March 15, 2023

Smaller Reporting Companies: Are They Small Enough?

Where have all the public companies gone? Ever since we hit the high water mark for public companies in the 1990s, this question has been asked throughout much of my career, as practitioners, academics, legislators and regulators have tried to figure out where all of the public companies have gone and why the number of IPOs has dropped precipitously over the years. The answers are complex, and it is often hard to see how much of a difference policymakers can make in trying to turn things around, when so much is driven by market dynamics.

In recent remarks at the “Going Public in the 2020s” Conference at Columbia University, Commissioner Mark Uyeda tackled this question again, contributing to a discussion that informs The New Special Study of the Securities Markets, which is intended to re-think how the securities markets should be regulated in the 21st century. One of the suggestions from Commissioner Uyeda is to revisit the test for “smaller reporting company” status. He notes:

Public float measures the value of the public’s investment in a company. It does not measure a company’s ability or resources to pay the attorneys, accountants, consultants, and internal staff to prepare Form 10-Ks, proxy statements, and other filings or to otherwise comply with the Commission’s disclosure rules. Instead, a test based on revenue or gross profit, either in addition to, or in lieu of, public float is better suited to determine whether a company can qualify for the ability to provide scaled disclosure. Gross profit may be more appropriate than revenue because it somewhat neutralizes the impact of the company’s industry and better reflects the company’s ability to pay its “below the line” compliance costs from a financial statements perspective. The Commission should further consider how companies can qualify as a smaller reporting company. Additionally, the starting point for any disclosure rule should be to allow for some degree of scaled disclosure for smaller reporting companies.

Commissioner Uyeda also suggests that smaller reporting companies should, by default, have delayed compliance dates of at least one year on any new disclosure rule.

– Dave Lynn