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Investor Advocate Says SEC Gave Insufficient Analysis on Expanding Small Company Definition

January 14, 2019

An investor advocate with the Securities and Exchange Commission (“SEC”) believes the agency failed in its research efforts when analyzing the expansion of its small company definition. In a report to Congress issued on December 20, 2018, Rick Fleming said the SEC should have conducted further analysis before adopting Release No. 33-10513, Amendments to Smaller Reporting Company Definition.

Release No. 33-10513 raises the public float threshold for smaller reporting companies from $75 million to $250 million, which allows nearly 1,000 companies to qualify for the disclosure requirements. Additionally, a company without a public float or with a public float under $700 million is considered a smaller reporting company if the annual revenues in its most recent fiscal year is under $100 million.

Fleming believes the SEC needs to fully grasp the costs of giving less information to investors, who prefer more disclosures to understand a company’s performance. He said the SEC should have reviewed the differences between small and large companies, and how such differences advise what disclosure requirements are appropriate. Fleming also noted that the SEC should have considered analyzing firm-level traits and investors’ information needs. Instead, according to Fleming, the rulemaking uses market indicators related to information environment, liquidity and growth in timeframes concerning other disclosure regulation changes.

This is not the first time Fleming as expressed concern over curtailing disclosure rules without conducting proper analysis. In a 2016 speech, he said scaling back disclosure requirements sets a dangerous path for issuers and their investors. Fleming also remarked that if investors had to choose between investing in a company providing full disclosures or one giving scaled disclosures, they would choose the former.