 12b-2 [17 CFR 240.12b-2]. EGCs also
are exempt from the Sarbanes-Oxley Act Section 404(b) auditor
attestation of internal control over financial reporting. For a
discussion of scaled disclosure accommodations available to EGCs,
see Business and Financial Disclosure Required by Regulation S-K,
Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (April 22, 2016)]
(``Regulation S-K Concept Release'').
    \20\ See SRC Adopting Release, 73 FR at 940. Where a disclosure
requirement applicable to SRCs is more stringent than the
corresponding requirement for non-SRCs, however, SRCs must comply
with the more stringent standard. The SRC Adopting Release
identified Item 404 of Regulation S-K [17 CFR 229.404] as the only
instance in Regulation S-K in which the disclosure requirements
applicable to SRCs could be more stringent.
    \21\ In addition to the accommodations itemized in the table,
SRCs using Form S-1 may incorporate by reference information filed
prior and subsequent to the effectiveness of the registration
statement if they meet the eligibility requirements in General
Instruction VII of Form S-1. See Item 12(b) of Form S-1; see also
Simplification of Disclosure Requirements for Emerging Growth
Companies and Forward Incorporation by Reference on Form S-1 for
Smaller Reporting Companies, Release No. 33-10003 (Jan. 19, 2016)
[81 FR 2743 (Jan. 19, 2016)].

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               Item                    Scaled disclosure accommodation
------------------------------------------------------------------------
                             Regulation S-K
------------------------------------------------------------------------
101--Description of Business......  May satisfy disclosure obligations
                                     by describing the development of
                                     the registrant's business during
                                     the last three years rather than
                                     five years. Business development
                                     description requirements are less
                                     detailed than disclosure
                                     requirements for non-SRCs.
201--Market Price of and Dividends  Stock performance graph not
 on the Registrant's Common Equity   required.
 and Related Stockholder Matters.
301--Selected Financial Data......  Not required.
302--Supplementary Financial        Not required.
 Information.
303--Management's Discussion and    Two-year MD&A comparison rather than
 Analysis of Financial Condition     three-year comparison.
 and Results of Operations          Two year discussion of impact of
 (``MD&A'').                         inflation and changes in prices
                                     rather than three years.
                                    Tabular disclosure of contractual
                                     obligations not required.
305--Quantitative and Qualitative   Not required.
 Disclosures About Market Risk.
402--Executive Compensation.......  Three named executive officers
                                     rather than five.
                                    Two years of summary compensation
                                     table information rather than
                                     three.
                                    Not required:
                                        Compensation discussion
                                        and analysis.
                                        Grants of plan-based
                                        awards table.
                                        Option exercises and
                                        stock vested table.
                                        Pension benefits table.
                                        Nonqualified deferred
                                        compensation table.
                                        Disclosure of
                                        compensation policies and
                                        practices related to risk
                                        management.
                                        Pay ratio disclosure.

404--Transactions With Related      Description of policies/procedures
 Persons, Promoters and Certain      for the review, approval or
 Control Persons 22.                 ratification of related party
                                     transactions not required.
407--Corporate Governance.........  Audit committee financial expert
                                     disclosure not required in first
                                     annual report.
                                    Compensation committee interlocks
                                     and insider participation
                                     disclosure not required.
                                    Compensation committee report not
                                     required.
503--Prospectus Summary, Risk       No ratio of earnings to fixed
 Factors and Ratio of Earnings to    charges disclosure required.
 Fixed Charges.                     No risk factors required in Exchange
                                     Act filings.
601--Exhibits.....................  Statements regarding computation of
                                     ratios not required.
------------------------------------------------------------------------
                             Regulation S-X
------------------------------------------------------------------------
               Rule                           Scaled disclosure
------------------------------------------------------------------------
8-02--Annual Financial Statements.  Two years of income statements
                                     rather than three years.
                                    Two years of cash flow statements
                                     rather than three years.
                                    Two years of changes in
                                     stockholders' equity statements
                                     rather than three years.
8-03--Interim Financial Statements  Permits certain historical financial
                                     data in lieu of separate historical
                                     financial statements of equity
                                     investees.
8-04--Financial Statements of       Maximum of two years of acquiree
 Businesses Acquired or to Be        financial statements rather than
 Acquired.                           three years.
8-05--Pro forma Financial           Fewer circumstances under which pro
 Information.                        forma financial statements are
                                     required.
8-06--Real Estate Operations        Maximum of two years of financial
 Acquired or to Be Acquired.         statements for acquisition of
                                     properties from related parties
                                     rather than three years.
8-08--Age of Financial Statements.  Less stringent age of financial
                                     statements requirements.
------------------------------------------------------------------------

II. Final Amendments

A. Amendments to Smaller Reporting Company Definition
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    \22\ Item 404 also contains the following expanded disclosure
requirements applicable to SRCs: (1) Rather than a flat $120,000
disclosure threshold, the threshold is the lesser of $120,000 or 1%
of total assets, (2) disclosures are required about underwriting
discounts and commissions where a related person is a principal
underwriter or a controlling person or member of a firm that was or
is going to be a principal underwriter, (3) disclosures are required
about the issuer's parent(s) and their basis of control, and (4) an
additional year of Item 404 disclosure is required in filings other
than registration statements.
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    We are adopting amendments to the SRC definition to expand the
number of registrants that qualify as SRCs and thereby benefit from
scaled disclosure requirements. These amendments will enable a
registrant to qualify as a SRC based on a public float test or a
revenue test.\23\
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    \23\ See Item 10(f)(1)(i) and (ii) of Regulation S-K; Securities
Act Rule 405; Exchange Act Rule 12b-2.
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    Under the final rules, SRCs generally \24\ are registrants with:
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    \24\ Consistent with the current definition, the SRC definition
in the final rules specifically excludes investment companies,
asset-backed issuers (as defined in Item 1101 of Regulation AB [17
CFR 229.1101]) and majority-owned subsidiaries of a parent that is
not a SRC. See Item 10(f)(1) of Regulation S-K; Securities Act Rule
405; Exchange Act Rule 12b-2. Lower public float and revenue
thresholds apply to registrants that determined that they did not
qualify as SRCs in the prior year, but are eligible to transition to
SRC status. See Item 10(f)(2)(iii) of Regulation S-K; Securities Act
Rule 405; Exchange Act Rule 12b-2. See also Section II.A for a
discussion of the amendments to these thresholds.
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     A public float of less than $250 million; \25\ or
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    \25\ Consistent with the current definition, public float is
computed under the final rules by multiplying the aggregate
worldwide number of shares of a registrant's voting and non-voting
common equity held by non-affiliates by the price at which the
common equity was last sold, or the average of the bid and asked
prices of common equity, in the principal market for the common
equity. See Item 10(f)(1)(i) of Regulation S-K; Securities Act Rule
405; Exchange Act Rule 12b-2. The determination of public float is
premised on the existence of a public trading market for the
issuer's equity securities. Therefore, an entity with equity
securities outstanding but not trading in any public trading market
would not be able to qualify on the basis of a public float test. In
contrast to public float, market capitalization reflects the value
of a registrant's voting and non-voting common equity held by all
holders, whether affiliates or non-affiliates.
    A reporting registrant calculates its public float as of the
last business day of its most recently completed second fiscal
quarter. See Item 10(f)(2)(i) of Regulation S-K; Securities Act Rule
405; Exchange Act Rule 12b-2. A registrant filing its initial
registration statement under the Securities Act or Exchange Act
calculates its public float as of a date within 30 days of the date
the registration statement is filed by multiplying the aggregate
worldwide number of shares of its voting and non-voting common
equity held by non-affiliates before the registration plus, in the
case of a Securities Act registration statement, the number of such
shares included in the registration statement by the estimated
public offering price of the shares. See Item 10(f)(2)(ii)(A) of
Regulation S-K; Securities Act Rule 405; Exchange Act Rule 12b-2.
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     annual revenues of less than $100 million \26\ and either
no public float \27\ or a public float of less than $700 million.\28\
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    \26\ Consistent with the current definition, annual revenues are
as of the most recently completed fiscal year for which audited
financial statements are available. Item 10(f)(2)(i)(B) and
(f)(2)(ii)(B) of Regulation S-K; Securities Act Rule 405; Exchange
Act Rule 12b-2.
    \27\ See Item 10(f)(1)(ii)(A) of Regulation S-K; Securities Act
Rule 405; Exchange Act Rule 12b-2. A registrant may have no public
float because it has no public common equity outstanding or no
market price for its common equity exists. Based on data compiled by
our Division of Economic and Risk Analysis (``DERA''), in calendar
year 2016, approximately 21.5% of registrants that qualified as SRCs
(and 7.7% of all registrants) had no public float. The estimated
number of registrants with no public float here and elsewhere in
this release may be over-inclusive due to the difficulty of
ascertaining this status based on data extracted from registrants'
filings. See note 141 for a discussion of the methodology used by
the staff to obtain this data.
    \28\ See Item 10(f)(1)(ii)(B) of Regulation S-K; Securities Act
Rule 405; Exchange Act Rule 12b-2.
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    As proposed, the final rules increase the threshold for determining
SRC status based on public float from $75 million to $250 million. A
registrant that qualifies as a SRC under the public float test would
qualify regardless of its revenues.\29\ In a change from the proposal,
the final rules will expand the SRC definition to include registrants
with a public float of less than $700 million, if they also have annual
revenues of less than $100 million.\30\ The following table summarizes
the amendments to the SRC definition for a registrant making an initial
determination under the amendments \31\

or a current SRC seeking to continue to qualify.
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    \29\ See Instruction to Paragraph (f) of Item 10 of Regulation
S-K; Instruction to definition of ``smaller reporting company'' in
Securities Act Rule 405; Instruction to definition of ``smaller
reporting company'' in Exchange Act Rule 12b-2.
    \30\ See Item 10(f)(1)(ii)(B) of Regulation S-K; Securities Act
Rule 405; Exchange Act Rule 12b-2.
    \31\ For purposes of the first fiscal year ending after
effectiveness of the amendments, a registrant will qualify as a SRC
if it meets one of the initial qualification thresholds in the
revised definition as of the date it is required to measure its
public float or revenues (the ``measurement date''), even if such
registrant previously did not qualify as a SRC. See Item 10(f)(2)(i)
and (ii) of Regulation S-K; Securities Act Rule 405; Exchange Act
Rule 12b-2 for additional information about the measurement date.
For example, a registrant with a September 30 fiscal year end that
previously was not a SRC and that had a public float of $220 million
as of March 30, 2018 (the last business day of its most recently
completed second quarter) will qualify as a SRC for the fiscal year
ending September 30, 2018.

------------------------------------------------------------------------
          Criteria             Current definition    Revised definition
------------------------------------------------------------------------
Public Float................  Public float of less  Public float of less
                               than $75 million.     than $250 million.
Revenues....................  Less than $50         Less than $100
                               million of annual     million of annual
                               revenues and no       revenues and
                               public float.         no public
                                                     float, or
                                                     public
                                                     float of less than
                                                     $700 million.
------------------------------------------------------------------------

    Consistent with the current definition, and as proposed, under the
final rules, a registrant that determines that it does not qualify as a
SRC under the initial qualification thresholds will remain unqualified
unless and until it determines that it meets one or more lower
qualification thresholds. The subsequent qualification thresholds, set
forth in the table below, are set at 80% of the initial qualification
thresholds.\32\
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    \32\ See Item 10(f)(2)(iii) of Regulation S-K; Securities Act
Rule 405; Exchange Act Rule 12b-2.

------------------------------------------------------------------------
         Criteria 33           Current definition    Revised definition
------------------------------------------------------------------------
Public Float................  Public float of less  Public float of less
                               than $50 million.     than $200 million,
                                                     if it previously
                                                     had $250 million or
                                                     more of public
                                                     float.34
Revenues....................  Less than $40         Less than $80
                               million of annual     million of annual
                               revenues and no       revenues, if it
                               public float.         previously had $100
                                                     million or more of
                                                     annual revenues;
                                                     and
                                                    Less than $560
                                                     million of public
                                                     float, if it
                                                     previously had $700
                                                     million or more of
                                                     public float.
------------------------------------------------------------------------

1. Public Float Test
a. Proposed Amendments
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    \33\ A registrant that does not qualify as a SRC may
subsequently seek to qualify under either test.
    \34\ A registrant that previously was not a SRC that
subsequently qualifies based on a public float of less than $200
million will qualify as a SRC regardless of its revenues. See
Instruction to Paragraph (f) of Item 10 of Regulation S-K;
Instruction to definition of ``smaller reporting company'' in
Securities Act Rule 405; Instruction to definition of ``smaller
reporting company'' in Exchange Act Rule 12b-2.
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    As proposed, a registrant with a public float of less than $250
million would qualify as a SRC.\35\ Consistent with the current
definition, the Commission proposed that once a registrant does not
qualify as a SRC,\36\ it would remain unqualified until its public
float falls below another, lower threshold. Specifically, the
Commission proposed amending the rules to provide that a registrant
that previously did not qualify as a SRC would qualify as a SRC if it
has a public float of less than $200 million as of its most recently
completed second fiscal quarter.\37\
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    \35\ See Proposed Item 10(f)(1)(i) and (ii) of Regulation S-K;
Proposed Securities Act Rule 405; Proposed Exchange Act Rule 12b-2.
    \36\ This applies either upon an initial determination in the
case of registrants filing an initial registration statement, or as
of an annual determination in the case of reporting registrants.
    \37\ The proposed $200 million subsequent qualification
threshold represents 80% of the proposed $250 million initial
qualification threshold. Under the current definition, a registrant
that previously determined that it did not qualify as a SRC because
its public float exceeded the current $75 million threshold may
qualify based on a subsequent determination if it has a public float
of less than $50 million. That registrant would then remain a SRC
until its public float again exceeded $75 million. Consistent with
the current definition, under the proposed definition, a registrant
that subsequently qualifies under the $200 million public float
threshold would remain qualified until its public float exceeds $250
million.
---------------------------------------------------------------------------

b. Comments
    Most commenters addressed the overall costs and benefits of
expanding the pool of registrants eligible for SRC status. Many of
these commenters expressed general support for the proposed amendments
to the SRC definition.\38\ Several of these commenters stated that the
proposed definition appropriately considers the objectives of capital
formation and investor protection \39\ and promotes capital formation
or liquidity for smaller registrants.\40\
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    \38\ See Letter from Acorda Therapeutics, Inc. et al., August
23, 2016 (``Acorda, et al.''); Letter from Advanced Medical
Technology Association, August 20, 2016 (``AMTA''); Letter from
Biotechnology Innovation Organization, August 30, 2016 (``BIO'');
Letter from BDO USA, LLP, August 29, 2016 (``BDO''); Letter from
Center for Audit Quality and Counsel of Institutional Investors,
August 30, 2016 (``CAQ/CII''); Letter from CONNECT, August 4, 2016
(``CONNECT''); Letter from Corporate Governance Coalition for
Investor Value, August 30, 2016 (``Coalition''); Letter from
Independent Community Bankers of America, August 29, 2016
(``ICBA''); Letter from MidSouth Bancorp, Inc., August 24, 2016
(``MidSouth''); Letter from Nasdaq, August 30, 2016 (``Nasdaq'');
Letter from NYSE Group, July 25, 2016 (``NYSE''); Letter from
National Venture Capital Association, August 25, 2016 (``NVCA'');
Letter from Seneca Foods Corporation, August 2, 2016 (``Seneca'');
and Letter from The Small Business Financial and Regulatory Affairs
Committee of the Institute of Management Accountants, August 24,
2016 (``IMA'').
    \39\ See AMTA; BDO; BIO; Coalition; ICBA.
    \40\ See AMTA; BDO; BIO; Coalition; ICBA; NVCA; and NYSE. See
also CONNECT (supporting the proposal to amend the SRC definition to
encompass a wider range of emerging businesses for which regulatory
costs present a significant burden to growth).
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    On the other hand, three commenters generally opposed the proposed
amendments to the SRC definition or generally opposed accommodations
based on company size.\41\ One of these commenters stated that the
accommodations for SRCs exist solely for the expedience of issuers and
must be balanced against the cost to market participants who have less
information from which to draw conclusions.\42\ Another of these
commenters stated that it was concerned that the scaled disclosure
regime for SRCs may prevent investors from receiving all of the
material information needed to conduct a thorough analysis.\43\ This
commenter

also noted that allowing different sized entities to use different
disclosure regimes would signal to investors that the entities lack
comparable quality.\44\ The third commenter recommended that the
Commission consider adopting disclosure objectives that would mitigate
the need to scale disclosure requirements based on the size or nature
of a reporting entity.\45\
---------------------------------------------------------------------------

    \41\ See Letter from Cable Car Capital LLC, June 28, 2016
(``Cable Car''); Letter from CFA Institute, August 30, 2016 (``CFA
Institute''); Letter from Ernst & Young LLP, September 8, 2016
(``EY'').
    \42\ See Cable Car.
    \43\ See CFA Institute (noting that ``the pension benefits table
and a disclosure of compensation policies and practices related to
risk management (both of which can be deleted under scaled
disclosure) are more vital than certain other disclosures'').
    \44\ See CFA Institute.
    \45\ See EY (noting that it ``previously recommended that the
Commission consider adopting disclosure objectives that would
mitigate the need for scaling disclosure requirements based on the
size or nature of a reporting entity'' and citing to its letter
dated July 21, 2016 responding to the SEC's concept release on
business and financial disclosures required by Regulation S-K
(Release No. 33-10064; File No. S7-06-16)).
---------------------------------------------------------------------------

    Two commenters stated that the proposed amendments would
potentially provide only marginal cost savings.\46\ One of these
commenters did not support the proposal and instead encouraged the
Commission to continue its review of scaled disclosure to determine
which disclosures are repetitive and should be deleted and which should
be retained.\47\ The other commenter stated that the proposed change
and the resulting reduced disclosure requirements for additional
registrants would have a minimal effect on its annual compliance
costs.\48\
---------------------------------------------------------------------------

    \46\ See CFA Institute; and Seneca.
    \47\ See CFA Institute.
    \48\ See Seneca.
---------------------------------------------------------------------------

    Many commenters expressed support for the proposed increases in
both the public float and revenue thresholds.\49\ One commenter
supported the amendments and viewed them as an acknowledgement that the
current public float threshold is overly restrictive.\50\ Another
commenter specifically stated that it supported the proposed approach
to adjusting the thresholds rather than simply relying on inflation
adjustments.\51\
---------------------------------------------------------------------------

    \49\ See Acorda et al; AMTA; BDO; BIO; CAQ/CII; CONNECT;
Coalition; ICBA; MidSouth; Nasdaq; NVCA; NYSE; Seneca; and IMA.
    \50\ See Letter from Council of State Bioscience Associations,
August 26, 2016 (``CSBA'') (stating that the Commission should
similarly reform the accelerated filer definition and institute an
alternative revenue test for both the SRC and accelerated filer
definitions).
    \51\ See NYSE.
---------------------------------------------------------------------------

    Two commenters recommended that the Commission review the SRC
definition periodically to determine whether the thresholds being used
remain appropriate.\52\ One of these commenters specifically
recommended that the Commission revisit the thresholds after three
years.\53\
---------------------------------------------------------------------------

    \52\ See CFA Institute; and Letter from Kermit Kubitz, August
31, 2016 (``Kubitz'').
    \53\ See Kubitz.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the comments received, as well as the
recommendations made by the ACSEC \54\ and the Small Business
Forum,\55\ consistent with the proposal, we are adopting amendments to
the SRC definition that will permit registrants with a public float of
less than $250 million to qualify as SRCs.\56\ As is the case with the
current definition, once a registrant determines that it does not
qualify as a SRC under the applicable thresholds,\57\ it will not
subsequently qualify until its public float falls below another, lower
threshold, set at 80% of the initial qualification threshold. While we
did not receive any comments on the subsequent qualification
thresholds, we continue to believe that these thresholds are necessary
to avoid situations in which registrants frequently enter and exit SRC
status due to small fluctuations in their public float and that the
thresholds do not impose an undue burden on registrants seeking to
qualify for SRC status. Accordingly, we are amending the rules to
permit a registrant that previously did not qualify as a SRC because
its public float was $250 million or more to qualify as a SRC if it has
a public float of less than $200 million, regardless of its
revenues.\58\
---------------------------------------------------------------------------

    \54\ See note 19.
    \55\ See note 20.
    \56\ See Item 10(f)(1)(i) of Regulation S-K; Securities Act Rule
405; Exchange Act Rule 12b-2.
    \57\ This applies either upon an initial determination in the
case of registrants filing an initial registration statement, or as
of an annual determination in the case of reporting registrants.
    \58\ See Item 10(f)(2)(iii)(A) and Instruction to Paragraph (f)
of Item 10 of Regulation S-K; Securities Act Rule 405 and
Instruction to definition of ``smaller reporting company'' in
Securities Act Rule 405; Exchange Act Rule 12b-2 and Instruction to
definition of ``smaller reporting company'' in Exchange Act Rule
12b-2. Consistent with the current definition, under the amended
definition, a registrant that subsequently qualifies under the $200
million public float threshold would remain qualified until its
public float exceeds $250 million.
---------------------------------------------------------------------------

    We are not revising the method of calculating public float, as
suggested by one commenter.\59\ The staff is not aware of significant
incidence of manipulation or stock price volatility affecting
qualification under the public float test. In addition, the method of
calculating public float is consistent with the existing rules and with
the method of determining eligibility to use Form S-3 or Form F-3 to
register a primary offering.\60\ This consistency will avoid additional
burdens or confusion for registrants and investors that may result if
registrants were required to calculate their public float in one manner
for determining SRC status and in another manner for Form S-3 or Form
F-3 eligibility.
---------------------------------------------------------------------------

    \59\ See Letter from Paul W. Zeller, July 18, 2016 (``Zeller'')
(suggesting that the Commission, in the calculation of public float,
adopt a revenue test for thinly traded registrants to address price
manipulation and volatility concerns).
    \60\ See Instructions I.B.1 and I.B.6 of Form S-3; Instructions
I.B.1 and I.B.5 of Form F-3. Certain newly eligible SRCs under the
new definition will continue to be eligible to rely on Instruction
I.B.1 of Form S-3 and Form F-3 to register primary offerings.
---------------------------------------------------------------------------

    We believe that these amendments will promote capital formation
through a modest reduction in compliance costs for newly eligible SRCs
while maintaining appropriate investor protections.\61\ In 2016,
approximately 28% of registrants had less than $75 million in public
float,\62\ compared to approximately 42% of registrants when the SRC
definition was established.\63\ Increasing the public float threshold
to $250 million would have resulted in approximately 39% of registrants
qualifying as SRCs in 2016 based on their public float.\64\
---------------------------------------------------------------------------

    \61\ See Section IV.B.
    \62\ Based on public float values disclosed by registrants in
their Form 10-K filings, 2,072, or 28.0%, of the 7,395 registrants
that filed a Form 10-K in 2016 reported having a public float of
less than $75 million.
    \63\ Approximately 4,976, or 41.8%, of the 11,898 registrants
that filed Exchange Act annual reports in 2006 had a public float of
less than $75 million. See SRC Adopting Release. The release cites
data from the Commission's EDGAR filing system and Thomson Financial
(``Datastream''). The Datastream data included all 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 excluded closed end funds, exchange traded funds,
American depositary receipts and direct foreign listings.
    \64\ Based on public float values disclosed by registrants in
their Form 10-K filings, 2,851, or 38.6%, of the 7,395 registrants
that filed a Form 10-K in 2016 reported having a public float of
less than $250 million.
---------------------------------------------------------------------------

    We believe the existing scaled disclosure accommodations have
reduced compliance costs for SRCs.\65\ These amendments will extend
those benefits to a broader pool of registrants, consistent with the
intent of the Commission when it adopted the SRC definition in
2007.\66\ Although the amendments will permit a broader group of
registrants to make scaled disclosure to their investors, we do not
believe that this scaling of disclosure

will detract substantially from the investor protection objectives of
our disclosure regime in light of the other protections available under
current law and regulations. First, the additional registrants that
will qualify for scaled disclosure, like all registrants, will remain
liable for their disclosures \67\ and, in addition to the disclosure
expressly required by the rules, will continue to be required to
provide such further material information, if any, as may be necessary
to make any required statements, in the light of the circumstances
under which they are made, not misleading.\68\ Moreover, their
disclosure also will continue to be subject to the Division of
Corporation Finance's filing review process. These measures of investor
protection will remain unchanged.
---------------------------------------------------------------------------

    \65\ See Section IV.B.3.a.
    \66\ See SRC Adopting Release, 73 FR at 934 and 942 (stating
that the Commission was ``adopting amendments to its disclosure and
reporting requirements . . . to expand the number of companies that
qualify for its scaled disclosure requirements for smaller reporting
companies;'' and ``[w]e believe this standard is appropriately
scaled in that it reduces costs to smaller companies caused by
unnecessary information requirements, consistent with investor
protection.'').
    \67\ See, e.g., Sections 11, 12, and 17 of the Securities Act,
Sections 10(b) and 18 of the Exchange Act, and Exchange Act Rule
10b-5 [17 CFR 240.10b-5].
    \68\ See Securities Act Rule 408 [17 CFR 230.408] and Exchange
Act Rule 12b-20 [17 CFR 240.12b-20].-
---------------------------------------------------------------------------

2. Revenue Test
a. Proposed Amendments
    As proposed, a registrant with no public float would qualify as a
SRC if it had annual revenues of less than $100 million during its most
recently completed fiscal year.\69\ Consistent with the current
definition, the Commission proposed that once a registrant determines
that it does not qualify as a SRC,\70\ it would not subsequently
qualify until its revenues fall below another, lower threshold.
Specifically the Commission proposed amending the rules to provide that
a registrant with no public float that previously determined that it
did not qualify as a SRC would qualify as a SRC if it had annual
revenues of less than $80 million as of the relevant measurement
date.\71\ The proposed $80 million subsequent qualification threshold
would maintain the 80% ratio that exists between the $50 million
initial qualification threshold and $40 million subsequent
qualification threshold in the current SRC definition.
---------------------------------------------------------------------------

    \69\ See Proposed Item 10(f)(1)(ii)(A) of Regulation S-K;
Proposed Securities Act Rule 405; Proposed Exchange Act Rule 12b-2.
    \70\ This applies either upon an initial determination in the
case of registrants filing an initial registration statement, or as
of an annual determination in the case of reporting registrants.
    \71\ Under the current definition, a registrant that previously
determined that it did not qualify as a SRC because it had no public
float and its revenues exceeded the current $50 million threshold
may qualify based on a subsequent determination if it had annual
revenues of less than $40 million. That registrant would then remain
a SRC until its revenues exceeded $50 million. Consistent with the
current definition, under the proposed definition, a registrant with
no public float that subsequently qualifies under the $80 million
revenue threshold would remain qualified until its revenue exceeds
$100 million.
---------------------------------------------------------------------------

    The Proposing Release noted that the 2015 Small Business Forum
recommended that the SRC definition be revised to include, in addition
to registrants with a public float of less than $250 million,
registrants with a public float of less than $700 million and annual
revenues of less than $100 million.\72\ The Proposing Release also
solicited comment on whether the Commission should revise the SRC
definition to include an alternative revenue test.
---------------------------------------------------------------------------

    \72\ See Proposing Release at text accompanying note 22.
---------------------------------------------------------------------------

b. Comments
    Many commenters recommended that the Commission add a revenue test
to the SRC definition for companies with a public float.\73\ Several
commenters stated that businesses below $100 million in revenue are
viewed by reasonable observers as ``small.'' \74\ One commenter
believed that a revenue test would stimulate innovation and drive
business growth.\75\ Another commenter stated that a revenue test would
ensure that pre-revenue companies are not ``forced to divert investment
funds . . . from science to compliance.'' \76\ Another commenter
supported an alternative revenue test for highly valued pre-revenue
companies ``to avoid stifling the advancement'' of these companies with
costly compliance.\77\ Two commenters suggested that we adopt a revenue
test without a limitation on the public float or market capitalization
of the company.\78\ Another two commenters specifically recommended
that the Commission adopt a definition based on revenues of less than
$100 million and a public float of less than $700 million, as
recommended by the Small Business Forum.\79\
---------------------------------------------------------------------------

    \73\ See Acorda, et al. (recommending a revenue test, stating
that public float is largely a marker of future value but paints an
inaccurate picture of small businesses in the present); AMTA; BIO
(stating that the Commission should move away from its reliance on
public float as the ultimate arbiter of company size); Letter from
Calithera Biosciences, August 8, 2016 (``Calithera''); CONNECT;
CSBA; Nasdaq (recommending a well-crafted revenue only threshold);
NYSE (recommending a simple revenue test without a limitation on
market capitalization); and Zeller (recommending a revenue test for
any issuers that are thinly traded). See also Section II.A.1.b for a
discussion of comments addressing the overall costs and benefits of
expanding the pool of registrants eligible for SRC status, including
the proposed revision to expand the revenue threshold for
registrants with no public float.
    \74\ See Acorda, et al.; BIO; and Calithera.
    \75\ See BIO (stating that pre-revenue small businesses should
remain focused on innovation and do not have the capital to pay for
expensive compliance requirements, and therefore allowing them to
qualify as SRCs until they generate revenue would stimulate
innovation and drive business growth).
    \76\ See Acorda, et al.
    \77\ See AMTA.
    \78\ See NYSE; and Nasdaq.
    \79\ See BIO; and Calithera.
---------------------------------------------------------------------------

c. Final Amendments
    After considering the comments received as well as the
recommendations made by the ACSEC \80\ and the Small Business
Forum,\81\ we are adopting the proposed amendments to the revenue test
of the SRC definition and expanding the revenue test to include certain
registrants with a public float. The definition in the final rules will
include, in addition to registrants with a public float of less than
$250 million, registrants with annual revenues of less than $100
million during their most recently completed fiscal year and either no
public float (calculated as discussed in Section II.A.1) or a public
float of less than $700 million.\82\ We are persuaded by commenters'
suggestions that it is appropriate to provide a measure by which a
registrant with a public float but limited revenues may qualify as a
SRC.\83\ This amended revenue test expands the proposed revenue
threshold for companies with no public float to permit registrants with
a public float that is less than $700 million to qualify based on their
revenues. The $700 million public float threshold included in this
amended revenue test was recommended by two commenters \84\ and the
Small Business Forum.\85\ This change from the proposal

permits some additional registrants to qualify as SRCs,\86\ and we
believe that these low-revenue registrants would benefit from the cost
savings of scaled disclosure accommodations and could redirect those
savings into growing their businesses without significantly detracting
from investor protections. For example, these registrants will remain
liable for their disclosures, will continue to be required to provide
all material information necessary to make any required statements not
misleading, and will continue to be subject to the Division of
Corporation Finance's filing review process.
---------------------------------------------------------------------------

    \80\ See note 19.
    \81\ See note 20.
    \82\ See Item 10(f)(1)(ii) of Regulation S-K; Securities Act
Rule 405; Exchange Act Rule 12b-2. Under the public float test
discussed in Section II.A.1., a registrant with public float of less
than $250 million will qualify as a SRC regardless of its revenues.
See Instruction to Paragraph (f) of Item 10 of Regulation S-K;
Instruction to definition of ``smaller reporting company'' in
Securities Act Rule 405; Instruction to definition of ``smaller
reporting company'' in Exchange Act Rule 12b-2.
    \83\ See Acorda, et al.; AMTA; BIO; Calithera; CONNECT; and
CSBA.
    \84\ See BIO and Calithera.
    \85\ See note 20. In 2016 and 2017, the Small Business Forum
recommended that the SRC definition be revised to include
registrants with a public float of less than $250 million or
registrants with annual revenues of less than $100 million,
excluding large accelerated filers. Registrants with a public float
of $700 million or more generally qualify as large accelerated
filers. See Exchange Act Rule 12b-2. In prior years, the Small
Business Forum recommended that the Commission revise the SRC
definition to include registrants with a public float of less than
$250 million or registrants with a public float of less than $700
million and annual revenues of less than $100 million. See, e.g.,
Final Report of the 2015 SEC Government Business Forum on Small
Business Capital Formation (Apr. 2016), available at https://www.sec.gov/info/smallbus/gbfor34.pdf.
    \86\ Excluding the 2,851 registrants that based on their 2016
data would qualify under the public float test described in Section
II.A.1 and the 594 registrants that would qualify under the proposed
no public float and less than $100 million in annual revenues test,
we estimate that this change would permit an additional 161
registrants to qualify as a SRC.
---------------------------------------------------------------------------

    The amended revenue test that we are adopting is consistent with
the position expressed by several commenters \87\ that it is not
necessary to subject capital-intensive, low-revenue registrants with
larger public floats or market capitalizations to the same reporting
requirements as registrants with larger public floats and more well-
established, revenue-generating businesses. Although two commenters
suggested that we adopt a revenue test without a limitation on the
public float or market capitalization of the company,\88\ we believe
that it is appropriate to include a public float limitation because, as
a registrant's business and public float grows, investors should
benefit from greater disclosure. The additional information provided by
the registrant in these circumstances will assist a growing investor
base in making informed investment decisions and also should lead to a
lower cost of capital for the business as it grows. In this way, the
amended revenue test in the final rules will enable some additional
capital-intensive, low-revenue registrants to benefit from the cost-
savings of scaled reporting, while continuing to require larger
registrants to comply with the disclosure requirements applicable to
non-SRCs.
---------------------------------------------------------------------------

    \87\ See Acorda, et al.; AMTA; BIO; Calithera; CONNECT; CSBA;
NYSE; and Nasdaq.
    \88\ See NYSE; and Nasdaq.
---------------------------------------------------------------------------

    In 2016, approximately 7.7% of registrants qualified as SRCs by
having no public float and less than $50 million in annual
revenues.\89\ The number of registrants that would qualify as SRCs
would have increased by 26, or 0.4%, under the new $100 million annual
revenue threshold for registrants with no public float.\90\ Expanding
the definition further to include registrants with annual revenues of
less than $100 million and public float of less than $700 million would
have increased the number of eligible registrants by an additional 161,
or 2.2%.\91\
---------------------------------------------------------------------------

    \89\ Based on public float values and revenues disclosed by
registrants in their Form 10-K filings in 2016, 568, or 7.7%, of the
7,395 registrants that filed a Form 10-K in 2016 reported having no
public float and less than $50 million in annual revenues.
    \90\ Based on public float values and revenues disclosed by
registrants in their Form 10-K filings in 2016, 26, or 0.4%, of the
7,395 registrants that filed a Form 10-K in 2016 had no public float
and $50 million or more but less than $100 million in annual
revenues.
    \91\ Based on public float values and revenues disclosed by
registrants in their Form 10-K filings in 2016, 161, or 2.2%, of the
7,395 registrants that filed a Form 10-K in 2016 had $250 million or
more but less than $700 million of public float and less than $100
million in annual revenues.
---------------------------------------------------------------------------

    Under the current definition, and as proposed, once a registrant
with no public float determines that it does not qualify as a SRC,\92\
it cannot subsequently qualify based on revenues until its revenues
fall below another, lower threshold. As discussed above with respect to
the public float test, while we did not receive any comments on the
subsequent qualification thresholds, we believe that a separate, lower
revenue threshold for these registrants helps to avoid situations in
which registrants enter and exit SRC status due to small fluctuations
in their revenues and does not impose an undue burden on registrants
seeking to qualify for SRC status. Therefore, consistent with the
proposal, once an issuer with no public float determines that it does
not qualify for SRC status because its annual revenues exceeded $100
million, it will remain unqualified unless and until its annual
revenues are less than $80 million as of the measurement date.\93\
---------------------------------------------------------------------------

    \92\ This applies either upon an initial determination in the
case of registrants filing an initial registration statement, or as
of an annual determination in the case of reporting registrants.
    \93\ See Item 10(f)(2)(iii)(B) of Regulation S-K; Securities Act
Rule 405; Exchange Act Rule 12b-2. Consistent with the current
definition, under the amended definition, a registrant with no
public float that subsequently qualifies under the $80 million
revenue threshold remains qualified until its revenue exceeds $100
million.
---------------------------------------------------------------------------

    Consistent with the 80% ratio we are adopting for the other
subsequent qualification thresholds, under the amended revenue test,
once a registrant with public float determines that it does not qualify
as a SRC because it exceeds either or both of the $100 million annual
revenue and $700 million public float thresholds, it will remain
unqualified unless and until it meets a lower threshold for the
criteria on which it previously failed to qualify ($80 million of
annual revenue and $560 million of public float) and continues to meet
any threshold it previously satisfied ($100 million of annual revenue
or $700 million of public float).\94\ By requiring that a registrant
satisfy a lower threshold only with respect to a threshold it
previously exceeded, we are attempting to strike a balance between
avoiding situations in which registrants frequently enter and exit SRC
status due to small fluctuations and not imposing an undue burden on
registrants seeking to qualify for SRC status. A registrant that
exceeded both the public float threshold and the revenue threshold,
however, would not qualify unless and until it met both lower
thresholds in order to avoid situations in which registrants enter and
exit SRC status due to small fluctuations in either their revenues or
public float. The table below sets forth the thresholds for
qualification as of the respective measurement date under the amended
revenue test after one or both thresholds have been exceeded:
---------------------------------------------------------------------------

    \94\ Id. Consistent with the current definition, under the
amended definition, a registrant that subsequently qualifies under
the $560 million public float threshold or $80 million revenue
threshold remains qualified until its public float exceeds $700
million or its revenue exceeds $100 million.

------------------------------------------------------------------------
                                          Prior public float
                             -------------------------------------------
    Prior annual revenues       None or less than
                                  $700 million      $700 million or more
------------------------------------------------------------------------
Less than $100 million......  Neither threshold     Public float--Less
                               exceeded.             than $560 million;
                                                     and
                                                    Revenues--Less than
                                                     $100 million.
$100 million or more........  Public float--None    Public float--Less
                               or less than $700     than $560 million;
                               million; and          and
                              Revenues--Less than   Revenues--Less than
                               $80 million.          $80 million.
------------------------------------------------------------------------

B. Amendments to Rule 3-05(b)(2)(iv) of Regulation S-X

    In the Proposing Release, the Commission asked whether, if the
revenue threshold in the SRC definition is increased, the threshold in
Rule 3-05 of Regulation S-X also should increase. Rule 3-05 of
Regulation S-X provides the requirements for financial statements of
businesses acquired or to be acquired in certain registration
statements and current reports. Current paragraph (b)(2)(iv) allows
certain registrants to omit such financial statements for the earliest
of the three fiscal years required if the net revenues of the business
to be acquired are less than $50 million.\95\ The $50 million threshold
is based on the revenue threshold in the SRC definition.\96\
---------------------------------------------------------------------------

    \95\ Rule 3-05(b)(2) sets forth the requirements for financial
statements of an acquired business or to be acquired business to be
provided other than when registering securities to be offered to the
security holders of the business to be acquired.
    \96\ In 1996, the Commission revised Rule 3-05 to streamline the
requirements for financial statements of significant business
acquisitions in filings made under the Securities Act and the
Exchange Act, stating:
    ``The threshold at which audited financial statements of an
acquired business are required for three years, as required for the
issuer itself (except for small business issuers), has been raised
from 40% to 50% in recognition of the significant burden imposed by
the lower threshold. In addition, consistent with the criteria for
small business issuers, financial statements for periods preceding
the most recent two fiscal years would not be required for acquired
businesses reporting revenues below $25 million.'' See Streamlining
Disclosure Requirements Relating to Significant Business
Acquisitions. Release No. 33-7355 (Oct. 10, 1996) [61 FR 54509 (Oct.
18, 1996)] (``1996 Rule 3-05 Adopting Release'').
    When the Commission adopted the SRC definition (which replaced
the small business issuer definition) in 2007, it noted:
    ``Several comment letters noted that in light of the $50 million
in revenues threshold proposed for determining a company's
qualification as a SRC if a company is unable to calculate public
float, the Commission should consider revising [Rule 3-05(b)(2)(iv)]
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. The $25 million threshold was based on the
$25 million in revenues standard in Regulation S-B that we are
rescinding. We are amending this standard to increase the threshold
to $50 million in revenues, as suggested by the commenters.'' See
SRC Adopting Release.
---------------------------------------------------------------------------

    Two commenters recommended amending Rule 3-05 to increase the
revenue threshold in paragraph (b)(2)(iv) to $100 million to maintain
the alignment between Rule 3-05 and the definition of a SRC.\97\ One
commenter noted that this alignment should be retained to ``maintain
the objective the Commission expressed when it adopted the 2007 S-X
Rule 3-05 relief.'' \98\ The other commenter noted that this amendment
would avoid having the financial statement requirements for a SRC-sized
target company exceed those of a similarly sized registrant.\99\
---------------------------------------------------------------------------

    \97\ See EY; and BDO. No other commenters addressed whether to
amend Rule 3-05 of Regulation S-X.
    \98\ See EY; see also SRC Adopting Release.
    \99\ See BDO.
---------------------------------------------------------------------------

    Consistent with these comments, we are amending Rule 3-05 to
increase the net revenue threshold in Rule 3-05(b)(2)(iv) of Regulation
S-X to $100 million.\100\ Given that the current $50 million revenue
threshold in Rule 3-05(b)(2)(iv) was based on the revenue threshold in
the SRC definition, and in light of our decision to increase the
revenue threshold in the SRC definition from $50 million to $100
million, we are raising the net revenue threshold in Rule 3-
05(b)(2)(iv) of Regulation S-X from $50 million to $100 million.
---------------------------------------------------------------------------

    \100\ See Rule 3-05(b)(2)(iv) of Regulation S-X.
---------------------------------------------------------------------------

C. Amendments to Accelerated Filer and Large Accelerated Filer
Definitions

1. Proposed Amendments
    The Commission proposed amending the definitions of ``accelerated
filer'' and ``large accelerated filer'' to remove the automatic
exclusion from these definitions of any registrant that qualifies as an
SRC \101\ and solicited comment on a number of questions related to
this issue.\102\ Among other requirements,\103\ being an accelerated
filer or a large accelerated filer triggers the requirement contained
in Section 404(b) of the Sarbanes-Oxley Act \104\ to have the auditor
provide an attestation report on internal control over financial
reporting. Currently, the accelerated filer and large accelerated filer
definitions include a provision that specifically excludes registrants
that are eligible to use the SRC requirements under Regulation S-K for
their annual and quarterly reports.\105\ As a result, the existing
public float threshold in the accelerated filer definition aligns with
the current public float threshold in the SRC definition.\106\
---------------------------------------------------------------------------

    \101\ See Proposing Release, 81 FR at 43136.
    \102\ See Proposing Release, 81 FR at 43137. As discussed in the
Proposing Release, the ACSEC and the Small Business Forum have
recommended increasing the thresholds in both the SRC and the
accelerated filer definitions. See notes 19 and 20.
    \103\ Accelerated and large accelerated filers are subject to
accelerated periodic report filing deadlines. In addition, they must
provide their internet address and disclosure regarding the
availability of their filings required by Items 101(e)(3) and (4) of
Regulation S-K [17 CFR 229.101(e)(3) and (4)], as well as disclosure
required by Item 1B of Form 10-K about unresolved staff comments on
their periodic or current reports.
    \104\ Public Law 107-204, Sec. 404(b) 116 Stat. 745 (2002).
    \105\ Paragraphs (1)(iv) of the accelerated filer definition and
(2)(iv) of the large accelerated filer definition in Exchange Act
Rule 12b-2.
    \106\ The public float thresholds for exiting SRC status and
entering accelerated filer status currently are both $75 million,
and the determinations are both made as of the last business day of
a registrant's most recently completed second fiscal quarter for
purposes of the following fiscal year.
[GRAPHIC] [TIFF OMITTED] TR10JY18.000

    Increasing the SRC public float threshold to $250 million without
eliminating the SRC provision from the accelerated filer definition
would exclude from the definition of accelerated filer those
registrants that are newly eligible to use the SRC disclosure
requirements, keeping the thresholds for both definitions linked as
they have been historically.
    The Commission proposed to eliminate the provision in the
accelerated filer definition that excludes SRCs to maintain the current
thresholds at which registrants are subject to the accelerated filer
disclosure and filing requirements. As a result, as illustrated in
Figure 2, some registrants would qualify as both SRCs and accelerated
filers.
[GRAPHIC] [TIFF OMITTED] TR10JY18.001

    As discussed in the Proposing Release, the public float threshold
for entering large accelerated filer status currently is $700 million,
so newly eligible SRCs under the proposed increased public float
threshold of $250 million would not include any registrants that
currently qualify as large accelerated filers. Nevertheless, the
Commission proposed to eliminate this provision because it currently
does not capture any registrants, would not have captured any
registrants under the proposed amendments, and could lead to confusion
if retained.
2. Comments
    Some commenters responded to the Commission's solicitation of
comment on this issue by supporting the elimination of the provisions
in the accelerated filer and large accelerated filer definitions that
specifically exclude registrants that are eligible to use the SRC
disclosure requirements for their annual or quarterly reports.\107\ One
commenter stated that it found no compelling argument to support what
it sees as a weakening of investor protections, particularly in light
of the 2011 Staff Section 404(b) Study \108\ finding that accelerated
filers subject to Section 404(b) had a lower restatement rate compared
to non-accelerated filers not subject to Section 404(b).\109\ Another
commenter recommended that the Commission undertake a separate
rulemaking before deciding whether to change the Section 404(b)
requirements.\110\ A third commenter recommended that the Commission
provide more time for registrants with a public float of less than $250
million to file their periodic reports.\111\
---------------------------------------------------------------------------

    \107\ See BDO; CAQ/CII; CFA Institute; Letter from Deloitte,
August 23, 2016 (``Deloitte''); and EY.
    \108\ Study and Recommendations on Section 404(b) of the
Sarbanes-Oxley Act of 2002 For Issuers With Public Float Between $75
and $250 Million (Apr. 2011), available at https://www.sec.gov/news/studies/2011/404bfloat-study.pdf.
    \109\ See CFA Institute, citing 2011 Staff Section 404(b) Study.
    \110\ See EY.
    \111\ See BDO.
---------------------------------------------------------------------------

    In contrast, many commenters responded to the Commission's
solicitation of comment on this issue by recommending that the
Commission increase the thresholds in the accelerated filer definition,
consistent with the changes to the SRC definition.\112\ Commenters
recommended increasing the public float threshold in the accelerated
filer definition to reduce compliance costs \113\ and to maintain
uniformity across our rules.\114\ Many of these commenters stated that
Section 404(b) is particularly costly for SRCs and emerging businesses
\115\ and that audit costs associated with Section 404(b) divert
capital from core business needs.\116\
---------------------------------------------------------------------------

    \112\ See Acorda, et al.; AMTA; BIO; Calithera; CONNECT;
Coalition; CSBA; ICBA; Letter from The Dixie Group, Inc., July 11,
2016 (``Dixie''); MidSouth; Nasdaq; NVCA; NYSE; and Seneca.
    \113\ See Acorda, et al.; AMTA; BIO; Calithera; CONNECT;
Coalition; CSBA; ICBA; Dixie; MidSouth; Nasdaq; NVCA; NYSE; and
Seneca.
    \114\ See BIO (stating that uniformity alone is a sufficiently
compelling argument to align the two definitions, that avoiding
investor confusion is an important responsibility of the SEC, and
that issuers and investors alike are used to having one standard for
small company status); Coalition; Nasdaq; NVCA; and NYSE.
    \115\ See Acorda, et al.; AMTA; BIO; Calithera; Coalition;
CONNECT; CSBA; and Seneca. See also Dixie.
    \116\ See Acorda, et al.; BIO; CSBA; ICBA; and NVCA.
---------------------------------------------------------------------------

    Several commenters addressed the costs associated with complying
with the requirements of Section 404(b).\117\ A few commenters stated
that, for many growing biotechnology companies, the Section 404(b)
audit represents over $1 million of capital diversion.\118\ One
commenter indicated that Section 404(b) compliance imposes a
significant burden on emerging biotech companies, citing the 2011 Staff
Section 404(b) Study that estimated that companies with a public float
between $75 million and $250 million spend, on average, $840,276 to
comply with Section 404(b).\119\ Another commenter estimated that it
will spend more than $400,000 annually on compliance with Section
404(b).\120\ One commenter that

stated that its public float was more than $75 million but less than
$250 million estimated that relief from Section 404(b) would result in
a 35% reduction in compliance costs whereas there would be no material
change in such costs from the proposed amendments.\121\ Another
commenter noted that, while most firms already take an integrated
accounting approach to Section 404(b) requirements that includes a
complete internal control review, if smaller companies were exempt from
Section 404(b), they would avoid the added legal liability of the
auditor attestation, providing a savings opportunity and lowering the
cost of being public for those companies.\122\
---------------------------------------------------------------------------

    \117\ See Acorda, et al.; BIO; Calithera; CONNECT; CSBA (stating
that ``accelerated filers spend, on average, more than $1 million
complying with Section 404(b)''); Dixie; and Seneca.
    \118\ See Acorda, et al.; and CONNECT. See also CSBA.
    \119\ See BIO.
    \120\ See Calithera. This estimate is generally consistent with
the estimate set forth by a presenter at a recent ACSEC meeting. The
presenter stated that some biotechnology companies that anticipate
losing their status as EGCs in the next few years ``believe they
will incur somewhere between $150,000 to $350,000 in additional
audit fees, $50,000 to $150,000 in other consulting costs and either
$40,000 or as much as $200,000 for internal labor.'' See Transcript
of Presentation by William Newell at September 13, 2017 ACSEC
Meeting available at https://www.sec.gov/info/smallbus/acsec/acsec-transcript-091317.pdf (pages 49 to 54); see also Newell, William J.,
``Sarbanes-Oxley Section 404(b): Costs of Compliance and Proposed
Reforms'', presentation at ACSEC meeting on Sept. 13, 2017 available
at https://www.sec.gov/info/smallbus/acsec/william-newell-acsec-091317.pdf.
    \121\ See Seneca.
    \122\ See Dixie.
---------------------------------------------------------------------------

    A few commenters stated that the market does not value the audit of
such internal control \123\ or that the costs of Section 404(b)
outweigh the benefits.\124\ Another commenter stated that expanding
relief from Section 404(b) to registrants with a public float of less
than $250 million would encourage capital formation because reduced
audit and disclosure requirements may encourage companies that have
been hesitant to go public to do so.\125\
---------------------------------------------------------------------------

    \123\ See Acorda, et al. (stating that the market does not
demand a Section 404(b) audit as a prerequisite for investing in
emerging, innovative companies and that virtually no EGCs are
voluntarily forgoing their exemption from Section 404(b)). See also
Dixie.
    \124\ See MidSouth.
    \125\ See ICBA (citing a 2005 ICBA study that estimated that
audit fees for publicly held bank holding companies would drop
dramatically--some by as much as 50%--if they were exempted from
Section 404(b)).
---------------------------------------------------------------------------

    A number of commenters recommended that the Commission allow a
revenue test for the accelerated filer definition, similar to the
amended revenue test being adopted by the Commission in the SRC
definition.\126\
---------------------------------------------------------------------------

    \126\ See Acorda, et al.; AMTA; BIO; CONNECT; Calithera; CSBA;
Nasdaq; and NYSE.
---------------------------------------------------------------------------

3. Final Amendments
    As proposed, we are adopting amendments to the ``accelerated
filer'' and ``large accelerated filer'' definitions in Exchange Act
Rule 12b-2 to preserve the application of the current thresholds
contained in those definitions.\127\ Specifically, we are eliminating
from the definitions of accelerated filer and large accelerated filer
the exclusions for registrants that are eligible to use the SRC
requirements under Regulation S-K for their annual and quarterly
reports. After the amendments to the SRC definition become effective,
some SRCs will exceed the public float thresholds for initial or
subsequent qualification in the accelerated filer definition, and a few
of these registrants also may exceed the public float threshold for
subsequent qualification in the large accelerated filer
definition.\128\
---------------------------------------------------------------------------

    \127\ See ``accelerated filer'' and ``large accelerated filer''
definitions in Exchange Act Rule 12b-2.
    \128\ The only registrants that would qualify as both SRCs and
large accelerated filers would be those companies (1) that
previously qualified as large accelerated filers because at one time
their public float was $700 million or more, (2) whose revenues for
the most recent fiscal year were less than $100 million, and (3)
whose public float as of the end of the most recent second quarter
was less than $560 million, such that they now qualify as SRCs, but
not less than $500 million, such that they are not eligible to exit
large accelerated filer status.
---------------------------------------------------------------------------

    Although we are not raising the accelerated filer public float
threshold or modifying the Section 404(b) requirements for registrants
with a public float between $75 million and $250 million in this
release, as stated above, the Chairman has directed the staff to
formulate recommendations to the Commission for possible changes to
reduce the number of registrants that our rules define as accelerated
filers. Eliminating the SRC provision in the accelerated filer and
large accelerated filer definitions will maintain the current
thresholds at which registrants are subject to the accelerated filer
and large accelerated filer disclosure and filing requirements. In
2007, the Commission noted that aligning the SRC public float threshold
based on the levels established for non-accelerated filers \129\ was
practical and avoided regulatory complexity.\130\ These amendments will
change the current relationship between the SRC and ``accelerated
filer'' definitions by allowing a registrant to qualify as both a SRC
and an accelerated filer.\131\ We acknowledge the regulatory complexity
created by this potential overlap between the SRC and ``accelerated
filer'' definitions.\132\ As part of the staff's consideration of
possible recommended amendments to the ``accelerated filer''
definition, the Chairman has directed the staff to consider, among
other things, the historical and current relationship between the SRC
and ``accelerated filer'' definitions.
---------------------------------------------------------------------------

    \129\ A non-accelerated filer is a filer that is not an
``accelerated filer'' or a ``large accelerated filer.'' See subpart
(3) of the accelerated filer and large accelerated filer definitions
in Exchange Act Rule 12b-2 [17 CFR 240.12b-2].
    \130\ See SRC Adopting Release 73 FR at 942.
    \131\ In conjunction with these amendments, we also are adopting
technical revisions to Securities Act Forms S-1, S-3, S-4, S-8, and
S-11 and Exchange Act Forms 10, 10-Q and 10-K. These amendments
modify the cover page of the specified forms to remove the
parenthetical next to the ``non-accelerated filer'' definition that
states ``(Do not check if a smaller reporting company).'' After
these amendments, a registrant should check all applicable boxes on
the cover page addressing, among other things, non-accelerated,
accelerated, and large accelerated filer status, SRC status, and
emerging growth company status.
    \132\ Several commenters specifically recommended increasing the
public float threshold in the accelerated filer definition to, among
other things, maintain uniformity across our rules. See BIO;
Coalition; Nasdaq; NVCA; and NYSE.
---------------------------------------------------------------------------

III. Other Matters

    If any of the provisions of these amendments, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given effect
without the invalid provision or application.

IV. Economic Analysis

    As discussed above, we are adopting amendments to the definition of
SRC as used in our rules and regulations. The amendments expand the
number of registrants that are eligible to provide scaled disclosure to
their investors and are intended to reduce compliance costs for these
registrants and promote capital formation, while maintaining
appropriate investor protections. Registrants with a public float of
less than $250 million (an increase from the current $75 million
threshold) will qualify as SRCs, as will registrants with no public
float if their revenues are less than $100 million (an increase from
the current $50 million threshold).\133\ In addition, registrants with
a public float of less than $700 million will qualify as SRCs if their
revenues are less than $100 million.\134\
---------------------------------------------------------------------------

    \133\ See note 29 and related text for a discussion of how and
when public float is calculated and when revenues are measured.
    \134\ The Commission received a number of comments in support of
expanding the definition of SRC to include a revenue test for
registrants with a public float. See Section II.A.1.b.
---------------------------------------------------------------------------

    We also are making corresponding amendments to other rules in light
of the new SRC definition. As proposed, we are adopting amendments to
the ``accelerated filer'' and ``large accelerated filer'' definitions
in Exchange Act Rule 12b-2 to preserve the application of the public
float thresholds in those definitions. In addition, we are amending
Rule 3-05(b)(2)(iv) of Regulation S-X to increase the revenue threshold
under which certain registrants may omit the earliest of the three
fiscal years of

audited financial statements of an acquired business or business to be
acquired.
    We are mindful of the costs and benefits of the amendments. In this
economic analysis, we examine the existing baseline, which consists of
the current regulatory framework and market practices, and discuss the
potential costs and benefits of the amendments, relative to this
baseline, and their potential effects on efficiency, competition, and
capital formation.\135\ We also consider the potential costs and
benefits of reasonable alternatives to the amendments. Where
practicable, we have attempted to quantify the economic effects of the
amendments; however, in certain cases, we are unable to do so because
either the necessary data are unavailable or the economic effects are
not quantifiable. In these cases, we provide a qualitative assessment
of the likely economic effects.
---------------------------------------------------------------------------

    \135\ Section 23(a)(2) of the Exchange Act requires us, when
adopting rules, to consider the impact that any new rule would have
on competition. In addition, Section 2(b) of the Securities Act and
Section 3(f) of the Exchange Act direct us, when engaging in
rulemaking that requires us to consider or determine whether an
action is necessary or appropriate in the public interest, to
consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital formation.
---------------------------------------------------------------------------

A. Baseline

    In calendar year 2016, 7,395 registrants filed a Form 10-K with the
Commission. Excluding investment companies, business development
companies, and ABS issuers, which are not eligible for SRC status,
6,739 registrants filed a Form 10-K in calendar year 2016. Of these
registrants, 2,592 (35.1% of all registrants) claimed SRC status by
checking the box on the cover page of their Forms 10-K indicating that
the registrant was a SRC. Under the current definition, a registrant
with a public float may qualify as a SRC if its public float is less
than $75 million or a registrant with no public float may qualify as a
SRC if its annual revenues are less than $50 million. An additional 232
filers in calendar year 2016 reported public float of less than $75
million or no public float and revenues of less than $50 million, but
did not check the box on the cover page of their Forms 10-K indicating
that they were SRCs.\136\ Of the 2,592 registrants that claimed SRC
status in 2016, 1,899 registrants (25.7% of all registrants) reported
having a public float that was less than $75 million and 509
registrants (6.9% of all registrants) reported having no public float
and revenues of less than $50 million.\137\ Of the 2,592 SRCs, 833
(11.3% of all registrants) also indicated in their filings that they
were EGCs.\138\
---------------------------------------------------------------------------

    \136\ There are two potential explanations for why the number of
registrants meeting the SRC thresholds exceeds the number of
reported SRCs. First, the public float and revenue thresholds
establish eligibility for SRC status, but do not require eligible
registrants to take advantage of the scaled disclosure requirements.
Thus, some registrants may be opting out of SRC status if they do
not find the reduced compliance costs to be net beneficial. Second,
some registrants that appear to be eligible may not be if they
previously exceeded the SRC threshold and were required to meet the
lower eligibility threshold (i.e., public float of less than $50
million or revenues of less than $40 million) to subsequently
qualify as a SRC.
    \137\ Based on analysis by DERA of available data. Staff
obtained the SRC status and public float data from information
extracted from exhibits to corporate financial reports filed with
the Commission using eXtensible Business Reporting Language
(``XBRL''), available at: http://www.sec.gov/dera/data/financial-statement-data-sets.html. Staff also extracted the SRC status and
public float directly from Forms 10-K using a computer program. For
robustness, staff compared the SRC status and public float
information between the two sources and corrected discrepancies
using data from Ives Group Audit Analytics. Staff extracted annual
revenue data from the Compustat database and XBRL data in Form 10-K
filings.
    \138\ Staff determined whether a registrant claimed EGC status
by parsing several types of filings (for example, Forms S-1, S-1/A,
10-K, 10-Q, 8-K, 20-F/40-F, and 6-K) filed by that registrant with
supplemental data drawn from Ives Group Audit Analytics.
---------------------------------------------------------------------------

    Table 1 summarizes the number and percentage of registrants that
claimed SRC status in each calendar year over the 2013-2016 period.

                                        Table 1--SRCs in 2013-2016 Period
----------------------------------------------------------------------------------------------------------------
                                                                                Qualified
                                                                                Qualified      based on no
                                    Total # of                                       based on      public float
           Filing year              registrants      # of SRCs      % of total     public float     and revenue
                                                                                <$75 million    <$50 million
                                                                                (% of Total)    (% of Total)
----------------------------------------------------------------------------------------------------------------
2013............................           7,624           3,380            44.3            33.5            10.8
2014............................           7,642           3,179            41.6            32.7             8.9
2015............................           7,557           2,900            38.4            29.7             8.7
2016............................           7,395           2,592            35.1            25.7             6.9
----------------------------------------------------------------------------------------------------------------

    Table 2 shows that, while registrants claiming SRC status with
available data account for a substantial percentage of the total number
of registrants in calendar year 2016, they account for less than one
percent of the entire public float, market value and revenue of all
registrants.\139\
---------------------------------------------------------------------------

    \139\ Compustat data on market value is obtained for calendar
year 2016 filings. Staff obtained revenue data either from XBRL data
in Form 10-K filings or directly from the filing itself. The summary
statistics presented in Table 2 represent those registrants for
which information on public float and revenue is concurrently
available. Market value, as used throughout this Economic Analysis,
is equivalent to market capitalization and presented for registrants
with available data (described in footnote 25).

                                     Table 2--Size Proxies for SRCs in 2016
----------------------------------------------------------------------------------------------------------------
                                             Public float             Market value               Revenue
----------------------------------------------------------------------------------------------------------------
Mean.................................  $14.7 million..........  $57.2 million..........  $42.8 million.
Median...............................  4.3 million............  14.1 million...........  1.9 million.
Aggregate size.......................  40.1 billion...........  98.7 billion...........  96.2 billion.
% of the aggregate size of all         0.15%..................  0.34%..................  0.66%.
 registrants.
----------------------------------------------------------------------------------------------------------------

    Table 3 shows the distribution of registrants that were eligible
for SRC status based on available data in calendar year 2016 using the
Fama-French 49-industry classification.\140\ The ``Business Services''
industry accounts for 10.6% of all SRCs, followed by ``Financial
Trading'' (9.8%), ``Pharmaceutical Products'' (8.5%), ``Banking''
(7.1%), ``Petroleum and Natural Gas'' (5.6%), and ``Computer Software''
(5.2%).\141\ We note that industries with a larger fixed component of
operating costs, such as shipping, defense, and aircraft, tend to have
fewer SRCs.
---------------------------------------------------------------------------

    \140\ The standard Fama-French classification sorts Standard
Industry Classification codes into 49 main industrial categories;
available at: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_49_ind_port.html.
    \141\ In 2016, SRCs accounted for 57% of all Form 10-K filers in
``Business Services,'' 37% in ``Financial Trading,'' 20% in
``Banking,'' 39% in ``Pharmaceutical Products,'' 50% in ``Petroleum
and Natural Gas'' and 47% in ``Computer Software,'' suggesting that
these industries all have a fairly high concentration of small
registrants.

                                                     Table 3--Industry Distribution of SRCs in 2016
--------------------------------------------------------------------------------------------------------------------------------------------------------
           Industry ID                 Industry          # of SRCs     % of all SRCs    Industry ID        Industry          # of SRCs     % of all SRCs
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................  Agriculture.......              26             1.0              26  Defense...........               2             0.1
2...............................  Food Products.....              35             1.3              27  Precious Metals...              38             1.4
3...............................  Candy & Soda......               3             0.1              28  Non-Metallic and                76             2.9
                                                                                Industrial Metal
                                                                                Mining.
4...............................  Beer & Liquor.....              18             0.7              29  Coal..............               3             0.1
5...............................  Tobacco Products..               9             0.3              30  Petroleum and                  149             5.6
                                                                                Natural Gas.
6...............................  Recreation........              23             0.8              31  Utilities.........              15             0.6
7...............................  Entertainment.....              55             2.0              32  Communication.....              45             1.7
8...............................  Printing and                     8             0.3              33  Personal Services.              37             1.4
                                   Publishing.
9...............................  Consumer Goods....              40             1.6              34  Business Services.             281            10.7
10..............................  Apparel...........              17             0.6              35  Computers.........              22             0.8
11..............................  Healthcare........              37             1.4              36  Computer Software.             136             5.2
12..............................  Medical Equipment.             116             4.4              37  Electronic                     102             3.9
                                                                                Equipment.
13..............................  Pharmaceutical                 225             8.5              38  Measuring and                   41             1.6
                                   Products.                                                           Control Equipment.
14..............................  Chemicals.........              54             2.1              39  Business Supplies.               6             0.2
15..............................  Rubber and Plastic              20             0.8              40  Shipping                         2             0.1
                                   Products.                                                           Containers.
16..............................  Textiles..........               4             0.2              41  Transportation....              24             0.9
17..............................  Construction                    29             1.1              42  Wholesale.........              78             3.0
                                   Materials.
18..............................  Construction......              22             0.8              43  Retail............              82             3.1
19..............................  Steel Works.......               9             0.3              44  Restaurants,                    28             1.1
                                                                                Hotels, Motels.
20..............................  Fabricated                       5             0.2              45  Banking...........             187             7.1
                                   Products.
21..............................  Machinery.........              54             2.0              46  Insurance.........              20             0.8
22..............................  Electrical                      39             1.5              47  Real Estate.......              96             3.6
                                   Equipment.
23..............................  Automobiles and                 21             0.8              48  Financial Trading.             258             9.8
                                   Trucks.
24..............................  Aircraft..........               8             0.3  ..............  Other and Unknown.              30             1.1
25..............................  Shipbuilding,                    3             0.1  ..............  ..................  ..............  ..............
                                   Railroad
                                   Equipment.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As discussed above, we are amending Rule 3-05(b)(2)(iv) of
Regulation S-X to increase the revenue threshold under which certain
registrants may omit the earliest of the three fiscal years of audited
financial statements of an acquired business or business to be
acquired. Rule 3-05 applies to registrants that are not SRCs.\142\ Rule
3-05(b)(2)(iv) provides that, if the acquired business is large enough
relative to the registrant (i.e., any of the significant subsidiary
tests for the acquired business exceed 50%), the registrant must file
three years of historical financial statements of the acquired business
unless the acquired business has revenues of less than $50 million, in
which case only two years of the acquired business's most recent
financial statements need to be filed. Given the difficulty in
accurately identifying registrants that have acquisitions (1) that meet
any of the significant subsidiary tests at the 50% level and (2) where
the acquired business has revenues of less than $50 million, we are
unable to estimate the number of registrants that were affected by the
$50 million revenue threshold in

Rule 3-05(b)(2)(iv) in 2016. We do not believe the disclosure
accommodation in Rule 3-05(b)(2)(iv) is frequently used because the
acquired business not only would need to meet one of the significant
subsidiary thresholds at the 50% level compared to the non-SRC
acquirer, but also would need to have less than $50 million of revenues
in its most recent fiscal year.
---------------------------------------------------------------------------

    \142\ Rule 8-04 of Regulation S-X [17 CFR 210.8-04] applies to
financial statements of business acquired or to be acquired by SRCs.
---------------------------------------------------------------------------

B. Potential Economic Effects

1. Introduction
    The primary benefit stemming from the amendments is a reduction in
compliance costs for the registrants that will newly qualify for SRC
status. To the extent that the reduced compliance costs have a fixed
cost component,\143\ which typically burdens smaller registrants
disproportionately, the cost savings may be particularly helpful for
those registrants.
---------------------------------------------------------------------------

    \143\ See, e.g., William A. Brock & David S. Evans, The
Economics of Small Businesses: Their Role and Regulation in the U.S.
Economy 65 at 70 (1986); C. Steven Bradford, Does Size Matter? An
Economic Analysis of Small Business Exemptions from Regulation,
College of Law, Faculty Publications. 72 (2004). See also Cindy R.
Alexander et al., Economic Effects of SOX Section 404 Compliance: A
Corporate Insider Perspective, 56 J. Account. & Econ. 267-290 at 285
(2013) (noting, among other things, that they found ``evidence of
fixed costs that weigh disproportionately on smaller firms'').
---------------------------------------------------------------------------

    As a secondary effect of the amendments, a lower disclosure burden
could spur growth in the registrants that will newly qualify for SRC
status to the extent that the compliance cost savings and other
resources (e.g., managerial effort) otherwise devoted to disclosure and
compliance are productively deployed in alternative ways. It also could
encourage capital formation because companies that may have been
hesitant to go public may choose to do so if they face reduced
disclosure requirements.
    With respect to costs, we expect that the amendments to the SRC
definition will result in a modest change in some indicators of the
overall quality of the information environment. Generally, a decrease
in the amount of direct disclosure could increase the information
asymmetry between investors and company insiders, leading to lower
liquidity and higher costs of capital for the affected registrants. For
example, one study found that, during the three-month period following
the establishment of the SRC definition, registrants with public floats
of $25 million or more and less than $75 million that claimed SRC
status experienced a significant reduction in liquidity relative to
comparable registrants.\144\ In addition, one of the sources of
information asymmetry under the amendments will be that the newly
eligible SRCs will not be required to provide certain executive
compensation disclosures, potentially lowering corporate governance
transparency of these registrants.\145\ Furthermore, by introducing
overlap between the SRC and the accelerated filer definitions, the
amendments we are adopting would increase regulatory complexity.\146\
---------------------------------------------------------------------------

    \144\ See Lin Cheng, Scott Liao, and Haiwen Zhang, Commitment
Effect versus Information Effect of Disclosure: Evidence from
Smaller Reporting Companies, 88 Account. Rev. 1239 (Jul. 2013).
    \145\ For a review of the effects of executive compensation
disclosures on compensation practices, see Kevin J. Murphy,
``Executive compensation: Where we are, and how we got there,''
Handbook of the Economics of Finance, Vol. 2. Elsevier (2013) 211-
356. See also Benjamin E. Hermalin and Michael S. Weisbach,
Information Disclosure and Corporate Governance, 67 J. Fin. 195
(2012), and Anya Kleymenova and Irem A. Tuna, Regulation of
Compensation (June 21, 2017), Chicago Booth Research Paper No. 16-
07, available at SSRN: https://ssrn.com/abstract=2755621.
    \146\ See SRC Adopting Release 73 FR at 942.
---------------------------------------------------------------------------

    The number of affected registrants that will make scaled
disclosures will ultimately depend on the choices of those registrants.
That is, the SRC definition establishes eligibility for, but does not
mandate reliance on, any of the scaled disclosure accommodations.\147\
We identified 232 registrants in 2016 that met either the $75 million
public float threshold or the $50 million revenue threshold for SRC
status but did not claim SRC status. While some of these registrants
may not have been eligible (for example, a registrant that previously
did not qualify as a SRC because it exceeded the thresholds and is now
subject to a lower threshold), it is possible that some elected not to
avail themselves of the scaled disclosure requirements.\148\
---------------------------------------------------------------------------

    \147\ If a disclosure requirement applicable to SRCs is more
stringent than for non-SRCs, however, SRCs must comply with the more
stringent standard. Item 404 is the only Regulation S-K disclosure
requirement that could be more stringent.
    \148\ Data from 2008 show that registrants do not always take
advantage of scaled disclosure. In a sample of 283 registrants that
were newly eligible for scaled disclosure in 2008, the evidence from
Form 10-K and proxy filings by those registrants shows that 109 of
the registrants chose to maintain their disclosure level for all ten
eligible items, while 174 of the registrants reduced the disclosure
level for at least one eligible item. See Lin Cheng, Scott Liao, and
Haiwen Zhang, Commitment Effect versus Information Effect of
Disclosure: Evidence from Smaller Reporting Companies, 88 Account.
Rev. 1239 (Jul. 2013) at 1247.
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    Under the amendments, we expect registrants will weigh their own
costs and benefits of scaled disclosure and decide whether to take
advantage of any of the scaled disclosure accommodations for which they
are newly eligible. Some registrants may determine that the costs of
potentially reduced liquidity for their securities and higher cost of
capital exceed the benefits of the lower compliance costs. Those
registrants may elect not to rely on the scaled disclosure
accommodations available to them. On the other hand, expanding SRC
eligibility could provide opportunities for adverse selection in a
greater number of registrants. For example, registrants whose outside
investors would have benefited from more disclosure might choose the
less burdensome disclosure requirement once becoming eligible. The net
benefit or cost for each newly eligible registrant and its investors
will ultimately depend on the specific facts and circumstances.
    Expanding the pool of registrants eligible for SRC status to
include registrants with revenues of less than $100 million and a
public float of $250 million or more and less than $700 million will
increase the cost savings, information asymmetries, and other effects
of scaled disclosure in proportion to the increase in the number of
registrants that become newly eligible at those higher thresholds and
choose to avail themselves of the scaled disclosure accommodation. This
number is likely to be small, as indicated by the evidence that 161
(2.2%) of the registrants that filed a Form 10-K in 2016 would have met
the thresholds in the amended revenue test for registrants with public
float.
    The effects of scaled disclosure for registrants with a public
float of $250 million or more and less than $700 million and revenues
of less than $100 million may be different from the effects of scaled
disclosure for registrants with public float nearer to the current
threshold of $75 million. This is because the characteristics of
registrants eligible for SRC status under the final rules may be
different from those of registrants close to the current threshold. For
example, differences in the relationships between management and
outside investors in registrants with higher public float could affect
the level of information asymmetries between those registrants and
investors. This may cause those registrants to make different decisions
about how much information they choose to disclose and whether to rely
on the scaled disclosure accommodations, leading to differences in the
observed use of scaled disclosure by different registrants of the same
size. The 161 additional registrants had an average public float of
$396 million, while those that qualify under the current definition had
an average public float of $15 million, and those that would have
qualified under the proposed rules had an average public

float of $55 million. These differences can affect whether a registrant
decides to rely on scaled disclosure and how that decision affects the
registrant's investors. We do not have sufficient information about the
experiences of registrants at the higher public float levels with lower
revenues implementing scaled disclosure to estimate the frequency with
which these registrants will implement scaled disclosure, if available.
    Similarly, increasing the revenue threshold below which registrants
are eligible to provide two rather than three years of certain acquired
businesses' historical financial statements under Rule 3-05(b)(2)(iv)
from $50 million to $100 million will increase the cost savings,
information asymmetries, and other effects of the reduced historical
financial statement disclosure that investors receive at or around the
time of the acquisition in proportion to the increase in the number of
registrants that acquire businesses with revenues below the higher
threshold and choose to avail themselves of this disclosure
accommodation.
    Overall, we expect the effect of raising the revenue threshold in
Rule 3-05(b)(2)(iv) of Regulation S-X from $50 million to $100 million
on information disclosed by registrants and its consequences for
registrants and investors to be modest. This reflects our appraisal
that few registrants are eligible to provide two rather than three
years of an acquired business's historical financial statements under
Rule 3-05(b)(2)(iv), because the acquired business not only would need
to meet one of the significant subsidiary thresholds at the 50% level
compared to the non-SRC acquirer, but the acquired business also would
need to have less than the $50 million of revenues in its most recent
fiscal year.\149\ The amendments we are adopting will have two
potentially countervailing effects on the number of registrants that
are eligible for the disclosure accommodation in Rule 3-05(b)(2)(iv).
First, they will increase the number of registrants that are eligible
to provide two rather than three years of an acquired business's
historical financial statements under Rule 3-05(b)(2)(iv) by raising
the revenue threshold for eligibility. Second, they will reduce the
number of registrants that are required to comply with Rule 3-05,
because Rule 3-05 is only applicable to registrants that are not SRCs,
and our final rules are likely to increase the number of SRCs. Thus,
the net effect may be to increase the number of registrants eligible to
provide two rather than three years of an acquired business's
historical financial statements under Rule 3-05(b)(2)(iv), but we do
not expect the net increase to be significant.
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    \149\ See text accompanying note 146.
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2. Impact on Eligibility for Smaller Reporting Company Status
    By increasing the public float threshold from $75 million to $250
million, increasing the annual revenue threshold for registrants with
no public float from $50 million to $100 million, and expanding the
revenue test to include registrants with a public float of less than
$700 million and revenues of less than $100 million in the SRC
definition, the amendments will permit more registrants to qualify as
SRCs. To estimate the number of additional registrants that are likely
to be affected by the amendments, we use public float data and revenue
data from Form 10-K filings.\150\ Our estimate of the number of
registrants likely to be eligible in the first year under the new
definition that would not have qualified under the current definition
is the number that would have been eligible had the rule been in
effect. We use evidence on the composition of those registrants from
the 2016 data to estimate the likely composition of the registrants
that would be eligible in the first year under the new definition.
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    \150\ Float and revenue values are from data in Form 10-K
filings filed in calendar year 2016 and extracted from XBRL
exhibits.
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    We estimate that 966 additional registrants will be eligible for
SRC status in the first year under the new definition. These
registrants estimated to be eligible in the first year comprise 779
registrants with a public float of $75 million or more and less than
$250 million, 26 registrants with no public float and revenues of $50
million or more and less than $100 million, and 161 registrants with a
public float of $250 million or more and less than $700 million and
revenues of less than $100 million.
    The 966 registrants that we estimate will be newly eligible for SRC
status are characterized by an average public float of $191 million
(median $162 million), an average market value of $279 million (median
$201 million), and average revenues of $196 million (median $68
million). Of these registrants, 365 currently are EGCs and are eligible
for certain scaled disclosure under Title I of the JOBS Act, including
the scaled executive compensation disclosures available to SRCs under
Item 402 of Regulation S-K. The newly eligible registrants with
available data in 2016 were concentrated in the following industries:
``Pharmaceutical Products'' (17.3%), ``Banking'' (15.2%), ``Financial
Trading'' (11.8%), ``Business Services'' (5.2%), and ``Electronic
Equipment'' (3.7%). If the distribution of eligible registrants does
not change over time, and if all of them claim SRC status, the
amendments will lead to a noticeable increase in the presence of
``Pharmaceutical Products'' and ``Banking'' registrants in the pool of
SRCs.
    Registrants eligible for SRC status with available data using the
public float threshold of less than $250 million represent
approximately 38.6% of all registrants, while only 28.0% of all
registrants qualify under the existing public float threshold of less
than $75 million. The 38.6% of all registrants that will qualify under
the public float threshold would be more in line with the 42% of
registrants that qualified under the public float threshold when the
Commission first established the definition of SRC.\151\ An additional
8.0% of registrants will qualify based on having no public float and
revenues of less than $100 million, while currently 7.7% of registrants
reported having no public float and less than $50 million in
revenues.\152\ Finally, based on the 2016 data, 2.2% of registrants had
a public float of $250 million or more and less than $700 million and
revenues of less than $100 million.
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    \151\ These percentages reflect the estimated number of
registrants that qualify under the respective public float tests and
do not include any registrants that are estimated to qualify under
the respective revenue tests.
    \152\ Using 2016 data, we estimate that, of the 7,395 total
registrants that filed Forms 10-K with available data, 3,606
registrants will meet one of the SRC thresholds under the
amendments. In particular, we estimate that 2,851 registrants
reported public float below $250 million and greater than zero in
2016, resulting in a percentage of 38.6% (2,851/7,395) of
registrants potentially qualifying as SRCs under the amended public
float threshold, and 2,072 registrants reported a public float below
$75 million in 2016, resulting in a percentage of 28.0% (2,072/
7,395). Also, we estimate that 594 registrants reported no public
float and annual revenues below $100 million in 2016, resulting in a
percentage of 8.0% (594/7,395) of registrants potentially qualifying
as SRCs under the amended revenue threshold, and 568 registrants
reported no public float and annual revenues below $50 million in
2016, resulting in a percentage of 7.7% (568/7,395). Finally, we
estimate that 161 registrants reported public float of $250 million
or more and less than $700 million and annual revenues below $100
million in 2016, resulting in an additional 2.2% (161/7,395) of
registrants potentially qualifying as SRCs.
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    Increasing the percentage of registrants that will qualify under
the public float threshold to align more closely with the 2007 level is
consistent with the rise in market capitalization of public companies
that has occurred

since that time.\153\ We do not have sufficient data to be able to
compare the percentage of registrants qualifying under the revenue
threshold when the Commission first established the definition of SRC
to the estimated 8.0% that will qualify using a revenue threshold of
$100 million. Table 4 summarizes the size of the potential SRCs in
terms of public float, market value, and annual revenue under the
amendments.
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    \153\ For example, the S&P 500 index grew by more than 80
percent over the decade ending with the fourth quarter of 2017.
Source: CRSP and St. Louis Fed (https://fred.stlouisfed.org/series/GDPDEF).

                          Table 4--Size Proxies for SRCs Eligible Under the Amendments
----------------------------------------------------------------------------------------------------------------
                                             Public float             Market value               Revenue
----------------------------------------------------------------------------------------------------------------
Mean.................................  $59.9 million..........  $480.1 million.........  $317.7 million.
Median...............................  $12.1 million..........  $40.9 million..........  $10.3 million.
Aggregate size.......................  $202.6 billion.........  $1,220.5 billion.......  $1,074.0 billion.
% of the aggregate size of all         0.9%...................  4.8%...................  8.7%.
 registrants.
----------------------------------------------------------------------------------------------------------------

    As discussed above, we are amending Rule 3-05(b)(2)(iv) of
Regulation S-X to increase the revenue threshold under which certain
registrants may omit the earliest of the three fiscal years of audited
financial statements of an acquired business or business to be
acquired. Similar to the baseline discussion of Rule 3-05, given the
difficulty in accurately identifying registrants that have acquisitions
(1) that meet any of the significant subsidiary tests at the 50% level
and (2) where the acquired business has revenues of less than $100
million, we are unable to estimate the number of registrants that will
be affected by raising the revenue threshold in Rule 3-05(b)(2)(iv)
from $50 million to $100 million. The amendments we are adopting today
increase the number of registrants that qualify as SRCs (which will
likely decrease the application of Rule 3-05) but also increase the
revenue threshold in Rule 3-05(b)(2)(iv) (which may offset the
decreased number of companies affected by Rule 3-05). Therefore, we do
not expect that the amendments will significantly alter the number of
registrants that will be eligible to omit the earliest of three years
of financial statements of an acquired business pursuant to Rule 3-
05(b)(2)(iv).
3. Estimation of Potential Costs and Benefits
    In this section, we estimate the incremental costs and benefits
associated with SRC-related scaled disclosures, using a multivariate
empirical analysis. We cannot isolate the costs and benefits associated
with scaled disclosures using available data from SRCs, because we
cannot with the data isolate the effects of scaled disclosures from the
effects of some other accommodations, such as the exemption from
Section 404(b) that is currently available to all SRCs through their
status as non-accelerated filers.\154\ Under the final rules, some
newly eligible SRCs will be able to provide scaled disclosures but will
continue to be subject to Section 404(b) as accelerated filers.
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    \154\ Although there is a clear threshold for eligibility, we
cannot use the well-known empirical method of Regression
Discontinuity Design to assess the treatment effect of scaled
disclosures for SRCs. This method requires that the assignment of
the treatment among registrants be ``as good as random'' around the
threshold. Under this assumption, the registrants that receive the
treatment of scaled disclosure (i.e., SRCs) should be comparable to
those registrants that do not receive the treatment because their
public float is just above the $75 million threshold. Given the
exemption from Section 404(b) available to current SRCs with public
float below $75 million, this assumption does not hold.
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    It is possible, however, to isolate the effects of scaled
disclosures on registrants with public float slightly below or above
the current $75 million public float threshold using 2006-2009 data.
This is because, as a result of the rules that established the SRC
definition in 2007, registrants with public float of $25 million or
more and less than $75 million experienced no change in the Section
404(b) exemption (that is, they remained exempt from the requirement),
but became eligible for the SRC scaled disclosures. Our empirical
method is a difference-in-difference estimation between a treatment
group and a control group that is the basis for comparison.\155\ In
particular, the treatment group (``Treatment Group'') consists of
registrants with public float of $25 million or more and less than $75
million that claimed SRC status in 2008. Two natural control groups
exist. The first (``Control Group 1'') consists of registrants that did
not qualify for SRC status because they had public float at or just
above $75 million ($75 million or more and less than $125
million).\156\ The second (``Control Group 2'') consists of registrants
with public float and revenues below $25 million that were already
eligible for scaled disclosures at that time and thus not affected by
the Commission's 2007 rules.\157\
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    \155\ Difference-in-difference is a technique used to calculate
the effect of a variable on a treatment group versus a control
group. In particular, in the analysis below, the average change over