
[Federal Register Volume 81, Number 127 (Friday, July 1, 2016)]
[Proposed Rules]
[Pages 43130-43154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15674]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 230, and 240

[Release No. 33-10107; 34-78168; File No. S7-12-16]
RIN 3235-AL90


Amendments to Smaller Reporting Company Definition

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: We are proposing amendments to the definition of ``smaller 
reporting company'' as used in our rules and regulations. The proposed 
amendments, which would expand the number of registrants that qualify 
as smaller reporting companies, are intended to promote capital 
formation and reduce compliance costs for smaller registrants, while 
maintaining investor protections. Registrants with less than $250 
million in public float would qualify, as would registrants with zero 
public float if their revenues were below $100 million in the previous 
year.

DATES: Comments should be received on or before August 30, 2016.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an email to rule-comments@sec.gov. Please include 
File No. S7-12-16 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-12-16. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's Web 
site (http://www.sec.gov/rules/proposed.shtml). Comments are also 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the Commission's Web site. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Amy Reischauer, Special Counsel, 
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 proposing amendments to Rule 405 \1\ 
under the Securities Act of 1933 (Securities Act),\2\ Rule 12b-2 \3\ 
under the Securities Exchange Act of 1934 (Exchange Act) \4\ and Item 
10(f) \5\ of Regulation S-K.\6\
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    \1\ 17 CFR 230.405.
    \2\ 15 U.S.C. 77a et seq.
    \3\ 17 CFR 240.12b-2.
    \4\ 15 U.S.C. 78a et seq.
    \5\ 17 CFR 229.10(f).
    \6\ 17 CFR 229.10 et seq.
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Table of Contents

I. Introduction
II. Proposed Amendments
    A. Rationale for Proposed Amendments
    B. Proposed Amendments to Smaller Reporting Company Definition
    1. Public Float Thresholds
    2. Revenue Thresholds
    C. Proposed Amendments to Accelerated Filer and Large 
Accelerated Filer Definitions
    D. Request for Comment
III. Economic Analysis
    A. Baseline and Potential Affected Parties
    B. Potential Economic Effects
    1. Introduction
    2. Estimation of Potential Costs and Benefits
    3. Affiliated Ownership and Adverse Selection
    4. Effects on Efficiency, Competition and Capital Formation
    C. Possible Alternatives
    D. Request for Comment
IV. Paperwork Reduction Act
    A. Background
    B. Summary of Information Collections

[[Page 43131]]

    C. Burden and Cost Estimates
    1. Form 10-K
    2. Form 10-Q
    3. Schedule 14A
    4. Schedule 14C
    5. Form 10
    6. Form S-1
    7. Form S-3
    8. Form S-4
    9. Form S-11
    D. Request for Comment
V. Initial Regulatory Flexibility Analysis
    A. Reasons for, and Objectives of, the Action
    B. Legal Basis
    C. Small Entities Subject to the Proposed Amendments
    D. Projected Reporting, Recordkeeping and Other Compliance 
Requirements
    E. Overlapping or Conflicting Federal Rules
    F. Significant Alternatives
    G. General Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Statutory Basis and Text of Proposed Rules

I. Introduction

    Over the years, the Commission has sought to promote capital 
formation and reduce compliance costs for smaller registrants while 
maintaining investor protections.\7\ Our disclosure system provides 
accommodations in the form of scaled disclosure requirements for 
certain categories of smaller registrants in an attempt to further 
these goals.
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    \7\ See, e.g., Simplified Registration and Reporting 
Requirements for Small Issuers, Release No. 33-6049 (Apr. 3, 1979) 
[44 FR 21562 (Apr. 10, 1979)] (Form S-18 Release); Small Business 
Initiatives, Release No. 33-6924 (Mar. 11, 1992) [57 FR 9768 (Mar. 
20, 1992)].
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    Smaller reporting companies are one category of registrants 
eligible for scaled disclosure.\8\ The Commission established the 
smaller reporting company category of registrants in 2007 in an effort 
to provide general regulatory relief for smaller registrants.\9\ The 
smaller reporting company definition replaced the ``small business 
issuer'' definition in former Regulation S-B. The Commission created 
Regulation S-B, a small business integrated registration and reporting 
system, in 1992 as part of a larger effort to facilitate small business 
capital formation and reduce the compliance burdens placed on small 
registrants by the federal securities laws.\10\ Regulation S-B was 
specifically tailored to small business issuers, which were issuers 
with both annual revenues and public floats of less than $25 million.
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    \8\ In 2012, Title I of the JOBS Act created a new category of 
registrant called an ``emerging growth company.'' Pub. L. 112-106, 
Secs. 102-104, 126 Stat. 306 (2012). Emerging growth companies 
(EGCs) also are eligible for a variety of accommodations, including 
certain of the scaled disclosure accommodations available to smaller 
reporting companies, such as the scaled executive compensation 
disclosures under Item 402(l) through (r) of Regulation S-K. In 
addition, EGCs 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).
    A registrant qualifies as an EGC if it did not complete its 
first registered sale of common equity securities on or before 
December 8, 2011 and has total annual gross revenues of less than $1 
billion during its most recently completed fiscal year.
    \9\ Smaller Reporting Company Regulatory Relief and 
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan. 
4, 2008)] (Smaller Reporting Company Adopting Release).
    \10\ Small Business Initiatives, Release No. 33-6949 (July 30, 
1992) [57 FR 36442 (Aug. 13, 1992)]. The Commission rescinded 
Regulation S-B when it established the smaller reporting company 
definition. Regulation S-B was modeled after former Form S-18, which 
allowed issuers that were not subject to the Commission's reporting 
requirements to raise limited amounts of capital without immediately 
incurring the full range of disclosure and reporting obligations 
required of other issuers. See Form S-18 Release. While Form S-18 
was intended to facilitate small business access to public capital 
markets, eligibility to use the form was based on offering size, not 
issuer size. The Commission rescinded Form S-18 when it adopted 
Regulation S-B.
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    Smaller reporting company is defined in Securities Act Rule 405, 
Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K. 
Substantively, the three definitions are identical. Smaller reporting 
companies generally \11\ are registrants with:
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    \11\ The smaller reporting company definition 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 smaller reporting company. 
Lower public float and revenue thresholds apply to registrants that 
determined that they did not qualify as smaller reporting companies 
in the prior year, but are eligible to transition to smaller 
reporting company status. Specifically, these registrants would 
qualify as smaller reporting companies if their public float was 
less than $50 million as of the last business day of their most 
recently completed second fiscal quarter or they had zero public 
float as of such date and revenues of less than $40 million during 
the previous fiscal year.
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     Less than $75 million in public float as of the last 
business day of their most recently completed second fiscal quarter; 
\12\ or
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    \12\ Public float is computed 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. A registrant filing its initial registration statement under 
the Securities Act or Exchange Act calculates its public float 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. In 
contrast, market capitalization reflects the value of a registrant's 
voting and non-voting common equity held by all holders, whether 
affiliates or non-affiliates.
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     zero public float \13\ and annual revenues of less than 
$50 million during the most recently completed fiscal year for which 
audited financial statements are available.
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    \13\ A registrant may have zero public float because it has no 
public equity outstanding or no market price for its equity exists. 
Based on data compiled by the Commission's Division of Economic and 
Risk Analysis (DERA), in calendar year 2015, approximately 18 
percent of smaller reporting companies had no public float.
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    Smaller reporting companies may comply selectively with the scaled 
disclosures available to them on an item-by-item basis.\14\ The 
following table summarizes the scaled disclosure accommodations 
available to smaller reporting companies in Regulation S-K and 
Regulation S-X.\15\
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    \14\ See Smaller Reporting Company Adopting Release. Where a 
disclosure requirement applicable to smaller reporting companies is 
more stringent than the corresponding requirement for non-smaller 
reporting companies, however, smaller reporting companies must 
comply with the more stringent standard. The Smaller Reporting 
Company 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 smaller reporting companies 
could be more stringent.
    \15\ 17 CFR 210.1-01 et seq.

 
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               Item                    Scaled disclosure accommodation
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                             Regulation S-K
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101--Description of Business......  May satisfy disclosure obligations
                                     by describing the development of
                                     its business during the last three
                                     years rather than five years.
                                     Business development description
                                     requirements are less detailed than
                                     disclosure requirements for non-
                                     smaller reporting companies.

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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 (MD&A).
                                    Two-year discussion of impact of
                                     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 \16\.               ratification of related party
                                     transactions not required.
407--Corporate Governance.........  Audit committee financial expert
                                     disclosure not required in first
                                     year.
                                    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.
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                             Regulation S-X
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Rule                                          Scaled Disclosure
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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.
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    \16\ Item 404 also contains the following expanded disclosure 
requirements applicable to smaller reporting companies: (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 parents and 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, and (3) an additional year of Item 404 disclosure is 
required in filings other than registration statements.
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II. Proposed Amendments

A. Rationale for Proposed Amendments

    The Commission seeks to promote capital formation and reduce 
compliance costs for smaller registrants while maintaining investor 
protections.\17\ Raising the financial thresholds in the smaller 
reporting company definition attempts to further these goals by 
expanding the number of smaller registrants that are eligible to 
deliver scaled disclosure to their investors. Doing so also would 
address several recommendations made to us multiple times by our 
Advisory Committee on Small and Emerging Companies (ACSEC) \18\ and the 
SEC Government-Business Forum on Small Business Capital Formation 
(Small Business Forum),\19\ as well as comments

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from small registrants, Congress and others.\20\
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    \17\ See note 7.
    \18\ The Commission established the ACSEC in 2011 with the 
objective of providing the Commission with advice on its rules, 
regulations and policies with regard to its mission of protecting 
investors, maintaining fair, orderly and efficient markets and 
facilitating capital formation, as they relate to: (1) Capital 
raising by emerging privately-held small businesses (emerging 
companies) and publicly traded companies with less than $250 million 
in public market capitalization (smaller public companies) through 
securities offerings, including private and limited offerings and 
initial and other public offerings; (2) trading in the securities of 
emerging companies and smaller public companies; and (3) public 
reporting and corporate governance requirements of emerging 
companies and smaller public companies. See Advisory Committee on 
Small and Emerging Companies Charter (Sept. 24, 2015); Advisory 
Committee on Small and Emerging Companies, Release No. 33-9258 
(Sept. 12, 2011) [76 FR 57769 (Sept. 16, 2011)]. The Commission's 
Investor Advisory Committee has not provided the Commission with a 
recommendation regarding the smaller reporting company definition.
    \19\ The Small Business Investment Incentive Act of 1980 
directed the Commission to conduct an annual government-business 
forum to undertake an ongoing review of the financing problems of 
small businesses.
    15 U.S.C. 80c-1. The Small Business Forum has met annually since 
1982 to provide a platform to highlight perceived unnecessary 
impediments to small business capital formation and address whether 
they can be eliminated or reduced. Each forum seeks to develop 
recommendations for government and private action to improve the 
environment for small business capital formation, consistent with 
other public policy goals, including investor protection. 
Information about the Small Business Forum is available at http://www.sec.gov/info/smallbus/sbforum.shtml.
    \20\ See letters from the UK Financial Report Council (Mar. 10, 
2015) (UK Financial), Biotechnology Industry Organization (July 14, 
2015) (BIO), and Standards & Financial Market Integrity Division, 
CFA Institute (Nov. 12, 2014) (CFA Institute). For a discussion of 
these comments see notes 25 through 30 and related text.
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    Advisory Committee on Small and Emerging Companies. In September 
2015 and March 2013, the ACSEC recommended revising the smaller 
reporting company definition to include registrants with a public float 
of up to $250 million.\21\ The 2013 ACSEC Recommendations also included 
a recommendation to revise the smaller reporting company definition for 
registrants that are unable to calculate their public float to include 
registrants with less than $100 million in annual revenues.
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    \21\ ACSEC Recommendations about Expanding Simplified Disclosure 
for Smaller Issuers (Sept. 23, 2015) (2015 ACSEC Recommendations), 
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 (Feb. 1, 2013) (2013 ACSEC 
Recommendations), 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 
companies with a public float of $250 million or more, but less than 
$700 million. The accelerated filer definition currently includes 
companies with a public float of $75 million or more, but less than 
$700 million. Exchange Act Rule 12b-2. If these recommendations were 
implemented, non-EGC registrants with public floats between $75 
million and $250 million would not be required to provide an auditor 
attestation report under Section 404(b) of the Sarbanes-Oxley Act of 
2002 (Pub. L. 107-204, 1116 Stat. 745 (2002) (Sarbanes-Oxley Act)). 
See Section II.C for a discussion of the accelerated filer 
definition.
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    Small Business Forum. The 2015 Small Business Forum recommended 
that the smaller reporting company definition be revised 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.\22\
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    \22\ Final Report of the 2015 SEC Government Business Forum on 
Small Business Capital Formation (Apr. 2016) (2015 Small Business 
Forum Recommendations), available at https://www.sec.gov/info/smallbus/gbfor34.pdf. The 2014, 2013, 2012, 2010 and 2009 Small 
Business Forums made the same or similar recommendations (Prior 
Small Business Forum Recommendations). Final Small Business Forum 
reports are available at https://www.sec.gov/info/smallbus/sbforumreps.htm.
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    Regulation S-K Study. Section 108 of the Jumpstart Our Business 
Startups Act (JOBS Act) \23\ required the Commission to conduct a 
review of Regulation S-K and to transmit to Congress a report of the 
review. In December 2013, the Commission published a staff report on 
the review of the disclosure requirements in Regulation S-K (S-K 
Study).\24\ The S-K Study recommended consideration of the criteria 
used to determine eligibility for scaling of disclosure requirements, 
including the definitional thresholds for smaller reporting companies.
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    \23\ Pub. L. 112-106, 126 Stat. 306 (2012).
    \24\ Report on Review of Disclosure Requirements in Regulation 
S-K (Dec. 2013), available at https://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf.
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    Disclosure Effectiveness Initiative Comments. The Commission staff 
currently is undertaking a broad-based review of our disclosure 
requirements, known as the Disclosure Effectiveness Initiative.\25\ As 
part of the Disclosure Effectiveness Initiative, the staff requested 
public input generally on how our disclosure system could be improved 
and, while the staff did not ask specifically for comment on smaller 
reporting companies, it received some comments on the smaller reporting 
company definition and scaled disclosure requirements available to 
smaller reporting companies.\26\ Only three commenters addressed the 
smaller reporting company definition or the general concept of scaling 
disclosure requirements for smaller reporting companies.\27\ One of 
these commenters generally supported scaled disclosure requirements, 
noting that smaller companies face challenges when preparing annual 
reports.\28\ Another of these commenters suggested that overreliance on 
public float to define smaller reporting companies creates a compliance 
burden for registrants with high valuations that otherwise would be 
considered small.\29\ This commenter recommended revising the smaller 
reporting company definition to include registrants with a public float 
below $250 million or annual revenues below $100 million regardless of 
public float to avoid grouping ``highly valued'' registrants with 
little or no revenue with larger registrants. The third commenter 
expressed concerns with a differential disclosure regime for different 
sized entities, stating that ``investors will factor the differences 
(i.e., they will price the lack of transparency, clarity and 
comparability in what may be perceived to be lower-quality 
requirements) into their price determinations.'' \30\
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    \25\ See Disclosure Effectiveness, available at https://www.sec.gov/spotlight/disclosure-effectiveness.shtml.
    \26\ Comment letters related to this request are available at 
https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.
    \27\ Other commenters commented on the placement of scaled 
disclosure requirements in Regulation S-K and on the scaled 
disclosure requirements available to EGCs. For a discussion of these 
comments, see Section IV.H of the S-K Concept Release. For purposes 
of this proposal, we focus on comments relevant to the smaller 
reporting company definition.
    \28\ See letter from UK Financial.
    \29\ See letter from BIO.
    \30\ See letter from CFA Institute.
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    FAST Act. The Fixing America's Surface Transportation (FAST) Act of 
2015 \31\ requires the Commission to revise Regulation S-K to further 
scale or eliminate disclosure requirements to reduce the burden on a 
variety of smaller registrants, including smaller reporting companies, 
while still providing all material information to investors.\32\ 
Because a number of Regulation S-K items already provide scaled 
disclosure requirements for smaller reporting companies, raising the 
financial thresholds in the smaller reporting company definition would 
be responsive to the FAST Act because it would reduce the burden on 
smaller registrants by increasing the number of registrants eligible 
for scaled disclosure.
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    \31\ Pub. L. 114-94, 129 Stat. 1312 (2015).
    \32\ Specifically, FAST Act Sec.  72002 requires the Commission 
within 180 days of enactment ``to take all such actions to revise 
[R]egulation S-K . . . to further scale or eliminate requirements of 
[R]egulation S-K, in order to reduce the burden on emerging growth 
companies, accelerated filers, smaller reporting companies, and 
other smaller issuers, while still providing all material 
information to investors.'' The FAST Act also requires the 
Commission to carry out a study to determine how best to modernize 
and simplify the disclosure requirements in Regulation S-K in 
consultation with the Investor Advisory Committee and the Advisory 
Committee on Small and Emerging Companies, to issue a report of 
findings and recommendations to Congress, and to propose revisions 
to those requirements. Pub. L. 114-94, Sec. 72003, 129 Stat. 1312 
(2015).
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    Although the proposed amendments would permit a broader group of 
registrants to make scaled disclosure to their investors, we do not 
believe that the scaled disclosure would significantly alter the total 
mix of information available about these registrants. We believe the 
existing scaled disclosure requirements benefit the current pool of 
smaller reporting companies, but we are requesting comment on how an 
extension of scaled disclosure requirements to a proposed broader pool 
of registrants could affect investors' access to material information 
about registrants. We further believe that the Commission should 
periodically re-evaluate whether the

[[Page 43134]]

definition of smaller reporting company remains appropriate. Under our 
proposed amendments, the additional registrants that would qualify for 
scaled disclosure would remain subject to liability for their 
disclosures and, in addition to the information expressly required to 
be included by the rules, would 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.\33\ In addition, their disclosure would be 
subject to the same review that they currently receive as part of the 
Division of Corporation Finance's review process. These measures of 
investor protection would remain unchanged under the proposed 
amendments.
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    \33\ See Securities Act Rule 408 [17 CFR 230.408] and Exchange 
Act Rule 12b-20 [17 CFR 240.12b-20].
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    Although the proposed amendments would not affect the existing 
scaled disclosure requirements in Regulation S-K or Regulation S-X, we 
are considering our approach to scaled disclosure generally in 
connection with the Disclosure Effectiveness Initiative. To that end, 
in April 2016, we issued the Regulation S-K Concept Release in which we 
considered and sought comment on other aspects of our scaled disclosure 
system, including categories of registrants eligible for scaled 
disclosure, whether we should exclude certain types of registrants from 
the use of scaled disclosure, and whether and how we should scale our 
disclosure requirements. Comments received on the Regulation S-K 
Concept Release will help to inform any further consideration of 
changes to the scaled disclosure system or other changes in connection 
with the Disclosure Effectiveness Initiative.

B. Proposed Amendments to Smaller Reporting Company Definition

    We are proposing amendments to the smaller reporting company 
definition to expand the number of registrants that qualify as smaller 
reporting companies and thereby benefit from scaled disclosure 
requirements. In addition, we are proposing 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.\34\
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    \34\ The definitions of accelerated filer and large accelerated 
filer are based on public float, but contain a provision excluding 
registrants that are eligible to use the smaller reporting company 
requirements in Regulation S-K for their annual and quarterly 
reports. As a result, raising the smaller reporting company 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 proposed amendments to the accelerated filer 
and large accelerated filer definitions.
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    When considering potential new thresholds for the public float and 
revenue calculations, we determined that solely adjusting those 
thresholds for inflation would not meaningfully reduce the burdens on 
smaller registrants because it would have a small impact on the number 
of additional registrants that would qualify as smaller reporting 
companies. If adjusted for inflation, the $75 million public float 
threshold set in 2007 would be equivalent to $85.7 million, and the $50 
million revenue threshold set in 2007 would be equivalent to $57.2 
million.\35\
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    \35\ The inflation adjustment was performed using the CPI 
calculator of the Bureau of Labor Statistics (http://data.bls.gov/cgi-bin/cpicalc.pl). For further discussion of the impact of 
adjusting the thresholds solely for inflation, including the number 
of additional registrants that would be eligible for smaller 
reporting company status, see note 99 and related text.
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    We also considered that EGCs, many of which have larger public 
floats and revenues than smaller reporting companies, are eligible for 
a variety of accommodations, including certain scaled disclosure 
accommodations. The EGC accommodations, however, are time-limited for 
equity issuers, as they phase out generally by the fifth anniversary of 
the first registered sale of common equity securities of the 
registrant.\36\ Because smaller reporting company status is not time-
limited and could extend indefinitely depending on the company's 
growth, we believe that the new smaller reporting company thresholds 
should be lower than the thresholds to qualify as an EGC, which this 
proposal would maintain.
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    \36\ A registrant retains EGC status until the earliest of: (1) 
The last day of its fiscal year during which its total annual gross 
revenues are $1 billion or more; (2) the date it is deemed to be a 
large accelerated filer under the Commission's rules; (3) the date 
on which it has issued more than $1 billion in non-convertible debt 
in the previous three years; or (4) the last day of the fiscal year 
following the fifth anniversary of the first registered sale of 
common equity securities of the registrant. Pub. L. 112-106, Sec. 
101, 126 Stat. 306 (2012); 15 U.S.C. 77b(a)(19); 15 U.S.C. 
78c(a)(80). In addition, the FAST Act amended Securities Act Section 
6(e)(1) [15 U.S.C. 77 f(e)(1)] to provide a grace period for EGCs at 
risk of losing such status after the initial filing or confidential 
submission of their initial public offering (IPO) registration 
statement but before the IPO is completed. Such registrants shall 
continue to be treated as an EGC through the earlier of the 
consummation of the IPO or one year after they would otherwise cease 
to be an EGC. See Pub. L. 114-94, Sec. 71002, 129 Stat. 1312 (2015).
---------------------------------------------------------------------------

    The smaller reporting company thresholds we are proposing today are 
consistent with those recommended by the ACSEC and the Small Business 
Forum, although they would be more limited in some respects.\37\ These 
amendments use the same criteria of public float and revenues to 
determine smaller reporting company status that the Commission adopted 
in 2007. We are, however, seeking comment on whether we should use 
other criteria and, if so, what criteria we should consider.\38\
---------------------------------------------------------------------------

    \37\ See 2015 ACSEC Recommendations; 2013 ACSEC Recommendations; 
2015 Small Business Forum Recommendations; Prior Small Business 
Forum Recommendations. See also note 21.
    \38\ For a discussion of alternative thresholds, see Section 
III.C.
---------------------------------------------------------------------------

    Under the proposed definition, registrants \39\ with a public float 
of less than $250 million would qualify as smaller reporting 
companies.\40\ Consistent with the current definition, a reporting 
company would determine whether it qualifies as a smaller reporting 
company by calculating its public float as of the last business day of 
its most recently completed second fiscal quarter.\41\ Similarly, as 
with the current definition, a registrant filing its initial 
registration statement under the Securities Act or the Exchange Act 
would calculate its public float as of a date within 30 days of filing 
the registration statement.\42\ A registrant whose public float was 
zero would qualify as a smaller reporting company if it had annual 
revenues of less than $100 million during its most recently completed 
fiscal year.\43\
---------------------------------------------------------------------------

    \39\ The proposed amendments would not change the types of 
registrants that are eligible to qualify as smaller reporting 
companies. See note 11.
    \40\ See Proposed Item 10(f)(1)(i) and (ii) of Regulation S-K; 
Proposed Securities Act Rule 405; Proposed Exchange Act Rule 12b-2.
    \41\ See Proposed Item 10(f)(1)(i) of Regulation S-K; Proposed 
Securities Act Rule 405; Proposed Exchange Act Rule 12b-2.
    \42\ See Proposed Item 10(f)(1)(ii) of Regulation S-K; Proposed 
Securities Act Rule 405; Proposed Exchange Act Rule 12b-2.
    \43\ See Proposed Item 10(f)(1)(iii) of Regulation S-K; Proposed 
Securities Act Rule 405; Proposed Exchange Act Rule 12b-2. A 
registrant may have zero public float if it has no public equity 
outstanding or no market price for its public equity.
---------------------------------------------------------------------------

    Under the proposed definition, a registrant that determines that it 
does not qualify as a smaller reporting company will remain unqualified 
unless and until it determines that its public float was less than $200 
million as of the last business day of its most recently completed 
second fiscal quarter.\44\ If such a registrant's public float was 
zero, it would remain unqualified unless and until it had annual 
revenues of less than $80 million during its previous fiscal year.\45\
---------------------------------------------------------------------------

    \44\ See Proposed Item 10(f)(2)(iii) of Regulation S-K; Proposed 
Securities Act Rule 405; Proposed Exchange Act Rule 12b-2.
    \45\ See id.

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[[Page 43135]]

    The following table summarizes the proposed amendments to the 
smaller reporting company definition.

------------------------------------------------------------------------
     Registrant category       Current definition    Proposed definition
------------------------------------------------------------------------
Reporting Registrant........  Less than $75         Less than $250
                               million of public     million of public
                               float at end of       float at end of
                               second fiscal         second fiscal
                               quarter.              quarter.
Registrant Filing Initial     Less than $75         Less than $250
 Registration Statement.       million of public     million of public
                               float within 30       float within 30
                               days of filing.       days of filing.
Registrant with Zero Public   Less than $50         Less than $100
 Float.                        million of revenues   million of revenues
                               in most recent        in most recent
                               fiscal year.          fiscal year.
Non-Smaller Reporting         Less than $50         Less than $200
 Company that Seeks to         million of public     million of public
 Qualify as a Smaller          float at end of       float at end of
 Reporting Company Based on    second fiscal         second fiscal
 Public Float.                 quarter.              quarter.
Non-Smaller Reporting         Less than $40         Less than $80
 Company with Zero Public      million of revenues   million of revenues
 Float that Seeks to Qualify   in most recent        in most recent
 as a Smaller Reporting        fiscal year.          fiscal year.
 Company.
------------------------------------------------------------------------

    Empirical analysis conducted by the Commission's Division of 
Economic and Risk Analysis (DERA) suggests that scaled disclosures may 
generate a modest, but statistically significant, amount of cost 
savings in terms of the reduction in compliance costs for most of the 
newly eligible smaller reporting companies under the proposed 
amendments, a modest, but statistically significant, deterioration in 
some of the proxies used to assess the overall quality of information 
environment, and a muted effect on the growth of the registrant's 
capital investments, investments in research and development (R&D) and 
assets.\46\
---------------------------------------------------------------------------

    \46\ For a discussion of DERA's empirical analysis, see Section 
III.B.
---------------------------------------------------------------------------

1. Public Float Thresholds
    In 2015, approximately 32% of registrants had less than $75 million 
in public float,\47\ compared to approximately 42% of registrants when 
the smaller reporting company was established.\48\ The decrease in the 
size of the pool of registrants that qualify as smaller reporting 
companies has limited the benefits of scaled reporting to a smaller 
percentage of registrants than under the original definition. If 
adopted as proposed, increasing the public float threshold to $250 
million would result in approximately 42% of registrants qualifying as 
smaller reporting companies based on their public float.\49\ As is the 
case with the current definition, we believe that once a registrant 
determines that it does not qualify as a smaller reporting company,\50\ 
it should not qualify until its public float falls below another, lower 
threshold. This definitional structure helps to avoid situations in 
which registrants enter and exit smaller reporting company status due 
to small fluctuations in their public float. Therefore, we propose 
increasing the public float threshold from $50 million to $200 million 
for registrants that determined that they did not qualify as smaller 
reporting companies and subsequently seek to qualify.
---------------------------------------------------------------------------

    \47\ Based on public float values disclosed by registrants in 
their Form 10-K filings, 2,408, or 31.8%, of the 7,557 registrants 
that filed a Form 10-K in 2015 reported having a public float of 
less than $75 million.
    \48\ 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 Smaller Reporting Company Regulatory 
Relief and Simplification, Release No. 33-8819 (July 5, 2007) [72 FR 
39670 (July 19, 2007)]. 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.
    \49\ Based on public float values disclosed by registrants in 
their Form 10-K filings, 3,159, or 41.8%, of the 7,557 registrants 
that filed a Form 10-K in 2015 reported having a public float of 
less than $250 million.
    \50\ 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.
---------------------------------------------------------------------------

2. Revenue Thresholds
    In 2015, approximately 10% of registrants qualified as smaller 
reporting companies by having zero public float and less than $50 
million in annual revenues.\51\ The number of registrants that would 
qualify as smaller reporting companies would increase by 31, or less 
than 1%, if the annual revenue threshold were adopted as proposed and 
increased to $100 million.\52\ The threshold is consistent with 
thresholds recommended by the ACSEC and the Small Business Forum.\53\
---------------------------------------------------------------------------

    \51\ 775, or 10.3%, of the 7,557 registrants that filed a Form 
10-K in 2015 reported having zero public float and less than $50 
million in annual revenues, based on public float values and 
revenues disclosed by registrants in their Form 10-K filings.
    \52\ Based on public float values and revenues disclosed by 
registrants in their Form 10-K filings, 31 of the 7,557 registrants 
that filed a Form 10-K in 2015 had zero public float and between $50 
million and $100 million in annual revenues.
    \53\ See 2015 Small Business Forum Recommendations; 2013 ACSEC 
Recommendations.
---------------------------------------------------------------------------

    Under the current definition, once a registrant determines that it 
does not qualify as a smaller reporting company,\54\ it cannot qualify 
based on revenues until its revenues fall below $40 million. As 
discussed above with respect to the public float thresholds, we believe 
having a separate, lower revenue threshold for these registrants helps 
to avoid situations in which registrants enter and exit smaller 
reporting company status due to small fluctuations in their revenues. 
Increasing the annual revenue threshold from $40 million to $80 million 
for registrants with zero public float that determined that they did 
not qualify as smaller reporting companies but subsequently seek to 
qualify would maintain the ratio that exists between the $50 million 
and $40 million thresholds in the current definition.
---------------------------------------------------------------------------

    \54\ 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.
---------------------------------------------------------------------------

    We are not proposing, as recommended by one commenter on the 
Disclosure Effectiveness Initiative,\55\ to eliminate the public float 
criteria for registrants that meet these proposed revenue thresholds or 
any other revenue thresholds. When the Commission proposed the smaller 
reporting company definition, it specifically solicited comment on a 
revenue-only test. In adopting the smaller reporting company 
definition, the Commission noted that the majority of commenters 
supported the proposal to use a public float standard in most cases, 
agreeing that the Commission should use a revenue test only if a 
registrant is unable to calculate

[[Page 43136]]

its public float.\56\ By eliminating the revenue test for most 
registrants, the Commission stated that the new definition of smaller 
reporting company would simplify and streamline the definition while 
expanding the number of companies eligible to qualify. The amendments 
to the smaller reporting company definition we are now proposing retain 
this approach because we believe that the public float test has worked 
well in practice and has streamlined the definition,\57\ as the 
Commission intended when it adopted the current test.\58\ We do, 
however, request comment below on whether we should consider instead 
using or allowing a revenue-only test for the smaller reporting company 
definition.
---------------------------------------------------------------------------

    \55\ See BIO Letter.
    \56\ See Smaller Reporting Company Adopting Release. The small 
business issuer definition, which the smaller reporting company 
definition replaced, was based on both public float and annual 
revenue.
    \57\ Registrants no longer have to calculate both public float 
and annual revenue under the smaller reporting company definition.
    \58\ See Smaller Reporting Company Adopting Release.
---------------------------------------------------------------------------

C. Proposed Amendments to Accelerated Filer and Large Accelerated Filer 
Definitions

    We are not proposing to amend the public float thresholds for when 
a registrant would qualify as an accelerated filer or large accelerated 
filer.\59\ We are proposing amendments to those definitions, however, 
to eliminate the provision in each that specifically excludes 
registrants that are eligible to use the smaller reporting company 
requirements under Regulation S-K for their annual and quarterly 
reports.\60\ As a result, the proposed amendments would preserve the 
application of the current thresholds contained in the accelerated 
filer and large accelerated filer definitions.
---------------------------------------------------------------------------

    \59\ Accelerated filer and large accelerated filer are defined 
in Exchange Act Rule 12b-2. Being an accelerated filer or a large 
accelerated filer triggers the requirement contained in Section 
404(b) of the Sarbanes-Oxley Act that a non-EGC registrant's 
registered public accounting firm provide, for inclusion in the 
registrant's annual report, an attestation report on internal 
control over financial reporting. Accelerated and large accelerated 
filers also 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, as well as disclosure required 
by Item 1B of Form 10-K about unresolved staff comments on their 
periodic or current reports. In addition, accelerated and large 
accelerated filers are subject to accelerated periodic report filing 
deadlines.
    \60\ Subparagraphs (1)(iv) of the accelerated filer definition 
and (2)(iv) of the large accelerated filer definition in Exchange 
Act Rule 12b-2.
---------------------------------------------------------------------------

    Because the public float thresholds for exiting smaller reporting 
company 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 second fiscal quarter, the smaller 
reporting company provision in the accelerated filer definition does 
not currently exclude from the accelerated filer definition any 
registrants that would not otherwise be excluded. If we raised the 
smaller reporting company public float threshold to $250 million 
without eliminating the smaller reporting company provision from the 
accelerated filer definition, however, those registrants with public 
floats of up to $250 million would be excluded from the accelerated 
filer requirements because they would be eligible under the proposed 
amendments to use the smaller reporting company requirements under 
Regulation S-K. In effect, we would be raising the accelerated filer 
public float threshold indirectly. Eliminating the smaller reporting 
company provision in the accelerated filer definition, therefore, would 
maintain the status quo regarding the size of registrants that are 
subject to the accelerated filer disclosure and filing requirements.
    The public float threshold for entering large accelerated filer 
status currently is $700 million, so the smaller reporting company 
provision in the large accelerated filer definition does not currently 
exclude from the large accelerated filer definition any registrants 
that would not otherwise be excluded. If the proposed amendments were 
adopted and the smaller reporting company public float threshold became 
$250 million, the smaller reporting company provision in the large 
accelerated filer definition still would not exclude any registrants 
that would not otherwise be excluded. Nevertheless, we are proposing to 
eliminate this provision because it currently does not capture any 
registrants, would not capture any registrants if the proposed 
amendments were adopted, and could lead to confusion if retained.
    In September 2015, the ACSEC recommended that the Commission revise 
the accelerated filer definition to include registrants with a public 
float threshold of $250 million or more, but less than $700 
million.\61\ If we implemented this recommendation, in addition to 
having a longer period to file their annual and quarterly reports, non-
EGCs with public floats between $75 million and $250 million would no 
longer be required to provide, and investors in those registrants would 
no longer receive the benefits of, auditor attestation reports required 
by Section 404(b) of the Sarbanes-Oxley Act.\62\
---------------------------------------------------------------------------

    \61\ 2015 ACSEC Recommendations; 2013 ACSEC Recommendations.
    \62\ As a general matter, the Sarbanes-Oxley Act requires that 
the management of certain registrants assess the effectiveness of 
the registrant's internal control over financial reporting, while 
Section 404(b) specifically requires a registrant's auditor to 
attest to, and report on, management's assessment.
---------------------------------------------------------------------------

    In April 2011, the staff conducted a study (Staff Section 404(b) 
Study) \63\ mandated by the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd Frank Act) \64\ to determine how the Commission 
could reduce the burden of complying with Section 404(b) of the 
Sarbanes-Oxley Act for registrants with market capitalizations between 
$75 million and $250 million.\65\ The staff's analysis, in part, found 
no specific evidence that any potential savings from exempting 
registrants with public floats between $75 million and $250 million 
from the auditor attestation provisions of Section 404(b) would justify 
the loss of investor protections and benefits to registrants from such 
an exemption.\66\ Rather, the staff found that accelerated filers 
(including those with a public float between $75 million and $250 
million) that were subject to the Section 404(b) auditor attestation 
requirements generally had a lower restatement rate than registrants 
that were not subject to the requirements. Moreover, the staff found 
that the population of registrants with public floats between $75 
million and $250 million did not have sufficiently unique 
characteristics that would justify differentiating this

[[Page 43137]]

population of registrants from other accelerated filers with respect to 
the Section 404 auditor attestation requirements.\67\ Ultimately, the 
study recommended that the Section 404(b) requirements be maintained 
for accelerated filers, including those with a public float between $75 
million and $250 million.\68\
---------------------------------------------------------------------------

    \63\ 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.
    \64\ Pub. L. 111-203, 124 Stat. 1376 (2010).
    \65\ See Dodd-Frank Act Sec.  989G(b). That section also 
provided that the study shall ``consider whether any such methods of 
reducing the compliance burden or a complete exemption for such 
companies from compliance with such section would encourage 
companies to list on exchanges in the United States in their initial 
public offerings.''
    \66\ In 2007, the Commission issued interpretive guidance for 
management regarding its evaluation of internal controls and 
disclosure requirements, and the Public Company Accounting Oversight 
Board adopted Auditing Standard No. 5 regarding Audits of Internal 
Control over Financial Reporting (AS 5) in an effort to reduce the 
compliance burden and improve the implementation of Section 404, 
including the requirements of Section 404(b). See Commission 
Guidance Regarding Management's Report on Internal Control Over 
Financial Reporting Under Section 13(a) or 15(d) of the Securities 
Exchange Act of 1934, Release No. 33-8810 (June 20, 2007) [72 FR 
35324 (June 27, 2007)]. However, one stakeholder representative has 
raised concerns about whether, in response to PCAOB inspection 
results, some auditors more recently have started to take approaches 
to evaluating internal control over financial reporting that are 
inconsistent with attaining goals for reduced compliance costs in 
this area. See letter from Center for Capital Markets 
Competitiveness (May 29, 2015).
    \67\ See Staff Section 404(b) Study at 107. At the same time, 
the staff's study recognized that registrants at the lower end of 
the studied range of $75 million and $250 million could be more 
likely to have characteristics more similar to non-accelerated 
filers (i.e., registrants that are just under or just over the $75 
million threshold are likely to have similar characteristics to one 
another). See id. at 4. The staff's study did not specifically 
assess whether registrants at the lower end of the group, such as 
those with a public float between $75 million and $125 million, 
might differ in relative benefits than registrants at the higher 
end.
    \68\ See Staff Section 404(b) Study at 112. Title I of the JOBS 
Act exempts EGCs from the Section 404(b) auditor attestation 
requirements, but EGC status is a temporary accommodation by 
Congress to lessen the burdens on new companies entering the public 
markets. Pub. L. 112-106, Sec. 103, 126 Stat. 306 (2012) (amending 
Section 404(b) of the Sarbanes-Oxley Act [Pub. L. 107-204, Sec. 
404(b) 116 Stat. 745 (2002)]). Smaller reporting company status, 
however, is not time-limited.
---------------------------------------------------------------------------

    Since the staff's study was concluded, academic research has 
resulted in mixed findings.\69\ In light of these mixed findings, we 
are not proposing to raise the accelerated filer public float threshold 
or to modify the Section 404(b) requirements for registrants with a 
public float between $75 million and $250 million. However, we are 
requesting comment below on whether we should consider raising the 
public float threshold in the accelerated filer definition.
---------------------------------------------------------------------------

    \69\ For a discussion of the academic research, see Section 
III.C.
---------------------------------------------------------------------------

D. Request for Comment

    1. Should the thresholds for smaller reporting company status be 
raised? Why or why not? Should the current thresholds be kept at their 
current levels but adjusted for inflation? Why or why not?
    2. Does raising the thresholds for smaller reporting company status 
as proposed appropriately consider the objectives of capital formation 
and investor protection? Why or why not? Is there a better way to 
accomplish these objectives?
    3. Would raising the thresholds promote capital formation or 
liquidity for smaller registrants? Could raising the thresholds result 
in a loss of material information about registrants that would qualify 
as smaller reporting companies under the higher thresholds? Does scaled 
disclosure impact the ability of investors to make informed investment 
decisions? Does scaled disclosure lead to a greater incidence of fraud?
    4. As proposed, should the smaller reporting company definition 
continue to be based primarily on public float and, in the absence of 
public float, revenue? Why or why not? If so, should the public float 
threshold be $250 million? Should the revenue threshold be $100 million 
for registrants without a public float? Should the public float 
threshold be $200 million for registrants that determined in a prior 
year that they did not qualify as smaller reporting companies and seek 
to transition to smaller reporting company status? Should the revenue 
threshold be $80 million for registrants without a public float that 
determined in a prior year that they did not qualify as smaller 
reporting companies and seek to transition to smaller reporting company 
status? Should any of the proposed thresholds be higher or lower? Why 
or why not?
    5. Should the smaller reporting company definition be based on both 
public float and revenue? Why or why not? If so, what should the public 
float and revenue thresholds be? If we required both thresholds, should 
the registrant maintain its smaller reporting company status until it 
exceeds both the public float and revenue thresholds or until it 
exceeds either threshold?
    6. Should the definition be based on whether a registrant meets 
either a public float threshold or a revenue threshold? Why or why not?
    7. Should the definition contain only a public float test, 
regardless of the registrant's revenues, rather than the current 
definition? Why or why not? If so, what should the threshold be?
    8. Should we eliminate the public float test and instead apply only 
a revenue test? Why or why not? If so, what should the threshold be? 
Should we allow a revenue-only test as an alternative to the public 
float test and permit a registrant to choose which test to apply? Why 
or why not? If so, what should the thresholds be for each test?
    9. Should we revise the method of calculating public float in our 
current rules? If so, how?
    10. Should the smaller reporting company definition be based on 
market capitalization rather than public float? If so, what market 
capitalization should we use? How should we determine any new market 
capitalization thresholds? What would be the advantages or 
disadvantages of this approach?
    11. Are there other criteria or measures for defining smaller 
reporting companies that we should consider? If so, what are they and 
what, if any, thresholds would be appropriate?
    12. Should any thresholds in the smaller reporting company 
definition be indexed to adjust for inflation? If so, to what indicator 
should the thresholds be indexed and how frequently should they be 
adjusted?
    13. If the thresholds are raised in the manner proposed, should the 
Commission re-visit the thresholds on a periodic basis to assess 
whether the thresholds are contributing to capital formation, liquidity 
and investor protection? If so, what criteria would be useful for 
assessing the efficacy of the thresholds and how frequently should re-
assessments occur?
    14. If the thresholds are raised, should larger registrants be 
limited in their ability to avail themselves of some of the scaled 
disclosure accommodations? Should any of the scaled disclosure 
requirements of Regulation S-K or Regulation S-X not be available for 
registrants at the higher end of the range in terms of public float or 
revenue? If so, which disclosure requirements and why? If so, would 
differences among the types of scaled disclosure accommodations 
adversely impact comparability across the larger group of registrants 
that would qualify as a smaller reporting company? Why or why not?
    15. If we increase the thresholds in the smaller reporting company 
definition, should we eliminate the provision in the accelerated and 
large accelerated filer definitions that specifically excludes 
registrants that are eligible to use the smaller reporting company 
requirements under Regulation S-K for their annual or quarterly 
reports, as proposed? Why or why not?
    16. If we increase the public float threshold in the smaller 
reporting company definition as proposed, should we also increase the 
public float threshold in the accelerated filer definition? Why or why 
not?
    17. If we increase the public float and revenue thresholds in the 
smaller reporting company definition as proposed, should we also 
increase the thresholds in Exchange Act Rule 12g5-1(a)(7)? \70\ Why or 
why not?
---------------------------------------------------------------------------

    \70\ Exchange Act Rule 12g5-1(a)(7) [17 CFR 240.12g5-1(a)(7)] 
provides issuers of securities in Tier 2 Regulation A offerings with 
an exemption from the mandatory registration requirements of 
Exchange Act Section 12(g) provided certain conditions are met, 
including a requirement that the issuer have a public float of less 
than $75 million as of the last business day of its most recently 
completed semiannual period, or, in the absence of a public float, 
annual revenues of less than $50 million as of its most recently 
completed fiscal year.
---------------------------------------------------------------------------

    18. If we increase the revenue threshold in the smaller reporting 
company definition as proposed, should we also increase the threshold 
in Rule

[[Page 43138]]

3-05 of Regulation S-X? \71\ Why or why not?
---------------------------------------------------------------------------

    \71\ Rule 3-05 of Regulation S-X provides the requirements for 
financial statements of businesses acquired or to be acquired. 
Paragraph (b)(2)(iv) allows registrants to omit such financial 
statements for the earliest of three fiscal years required if the 
net revenues of the business to be acquired are less than $50 
million. The $50 million threshold is based on the revenue threshold 
in the smaller reporting company definition. See Smaller Reporting 
Company Adopting Release.
---------------------------------------------------------------------------

III. Economic Analysis

    As discussed above, we are proposing amendments to the definition 
of ``smaller reporting company'' as used in our rules and regulations. 
The proposed amendments are intended to promote capital formation and 
reduce compliance costs for smaller registrants by expanding the number 
of smaller registrants that are eligible to deliver scaled disclosure 
to their investors, while maintaining investor protections.
    Registrants with less than $250 million (vs. currently $75 million) 
in public float would qualify, as would registrants with zero public 
float if their revenues were below $100 million (vs. currently $50 
million) in the previous year. We are sensitive to the costs and 
benefits of the proposed amendments. In this economic analysis, we 
examine the existing baseline, which consists of the current regulatory 
framework and market practices, and discuss the potential benefits and 
costs of the proposed amendments, relative to this baseline, and their 
potential effects on efficiency, competition and capital formation.\72\ 
We also consider the potential costs and benefits of reasonable 
alternatives to the proposed amendments. Where practicable, we attempt 
to quantify the economic effects of the proposed amendments; however, 
in certain cases, we are unable to do so because either we lack the 
necessary data or the economic effects are not quantifiable. In these 
cases, we provide a qualitative assessment of the likely economic 
effects.
---------------------------------------------------------------------------

    \72\ 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 and Potential Affected Parties

    In calendar year 2015, of the 7,557 registrants that filed a Form 
10-K with the Commission, 3,183 (42.1% of all registrants) were 
eligible to claim smaller reporting company status. Of those, 2,900 
(38.4% of all registrants) claimed smaller reporting company status. 
Under the current definition, a registrant may qualify as a smaller 
reporting company under either a public float threshold or an annual 
revenue threshold if the public float is zero. Of the 2,900 smaller 
reporting companies, 2,241 companies (29.7% of all registrants) 
qualified under the $75 million public float threshold and 659 
companies (8.7% of all registrants) qualified under the $50 million 
revenue threshold.\73\ Of the 2,900 smaller reporting companies, 490 
(6.5% of all registrants) also claimed EGC status.\74\
---------------------------------------------------------------------------

    \73\ Based on analysis by DERA. Staff obtained the smaller 
reporting company status and public float data from 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 smaller reporting company status and public float 
directly from Forms 10-K using a computer program. For robustness, 
staff compared the smaller reporting company status and public float 
information between the two sources and corrected discrepancies. 
Staff extracted annual revenue data from the Compustat database and 
XBRL filings. Registrants transitioning out of smaller reporting 
company status that reported either public float greater than $75 
million or zero public float but revenue greater than $50 million 
were not counted as smaller reporting companies.
    \74\ 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.
---------------------------------------------------------------------------

    Table 1 summarizes the number and percentage of registrants that 
claimed smaller reporting company status in each calendar year over the 
2013-2015 period.

                         Table 1--Smaller Reporting Companies (SRCs) in 2013-2015 Period
----------------------------------------------------------------------------------------------------------------
                                                                                     Qualified       Qualified
                                    Total # of                                       based on        based on
           Filing year              registrants      # of SRCs      % of total     public float    revenue (% of
                                                                                   (% of total)       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
----------------------------------------------------------------------------------------------------------------

    Table 2 shows that, while smaller reporting companies account for a 
substantial percentage of the total number of registrants in calendar 
year 2015, they account for less than one percent of the entire public 
float, market value and revenue of all registrants.\75\
---------------------------------------------------------------------------

    \75\ Market value and revenue data as of the fiscal year end are 
obtained from Compustat. Where revenue data was unavailable from 
Compustat, staff obtained the information directly from XBRL data 
filed with the registrants' Forms 10-K. Where revenue data was 
unavailable in XBRL, staff obtained the data directly from the 
registrants' Forms 10-K. The summary statistics on revenue are for 
all current smaller reporting companies, not just those qualifying 
under the revenue threshold.

                      Table 2--Size Proxies for Smaller Reporting Companies (SRCs) in 2015
----------------------------------------------------------------------------------------------------------------
                                             Public float             Market value               Revenue
----------------------------------------------------------------------------------------------------------------
                                       .......................  .......................  .......................
Mean.................................  $17.0 million..........  $33.6 million..........  $21.3 million.
Median...............................  8.8 million............  13.0 million...........  0.21 million.
Aggregate size.......................  38.0 billion...........  79.3 billion...........  61.9 billion
% of the aggregate size of all         0.01%..................  0.31%..................  0.37%.
 registrants.
----------------------------------------------------------------------------------------------------------------


[[Page 43139]]

    Table 3 shows the distribution of registrants that claimed smaller 
reporting company status in calendar year 2015 using the Fama-French 
49-industry classification.\76\ The ``Business Services'' industry 
accounts for 11.7% of all smaller reporting companies, followed by 
``Financial Trading'' (9.5%), ``Banking'' (7.8%), ``Pharmaceutical 
Products'' (6.8%), ``Petroleum and Natural Gas'' (6.9%), and ``Computer 
Software'' (5.6%).\77\ We note that industries with a larger fixed 
component of operating costs, such as shipping, defense, and aircraft, 
tend to have fewer smaller reporting companies.
---------------------------------------------------------------------------

    \76\ Using Standard Industry Classification (SIC) codes, 
Professors Eugene Fama and Kenneth French have sorted companies into 
48 main industries, plus a residual ``Other'' industry. This 
classification is commonly used in the financial economics 
literature and is available at: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_49_ind_port.html.
    \77\ Smaller reporting companies account for 57% of all 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 Smaller Reporting Companies (SRCs) in 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
           Industry ID                 Industry          # of SRCs     % of all SRCs    Industry ID        Industry          # of SRCs     % of all SRCs
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............................  Agriculture.......              27             0.9              26  Defense...........               2             0.1
2...............................  Food Products.....              40             1.4              27  Precious Metals...              44             1.5
3...............................  Candy & Soda......               3             0.1              28  Non-Metallic and               110             3.8
                                                                                                       Industrial Metal
                                                                                                       Mining.
4...............................  Beer & Liquor.....              19             0.7              29  Coal..............               4             0.1
5...............................  Tobacco Products..               8             0.3              30  Petroleum and                  200             6.9
                                                                                                       Natural Gas.
6...............................  Recreation........              21             0.7              31  Utilities.........              18             0.6
7...............................  Entertainment.....              60             2.1              32  Communication.....              50             1.7
8...............................  Printing and                    11             0.4              33  Personal Services.              50             1.7
                                   Publishing.
9...............................  Consumer Goods....              53             1.8              34  Business Services.             337            11.6
10..............................  Apparel...........              18             0.6              35  Computers.........              24             0.8
11..............................  Healthcare........              39             1.3              36  Computer Software.             163             5.6
12..............................  Medical Equipment.             102             3.5              37  Electronic                     104             3.6
                                                                                                       Equipment.
13..............................  Pharmaceutical                 198             6.8              38  Measuring and                   52             1.8
                                   Products.                                                           Control Equipment.
14..............................  Chemicals.........              49             1.7              39  Business Supplies.               3             0.1
15..............................  Rubber and Plastic              20             0.7              40  Shipping                         3             0.1
                                   Products.                                                           Containers.
16..............................  Textiles..........               5             0.2              41  Transportation....              21             0.8
17..............................  Construction                    30             1.0              42  Wholesale.........              84             2.9
                                   Materials.
18..............................  Construction......              24             0.8              43  Retail............              81             2.8
19..............................  Steel Works.......               6             0.2              44  Restaurants,                    28             1.0
                                                                                                       Hotels, Motels.
20..............................  Fabricated                       3             0.1              45  Banking...........             225             7.8
                                   Products.
21..............................  Machinery.........              58             2.0              46  Insurance.........              25             0.9
22..............................  Electrical                      39             1.3              47  Real Estate.......              96             3.3
                                   Equipment.
23..............................  Automobiles and                 26             0.9              48  Financial Trading.             277             9.5
                                   Trucks.
24..............................  Aircraft..........               4             0.1              49  Other.............              34             1.2
25..............................  Shipbuilding,                    2             0.1  ..............  ..................  ..............  ..............
                                   Railroad
                                   Equipment.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    By increasing the public float threshold from $75 million to $250 
million and the annual revenue threshold from $50 million to $100 
million in the smaller reporting company definition, the proposed 
amendments would permit more registrants to qualify as smaller 
reporting companies. To estimate the number of additional registrants 
that could be potentially affected by the proposed amendments, we use 
the public float data from Form 10-K filings and revenue data from 
Compustat to determine the number of existing registrants that could 
qualify as a smaller reporting company under the proposed new 
thresholds. Under the proposed amendments, we estimate that 782 
additional registrants could be eligible for smaller reporting company 
status, 751 of which have a public float between $75 million and $250 
million and 31 of which have zero public float and annual revenues 
between $50 million and $100 million.
    The 782 additional registrants have an average public float of $149 
million (median $144 million), an average market value of $257 million 
(median $195 million), and average revenues of $248 million (median $80 
million). Of the 782 potentially eligible registrants, 153 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 smaller reporting companies under Item 402 of 
Regulation S-K. The 782 additional registrants tend to be concentrated 
in the following industries: ``Banking'' (17.4%),

[[Page 43140]]

``Pharmaceutical Products'' (13.4%), ``Financial Trading'' (9.0%), 
``Business Services'' (6.1%) and ``Electric Equipment'' (4.9%). If all 
782 registrants were to claim smaller reporting company status, the 
proposed amendments would lead to a noticeable increase in the presence 
of ``Banking'' and ``Pharmaceutical Products'' registrants in the pool 
of smaller reporting companies.
    We estimate that the proposed amendments would lead to an expansion 
of the smaller reporting company pool. Under the proposed rules, 41.8% 
of the total registrants would qualify using a public float threshold 
of less than $250 million, while currently 31.9% of the total 
registrants reported having a public float of less than $75 million. In 
addition, 10.7% of the total registrants would qualify using a revenue 
threshold of $100 million, while currently 10.3% of the total 
registrants reported having less than $50 million in revenues.\78\ The 
41.8% of registrants qualifying under the public float threshold would 
be in line with the 42% of registrants that qualified under the public 
float threshold when the Commission first established the definition of 
smaller reporting company. Raising the percentage of registrants 
qualifying under the public float threshold to the 2007 level would 
reflect the real growth in the stock market as well as inflation in 
nominal prices in the past decade. 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 smaller reporting company to the 10.7% that would qualify using a 
revenue threshold of $100 million. Table 4 summarizes the size of the 
potential smaller reporting companies in terms of public float, market 
value and annual revenue under the proposed amendments.
---------------------------------------------------------------------------

    \78\ Using 2015 data, we estimated that, of 7,557 total 
registrants that filed 10-Ks, 3,965 registrants would potentially 
qualify as smaller reporting companies under the proposed 
thresholds. In particular, we estimated that 3,159 registrants 
reported public float below $250 million in 2015, resulting in a 
percentage of 41.8% (3,159/7,557) of registrants potentially 
qualifying as smaller reporting companies under the proposed public 
float threshold, and 2,408 registrants reported a public float below 
$75 million in 2015, resulting in a percentage of 31.9% (2,408/
7,557). Also, we estimated that 806 registrants reported annual 
revenues below $100 million in 2015, resulting in a percentage of 
10.7% (806/7,557) of registrants potentially qualifying as smaller 
reporting companies under the proposed revenue threshold, and 775 
registrants reported annual revenues below $50 million in 2015, 
resulting in a percentage of 10.3% (775/7,557).
    \79\ The percentages in Table 4 are generally in line with the 
percentages in 2006 prior to the adoption of the current smaller 
reporting company definition. Because public float information in 
2006 was not easily available, we use the free float values from 
Thomson Reuter's Datastream database instead, which excludes from a 
company's total market value all insider ownership and 5% 
institutional ownership. We estimate that in 2006 the total number 
of registrants with free float less than $75 million accounted for 
0.37% of the aggregate free float, 1.81% of the aggregate market 
value, and 1.92% of the aggregate revenue.

  Table 4--Size Proxies for the Potentially Eligible Smaller Reporting Companies Under the Proposed Amendments
----------------------------------------------------------------------------------------------------------------
                                             Public float             Market value               Revenue
----------------------------------------------------------------------------------------------------------------
Mean.................................  $50.0 million..........  $111.1 million.........  $74.2 million.
Median...............................  $20.9 million..........  $29.1 million..........  $1.5 million.
Aggregate size.......................  $157.8 billion.........  $374.1 billion.........  $294.2 billion.
% of the aggregate size of all         0.03%..................  1.46%..................  1.75%.
 registrants \79\.
----------------------------------------------------------------------------------------------------------------

B. Potential Economic Effects

1. Introduction
    The primary benefit stemming from the proposed amendments would be 
a reduction in compliance costs for those registrants that would newly 
qualify for smaller reporting company status. If the compliance costs 
have a fixed cost component, which typically burdens smaller 
registrants disproportionately, the cost savings may be particularly 
helpful for these registrants.
    As a secondary effect of the proposed amendments, a lower 
disclosure burden could spur growth in smaller registrants to the 
extent that the compliance cost savings and other resources (e.g., 
managerial effort) 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.\80\
---------------------------------------------------------------------------

    \80\ The debate on the impact of the Sarbanes-Oxley Act on 
companies' propensities to go private (Engel et al. (2007)), go dark 
(Leuz et al. (2008)), and go public (Bova et al., (2014)) highlights 
the importance of compliance costs in companies' decisions to 
participate in the public capital market. See Ellen Engel, Rachel M. 
Hayes, and Xue Wang. The Sarbanes-Oxley Act and Firms' Go Private 
Decisions 44 J. Account. & Econ. 116 (2007); Christian Leuz, 
Alexander J. Triantis, and Tracy Yue Wang, Why Do Firms Go Dark? 
Causes and Economic Consequences of Voluntary SEC Deregistrations, 
45 J. Account. & Econ. 181 (Mar. 1, 2008); and Francesco Bova, 
Miguel Minutti-Meza, Gordon D. Richardson, and Dushyantkumar Vyas, 
The Sarbanes-Oxley Act and Exit Strategies of Private Firms, 31 
Contemporary Account. Research 818 (Jan. 12, 2014).
---------------------------------------------------------------------------

    With respect to costs, the proposed amendments would reduce the 
amount of information available to investors, thereby potentially 
reducing investor protection. A decrease in the amount of 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, an academic study \81\ finds 
that during the three-month period following the establishment of the 
smaller reporting company definition, registrants with public floats 
between $25 million and $75 million that claimed smaller reporting 
company status experienced a significant reduction in liquidity 
relative to comparable companies. Also, under the proposed amendments, 
the newly eligible smaller reporting companies would not be required to 
provide certain executive compensation disclosure requirements, 
potentially lowering corporate governance transparency of these 
registrants.\82\
---------------------------------------------------------------------------

    \81\ 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).
    \82\ For a review of the effects of executive compensation 
disclosures on compensation practices, see Michael Jensen, Kevin 
Murphy, and Eric Wruck, Remuneration: Where We Have Been, How We Got 
to Here, What Are the Problems, and How to Fix Them, Working paper, 
Harvard Business School (2004), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=561305. See also Benjamin E. Hermalin 
and Michael S. Weisbach, Information Disclosure and Corporate 
Governance, 67 J. Fin. 195 (2012), and Anya Kleymenova and A. Irem 
Tuna, Regulation of Compensation, Working Paper, University of 
Chicago (2016), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2755621.
---------------------------------------------------------------------------

    It is important to note that the smaller reporting company 
thresholds establish eligibility for but do not mandate reliance on any 
of the scaled disclosure

[[Page 43141]]

accommodations.\83\ If the proposed amendments were adopted, we expect 
that the newly eligible registrants would weigh the costs and benefits 
of scaled disclosure for themselves and decide whether to take 
advantage of any of the scaled disclosure accommodations. To the extent 
that there may be agency concerns, expanding smaller reporting company 
eligibility may provide opportunities for adverse selection in a 
greater number of registrants, that is, registrants whose outside 
investors would have benefited from more disclosure may choose the 
lower disclosure requirement once becoming eligible. The net benefit 
for the newly eligible registrants would ultimately depend on the 
specific facts and circumstances.
---------------------------------------------------------------------------

    \83\ If a disclosure requirement applicable to smaller reporting 
companies is more stringent than for non-smaller reporting 
companies, however, smaller reporting companies must comply with the 
more stringent standard. Item 404 is the only Regulation S-K 
disclosure requirement that could be more stringent.
---------------------------------------------------------------------------

2. Estimation of Potential Costs and Benefits
    In this section, we estimate the incremental costs and benefits 
associated with smaller reporting company-related scaled disclosures, 
using a multivariate empirical analysis. The challenge is to isolate 
the economic effects of scaled disclosures from the effect of other 
significant accommodations, such as the exemption from Section 404(b) 
that is currently available to all smaller reporting companies. For 
this reason, we cannot isolate the costs and benefits associated with 
scaled disclosures using data from current smaller reporting 
companies.\84\ Under the proposed amendments, the newly eligible 
smaller reporting companies would be able to provide scaled disclosures 
but would continue to be subject to Section 404(b) as accelerated 
filers.
---------------------------------------------------------------------------

    \84\ Although there exists 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 smaller reporting companies. This method requires 
that the assignment of the treatment among registrants is ``as good 
as random'' around the threshold. Under this assumption, the 
registrants that receive the treatment of scaled disclosure (i.e., 
smaller reporting companies) 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 smaller reporting companies 
with public float below $75 million, this assumption does not hold.
---------------------------------------------------------------------------

    It is possible, however, to isolate the effects of scaled 
disclosures using 2006-2009 data. This is because, as a result of the 
rules that established the smaller reporting company category in 2007, 
registrants with public float between $25 million and $75 million 
experienced no change in the Section 404(b) exemption but became 
eligible for the smaller reporting company scaled disclosures. Our 
empirical methodology is a difference-in-difference estimation between 
a treatment group and a comparison group.\85\ In particular, the 
treatment group (Treatment Group) consists of registrants with public 
float between $25 million and $75 million that claimed smaller 
reporting company status in 2008. Two natural comparison groups exist. 
The first comparison group (Control Group 1) consists of registrants 
that did not qualify for smaller reporting company status because they 
had public float just above $75 million (between $75 million and $125 
million).\86\ The second comparison group (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.\87\
---------------------------------------------------------------------------

    \85\ 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 
time in the outcome of a variable for the treatment group is 
compared to the average change over time in the outcome of that 
variable for the control group.
    \86\ This would allow for a $50 million bandwidth similar to 
that used in the Commission's 2007 rules, which raised the threshold 
for relief from $25 million to $75 million.
    \87\ The comparison groups help control for confounding factors 
that may also independently affect the economic effects associated 
with scaled disclosures. While we determine Treatment Group and 
Control Group 1 based on public float alone, we use both public 
float and revenues to determine Control Group 2, because, prior to 
the Commission's 2007 rules, registrants with public float below $25 
million were not eligible for scaled disclosures if their revenues 
exceeded $25 million.
---------------------------------------------------------------------------

    To analyze the economic effects of eligibility for scaled 
disclosures resulting from the Commission's 2007 rules, we compare the 
Treatment Group with Control Group 1 and Control Group 2 in the 
following areas: cost savings, information environment, liquidity and 
growth. We then use the analysis to extrapolate the likely effects of 
the expansion of eligibility for smaller reporting company status under 
the proposed amendments. In extrapolating the likely effects, we place 
particular emphasis on the comparison between the Treatment Group and 
Control Group 1, which represents a closer group in size to the newly 
eligible smaller reporting companies under the proposed amendments.
i. Potential Cost Savings: Estimates Based on Changes in Audit Fees
    The cost savings from scaled disclosures could include savings of 
resources that would be used for the relevant parts of disclosures, for 
example, managerial and employee time, other internal resources, and 
audit fees related to certain disclosures. Among these potential 
savings, changes in audit fees are readily quantifiable. To the extent 
that the scaled disclosure accommodations impact information that must 
be audited, scaled disclosures of the audited portions of the filings 
should lead to a reduction in audit expenses. Because many of the 
scaled disclosures available to smaller reporting companies relate to 
governance and compensation disclosures that are not subject to audit, 
we acknowledge that a reduction in audit fees is likely a small part of 
the total cost savings associated with scaled disclosures. However, 
quantifying the change in audit fees can potentially help us estimate 
the entire cost savings.
    To estimate the cost savings from the proposed amendments, we first 
examine changes in the audit fees of registrants that were newly 
eligible to use scaled disclosures as a result of the 2007 rules 
relative to those in the comparison groups between the pre-rule 2006-
2007 period and the post-rule 2008-2009 period. Audit fee data come 
from the Audit Analytics database. We include only registrants that had 
both pre-rule and post-rule audit fee data in the analysis. Table 5 
reports the main results.

[[Page 43142]]



 Table 5--Pre- and Post-Commission's 2007 Rules Audit Fees for Smaller Reporting Companies (SRCs) and Comparison
                                                     Groups
----------------------------------------------------------------------------------------------------------------
                                                                     Treatment    Control  group  Control  group
                                                                   group  (SRCs     1 (Non-SRCs    2  (SRCs with
                           Fiscal year                             with  public    with  public    public float
                                                                   float  $25m-    float  $75m-    and revenues
                                                                       $75m)          $125m)        below $25m)
----------------------------------------------------------------------------------------------------------------
Avg. 2006-2007..................................................        $311,105        $676,194        $113,757
Avg. 2008-2009..................................................        $267,252        $654,463        $101,854
Number of Observations..........................................           1,315             694             962
----------------------------------------------------------------------------------------------------------------

    For smaller reporting companies with public floats between $25 
million and $75 million, in 2008-2009, average audit fees declined by 
$43,853. In contrast, both Control Group 1, which just missed 
eligibility for claiming smaller reporting company status, and Control 
Group 2, which already was subject to scaled disclosures, experienced a 
much smaller decline in average audit fees after the adoption of the 
Commission's 2007 rules: $21,731 and $11,903, respectively. Thus, the 
difference-in-difference estimate of the savings in audit fees 
associated with scaled disclosures is between $22,122 and $31,950 per 
smaller reporting company. Both estimated differences differ 
significantly from zero. Although two different control groups are used 
to control for all other factors that may have caused the changes in 
audit fees in smaller registrants during the 2006-2009 period,\88\ the 
effect of the 2008 financial crisis may not be completely ruled out and 
could make the estimated savings in audit fees appear larger than they 
actually were.
---------------------------------------------------------------------------

    \88\ For example, among other factors, we note that the 
Commission approved Public Company Accounting Oversight Board 
Auditing Standard No. 5 regarding Audits of Internal Control over 
Financial Reporting (AS 5). Among other things, AS 5 was intended to 
reduce unnecessary costs by making the audit scalable to fit the 
size and complexity of company. AS 5 became effective in November 
2007 and registrants with fiscal years ending between July and 
November were allowed to avail themselves of the provision earlier. 
The adoption and implementation of AS 5 in 2007 could have had an 
impact on the audit fees of all companies subject to Section 404(b). 
Given that in our analysis both Treatment Group and Control Group 1 
were affected by AS 5, however, the difference-in-difference 
methodology should control for the potential effects of AS 5 on 
audit fees. In addition, based on companies' fiscal year end, we 
have no reason to believe that early adopters were more or less 
concentrated in Treatment Group than Control Group 1.
---------------------------------------------------------------------------

    We can also estimate the savings in audit fees in terms of a 
percentage reduction, instead of a dollar value.\89\ The audit fees for 
the Treatment Group declined by 14.1% in the 2008-2009 period relative 
to the 2006-2007 period, but only by 3.2% for Control Group 1 and 10.5% 
for Control Group 2. Thus, the difference-in-difference estimate of the 
treatment effect in terms of a percentage reduction is a 3.6% to 10.9% 
reduction of the audit fees.
---------------------------------------------------------------------------

    \89\ If there is a fixed (dollar value) component in audit 
expenses that apply to registrants of all sizes, then the estimates 
under this alternative approach can be viewed as the upper bound of 
the potential audit fee savings.
---------------------------------------------------------------------------

    For the 782 newly eligible registrants that we estimate would be 
potentially affected by the proposed amendments, the average audit fees 
were $683,607 in fiscal year 2014. Thus, if we use the dollar value 
estimates of the audit fee savings, then the estimated reduction in 
audit fees would be between $24,353 and $35,172 for this group, which 
are the inflation-adjusted values of the audit fee savings estimates in 
2008 and 2009.\90\ This estimate for savings on audit fees for the 
newly eligible registrants would be about 3.6% (=$24,353/$683,607) to 
5.1% (=$35,172/$683,607) of the audit fees. If we use the percentage 
reduction estimates, then the estimated reduction in the audit fees 
would range from $24,610 (=$683,607 x 3.6%) to $74,513 (=$683,607 x 
10.9%) for the Treatment Group.
---------------------------------------------------------------------------

    \90\ The inflation adjustment was performed using the CPI 
calculator of the Bureau of Labor Statistics (http://data.bls.gov/cgi-bin/cpicalc.pl).
---------------------------------------------------------------------------

    We recognize that our analysis is subject to a number of 
assumptions, some of which may not be fully applicable when estimating 
the possible current change in audit expenses as a result of the 
proposed amendments.\91\ In addition, we recognize that audit expenses 
are only one component of costs for registrants and that changes in 
audit fees do not capture the full range of potential cost savings 
stemming from scaled disclosures. There are cost savings apart from the 
audit, such as cost savings resulting from a smaller reporting company 
not being required to prepare compensation discussion and analysis 
(CD&A) and from other scaled disclosures in Item 402 of Regulation S-K. 
These cost savings likely will include both internal cost savings (such 
as employee and managerial time and resources) and external cost 
savings from fees for other outside professionals such as attorneys. 
Given the nature of scaled disclosures available to smaller reporting 
companies, we expect these other cost savings to be much larger than 
the cost savings in audit fees. Accordingly, we assume that 25% of the 
total cost savings from scaled disclosure comes from savings in audit 
fees and 75% of the savings comes from reduction in other expenses. 
Given this assumption, we estimate total annual cost savings per newly 
eligible registrant to be between $98,439 (=$24,610 x 4) and $298,052 
(=$74,513 x 4), which is 0.04% (=$98,439/$246.9 million) to 0.12% 
(=$298,052/$246.9 million) of the average revenue of the newly eligible 
registrants.
---------------------------------------------------------------------------

    \91\ Estimates based on data from 2006 to 2009 may not be 
directly applicable to newly eligible registrants under the proposed 
amendments. On the one hand, because auditors may charge larger 
registrants more for auditing the same disclosure items, our 
estimate could be viewed as a conservative estimate on the potential 
savings of audit fees for the newly eligible smaller reporting 
companies. On the other hand, if there were any increased 
competition in the auditing industry since 2009, then it could have 
led to lower audit expenses for the same disclosure items. Thus, our 
estimate could be higher or lower than the actual savings on audit 
fees for smaller reporting companies in 2008 and 2009.
---------------------------------------------------------------------------

ii. Information Environment, Liquidity and Growth
    A registrant's information environment can be measured by the 
amount of useful information available to investors and the quality of 
information. To gauge the potential effects on the degree of external 
information production about the registrant that could benefit 
investors, we determine a registrant's percentage of institutional 
ownership, total 5% block institutional ownership, and analyst coverage 
(i.e., whether a registrant is covered by at least one analyst and the 
number of analysts).
    To measure disclosure quality, we use four discretionary accrual 
measures commonly used in the accounting literature as proxies for 
earnings management and the incidence of material restatements (based 
on when the restatement happened--beginning

[[Page 43143]]

year--and when the restatement was reported--filing year). Scaled 
disclosure may contribute to lowering the overall quality of the 
information environment, which is proxied here by the propensity for 
earnings management and the incidence of material restatements.\92\ The 
data on restatements are from the Audit Analytics database. A material 
restatement is defined as a restatement that is reported under Item 
4.02 of Form 8-K.
---------------------------------------------------------------------------

    \92\ In using these proxies, we do not mean to suggest that 
scaled disclosure would be expected to directly cause an increase in 
earnings management or an increased incidence of material 
restatements, as there is little direct connection between the types 
of disclosure governed by our scaled disclosure requirements and the 
disclosure affected by a restatement.
---------------------------------------------------------------------------

    To examine the potential effects on liquidity, we focus on the 
share turnover ratio, which is calculated by dividing the total number 
of shares traded over a period by the number of shares outstanding. To 
assess the effects of scaled disclosures on growth, we examine a 
registrant's capital investment, which is measured by the capital 
expenditures to assets ratio, as a proxy for real growth. Because there 
is a high concentration of smaller reporting companies in industries 
for which R&D investment is important (e.g., pharmaceutical products 
and electronic equipment), we also examine a registrant's investment in 
R&D. Finally, we examine asset growth, which is the growth rate in book 
assets, which could capture a registrant's growth through both capital 
investment and acquisition.
    Table 6 reports the estimated treatment effect. The number in the 
Treatment Group vs. Control Group 1 column reflects the difference 
between: (1) The average change in the metric for the Treatment Group, 
from the 2006-2007 period, when it was not eligible for scaled 
disclosure, to the 2008-2009 period, when it was eligible for scaled 
disclosure, and (2) the average change in the metric between the same 
periods for Control Group 1, which was never eligible for scaled 
disclosure. Similarly, the number in the Treatment Group vs. Control 
Group 2 column reflects the difference between: (1) The average change 
in the metric for the Treatment Group from the 2006-2007 period, when 
it was not eligible for scaled disclosure, to the 2008-2009 period, 
when it was eligible for scaled disclosure and (2) the average change 
in the metric between the same periods for Control Group 2, which had 
been eligible for scaled disclosure for both periods.\93\
---------------------------------------------------------------------------

    \93\ Specifically, for each number reported in Table 6, we 
estimate the following equation:
    y = a + b * SRC + c * After + d * [SRC * After]
    where the single-letter terms ``a'' to ``d'' are coefficients to 
be estimated; ``SRC'' equals one for the treatment group and zero 
for the comparison group; and ``After'' equals one for fiscal years 
2008 and 2009 and zero for fiscal years 2006 and 2007. The treatment 
effect is reflected in the coefficient estimate d, which is the 
differential value of the variable y for treated firms following the 
start of the treatment. A statistically negative estimate of d is 
consistent with a reduction in the value of the dependent variable y 
(Institutional Ownership, Institutional Block Ownership, etc.) for 
treated firms.
---------------------------------------------------------------------------

    This table shows the scaled disclosure effect for smaller reporting 
companies (SRCs) on information environment, liquidity, and growth. 
Treatment Group consists of SRCs with public float between $25 million 
and $75 million in fiscal year 2008. Control Group 1 consists of non-
SRCs with public float between $75 million and $125 million. Control 
Group 2 consists of small business issuers with public float and 
revenues below $25 million. Institutional Ownership is total percentage 
institutional ownership. Block Institutional Ownership is total block 
(5%) institutional ownership. Number of Analysts is the number of 
analysts following a registrant. Analyst Coverage Dummy is a dummy 
variable indicating the existence of analyst following. Earnings Mgmt. 
1-4 are four different discretionary accruals measures. Earnings Mgmt. 
1 follows Kothari, Leone, and Wasley (2005), and Earnings Mgmt. 2-4 
follows Dechow, Sloan, and Sweeney (1995).\94\ Material Restatement 
(Filing Year) is a dummy variable that equals one if a registrant 
discloses restatement under Item 4.02 of Form 8-K in that year, and 
zero otherwise. Material Restatement (Beginning Year) is a dummy 
variable that equals one if the material reason for the restatement 
under Item 4.02 of Form 8-K originated in that year, and zero 
otherwise. Share Turnover is the ratio of shares traded over shares 
outstanding. Capital Investment is capital expenditures over book 
assets. R&D investment is R&D expenditures over revenue. Asset Growth 
is the annual growth rate of book assets. ***, **, and * indicate 
significance at 1%, 5%, and 10% confidence levels, respectively.
---------------------------------------------------------------------------

    \94\ See, Patricia M. Dechow, Richard G. Sloan, and Amy P. 
Sweeney, Detecting Earnings Management 70 Account. Rev. 193 (1995); 
S.P. Kothari, Andrew J. Leone, and Charles E. Wasley, Performance 
Matched Discretionary Accrual Measures, 39 J. Account. & Econ. 163 
(2005).

    Table 6--Effect of Scaled Disclosures on Information Environment,
                          Liquidity and Growth
------------------------------------------------------------------------
                                     Treatment Group    Treatment Group
                                    vs. Control Group  vs. Control Group
                                            1                  2
------------------------------------------------------------------------
Information Environment:
External Information Production
    Institutional Ownership.......          ***-0.052          ***-0.022
    Institutional Block Ownership.           **-0.016             -0.002
    Number of Analysts............             -0.179             -0.068
    Analyst Coverage Dummy........          ***-0.099           ***0.087
Information Environment:
Disclosure Quality
    Earnings Mgmt. 1..............              0.025              0.015
    Earnings Mgmt. 2..............              0.024              0.013
    Earnings Mgmt. 3..............              0.020              0.024
    Earnings Mgmt. 4..............              0.018              0.023
    Material Restatement (Filing                0.018              0.015
     Year)........................
    Material Restatement                      **0.036              0.016
     (Beginning Year).............
Liquidity
    Share Turnover Ratio..........             -0.063             -0.052
Growth
    Capital Investment............              0.005             -0.005
    R&D Investment................             -0.035             -0.002

[[Page 43144]]

 
Asset Growth Rate.................             -0.005          ***-0.282
------------------------------------------------------------------------

    The results in Table 6 suggest that the scaled disclosures had a 
negative effect on institutional ownership. The Treatment Group, which 
became eligible for scaled disclosures, experienced a 5.2% greater 
decrease in average institutional ownership from period to period than 
the companies in Control Group 1, which remained ineligible for scaled 
disclosures, and a 2.2% greater decrease in average institutional 
ownership from period to period than the companies in Control Group 2, 
which were eligible for scaled disclosures throughout both periods.
    The results reflect a positive effect on material restatements 
measured based on when such restatement was triggered (material 
restatement by beginning year) in smaller reporting companies, while 
the effect on analyst coverage is inconclusive. Smaller reporting 
companies tend to lose analyst coverage relative to comparable 
companies that just missed eligibility, but they gain coverage relative 
to even smaller companies that already enjoyed scaled disclosures. 
There is no statistically significant effect on earnings quality as 
captured by discretionary accruals measures or the incidence of 
material restatement by filing year. Overall, the evidence suggests a 
modest, but statistically significant, negative effect of scaled 
disclosure on smaller reporting companies' overall information 
environment.
    The effect of scaled disclosures on share turnover ratio is 
negative but statistically insignificant, suggesting no significant 
effect of scaled disclosures on smaller reporting companies' 
liquidity.\95\ Because the newly eligible registrants are larger in 
market capitalization and have more institutional ownership and analyst 
coverage than the current smaller reporting companies, we do not expect 
the proposed amendments to have a significantly negative impact on 
their liquidity.
---------------------------------------------------------------------------

    \95\ In contrast, Chang et al. (2013) did find a negative and 
significant effect of the Commission's 2007 rules on smaller 
reporting companies' liquidity. The difference in the results could 
stem from the use of a different empirical methodology, different 
sample and sample period. Chang et al. (2013) excluded financial 
companies. While the authors examined a pre-rule period of April to 
June of 2007, we included the entire 2006 and 2007 periods. Also, 
while the authors examined a post-rule period of February to August 
of 2008, we included the entire 2008 and 2009 periods. In addition, 
the authors focus on a set of illiquidity measures, while we focus 
on the share turnover ratio, a commonly used liquidity measure.
---------------------------------------------------------------------------

    The results in Table 6 indicate no clear difference between smaller 
reporting companies and comparable registrants in terms of changes in 
capital investment and R&D investment. The effect on asset growth rate 
is mixed. There is no significant difference between the Treatment 
Group companies and Control Group 1, but compared to Control Group 2, 
Treatment Group companies had deterioration in asset growth rate after 
the 2007 rules. Overall, our empirical analysis suggests that scaled 
disclosures have only a minimal effect on growth in current smaller 
reporting companies relative to comparable companies. Thus, we also do 
not expect any significant effect of the scaled disclosures on the 
growth of the newly eligible registrants under the proposed amendments.
iii. Conclusion
    Taken together, our empirical analysis suggests that, for most of 
the newly eligible smaller reporting companies under the proposed 
amendments, scaled disclosures may generate a modest, but statistically 
significant, amount of cost savings in terms of the reduction in 
compliance costs, a modest, but statistically significant, 
deterioration in some of the proxies used to assess the overall quality 
of information environment, and a muted effect on the growth of the 
registrant's capital investments, investments in R&D and assets.
3. Affiliated Ownership and Adverse Selection
    In general, holding market value constant, the use of public float 
to define eligibility favors registrants with more affiliated 
ownership. If we consider two registrants with the same market value 
but different affiliated ownership, the one with greater affiliated 
ownership will have a lower public float, which is the value of non-
affiliated ownership, and thus will be more likely to qualify for 
smaller reporting company status based on the public float threshold. 
This could be problematic if the adverse selection problem creates a 
conflict of interest between affiliated owners--who are often the 
decision makers--and non-affiliated owners--who are often the 
uninformed minority shareholders on whom reduced disclosure would have 
a greater impact. We examine whether the effects of scaled disclosure 
on registrants' information environment, liquidity, and growth depend 
on the percentage of affiliated ownership, which is the market value of 
affiliated equity shares divided by the registrant's total market value 
of equity. The average affiliated ownership is 43% for smaller 
reporting companies in the treatment group in years 2008 and 2009 
(median 42%).
    The results are reported in Table 7. The number in the Treatment 
Group vs. Control Group 1 column reflects the difference between: (1) 
The difference between the average metric of registrants in the 
Treatment Group with affiliated ownership that is higher than the group 
median and that of the registrants in the Treatment Group with 
affiliated ownership that is lower than the group median and (2) the 
difference between the average metric of registrants in Control Group 1 
with affiliated ownership that is higher than the group median and that 
of the registrants in Control Group 1 with affiliated ownership that is 
lower than the group median. Similarly, the number in the Treatment 
Group vs. Control Group 2 column reflects the difference between: (1) 
The difference between the average metric for the higher-than-median 
affiliated ownership registrants and that of the lower-than-median 
affiliated ownership registrants in the Treatment Group and (2) the 
difference between the average metrics for the same sectors of Control 
Group 2.\96\
---------------------------------------------------------------------------

    \96\ Specifically, for each number reported in Table 7, we 
estimate the following equation:
    y = a + b * SRC + c * After + d * HighAff + e * [SRC * After] + 
f * [SRC * HighAff + g * [After * HighAff] + h * [SRC * High Aff * 
After]
    where the single-letter terms ``a'' to ``h'' are coefficients to 
be estimated. ``After'' and ``SRC'' are defined in note 93. 
``HighAff'' is a dummy variable equal to one if the firm's 
affiliated ownership is greater than the sample median of 0.42; 
otherwise, ``HighAff'' is equal to zero. The treatment effect of 
interest is measured by the coefficient h, which is the differential 
value of the variable y for treated firms with high affiliated 
ownership, following the start of the treatment. See also note 93.

---------------------------------------------------------------------------

[[Page 43145]]

    This table shows the estimated difference in the scaled disclosure 
effect on smaller reporting companies with high affiliated ownership 
and those with low affiliated ownership. Affiliated ownership is the 
percentage of a registrant's market value of equity that is owned by 
affiliated parties (i.e., corporate insiders and 10% block owners). 
Companies with high (low) affiliated ownership include companies with 
affiliated ownership above (below) the sample median. A negative and 
significant estimate means that scaled disclosures have a more negative 
effect on smaller reporting companies with high affiliated ownership 
than on those with low affiliated ownership. ***, **, and * indicate 
significance at 1%, 5%, and 10% confidence levels, respectively.

           Table 7--Affiliated Ownership and Adverse Selection
------------------------------------------------------------------------
                                     Treatment Group    Treatment Group
                                    vs. Control Group  vs. Control Group
                                            1                  2
------------------------------------------------------------------------
Information Environment:
External Information Production
    Institutional Ownership.......        * * *-0.127            *-0.110
    Institutional Block Ownership.           **-0.079            *-0.126
    Number of Analysts............           **-0.742           ** 1.277
    Analyst Coverage Dummy........             -0.052           ** 0.500
Information Environment:
Disclosure Quality
    Earnings Mgmt. 1..............              0.010              0.286
    Material Restatement (Filing                0.038             -0.040
     Year)........................
    Material Restatement                     ** 0.084              0.001
     (Beginning Year).............
Liquidity
    Share Turnover Ratio..........              0.052              0.059
Growth
    Capital Investment............           ** 0.029              0.049
    R&D Investment................              0.014             -0.756
    Asset Growth Rate.............              0.136             -1.485
------------------------------------------------------------------------

    Our analysis suggests that affiliated ownership may exacerbate the 
potential negative effects of scaled disclosure on external information 
production by professionals such as institutional investors. There is 
also some evidence that larger affiliated ownership may exacerbate the 
adverse effect of scaled disclosure on material restatements measured 
based on when such restatement was triggered in smaller reporting 
companies (relative to Control Group 1). At the same time, scaled 
disclosures tend to have a more positive effect on smaller reporting 
companies' capital investment when affiliated ownership is higher. 
Overall, there is inconclusive evidence that affiliated ownership is 
associated with adverse selection in current smaller reporting 
companies. For the 782 newly eligible registrants that would 
potentially be affected by the proposed amendments, the average 
affiliated ownership is 34.5% of market capitalization, lower than for 
the current smaller reporting companies (47.6% in 2015). Thus, any 
agency concerns arising from affiliated ownership should have a lower 
impact for the newly eligible registrants than for the current smaller 
reporting companies.
4. Effects on Efficiency, Competition and Capital Formation
    The proposed amendments may have competitive effects. On one hand, 
the proposed amendments may reduce the potential disadvantage that the 
newly eligible registrants have relative to the current smaller 
reporting companies that already use the scaled disclosure 
requirements. The proposed amendments may also increase the competitive 
advantage of the newly eligible registrants relative to unregistered 
companies that compete with them in the product market. However, 
because there is no clear evidence that scaled disclosures have a 
significant effect on the growth of current smaller reporting 
companies, we expect these potentially positive competitive effects to 
be modest. On the other hand, setting any eligibility threshold may 
create a competitive disadvantage for those registrants that miss 
eligibility because their public float is just above the specified 
threshold, relative to the newly eligible registrants. However, our 
economic analysis suggests that this potentially negative effect would 
be modest.
    As discussed above, our empirical analysis suggests that scaled 
disclosures related to smaller reporting companies are unlikely to have 
a significantly negative effect on the overall information environment 
of smaller reporting companies. Thus, we do not expect that the 
proposed amendments would have a significant negative effect on the 
information efficiency of affected parties. Finally, it is difficult to 
quantify the effect of scaled disclosures on capital formation because 
the Commission's 2007 rules coincided with the 2008 financial crisis 
and its aftermath, which led to extremely thin capital market 
activities. However, given that both the potential cost savings and the 
potential negative consequences of scaled disclosure are modest, as 
shown in Tables 5 and 6, we do not expect the proposed amendments to 
have a significant impact on capital formation for the newly eligible 
registrants.

C. Possible Alternatives

    In this section, we present several alternatives to the proposed 
amendments and discuss their relative costs and benefits.
    As a first alternative, we could use a different registrant size 
metric in the smaller reporting company definition. While public float 
has the advantage of capturing the value held by non-affiliated 
investors who may be more affected by informational asymmetries, the 
disadvantage of public float is twofold. First, reported public float 
numbers are not easily verifiable. Second, using public float to define 
eligibility may increase adverse selection due to conflicts of interest 
between affiliated and non-affiliated owners. We considered equity 
market value as an alternative size metric to public float. Equity 
market value is more accessible and more easily verifiable than public 
float. It does not

[[Page 43146]]

differentiate registrants based on the degree of informational 
asymmetry concerns, but it also does not favor registrants with more 
affiliated ownership. If we define registrants as smaller reporting 
companies when they have less than $250 million in equity market value 
or zero equity market value but revenue below $100 million, 3,604 or 
47.7% of the registrants that filed Forms 10-K in 2015 would qualify as 
smaller reporting companies (3,084 based on equity market value and 520 
based on revenue).\97\
---------------------------------------------------------------------------

    \97\ This alternative would lead to a slightly smaller pool of 
registrants eligible for smaller reporting company status than under 
the proposed amendments.
---------------------------------------------------------------------------

    As a second alternative, we could revise the smaller reporting 
company definition to capture registrants that meet either a public 
float threshold or a revenue threshold. For example, one commenter 
suggested defining a smaller reporting company as any registrant with 
either public float below $250 million or revenue below $100 
million.\98\ This alternative would lead to 1,266 additional eligible 
registrants relative to the current definition, and 201 relative to the 
proposed amendments. Among the 201 additional registrants, 41.5% are in 
``Pharmaceutical Products'' and 18% are in ``Financial Trading.'' 
Expanding the pool of eligible registrants would lead to increased cost 
savings for registrants while also increasing the potential for 
informational asymmetries and other costs associated with scaled 
disclosures. In addition, relative to the current smaller reporting 
companies or those newly eligible under the proposed amendments, the 
201 additional qualifying registrants may have different 
characteristics that could affect the appropriateness of scaled 
disclosure. For example, the 201 additional registrants are 
substantially larger than those eligible under the current definition 
or the proposed amendments. The average public float of the 201 
additional registrants is $769 million, while it is $17 million under 
the current definition and $50 million under the proposed amendments. 
The size of these registrants implies that any cost savings from scaled 
disclosures would generate a much smaller impact on their firm value 
and may not justify the potential loss of informational transparency.
---------------------------------------------------------------------------

    \98\ See BIO Letter.
---------------------------------------------------------------------------

    While neither public float nor revenue data show a natural 
breakpoint, as a third alternative to the proposed amendments, we could 
have revised the smaller reporting company definition using different 
thresholds. For example, we could take inflation since 2007 into 
account, raising the public float threshold from $75 million to $85.7 
million and the revenue threshold from $50 million to $57.2 million. 
The inflation adjustment of the current thresholds would expand the 
pool of eligible smaller reporting companies by 88 registrants, 82 of 
which reported public float between $75 million and $85.7 million in 
their 2015 Form 10-Ks and six of which had zero public float and 
revenue between $50 million and $57.2 million.\99\ Alternatively, 
instead of $250 million public float, we could use $700 million public 
float, which is the threshold in the ``large accelerated filer'' 
definition. For registrants with zero public float, we could use $1 
billion in revenue instead of $100 million in revenue, which is the 
threshold in the EGC definition. A $1 billion revenue threshold would 
make scaled disclosure accommodations for smaller reporting companies 
and EGCs uniform for the subset of smaller registrants that have zero 
public float. Using 2015 data, we estimate that if we were to use these 
alternative thresholds in combination, there would be 899 newly 
eligible registrants for smaller reporting company status (746 newly 
eligible registrants based on public float and 153 newly eligible 
registrants based on revenues), in addition to the 782 newly eligible 
registrants under the proposed amendments. Expanding the pool of 
registrants eligible for smaller reporting company status using the 
latter two alternative thresholds would further reduce overall 
compliance costs for registrants but also potentially increase the 
informational asymmetries and other adverse effects associated with 
scaled disclosures. Relative to the current smaller reporting companies 
or the newly eligible smaller reporting companies under the proposed 
amendments, these additional qualifying registrants also may have 
different characteristics that could affect the appropriateness of 
scaled disclosure. For example, the 899 additional registrants under 
this alternative are much larger, implying that any cost savings from 
scaled disclosures would generate a much smaller impact on the 
registrants' firm value, and may not justify the potential loss of 
informational transparency.
---------------------------------------------------------------------------

    \99\ The inflation adjustment was performed using the CPI 
calculator of the Bureau of Labor Statistics (http://data.bls.gov/cgi-bin/cpicalc.pl).
---------------------------------------------------------------------------

    As a fourth alternative, we could consider expanding the number of 
registrants eligible for the Sarbanes-Oxley Act Section 404(b) 
exemption. The newly eligible smaller reporting companies under the 
proposed amendments would remain subject to Section 404(b). This would 
create two tiers among smaller reporting companies: registrants with 
public floats below $75 million would be eligible for the scaled 
disclosures and exempt from Section 404(b) and registrants with public 
floats between $75 million and $250 million would be eligible only for 
the scaled disclosures. Thus, one alternative would be to extend the 
Section 404(b) exemption to all registrants that are eligible for and 
claim smaller reporting company status.
    The advantage of this alternative would be twofold. First, it would 
provide a uniform exemption from the auditor attestation about the 
effectiveness of internal controls over financial reporting for all 
smaller reporting companies, which could potentially simplify the 
regulatory framework. Second, it could lead to greater cost savings for 
the newly eligible registrants. Although there is debate on whether the 
direct cost of Section 404(b) is substantial for the majority of 
registrants, there are academic studies suggesting that the cost was 
non-trivial for smaller registrants when Section 404(b) was first 
implemented in 2004,\100\ and that expenses related to Section 404(b) 
compliance have decreased over time as companies and their auditors 
gained more experience with the requirements and as a result of steps 
taken by both the Commission and the Public Company Accounting 
Oversight Board.\101\ There also may be indirect costs associated with 
Section 404(b), such as, among other things, increasing smaller 
registrants' propensity to go private or decreasing their propensity to 
go public or altering their incentives to grow by undertaking less 
investment.\102\

[[Page 43147]]

Extending the exemption also could lead to a reduction of these 
indirect costs, although this reduction is difficult to quantify.
---------------------------------------------------------------------------

    \100\ See, e.g., Peter Iliev, Effect of SOX Section 404: Costs, 
Earnings Quality, and Stock Prices, 45 J. Fin. 1163-1196 (2010).
    \101\ See, e.g., Cindy R. Alexander et al., Economic Effects of 
SOX Section 404 Compliance: A Corporate Insider Perspective,'' 56 J. 
Account. & Econ. 267-290; John Coates and Suraj Srinivasan, SOX 
after Ten Years: A Multidisciplinary Review, Accounting Horizons, 
forthcoming (2014). But see note 66 (indicating that one stakeholder 
representative has raised concerns about whether, in response to 
PCAOB inspection results, some auditors more recently have started 
to take approaches to evaluate internal control over financial 
reporting that are inconsistent with attaining goals of reduced 
compliance costs).
    \102\ See Gao, Feng, Joanna Wu, and Jerold Zimmerman, Unintended 
Consequences of Granting Small Firms Exemptions From Securities 
Regulation: Evidence From The Sarbanes-Oxley Act, Journal of 
Accounting Research, Vol. 49, No. 2, 459-506 (2009) (providing 
evidence that the exemption from Section 404 for non-accelerated 
filers has created an incentive for some of these firms to remain 
below the bright-line threshold of $75 million of public float).
---------------------------------------------------------------------------

    Under this alternative, however, investors of the affected 
registrants would lose the benefits of Section 404(b). Existing surveys 
of corporate leaders as well as academic studies suggest that Sarbanes-
Oxley Act Section 404(b) has led to improvements in the quality of 
registrants' information environment and financial reporting, 
registrants' ability to prevent and detect fraud, and investor 
confidence in U.S. registrants.\103\ Moreover, an academic study found 
that non-accelerated filers not subject to the Section 404(b) auditor 
attestation requirements suffered from a deterioration in the quality 
of their financial reporting vis-[agrave]-vis accelerated filers.\104\ 
Another recent working paper suggests that registrants that voluntarily 
comply with the Section 404(b) auditor attestation have lower cost of 
capital.\105\
---------------------------------------------------------------------------

    \103\ See John Coates and Suraj Srinivasan, SOX after Ten Years: 
A Multidisciplinary Review, Accounting Horizons, forthcoming (2014). 
See also, United States Government Accountability Office, Report to 
Congressional Committees, Internal Controls (July 2013) available at 
http://www.gao.gov/assets/660/655710.pdf (noting that compliance 
with Section 404(b) has a positive impact on investor confidence in 
the quality of financial reports and recommending that the 
Commission consider requiring companies to explicitly state whether 
they have obtained an auditor attestation of their internal 
controls, which may increase transparency and investor protection).
    \104\ See Anthony D. Holder, Khnondkar E. Karim, and Ashok 
Robin, Was Dodd-Frank Justified in Exempting Small Firms from 
Section 404b Compliance?, Accounting Horizons, Vol. 27, No. 1 
(2013). Similarly, a 2012 study found that smaller accelerated 
filers subject to the Section 404(b) auditor attestation 
requirements benefit from higher revenue quality as compared to non-
accelerated filers, which are not subject to the requirements. See 
Gopal V. Krishnan and Wei Yu, Do Small Firms Benefit from Auditor 
Attestation of Internal Control Effectiveness, Auditing: A Journal 
of Practice & Theory, Vol. 34, No. 1 (Nov. 2012).
    \105\ See Cory A. Cassell, Linda A. Myers, and Jian Zhou, The 
Effect of Voluntary Internal Control Audits on the Cost of Capital 
(June 1, 2013), available at SSRN: http://ssrn.com/abstract=1734300, 
finding that voluntary compliance with Section 404(b) is associated 
with significant reductions in both the cost of equity and the cost 
of debt in the first year of voluntary compliance. However, we note 
that the registrants that voluntarily comply with Section 404(b) may 
be fundamentally different from other non-accelerated filers. Thus, 
the economic effects of voluntary compliance with Section 404(b) may 
not necessarily apply to other firms.
---------------------------------------------------------------------------

D. Request for Comment

    We request comment on all aspects of this economic analysis, 
including the costs and benefits of the proposals and alternatives 
thereto, as well as their potential effects on efficiency, competition, 
and capital formation. With respect to comments, we note that they are 
of greatest assistance to our rulemaking initiative if accompanied by 
supporting data and analysis of the issues addressed in those comments 
and by alternatives to our proposals where appropriate. We also request 
qualitative feedback on the nature of the benefits and costs we have 
identified and any other benefits and costs that we should consider.
    To assist in our consideration of these costs and benefits, we 
specifically request comment on the following:
    19. Are there quantifiable aspects of savings related to scaled 
disclosures other than those captured by audit fees? Please provide 
detailed descriptions of these aspects of savings and quantitative data 
or support, if applicable.
    20. Some registrants eligible for scaled disclosure choose not to 
avail themselves of the scaling permitted by our rules. Why do such 
registrants choose not to claim the smaller reporting company status 
and not to use the scaled disclosure accommodations? Are there 
quantifiable benefits to such potentially eligible registrants of 
opting out of scaled disclosure?
    21. Are there filers that are not required to file with the 
Commission that choose to voluntarily provide non-scaled disclosure 
even though the filer would qualify under the smaller reporting company 
thresholds? Why do such filers choose to opt out of scaled disclosure? 
Are there quantifiable benefits to such filers of opting out of scaled 
disclosure?
    22. Are there indirect costs or cost savings related to scaled 
disclosures for smaller reporting companies that we have not considered 
and could be quantified?
    23. To arrive at an estimate for the total cost savings associated 
with scaled disclosures, we assume that the total cost savings 
(including employee and managerial time and resources) are four times 
the cost savings on audit fees. Is there a different assumption we 
should use and why? Please provide data to support the suggestion if 
available.
    24. Are there ways to further assess the degree of adverse 
selection associated with the proposed amendments? Are there other 
proxies for information environment, liquidity and growth that would 
better capture the potential economic impact of scaled disclosure? Are 
there data or empirical studies about incidence of fraud in relation to 
registrants' size?
    25. Are there other ways to quantify the effect of scaled 
disclosures on smaller reporting companies' capital formation?
    26. Are there any metrics alternative to public float and annual 
revenue to be considered in the definition of smaller reporting 
companies? What are the advantages and disadvantages associated with 
these alternative metrics?

IV. Paperwork Reduction Act

A. Background

    The proposed amendments contain ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(PRA).\106\ We are submitting a request for approval of the proposed 
amendments to the Office of Management and Budget (OMB) for review in 
accordance with the PRA and its implementing regulations.\107\ The 
titles of the collections of information are: \108\
---------------------------------------------------------------------------

    \106\ 44 U.S.C. 3501 et seq.
    \107\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \108\ The paperwork burden from Regulation S-K, Regulation C and 
Regulation 12B is imposed through the forms that are subject to the 
requirements in those regulations and is reflected in the analysis 
of those forms. To avoid a PRA inventory reflecting duplicative 
burdens and for administrative convenience, we assign a one-hour 
burden to each of Regulation S-K, Regulation C and Regulation 12B.
---------------------------------------------------------------------------

    (1) ``Regulation S-K'' (OMB Control No. 3235-0071);
    (2) ``Regulation C'' (OMB Control No. 3235-0074);
    (3) ``Regulation 12B'' (OMB Control No. 3235-0062);
    (4) ``Form 10-K'' (OMB Control No. 3235-0063);
    (5) ``Form 10-Q'' (OMB Control No. 3235-0070);
    (6) ``Schedule 14A'' (OMB Control No. 3235-0059);
    (7) ``Schedule 14C'' (OMB Control No. 3235-0057);
    (8) ``Form 10'' (OMB Control No. 3235-0064);
    (9) ``Form S-1'' (OMB Control No. 3235-0065);
    (10) ``Form S-3'' (OMB Control No. 3235-0073);
    (11) ``Form S-4'' (OMB Control No. 3235-0324); and
    (12) ``Form S-11'' (OMB Control No. 3235-0067).
    We adopted the existing rules, regulations, and forms pursuant to 
the Securities Act and the Exchange Act. These rules, regulations, and 
forms set forth the disclosure requirements for annual and quarterly 
reports, proxy and information statements, and registration statements 
that are prepared by registrants to provide investors information to 
make informed investment and voting decisions. Our proposed amendments 
are intended to make scaled disclosure accommodations available to a 
larger number of registrants. The proposed amendments

[[Page 43148]]

should decrease the disclosure requirements for some registrants. The 
proposed amendments do not affect any disclosure requirements for any 
registrant with a calculable public float of $250 million or more.
    The hours and costs associated with preparing disclosure, filing 
information required by forms, and retaining records constitute 
reporting and cost burdens imposed by collection of information 
requirements. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information requirement unless 
it displays a currently valid control number. Compliance with the 
information collections listed above is mandatory to the extent 
applicable to each registrant.\109\ Responses to the information 
collections are not kept confidential and there is no mandatory 
retention period for the information disclosed.
---------------------------------------------------------------------------

    \109\ As noted above, registrants claiming smaller reporting 
company status have the option to selectively comply with the scaled 
disclosures available to them on an item-by-item basis.
---------------------------------------------------------------------------

B. Summary of Information Collections

    The proposed amendments, which would amend the definition of 
smaller reporting company to capture a greater number of registrants, 
may decrease existing collection of information total burden estimates, 
or not affect them at all, for some reports on Form 10-K and Form 10-Q, 
some proxy statements on Schedule 14A, some information statements on 
Schedule 14C, and some registration statements on Form 10, Form S-1, 
Form S-3, Form S-4, and Form S-11, filed by registrants that meet the 
definition of smaller reporting company as we propose to revise it.
    The proposed amendments would not change the amount of information 
required to be included in Exchange Act reports by any registrant 
because of its status as an accelerated filer or a large accelerated 
filer.

C. Burden and Cost Estimates

    For purposes of the PRA, we believe that if the proposed amendments 
were adopted the total decrease in burden hours for Form 10-K, Form 10-
Q, Schedule 14A, Schedule 14C, Form 10, Form S-1, Form S-3, Form S-4, 
and Form S-11 would be approximately 220,357 burden hours and the total 
decrease in external costs would be approximately $35,691,649.
    Our burden hour and cost estimates presented below represent the 
average burdens for all registrants, both large and small. In deriving 
our estimates, we recognize that the burdens likely would vary among 
individual registrants based on a number of factors, including the size 
and complexity of their business. We believe that some registrants 
would experience costs in excess of this average and some registrants 
would experience less than the average costs. In addition, for 
quarterly and annual reports and for proxy and information statements, 
we estimate that 75% of the burden of preparation is carried by the 
registrant internally and that 25% of the burden is carried by outside 
professionals retained by the registrant at an average cost of $400 per 
hour.\110\ For registration statements, we estimate that 25% of the 
burden of preparation is carried by the registrant internally and that 
75% of the burden is carried by outside professionals retained by the 
registrant at an average cost of $400 per hour.
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    \110\ We recognize that the costs of retaining outside 
professionals may vary depending on the nature of the professional 
services, but for purposes of this PRA analysis, we estimate that 
such costs would be an average of $400 per hour. This is the rate we 
typically estimate for outside legal services used in connection 
with public company reporting.
---------------------------------------------------------------------------

    For purposes of the PRA, we estimate that over a three-year 
period,\111\ the annual aggregate decreased burden \112\ resulting from 
the proposed amendments would average:
---------------------------------------------------------------------------

    \111\ We calculated an annual average over a three-year period 
because OMB approval of PRA submissions covers a three-year period.
    \112\ Our decreased burden estimates take into account, and are 
net of, any increased burden that may result from smaller reporting 
companies providing expanded disclosures under disclosure 
requirements that are more stringent for smaller reporting companies 
than for non-smaller reporting companies, such as Item 404 of 
Regulation S-K.
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     142,068 hours and $18,943,168 of external costs for Form 
10-K;
     71,938 hours and $9,594,202 of external costs for Form 10-
Q;
     432 hours and $57,600 of external costs for Schedule 14A;
     7 hours and $880 of external costs for Schedule 14C;
     9 hours and $11,100 of external costs for Form 10;
     3,477 hours and $4,172,314 of external costs for Form S-1;
     37 hours and $43,920 of external costs for Form S-3;
     2,140 hours and $2,567,578 of external costs for Form S-4; 
and
     251 hours and $300,888 of external costs for Form S-11.
    These estimates were based on the following assumptions:
1. Form 10-K
    We estimate that approximately 782 registrants would become newly 
eligible to use scaled disclosure for smaller reporting companies or 
have a new opportunity to assess whether to avail themselves of scaled 
disclosure for their annual reports and could experience burden and 
cost savings if these proposed amendments are adopted.\113\ We estimate 
that if these registrants use all of the scaled disclosure 
requirements,\114\ they would save 177,584 burden hours and an 
aggregate cost of $23,678,960.\115\
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    \113\ We estimate that 782 additional registrants would be 
eligible under the proposed amendments to use the scaled disclosure 
requirements available to smaller reporting companies for their 
annual and quarterly reports in the first year. We base this 
estimate on the number of additional registrants that would have 
been eligible to use scaled disclosure for their annual and 
quarterly reports in 2015, based on data collected by DERA from 
annual reports on Form 10-K filed in 2015. This data shows that 751 
registrants had a public float greater than $75 million but less 
than $250 million, and 31 registrants with a public float of zero 
had annual revenues greater than $50 million but less than $100 
million.
    \114\ A smaller reporting company generally may choose to comply 
with some, all, or none of the scaled disclosure requirements 
available for smaller reporting companies under our rules.
    \115\ Consistent with our analysis in the Smaller Reporting 
Company Adopting Release, we estimate the compliance burden for a 
Form 10-K for a smaller reporting company using all scaled 
disclosure available to be the same as the last available PRA 
inventory for completing a Form 10-KSB, which was 1,272 burden hours 
and a cost of $169,600 (424 professional hours x $400/hour) per 
report.
    Accordingly, we estimate that it would decrease the compliance 
burden of Form 10-K by up to 177,584.38 hours (1,499.09 internal 
hours per filing using standard Regulation S-K disclosure minus 
1,272 internal hours per filing using scaled disclosure = 227.09 
internal hours saved per filing x 782 filings) and decrease the cost 
by up to $23,678,960 (499.70 professional hours per filing using 
standard Regulation S-K disclosure minus 424 professional hours per 
filing using scaled disclosure = 75.70 external hours saved per 
filing x $400 per hour = $30,280 external cost savings per filing x 
782 filings).
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    While we are unsure of the extent to which these newly eligible 
smaller reporting companies would realize the full savings from the 
scaled disclosure requirements, for purposes of this analysis, we 
estimate that eligible registrants would realize approximately 80% of 
these savings.\116\ As a result, we

[[Page 43149]]

estimate that the aggregate decrease in burden for Form 10-K would be 
142,068 internal burden hours and costs of $18,943,168.\117\
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    \116\ This estimated realization rate reflects the percentage of 
registrants eligible to claim smaller reporting company status in 
2015 that claimed such status. Based on data collected by DERA, 
2,900, or approximately 91.1%, of the estimated 3,183 eligible 
registrants claimed smaller reporting company status. Specifically, 
2,241, or approximately 93.1%, of the estimated 2,408 registrants 
that would qualify under the public float threshold and 659, or 
approximately 85.0%, of the estimated 775 registrants that would 
qualify under the annual revenue threshold, claimed smaller 
reporting company status.
    In addition, this estimated realization rate is further reduced 
to reflect that a portion of newly eligible smaller reporting 
companies may already qualify as EGCs, which are eligible to rely on 
certain scaled disclosure requirements for a limited period, 
including some of the scaled requirements available to smaller 
reporting companies. Based on data collected by DERA, 153, or 
approximately 19.6%, of the 782 newly eligible registrants were EGCs 
and therefore eligible to rely on some scaled disclosure 
accommodations and already benefitting from a portion of these 
estimated savings.
    \117\ This estimated decrease in the compliance burden for Form 
10-K is based on 80% x 177,584.38 internal hours saved = 142,067.50 
internal hours saved and 80% x $23,678,960 external cost savings = 
$18,943,168 external cost savings.
---------------------------------------------------------------------------

2. Form 10-Q
    We assume that the same approximately 782 registrants would become 
newly eligible to use scaled disclosure for purposes of their quarterly 
reports. We estimate that if these registrants use all of the scaled 
smaller reporting company requirements, they would save 89,922 burden 
hours and an aggregate cost of $11,992,752.\118\
---------------------------------------------------------------------------

    \118\ Similar to our approach to estimating the reduced 
compliance burden for a Form 10-K using scaled disclosure, we base 
our estimates of the reduced compliance burden for smaller reporting 
companies using all scaled disclosure available for certain other 
filings on the last available PRA inventory for completing the most 
comparable form under Regulation SB. We estimate the compliance 
burden for a Form 10-Q for a smaller reporting company using all 
scaled disclosure available to be the same as the last available PRA 
inventory for completing a Form 10-QSB, which was 102.24 burden 
hours and a cost of $13,362 (34.08 professional hours x $400/hour) 
per report.
    Accordingly, we estimate that it would decrease the compliance 
burden of Form 10-Q by up to 89,922.18 hours (140.57 internal hours 
per filing using standard Regulation S-K disclosure minus 102.24 
internal hours per filing using scaled disclosure = 38.33 internal 
hours saved per filing x 782 registrants x 3 filings per year) and 
decrease the cost by up to $11,992,752 (46.86 professional hours per 
filing using standard Regulation S-K disclosure minus 34.08 
professional hours per filing using scaled disclosure = 12.78 
external hours saved per filing x $400 per hour = $5,112 external 
cost savings per filing x 782 registrants x 3 filings per year).
---------------------------------------------------------------------------

    Assuming that newly eligible registrants realize approximately 80% 
of these savings, we estimate that the aggregate decrease in burden for 
Form 10-Q would be 71,938 internal burden hours and costs of 
$9,594,202.\119\
---------------------------------------------------------------------------

    \119\ This estimated decrease in the compliance burden for Form 
10-Q is based on 80% x 89,922.18 internal hours saved = 71,937.74 
internal hours saved and 80% x $11,992,752.00 external cost savings 
= $9,594,201.60 external cost savings.
---------------------------------------------------------------------------

3. Schedule 14A
    We estimate that registrants newly eligible to use scaled 
disclosure would file approximately 720 definitive proxy statements on 
Schedule 14A.\120\ We estimate that if these registrants use all of the 
scaled smaller reporting company requirements, they would save 540 
burden hours and an aggregate cost of $72,000.\121\
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    \120\ We base this estimate on the number of definitive proxy 
statements on Schedule 14A filed in 2015 by registrants that would 
have been newly eligible to use scaled disclosure under the proposed 
amendments. Based on data collected by DERA, registrants with a 
public float greater than $75 million but less than $250 million 
filed 697 definitive proxy statements on Schedule 14A, and 
registrants with a public float of zero and annual revenues greater 
than $50 million but less than $100 million filed 23 definitive 
proxy statements on Schedule 14A.
    \121\ We base our estimate of the reduced compliance burden for 
Schedule 14A for a smaller reporting company using all scaled 
disclosure available on our estimate of the compliance burden for 
Item 407(d)(5), (e)(4) and (e)(5) of Regulation S-K, with which 
smaller reporting companies are not required to comply. We estimate 
this burden to be 0.75 burden hours and a cost of $100 (0.25 
professional hours x $400/hour) per report.
    Accordingly, we estimate that it would decrease the compliance 
burden of Schedule 14A by up to 540 hours (0.75 internal hours saved 
per filing x 720 filings) and decrease the cost by up to $72,000 
(0.25 professional hours saved per filing x $400 per hour = $100 
external cost savings per filing x 720 filings).
---------------------------------------------------------------------------

    Assuming that newly eligible registrants realize approximately 80% 
of these savings, we estimate that the aggregate decrease in burden for 
Schedule 14A would be 432 internal burden hours and costs of 
$57,600.\122\
---------------------------------------------------------------------------

    \122\ This estimated decrease in the compliance burden for 
Schedule 14A is based on 80% x 540 internal hours saved = 432 
internal hours saved and 80% x $72,000.00 external cost savings = 
$57,600.00 external cost savings.
---------------------------------------------------------------------------

4. Schedule 14C
    We estimate that registrants newly eligible to use scaled 
disclosure would file approximately 11 definitive information 
statements on Schedule 14C.\123\ We estimate that if these registrants 
use all of the scaled smaller reporting company requirements, they 
would save eight burden hours and an aggregate cost of $1,100.\124\
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    \123\ We base this estimate on the number of definitive 
information statements on Schedule 14C filed in 2015 by registrants 
that would have been newly eligible to use scaled disclosure under 
the proposed amendments. Based on data collected by DERA, 
registrants with a public float greater than $75 million but less 
than $250 million filed 11 definitive information statements on 
Schedule 14C, and registrants with a public float of zero and annual 
revenues greater than $50 million but less than $100 million filed 
no definitive information statements on Schedule 14C.
    \124\ Similar to Schedule 14A, we base our estimate of the 
decrease in the compliance burden for Schedule 14C for a smaller 
reporting company using all scaled disclosure available on our 
estimate of the compliance burden for Item 407(d)(5), (e)(4) and 
(e)(5) of Regulation S-K, which is 0.75 burden hours and a cost of 
$100 (0.25 professional hours x $400/hour) per report.
    Accordingly, we estimate that it would decrease the compliance 
burden of Schedule 14C by up to 8.25 hours (0.75 internal hours 
saved per filing x 11 filings) and decrease the cost by up to $1,100 
(0.25 professional hours saved per filing x $400 per hour = $100 
external cost savings per filing x 11 filings).
---------------------------------------------------------------------------

    Assuming that newly eligible registrants realize approximately 80% 
of these savings, we estimate that the aggregate decrease in burden for 
Schedule 14C would be seven internal burden hours and costs of 
$880.\125\
---------------------------------------------------------------------------

    \125\ This estimated decrease in the compliance burden for 
Schedule 14C is based on 80% x 8.25 internal hours saved = 6.6 
internal hours saved and 80% x $1,100.00 external cost savings = 
$880.00 external cost savings.
---------------------------------------------------------------------------

5. Form 10
    We estimate that registrants newly eligible to use scaled 
disclosure would file one registration statement on Form 10.\126\ We 
estimate that if this registrant uses all of the scaled smaller 
reporting company requirements, it would save nine burden hours and an 
aggregate cost of $11,100.\127\ Due to the low number of Form 10 
filers, the reduced number of scaled disclosure accommodations 
available to EGCs for purposes of Form 10, and rounding considerations, 
we assume that any newly eligible registrant would realize the full 
extent of these savings.
---------------------------------------------------------------------------

    \126\ We base our estimated number of each type of registration 
statement filed on the average number of that type of registration 
statement filed in each of the calendar years 2013 through 2015 by 
registrants that would have been newly eligible to use scaled 
disclosure under the proposed amendments. Based on data collected by 
DERA, during 2013 through 2015, registrants with a public float 
greater than $75 million but less than $250 million filed one 
registration statement on Form 10 during the period 2013 through 
2015, and registrants with a public float of zero and revenues 
greater than $50 million but less than $100 million filed an average 
of one registration statement on Form 10 each year.
    \127\ We estimate the compliance burden for a Form 10 for a 
smaller reporting company using all scaled disclosure available to 
be the same as the last available PRA inventory for completing a 
Form 10-SB, which was 44.50 burden hours and a cost of $53,400 
(133.50 professional hours x $400/hour) per report.
    Accordingly, we estimate that it would decrease the compliance 
burden of Form 10 by up to 9.25 hours (53.75 internal hours per 
filing using standard Regulation S-K disclosure minus 44.50 internal 
hours per filing using scaled disclosure = 9.25 internal hours saved 
per filing x 1 filing) and decrease the cost by up to $11,100 
(161.25 professional hours per filing using standard Regulation S-K 
disclosure minus 133.50 professional hours per filing using scaled 
disclosure = 27.75 external hours saved per filing x $400 per hour = 
$11,100 external cost savings per filing x 1 filing).
---------------------------------------------------------------------------

6. Form S-1
    We estimate that registrants newly eligible to use scaled 
disclosure would file approximately 52 registration statements on Form 
S-1.\128\ We estimate that if these registrants use all of the scaled 
smaller reporting company

[[Page 43150]]

requirements, they would save 4,346 burden hours and an aggregate cost 
of $5,215,392.\129\
---------------------------------------------------------------------------

    \128\ Based on data collected by DERA, during 2013 through 2015, 
registrants with a public float greater than $75 million but less 
than $250 million filed an average of approximately 26 registration 
statements on Form S-1 each year, and registrants with a public 
float of zero and revenues greater than $50 million but less than 
$100 million filed an average of approximately 26 registration 
statements on Form S-1 each year.
    \129\ We estimate the compliance burden for a Form S-1 for a 
smaller reporting company using all scaled disclosure available to 
be the same as the last available PRA inventory for completing a 
Form SB-2, which was 159.50 burden hours and a cost of $191,400 
(478.50 professional hours x $400/hour) per report.
    Accordingly, we estimate that it would decrease the compliance 
burden of Form S-1 by up to 4,346.16 hours (243.08 internal hours 
per filing using standard Regulation S-K disclosure minus 159.50 
internal hours per filing using scaled disclosure = 83.58 internal 
hours saved per filing x 52 filings) and decrease the cost by up to 
$5,215,392 (729.24 professional hours per filing using standard 
Regulation S-K disclosure minus 478.50 professional hours per filing 
using scaled disclosure = 250.74 external hours saved per filing x 
$400 per hour = $100,296 external cost savings per filing x 52 
filings).
---------------------------------------------------------------------------

    Assuming that newly eligible registrants realize approximately 80% 
of these savings, we estimate that the aggregate decrease in burden for 
Form S-1 would be 3,477 internal burden hours and costs of 
$4,172,314.\130\
---------------------------------------------------------------------------

    \130\ This estimated decrease in the compliance burden for Form 
S-1 is based on 80% x 4,346.16 internal hours saved = 3,476.93 
internal hours saved and 80% x $5,215,392.00 external cost savings = 
$4,172,313.60 external cost savings.
---------------------------------------------------------------------------

7. Form S-3
    We estimate that registrants newly eligible to use scaled 
disclosure would file approximately 183 registration statements on Form 
S-3.\131\ We estimate that if these registrants use all of the scaled 
smaller reporting company requirements, they would save 46 burden hours 
and an aggregate cost of $54,900.\132\
---------------------------------------------------------------------------

    \131\ Based on data collected by DERA, during 2013 through 2015, 
registrants with a public float greater than $75 million but less 
than $250 million filed an average of approximately 181 registration 
statements on Form S-3 each year, and registrants with a public 
float of zero and revenues greater than $50 million but less than 
$100 million filed an average of approximately two registration 
statements on Form S-3.
    \132\ We base our estimate of the reduced compliance burden for 
Form S-3 for a smaller reporting company using all scaled disclosure 
available on our estimate of the average compliance burden for Items 
503(d) and 504 of Regulation S-K, which requirements are scaled for 
smaller reporting companies. We estimate the decrease in compliance 
burden for a registration statement on Form S-3 for a smaller 
reporting company using all scaled disclosure available to be 0.25 
burden hours and a cost of $300 (0.75 professional hours x $400/
hour) per filing.
    Accordingly, we estimate that it would decrease the compliance 
burden of Form S-3 by up to 45.75 hours (0.25 internal hours saved 
per filing x 183 filings) and decrease the cost by up to $54,900 
($300 external cost savings per filing x 183 filings).
---------------------------------------------------------------------------

    Assuming that newly eligible registrants realize approximately 80% 
of these savings, we estimate that the aggregate decrease in burden for 
Form S-3 would be 37 internal burden hours and costs of $43,920.\133\
---------------------------------------------------------------------------

    \133\ This estimated decrease in the compliance burden for Form 
S-3 is based on 80% x 45.75 internal hours saved = 36.60 internal 
hours saved and 80% x $54,900.00 external cost savings = $43,920.00 
external cost savings.
---------------------------------------------------------------------------

8. Form S-4
    We estimate that registrants newly eligible to use scaled 
disclosure would file approximately 32 registration statements on Form 
S-4.\134\ We estimate that if these registrants use all of the scaled 
smaller reporting company requirements, they would save 2,675 burden 
hours and an aggregate cost of $3,209,472.\135\
---------------------------------------------------------------------------

    \134\ Based on data collected by DERA, during 2013 through 2015, 
registrants with a public float greater than $75 million but less 
than $250 million filed an average of approximately 29 registration 
statements on Form S-4 each year, and registrants with a public 
float of zero and revenues greater than $50 million but less than 
$100 million filed an average of approximately three registration 
statements on Form S-4.
    \135\ We estimate the reduction in the compliance burden for 
Form S-4 for a smaller reporting company using all scaled disclosure 
available to be the same as the reduction in the compliance burden 
for a Form S-1 for a smaller reporting company using all scaled 
disclosure available as compared to standard Regulation S-K 
disclosure, which was 83.58 burden hours and a cost of $100,296 
(250.74 professional hours x $400/hour) per report.
    Accordingly, we estimate that it would decrease the compliance 
burden of Form S-4 by up to 2,674.56 hours (83.58 internal hours 
saved per filing x 32 filings) and decrease the annual cost by up to 
$3,209,472 ($100,296 external cost savings per filing x 32 filings).
---------------------------------------------------------------------------

    Assuming that newly eligible registrants realize approximately 80% 
of these savings, we estimate that the aggregate decrease in burden for 
Form S-4 would be 2,140 internal burden hours and costs of 
$2,567,578.\136\
---------------------------------------------------------------------------

    \136\ This estimated decrease in the compliance burden for Form 
S-4 is based on 80% x 2,674.56 internal hours saved = 2,139.65 
internal hours saved and 80% x $3,209,472.00 external cost savings = 
$2,567,577.60 external cost savings.
---------------------------------------------------------------------------

9. Form S-11
    We estimate that registrants newly eligible to use scaled 
disclosure would file approximately three registration statements on 
Form S-11.\137\ We estimate that if these registrants use all of the 
scaled smaller reporting company requirements, they would save 251 
burden hours and an aggregate cost of $300,888.\138\ Due to the low 
number of Form S-11 filers and rounding considerations, we assume that 
the newly eligible registrants would realize the full extent of these 
savings.
---------------------------------------------------------------------------

    \137\ Based on data collected by DERA, during 2013 through 2015, 
registrants with a public float greater than $75 million but less 
than $250 million filed an average of approximately two registration 
statements on Form S-11 each year, and registrants with a public 
float of zero and revenues greater than $50 million but less than 
$100 million filed an average of approximately one registration 
statement on Form S-11.
    \138\ We estimate the reduction in the compliance burden for 
Form S-11 for a smaller reporting company using all scaled 
disclosure available to be the same as reduction in the compliance 
burden for Form S-1 for a smaller reporting company using all scaled 
disclosure available as compared to standard Regulation S-K 
disclosure, which was 83.58 burden hours and a cost of $100,296 
(250.74 professional hours x $400/hour) per report.
    Accordingly, we estimate that it would decrease the compliance 
burden of Form S-11 by up to 250.74 hours (83.58 internal hours 
saved per filing x 3 filings) and decrease the annual cost by up to 
$300,888.00 ($100,296 external cost savings per filing x 3 filings).
---------------------------------------------------------------------------

D. Request for Comment

    We request comment to:
     Evaluate whether the collections of information are 
necessary for the proper performance of our functions, including 
whether the information will have practical utility;
     evaluate the accuracy of our estimate of the burden of 
collections of information;
     determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
     evaluate whether there are ways to minimize the burden of 
the collections of information on those who respond, including through 
the use of automated collection techniques or other forms of 
information technology; and
     evaluate whether the proposed amendments would have any 
effects on any other collections of information not previously 
identified in this section.\139\
---------------------------------------------------------------------------

    \139\ Comments are requested pursuant to 44 U.S.C. 
3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments about the 
accuracy of these burden estimates and any suggestions for reducing 
these burdens. Persons submitting comments on the collection of 
information requirements should direct the comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should send a copy to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090, with reference to File No. S7-XX-XX. 
Requests for materials submitted to OMB by the Commission with regard 
to these collections of information should be in writing, refer to File 
No. S7-XX-XX, and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 
20549-2736. OMB is required to make a decision concerning the 
collection of information between 30

[[Page 43151]]

and 60 days after publication of this release. Consequently, a comment 
to OMB is best assured of having its full effect if OMB receives it 
within 30 days of publication.

V. Initial Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) \140\ requires us, in 
promulgating rules under Section 553 of the Administrative Procedure 
Act,\141\ to consider the impact of those rules on small entities. We 
have prepared this Initial Regulatory Flexibility Analysis (IRFA) in 
accordance with Section 603 of the RFA.\142\ This IRFA relates to the 
proposed amendments to the smaller reporting company definition as used 
in our rules.
---------------------------------------------------------------------------

    \140\ 5 U.S.C. 601 et seq.
    \141\ 5 U.S.C. 553.
    \142\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Reasons for, and Objectives of, the Action

    Small businesses, the ACSEC, the Small Business Forum, Congress and 
others have raised concerns about the burden of our disclosure rules on 
smaller registrants. The primary reason for, and objective of, the 
proposed amendments to the smaller reporting company definition is to 
reduce the disclosure burdens on smaller registrants by expanding the 
number of registrants that qualify as smaller reporting companies. The 
primary reason for, and objective of, the proposed amendments to the 
accelerated filer and large accelerated filer definitions is to 
maintain the status quo regarding the category of registrants that are 
subject to accelerated and large accelerated filer disclosure and 
filing requirements.
    The ACSEC and the Small Business Forum have recommended that we 
revise the smaller reporting company definition to include registrants 
with a public float of up to $250 million. The proposed amendments are 
responsive to those recommendations.
    The FAST Act requires us to revise Regulation S-K to further scale 
or eliminate disclosure requirements to reduce the burden on a variety 
of smaller registrants, including smaller reporting companies, while 
still providing all material information to investors. A number of 
existing Regulation S-K disclosure requirements provide smaller 
reporting companies with the opportunity to provide scaled disclosures 
in their Commission filings. Raising the financial thresholds in the 
smaller reporting company definition would be responsive to the FAST 
Act because it would reduce the burden on smaller registrants by 
increasing the number of registrants eligible to provide scaled 
disclosures.

B. Legal Basis

    We are proposing the amendments pursuant to Sections 7, 10 and 19 
of the Securities Act, Sections 3(b), 12, 13, 15(d) and 23(a) of the 
Exchange Act and Section 72002 of the FAST Act.

C. Small Entities Subject to the Proposed Amendments

    For purposes of the RFA, under Securities Act Rule 157 \143\ an 
issuer, other than an investment company, is a ``small business'' or 
``small organization'' if it had total assets of $5 million or less on 
the last day of its most recent fiscal year and is engaged or proposing 
to engage in an offering of securities not exceeding $5 million. Under 
Exchange Act Rule 0-10(a),\144\ an issuer, other than an investment 
company, is a ``small business'' or ``small organization'' if it had 
total assets of $5 million or less on the last day of its most recent 
fiscal year. For purposes of the RFA, under our rules an investment 
company is a small entity if it, together with other investment 
companies in the same group of related investment companies, has net 
assets of $50 million or less as of the end of its most recent fiscal 
year.\145\
---------------------------------------------------------------------------

    \143\ 17 CFR 230.157.
    \144\ 17 CFR 240.0-10(a).
    \145\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    The proposed amendments would increase the financial thresholds in 
the smaller reporting company definition. We estimate that there are 
currently 837 entities that qualify as ``small'' under the definitions 
set forth above.\146\ We believe it is likely that virtually all small 
businesses or small organizations, as defined in our rules described 
above, are already encompassed within the current smaller reporting 
company definition and would continue to be encompassed within the 
definition if the proposed amendments were adopted. To the extent any 
small business or small organization, as defined for RFA purposes, is 
not already encompassed within the current smaller reporting company 
definition, we believe it is likely that the proposed amendments would 
capture those entities.
---------------------------------------------------------------------------

    \146\ Staff estimate based on review of Form 10-K filings with 
fiscal periods ending between January 31, 2015 and January 31, 2016.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

    The proposed amendments to the smaller reporting company definition 
would increase the number of registrants eligible to provide scaled 
disclosures in response to Regulation S-K and Regulation S-X disclosure 
requirements. The proposed amendments do not revise the scaled 
disclosure requirements themselves.
    If the proposed amendments were adopted, registrants with public 
floats in excess of $75 million and less than $250 million would become 
eligible to provide scaled disclosures. Registrants with zero public 
float and revenues in excess of $50 million and less than $100 million 
in the most recent fiscal year also would become eligible to provide 
scaled disclosures. Registrants with less than $75 million of public 
float and registrants with zero public float and less than $50 million 
in annual revenues would not be impacted by the proposed amendments 
because they already are eligible to provide scaled disclosures.
    The proposed amendments would not increase the overall disclosure 
requirements for small entities and could decrease substantially the 
disclosures required for registrants with public floats between $75 
million and $250 million and registrants with zero public float and 
annual revenues between $50 million and $100 million.
    Item 404 is the only disclosure item in Regulation S-K that may 
require more extensive information for smaller reporting companies than 
for non-smaller reporting companies. Item 404(d)(1) requires disclosure 
of transactions with related persons that exceed the lesser of $120,000 
or 1% of the average of the smaller reporting company's total assets at 
year end for the last two completed fiscal years. This requirement may 
be more burdensome to a smaller reporting company if 1% of its average 
total assets is less than $120,000, which is the disclosure threshold 
for non-smaller reporting companies. This disclosure requirement would 
affect only smaller reporting companies with related person 
transactions. Item 404 also requires disclosure, only by smaller 
reporting companies, about parents and 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. In addition, for filings other than registration 
statements, Item 404 requires smaller reporting companies to provide 
information covering an additional year.

[[Page 43152]]

E. Overlapping or Conflicting Federal Rules

    We do not believe any current federal rules duplicate, overlap or 
conflict with the proposed amendments.

F. Significant Alternatives

    The RFA directs us to consider significant alternatives that would 
accomplish the stated objectives of our proposed amendments, while 
minimizing any significant adverse impact on small entities. 
Accordingly, we considered the following alternatives:
     Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
     clarifying, consolidating or simplifying compliance and 
reporting requirements for small entities under our rules as revised by 
the proposed amendments;
     using performance rather than design standards; and
     exempting small entities from coverage of all or part of 
the proposed amendments.
    The proposed amendments generally do not create any new compliance 
or reporting requirements. Instead, they would expand the number of 
companies eligible for the different compliance and reporting 
requirements available to smaller reporting companies.\147\ As a 
result, we do not believe it is necessary or appropriate to exempt 
small entities in connection with this rulemaking. The proposed 
amendments are intended to increase the number of registrants eligible 
to provide scaled disclosures under Regulation S-K and Regulation S-X. 
We believe that some of the registrants that would become eligible to 
provide scaled disclosures if the proposed amendments are adopted may 
be smaller entities. Therefore, we believe that the proposed amendments 
may simplify compliance and reporting requirements for small entities. 
With respect to the use of performance rather than design standards, 
because the proposed amendments are not expected to have any 
significant adverse effect on small entities (and may, in fact, relieve 
burdens for some such entities), we do not believe it is necessary to 
use performance standards in connection with this rulemaking.
---------------------------------------------------------------------------

    \147\ As discussed in Section V.D, Item 404 is the only 
disclosure item in Regulation S-K that may require more extensive 
information for smaller reporting companies than for non-smaller 
reporting companies.
---------------------------------------------------------------------------

    In Section III, above, we discuss additional alternatives that we 
have considered. We note that those alternatives, such as using a 
different threshold or different standard for determining smaller 
reporting company status, are unlikely to have a significant effect on 
smaller entities because, as noted above, we believe virtually all 
small entities are already eligible for smaller reporting company 
status. Similarly, with respect to the alternative of not amending the 
accelerated and large accelerated filer definitions, we believe there 
are very few small entities that would be considered accelerated filers 
under the current definitions, and, therefore, this alternative would 
not significantly affect small entities.

G. General Request for Comment

    We encourage comments with respect to any aspect of this IRFA. In 
particular, we request comments on:
     The number of small entities that may be affected by the 
proposed amendments;
     The existence or nature of the potential impact of the 
proposals on small entities discussed in the analysis; and
     How to quantify the impact of the proposed amendments.
    Commenters should describe the nature of any impact and provide 
empirical data supporting the extent of the impact. Any comments we 
receive will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed amendments are adopted, and will 
be placed in the same public file as comments on the proposed 
amendments themselves.

VI. Small Business Regulatory Enforcement Fairness Act

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (SBREFA),\148\ the Commission must advise the OMB as to 
whether a proposed regulation constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in:
---------------------------------------------------------------------------

    \148\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     a major increase in costs or prices for consumers or 
individual industries; or
     significant adverse effects on competition, investment or 
innovation.

If a rule is ``major,'' its effectiveness will generally be delayed for 
60 days pending Congressional review.
    We request comment on whether our proposed amendments would be a 
``major rule'' for purposes of SBREFA. We solicit comment and empirical 
data on:
     The potential effect on the U.S. economy on an annual 
basis;
     any potential increase in costs or prices for consumers or 
individual industries; and
     any potential effect on competition, investment or 
innovation.

We request those submitting comments to provide empirical data and 
other factual support for their views to the extent possible.

VII. Statutory Basis and Text of Proposed Rules

    The rule amendments described in this release are being proposed 
pursuant to Sections 7, 10 and 19 of the Securities Act (15 U.S.C. 77a 
et seq.), as amended, Sections 3(b), 12, 13, 15(d) and 23(a) of the 
Exchange Act (15 U.S.C. 78a et seq.), as amended, and Section 72002 of 
the FAST Act.

List of Subjects in 17 CFR Parts 210, 229, 230, 240

    Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the Commission is 
proposing to amend Title 17, Chapter II of the Code of Federal 
Regulations as follows:

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

0
1. The authority citation for part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 
80a-37, 80a-38(a), 80a-39, 80b-11, and 7201 et seq., and 18 U.S.C. 
1350 unless otherwise noted.
* * * * *
0
2. Amend Sec.  229.10 by revising paragraphs (f)(1) and (f)(2) to read 
as follows:


Sec.  229.10  (Item 10) General.

* * * * *
    (f) * * *
    (1) Definition of smaller reporting company. As used in this part, 
the term smaller reporting company means an issuer that is not an 
investment company, an asset-backed issuer (as defined in Sec.  
229.1101), or a majority-owned subsidiary of a parent that is not a 
smaller reporting company and that:
    (i) Had a public float of less than $250 million as of the last 
business day of its

[[Page 43153]]

most recently completed second fiscal quarter, computed by multiplying 
the aggregate worldwide number of shares of its voting and non-voting 
common equity held by non-affiliates by the price at which the common 
equity was last sold, or the average of the bid and asked prices of 
common equity, in the principal market for the common equity; or
    (ii) In the case of an initial registration statement under the 
Securities Act or Exchange Act for shares of its common equity, had a 
public float of less than $250 million as of a date within 30 days of 
the date of the filing of the registration statement, computed by 
multiplying the aggregate worldwide number of such shares 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; or
    (iii) In the case of an issuer whose public float as calculated 
under paragraph (i) or (ii) of this definition was zero, had annual 
revenues of less than $100 million during the most recently completed 
fiscal year for which audited financial statements are available.
    (2) Determination. Whether or not an issuer is a smaller reporting 
company is determined on an annual basis.
    (i) For issuers that are required to file reports under section 
13(a) or 15(d) of the Exchange Act, the determination is based on 
whether the issuer came within the definition of smaller reporting 
company, using the amounts specified in paragraphs (f)(1)(i) or 
(f)(1)(iii) of this Item, as of the last business day of the second 
fiscal quarter of the issuer's previous fiscal year. An issuer in this 
category must reflect this determination in the information it provides 
in its quarterly report on Form 10-Q for the first fiscal quarter of 
the next year, indicating on the cover page of that filing, and in 
subsequent filings for that fiscal year, whether or not it is a smaller 
reporting company, except that, if a determination based on public 
float indicates that the issuer is newly eligible to be a smaller 
reporting company, the issuer may choose to reflect this determination 
beginning with its first quarterly report on Form 10-Q following the 
determination, rather than waiting until the first fiscal quarter of 
the next year.
    (ii) For determinations based on an initial Securities Act or 
Exchange Act registration statement under paragraph (f)(1)(ii) of this 
Item, the issuer must reflect the determination in the information it 
provides in the registration statement and must appropriately indicate 
on the cover page of the filing, and subsequent filings for the fiscal 
year in which the filing is made, whether or not it is a smaller 
reporting company. The issuer must redetermine its status at the end of 
its second fiscal quarter and then reflect any change in status as 
provided in paragraph (f)(2)(i) of this Item. In the case of a 
determination based on an initial Securities Act registration 
statement, an issuer that was not determined to be a smaller reporting 
company has the option to redetermine its status at the conclusion of 
the offering covered by the registration statement based on the actual 
offering price and number of shares sold.
    (iii) Once an issuer determines that it does not qualify for 
smaller reporting company status, it will remain unqualified unless it 
determines that its public float, as calculated in accordance with 
paragraph (f)(1)(i) of this Item, was less than $200 million as of the 
last business day of its second fiscal quarter or, if that calculation 
results in zero because the issuer had no public equity outstanding or 
no market price for its equity existed, if the issuer had annual 
revenues of less than $80 million during its previous fiscal year.
* * * * *

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
3. The authority citation for part 230 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
4. Amend Sec.  230.405 by revising the definition of ``smaller 
reporting company'' to read as follows:


Sec.  230.405  Definitions of terms.

* * * * *
    Smaller reporting company. As used in this part, the term smaller 
reporting company means an issuer that is not an investment company, an 
asset-backed issuer (as defined in Sec.  229.1101 of this chapter), or 
a majority-owned subsidiary of a parent that is not a smaller reporting 
company and that:
    (1) Had a public float of less than $250 million as of the last 
business day of its most recently completed second fiscal quarter, 
computed by multiplying the aggregate worldwide number of shares of its 
voting and non-voting common equity held by non-affiliates by the price 
at which the common equity was last sold, or the average of the bid and 
asked prices of common equity, in the principal market for the common 
equity; or
    (2) In the case of an initial registration statement under the 
Securities Act or Exchange Act for shares of its common equity, had a 
public float of less than $250 million as of a date within 30 days of 
the date of the filing of the registration statement, computed by 
multiplying the aggregate worldwide number of such shares 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; or
    (3) In the case of an issuer whose public float as calculated under 
paragraph (1) or (2) of this definition was zero, had annual revenues 
of less than $100 million during the most recently completed fiscal 
year for which audited financial statements are available.
    (4) Determination. Whether or not an issuer is a smaller reporting 
company is determined on an annual basis.
    (i) For issuers that are required to file reports under section 
13(a) or 15(d) of the Exchange Act, the determination is based on 
whether the issuer came within the definition of smaller reporting 
company using the amounts specified in paragraphs (f)(1)(i) or 
(f)(1)(iii) of Item 10 of Regulation S-K (Sec.  229.10(f)(1)(i) or 
Sec.  229.10(f)(1)(iii) of this chapter), as of the last business day 
of the second fiscal quarter of the issuer's previous fiscal year. An 
issuer in this category must reflect this determination in the 
information it provides in its quarterly report on Form 10-Q for the 
first fiscal quarter of the next year, indicating on the cover page of 
that filing, and in subsequent filings for that fiscal year, whether or 
not it is a smaller reporting company, except that, if a determination 
based on public float indicates that the issuer is newly eligible to be 
a smaller reporting company, the issuer may choose to reflect this 
determination beginning with its first quarterly report on Form 10-Q 
following the determination, rather than waiting until the first fiscal 
quarter of the next year.
    (ii) For determinations based on an initial Securities Act or 
Exchange Act registration statement under paragraph (f)(1)(ii) of Item 
10 of Regulation S-K (Sec.  229.10(f)(1)(ii) of this chapter), the 
issuer must reflect the determination in the information it provides in 
the registration statement and must

[[Page 43154]]

appropriately indicate on the cover page of the filing, and subsequent 
filings for the fiscal year in which the filing is made, whether or not 
it is a smaller reporting company. The issuer must redetermine its 
status at the end of its second fiscal quarter and then reflect any 
change in status as provided in paragraph (4)(i) of this definition. In 
the case of a determination based on an initial Securities Act 
registration statement, an issuer that was not determined to be a 
smaller reporting company has the option to redetermine its status at 
the conclusion of the offering covered by the registration statement 
based on the actual offering price and number of shares sold.
    (iii) Once an issuer determines that it does not qualify for 
smaller reporting company status, it will remain unqualified unless it 
determines that its public float, as calculated in accordance with 
paragraph (1) of this definition, was less than $200 million as of the 
last business day of its second fiscal quarter or, if that calculation 
results in zero because the issuer had no public equity outstanding or 
no market price for its equity existed, if the issuer had annual 
revenues of less than $80 million during its previous fiscal year.
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
5. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., 
and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; 
and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010), unless otherwise 
noted.
* * * * *
0
6. Amend Sec.  240.12b-2 by:
0
a. Amending the definition of ``accelerated filer and large accelerated 
filer'' as follows:
0
i. Adding the word ``and'' at the end of paragraph (1)(ii);
0
ii. Removing ``; and'' at the end of paragraph (1)(iii) and in its 
place adding a period;
0
iii. Removing paragraph (1)(iv);
0
iv. Adding the word ``and'' at the end of paragraph (2)(ii);
0
v. Removing ``; and'' at the end of paragraph (2)(iii) and in its place 
adding a period; and
0
vi. Removing paragraph (2)(iv); and
0
b. Revising the definition of ``smaller reporting company.''
    The revision to read as follows:


Sec.  240.12b-2  Definitions.

* * * * *
    Smaller reporting company. As used in this part, the term smaller 
reporting company means an issuer that is not an investment company, an 
asset-backed issuer (as defined in Sec.  229.1101 of this chapter), or 
a majority-owned subsidiary of a parent that is not a smaller reporting 
company and that:
    (1) Had a public float of less than $250 million as of the last 
business day of its most recently completed second fiscal quarter, 
computed by multiplying the aggregate worldwide number of shares of its 
voting and non-voting common equity held by non-affiliates by the price 
at which the common equity was last sold, or the average of the bid and 
asked prices of common equity, in the principal market for the common 
equity; or
    (2) In the case of an initial registration statement under the 
Securities Act or Exchange Act for shares of its common equity, had a 
public float of less than $250 million as of a date within 30 days of 
the date of the filing of the registration statement, computed by 
multiplying the aggregate worldwide number of such shares 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; or
    (3) In the case of an issuer whose public float as calculated under 
paragraph (1) or (2) of this definition was zero, had annual revenues 
of less than $100 million during the most recently completed fiscal 
year for which audited financial statements are available.
    (4) Determination. Whether or not an issuer is a smaller reporting 
company is determined on an annual basis.
    (i) For issuers that are required to file reports under section 
13(a) or 15(d) of the Exchange Act, the determination is based on 
whether the issuer came within the definition of smaller reporting 
company using the amounts specified in paragraphs (f)(1)(i) or 
(f)(1)(iii) of Item 10 of Regulation S-K (Sec.  229.10(f)(1)(i) or 
Sec.  229.10(f)(1)(iii) of this chapter), as of the last business day 
of the second fiscal quarter of the issuer's previous fiscal year. An 
issuer in this category must reflect this determination in the 
information it provides in its quarterly report on Form 10-Q for the 
first fiscal quarter of the next year, indicating on the cover page of 
that filing, and in subsequent filings for that fiscal year, whether or 
not it is a smaller reporting company, except that, if a determination 
based on public float indicates that the issuer is newly eligible to be 
a smaller reporting company, the issuer may choose to reflect this 
determination beginning with its first quarterly report on Form 10-Q 
following the determination, rather than waiting until the first fiscal 
quarter of the next year.
    (ii) For determinations based on an initial Securities Act or 
Exchange Act registration statement under paragraph (f)(1)(ii) of Item 
10 of Regulation S-K (Sec.  229.10(f)(1)(ii) of this chapter), the 
issuer must reflect the determination in the information it provides in 
the registration statement and must appropriately indicate on the cover 
page of the filing, and subsequent filings for the fiscal year in which 
the filing is made, whether or not it is a smaller reporting company. 
The issuer must redetermine its status at the end of its second fiscal 
quarter and then reflect any change in status as provided in paragraph 
(4)(i) of this definition. In the case of a determination based on an 
initial Securities Act registration statement, an issuer that was not 
determined to be a smaller reporting company has the option to 
redetermine its status at the conclusion of the offering covered by the 
registration statement based on the actual offering price and number of 
shares sold.
    (iii) Once an issuer determines that it does not qualify for 
smaller reporting company status, it will remain unqualified unless it 
determines that its public float, as calculated in accordance with 
paragraph (1) of this definition, was less than $200 million as of the 
last business day of its second fiscal quarter or, if that calculation 
results in zero because the issuer had no public equity outstanding or 
no market price for its equity existed, if the issuer had annual 
revenues of less than $80 million during its previous fiscal year.
* * * * *

    By the Commission.

    Dated: June 27, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-15674 Filed 6-30-16; 8:45 am]
 BILLING CODE 8011-01-P


