Smaller Reporting Companies: Things to Know

Small cap companies, such as growing companies that have limited revenues, may be subject to lower financial reporting and disclosure requirements in their public filings with the Securities and Exchange Commission (SEC). This opportunity may be available to companies that fall within the category of “smaller reporting companies” as defined under the U.S. securities laws. The reduced disclosure obligations can be a huge advantage for companies that qualify for “smaller reporting company” status, allowing them to omit information that can be expensive to prepare and provide in SEC filings.

Eligibility to be a Smaller Reporting Company

A company may qualify as a smaller reporting company if it satisfies either of the following criteria:

  • Public float of less than $250 million; or
  • Public float of less than $700 million (including having no public float) and annual revenues of less than $100 million

The public float test is computed by taking the aggregate worldwide number of shares of a company’s voting and non-voting common equity held by non-affiliates and multiplying it by the price the company’s common equity was last sold. The public float is measured as of the last business day of a company’s most recently completed second fiscal quarter. For most public companies this date is June 30th of each year.

If a company no longer qualifies as a smaller reporting company as of the end of its most recently completed second fiscal quarter, it may still be able to take advantage of the reduced disclosure obligations available to smaller reporting companies through the company’s next 10-K annual report. After that point, the company would no longer be allowed to rely on the scaled disclosure accommodations.

Benefits of Smaller Reporting Company Status

Smaller reporting companies are subject to reduced financial reporting, compensation, and other disclosure obligations in their SEC filings. Most companies are required to provide three years of audited financial statements. Companies qualifying for smaller reporting company status only need to provide two years of audited financial statements.

The compensation disclosure requirements are significantly reduced for smaller reporting companies. Such companies can omit the “Compensation Discussion & Analysis” section in a proxy statement or 10-K annual report. They are also exempt from providing other information under Regulation S-K Item 402 regarding executive compensation. This may include:

  • Omitting pay ratio disclosure
  • Omitting grants of plan-based awards table
  • Omitting pension benefits table
  • Only providing two years of summary compensation table information (rather than three years)
  • Only providing detailed compensation disclosure for three named executive officers (rather than five named executive officers)

Another scaled disclosure accommodation available for smaller reporting companies is the opportunity to not include a description of their procedures for the review and approval of related party transactions. However, smaller reporting companies are subject to enhanced disclosure obligations with respect to specific related party transactions. Most companies are required to disclose related party transactions exceeding the $120,000 threshold under Regulation S-X Item 404. For smaller reporting companies, this threshold is the lesser of $120,000 or 1% of total assets.

Examples of Smaller Reporting Companies

A range of companies may qualify for the reduced disclosure requirements afforded to smaller reporting companies. Smaller reporting companies are typically pre-revenue or low-revenue companies that have plans to launch their products and services on a larger scale in the near future. Technology and life sciences companies may be particularly likely to qualify as smaller reporting companies.

One example of a smaller reporting company is the Honest Company, Inc., the personal care brand founded by Jessica Alba. On the cover page of the Honest Company’s annual report on Form 10-K, they check box for “smaller reporting company.” In addition, they do not provide a comparative stock performance graph or quantitative and qualitative disclosures about market risk, citing the exemptions provided by their smaller reporting company status.