Filer status and the 404(b) exemption for non-accelerated filers

• Apply the accelerated and large accelerated filer conditions to an issuer
• Explain how the 2020 amendments use the SRC revenue test to exclude issuers
• Determine whether 404(b) applies, using 15 U.S.C. 7262(b) and (c)
• Identify what a non-accelerated filer still must do under 404(a)

Why filer status matters for SOX

Section 404(b) of the Sarbanes-Oxley Act requires the company’s auditor to attest to management’s ICFR assessment. Two statutory carve-outs decide who is outside it:

• 15 U.S.C. 7262(b) does not apply to an emerging growth company (EGC). The JOBS Act of 2012 added this exemption.
• 15 U.S.C. 7262(c), added by Section 989G of the Dodd-Frank Act in 2010, says 404(b) does not apply to an issuer that is neither a large accelerated filer nor an accelerated filer, as those terms are defined in Exchange Act Rule 12b-2.

Filer status therefore drives the cost of the SOX program. It also drives filing deadlines, so the finance team already tracks it.

The definitions

Release 34-88365 summarizes the conditions. An accelerated filer:

1. had an aggregate worldwide public float of $75 million or more, but less than $700 million, as of the last business day of its most recently completed second fiscal quarter;
2. has been subject to Exchange Act Section 13(a) or 15(d) reporting for at least twelve calendar months;
3. has filed at least one annual report under those sections; and
4. is not eligible to use the smaller reporting company (SRC) revenue test.

A large accelerated filer meets the same conditions with a public float of $700 million or more.

Public float is measured on the last business day of the second fiscal quarter. For a calendar-year company, that is the last business day of June, and the status applies to the 10-K for that fiscal year.

The 2020 amendments

Before 2020, an SRC with a public float of $75 million or more could still be an accelerated filer. The SEC adopted amendments on March 12, 2020, effective April 27, 2020, that exclude from both definitions an issuer that is eligible to be an SRC under the SRC revenue test and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. Under the SRC definition, the revenue test covers issuers with annual revenues under $100 million and either no public float or a public float under $700 million.

Release 34-88365 explains the overlap the amendments addressed. After the 2018 SRC changes, an issuer could be both an SRC and an accelerated filer if it had either a public float of $75 million or more but less than $250 million, regardless of revenue, or revenues under $100 million and a public float of $250 million or more but less than $700 million. The 2020 amendments took the low-revenue group out of the accelerated filer definitions. The first group remains: an SRC with a public float from $75 million up to $250 million and revenues of $100 million or more is still an accelerated filer and still needs 404(b).

The amendments also raised the transition thresholds: from $50 million to $60 million for an accelerated or large accelerated filer to become a non-accelerated filer, and from $500 million to $560 million to exit large accelerated filer status. They added a revenue test to those transition thresholds and a cover-page check box on Forms 10-K, 20-F and 40-F showing whether an ICFR auditor attestation is included.

What a non-accelerated filer still does

The SEC’s release is explicit: low-revenue issuers remain obligated to establish and maintain ICFR and to have management assess its effectiveness. They lose only the auditor’s attestation. So the non-accelerated filer still:

• runs a 404(a) evaluation and includes management’s report in the 10-K;
• provides quarterly Section 302 certifications;
• receives the financial statement auditor’s communications about control deficiencies found in the audit.

The financial statement auditor still evaluates controls as part of the audit; the amendments do not change the auditor’s role in the financial statement audit.

Working the test each year

Build a one-page status memo each second quarter:

1. Public float at the last business day of Q2, with the share count held by non-affiliates and the price used.
2. Annual revenues for the most recent fiscal year with audited financial statements.
3. EGC status and the date it ends.
4. Conclusion on accelerated, large accelerated or non-accelerated status, and whether 404(b) applies for the year.

Have the audit committee see the memo, because a status change can add an ICFR audit with little notice.

Three issuers, three answers