The SEC has issued Compliance and Disclosure Interpretation (C&DI) 130.05 to clarify filer status transition upon loss of SRC status. Specifically, an SRC that qualified under the two-part revenue test but subsequently loses SRC status:
- Retains non-accelerated filer status. If a registrant classified as a non-accelerated filer loses its SRC status under the two-part revenue test at the end of its second fiscal quarter, it will continue to qualify as a non-accelerated filer for all filings due in the year following loss of its SRC status.
- Receives a one-year deferral of 404(b) requirements. The guidance practically grants a one-year deferral before Section 404(b) auditor attestation becomes mandatory by providing a transition relief period for non-accelerated filer registrants in the year they lose their SRC status.
The annual determination of a registrant’s reporting and filer status plays a critical role in meeting mandatory regulatory requirements, including disclosure obligations, Section 404(b) auditor attestation requirements, and the timing of periodic filings. An accurate and timely annual determination of reporting and filing status, especially during transitional years, remains a complex and ongoing challenge for registrants.
Overview of C&DI 130.05
C&DI 130.05 clarifies filer status transition from a non-accelerated filer to an accelerated or a large accelerated filer when a registrant ceases to qualify as an SRC.
By way of background, a registrant can qualify as an SRC at its annual determination date (the last business day of the second fiscal quarter, e.g. June 30 for calendar-year registrants) under:
- Public float test: The registrant must have a public float of less than $250 million (or less than $200 million for requalification assessment); or
- Two-part revenue test: The registrant must have:
- annual revenues of less than $100 million for the most recently completed fiscal year; and
- either no public float, or a public float of less than $700 million (or less than $80 million in annual revenue and/or $560 million public float for requalification assessment).
Under C&DI 130.05, if a registrant previously qualified as an SRC under the two-part revenue test at the last annual determination date but loses its SRC status during the current fiscal year, it does not automatically become an accelerated filer or a large accelerated filer at the current year-end. Instead, it continues to be classified as a non-accelerated filer through the end of the fiscal year in which SRC status is lost. This is because, at the year-end annual filer status assessment, it does not meet all the conditions outlined in the definitions of accelerated filer or large accelerated filer under Rule 12b-2. Notably, these definitions exclude registrants that are eligible to use the requirements for SRCs under the two-part revenue test as of the year-end filer status determination date.
As a result of the C&DI, registrants that previously qualified as SRCs under the two-part revenue test but lose that status are provided targeted transition relief from non-accelerated filer to accelerated or large accelerated filer status. When these registrants lose their SRC status, they are eligible for the following relief measures:
- One-year transition period: Registrants are granted a one-year transition period before they must comply with the Section 404(b) auditor attestation requirement.
- Continued non-accelerated filer status: The registrant remains a non-accelerated filer for all filings due in the fiscal year immediately following the loss of SRC status.
- Scaled disclosure requirements: The registrant may continue to file using the scaled disclosure accommodations for SRCs through the end of the fiscal year when SRC status is lost. However, starting with the first Form 10-Q of the next fiscal year, it must provide full disclosures applicable to larger companies.
This transition relief applies exclusively to registrants who previously qualified as SRCs under the two-part revenue test in the year their SRC status is lost. Registrants who qualified as SRCs solely under the public float test are not eligible for the same transition relief.
KPMG observation:
Emerging Growth Companies (EGCs) are exempt from Section 404(b) until their EGC status ends due to triggering one of the disqualifying provisions. While the C&DI does not specifically address EGC status, it may affect an EGC that loses SRC status and would have otherwise been classified as a large accelerated filer. An EGC that loses SRC status and falls in the scope of this C&DI is not considered to have met all the conditions for classification as a large accelerated filer. As a result, the provision in the EGC definition that disqualifies a company due to large accelerated filer status is not triggered. The registrant continues as an EGC unless any other disqualifying provisions apply, or until such provisions are met in future years.
Determining a registrant’s reporting and filer status is a complex legal process that requires ongoing monitoring and careful evaluation of each registrant’s unique facts and circumstances. Registrants should consult with their advisors when determining their reporting and filer status.
Illustrative examples
The examples below illustrate the applicability of the C&DI. We anticipate the SEC staff will issue additional guidance, including clarifications on particular fact patterns. Due to the ongoing US government shutdown, the timing of such updates remains uncertain. We will continue to closely monitor any developments and share relevant updates as they become available.
