SEC Amends Smaller Reporting Company Definition and Requires Inline XBRL

On June 28^th, the SEC adopted amendments to the definition of a smaller reporting company^[1] (SRC) and its XBRL requirements. 

SRC Definition

The amendments increase the financial thresholds in the SRC definition, thereby expanding the number of companies eligible for the scaled disclosures permitted by Regulation S-K and Regulation S-X. The financial thresholds in the definitions of accelerated and large accelerated filer and the related filing requirements (including those related to obtaining audits of internal control over financial reporting) remain unchanged.
 
Under the amended initial qualification thresholds, a company with less than $250 million of public float qualifies as a SRC.  In addition, a company with less than $100 million in annual revenues qualifies if it has either no public float or a public float of less than $700 million. The following table summarizes the new initial qualification thresholds, as compared to the prior thresholds:

SRC Criteria	Prior Definition	New Definition
Public Float	Less than $75 million of public float at end of second fiscal quarter	Less than $250 million of public float at end of second fiscal quarter
Revenues	Less than $50 million of revenues in most recent fiscal year and no public float at the end of the second fiscal quarter	Less than $100 million of revenues in most recent fiscal year and no public float or less than $700 million in public float at the end of the second fiscal quarter

 The amendments also increase the financial thresholds for a company that is not a SRC to enter SRC status, which are set at 80% of the initial qualification thresholds outlined above.  For example, a company may enter SRC status when its public float falls below $200 million at the measurement date.  In addition, a company that is not a SRC because it exceeded either or both of the $100 million annual revenue and $700 million public float thresholds may enter SRC status when it meets 80% of the criteria on which it previously failed to qualify ($80 million of annual revenue and $560 million of public float) and continues to meet any threshold it previously satisfied ($100 million of annual revenue and $700 million of public float).  The following table summarizes the subsequent qualification thresholds:

SRC Criteria	Prior Definition	New Definition
Subsequent Qualification Based on Public Float	Less than $50 million of public float at end of second fiscal quarter	Less than $200 million of public float at end of second fiscal quarter
Subsequent Qualification Based on Revenues	Less than $40 million of revenues in most recent fiscal year and no public float	Less than $80 million of revenues in most recent fiscal year, if it previously had $100 million or more of annual revenues;** and   Less than $560 million of public float, if it previously had $700 million or more of public float**

** A registrant must satisfy a lower threshold only with respect to the threshold it previously exceeded.  For example, if a registrant with less than $700 million of public float lost SRC status because its annual revenues exceeded $100 million, it can re-enter SRC status if its revenues drop below $80 million (i.e., public float does not also need to be below $560 million for the registrant to re-enter SRC status). 
 
The prior definitions of accelerated and large accelerated filer contained a provision that automatically excluded registrants that qualified as SRCs. The final rule eliminates that provision, while maintaining the financial thresholds in the definitions of accelerated filer (i.e., $75 million of public float) and large accelerated filer (i.e., $700 million of public float). Therefore, companies with public float of $75 million or more, but less than $250 million,^[2] that qualify as SRCs under the amended definition, would still be subject to the accelerated filing requirements, including the accelerated timing of filing periodic reports and the requirement to provide the auditor’s attestation on management’s assessment of internal control over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002. However, SEC Chairman Clayton has directed to the staff to develop recommendations for the Commission to consider which would amend the accelerated filer definition and potentially reduce the number of companies that qualify as accelerated filers. 
 
The Commission also made conforming changes to Rule 3-05 of Regulation S-X.  Rule 3-05 requires financial statements of businesses acquired or to be acquired. Rule 3-05(b)(2)(iv) previously allowed registrants to omit such financial statements for the earliest of three fiscal years required if the net revenues of the business acquired or to be acquired are less than $50 million. The Commission increased this revenue threshold in Rule 3-05 to $100 million in line with the amendments to the SRC definition.
 
The amendments, which become effective 60 days after they are published in the Federal Register, can be found here on the SEC’s website.

Inline XBRL

The SEC also amended its XBRL reporting requirements to require the use of “Inline XBRL,” which will allow the financial statements to be both human-readable and machine-readable.  Historically, issuers have been required to provide XBRL data in an exhibit to their filings.  Consequently, issuers copy their financial statement information into a separate document and tag it in XBRL.  The amendments require issuers to embed XBRL tags directly in their financial statements using a format known as Inline XBRL in lieu of providing tagged data in a separate exhibit.  The intent of the amendments is to reduce the preparation costs over time and improve the quality, timeliness and usefulness of the data, which benefits investors and other market participants.   
 
The Inline XBRL requirements take effect based on filing status as follows:

• June 15, 2019 – large accelerated filers that prepare their financial statements in accordance with U.S. GAAP;

• June 15, 2020 – accelerated filers that prepare their financial statements in accordance with U.S. GAAP; and

• June 15, 2021 – all other filers.

Form 10-Q filers will commence Inline XBRL reporting in their Form 10-Q for the first quarter ending on or after these dates.
 
Filers will be permitted to file using Inline XBRL prior to their compliance date once the SEC modifies its EDGAR system to accept submissions in Inline format.  The SEC expects this to occur in March 2019.^[3] 
 
The requirement for companies to post XBRL data on their websites is eliminated upon the applicable effective date.
 
Currently, the information in XBRL files is excluded from the officer certification requirements, and issuers are not required to obtain assurance on such information from third parties, such as auditors.  In the adopting release, the Commission noted that the change in format to Inline XBRL does not change this.
 
The amendments are available here on the SEC’s website.