The U.S. Securities and Exchange Commission (SEC) Thursday extended the public on-ramp for small companies that take longer than five years to generate $100 million in annual revenue, as well as some of the business development companies that invest in them.
The extension, which comes by way of amendments that tailor the types of issuers included in the definitions of “accelerated filer” and “large accelerated filer,” could be a boon to biopharma and med-tech startups that may not see any revenue for several years.
The amendments continue to exempt smaller reporting companies – those with less than $100 million in revenue in the most recent fiscal year – from the requirement to have a separate attestation of their internal control over financial reporting (ICFR) from an outside auditor. Instead, they can redirect the cost savings into growing their businesses, according to the SEC.
The exemption was created under the Jumpstart Our Business Startups (JOBS) Act for emerging growth companies, but it was originally limited to five years. “These amendments would allow smaller reporting companies that have made it to that five-year point, but have not yet reached $100 million in revenues, to continue to benefit from that exemption as they build their businesses, while still subjecting those companies to important investor protection requirements,” SEC Chairman Jay Clayton said in adopting the amendments.
“I am not persuaded that after five years of public reporting, which includes providing audited financial statements and conducting Section 404(a) reviews, these smaller companies should, in year six, be subject to a new, additional control attestation requirement,” he said.
The amendments are incremental, Clayton added, but they represent a meaningful change “that builds on the benefits of the JOBS Act for smaller public companies.”
Citing comments submitted after the SEC first proposed the change, Commissioner Hester Peirce noted the impact the extension will have on the drug and device sector. “The amendments will enable, for example, biotech companies to invest more in research and development. … A company trying to develop a vaccine for a fast-spreading virus, something that is now on all of our minds, will be able to pour resources and – importantly – management’s time and attention into that effort rather than into obtaining an internal controls audit,” she said.
Not all the SEC commissioners were on board with the changes. Commissioner Allison Herren Lee questioned the premise that reducing costs for low-revenue issuers would promote capital formation. “The final rule rests in part on the unsupported hypothesis that relieving companies of modest additional costs for auditor attestation will encourage more companies to go public,” she said. “Unfortunately, there just isn’t evidence for this intuition.”
Herren Lee also questioned the idea that the exemption would create savings that could be used for more productive ends. “Any cost savings for those companies may well be diminished or even negated by an increase in the cost of capital for issuers that do not have auditor attestations,” she said.
While extending the ramp for smaller companies, the amendments will continue to require smaller reporting companies to establish, maintain and certify an effective ICFR. The companies also will continue to be subject to independent financial audits. In addition, the amendments will:
- increase the transition threshold for an accelerated and a large accelerated filer becoming a nonaccelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million;
- add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status;
- add a check box to the cover pages of annual reports on Forms 10-K, 20-F and 40-F to indicate whether an ICFR auditor attestation is included in the filing.
The amendments will become effective 30 days after they’re published in the Federal Register. They will apply to annual report filings due on or after the effective date.