Smaller reporting company: Overview, definition, and example
What is a smaller reporting company?
A smaller reporting company is a classification defined by the U.S. Securities and Exchange Commission (SEC) for companies that meet certain criteria based on their revenue and market capitalization. These companies are subject to less stringent financial reporting and disclosure requirements compared to larger, more established public companies. The SEC created the smaller reporting company category to reduce the regulatory burden on smaller businesses, allowing them to focus more on growth while still maintaining transparency and accountability.
For example, a smaller reporting company may not be required to provide as detailed financial statements or may have more leniency in certain aspects of corporate governance.
Why is a smaller reporting company important?
The concept of a smaller reporting company is important because it helps to level the playing field for smaller businesses in the public markets. By offering reduced disclosure requirements, the SEC makes it easier for emerging companies to access capital markets without incurring the same costs and administrative burdens that larger companies face. For investors, understanding a company’s classification as a smaller reporting company helps set expectations for the depth of financial reporting and regulatory compliance.
For businesses, being classified as a smaller reporting company can provide certain regulatory advantages and lower costs associated with filing and maintaining public reporting requirements.
Understanding smaller reporting company through an example
Imagine a tech startup, InnovateTech, that recently went public with a market capitalization of $100 million. Because InnovateTech's market cap falls below a certain threshold set by the SEC, it qualifies as a smaller reporting company. As a result, InnovateTech enjoys relaxed reporting requirements, such as the ability to file less detailed financial statements, compared to larger companies with market caps over $700 million. This reduction in regulatory burden allows InnovateTech to allocate more resources toward research and development instead of spending heavily on compliance.
In another example, a smaller manufacturing company, GreenMaterials Co., with annual revenue of $60 million, qualifies as a smaller reporting company. As a result, GreenMaterials is not required to disclose as much financial detail in its filings, such as full executive compensation information, which helps the company reduce its administrative costs while still offering sufficient information for investors to make informed decisions.
An example of a "smaller reporting company" clause
Here’s how a clause like this might appear in a contract:
“The Company qualifies as a Smaller Reporting Company under the SEC’s regulations and will comply with the applicable reduced disclosure requirements, as outlined in Regulation S-K.”
Conclusion
A smaller reporting company is a designation by the SEC that allows smaller public companies to reduce their regulatory and financial reporting burdens, making it easier for emerging businesses to comply with public market requirements. By benefiting from less stringent disclosure rules, smaller reporting companies can save on costs and focus on growth. For investors, understanding this designation helps set realistic expectations for the level of information available and the associated risks.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.