The concept of affiliation resonates throughout the federal securities laws, including pertaining to both the Securities Act and Exchange Act rules, regulations and forms and Nasdaq and NYSE compliance. In this multi-part series of blogs, I am unpacking what the term “affiliate” means and its implications. The first blog in the series began with an analysis of the Securities Act definition of “affiliate” and the implications under Rule 144, Section 4(a)(7) and Form S-3 eligibility (see HERE). The second delved into the topic of a primary vs. secondary offering, which itself hinges on whether the offeror is an affiliate (see HERE). In this third part of the series, I will discuss the meaning and implications of an “affiliate” under the Exchange Act.
Exchange Act Definition of Affiliate
Exchange Act Rule 12b-2 defines an affiliate the same as the Securities Act, to wit: ‘An affiliate’ of, or a person “affiliated” with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.” A determination of affiliation under the Exchange Act is the same as under the Securities Act, included at the end of this blog for ease of reference.
Why Does it Matter – Determining Filer Status
A public company with a class of securities registered under either Section 12 or which is subject to Section 15(d) of the Exchange Act must file reports with the SEC (“Reporting Requirements”). The SEC disclosure requirements and timing to file reports are scaled based on company size. The SEC established the smaller reporting company (“SRC”) category in 2007 to provide general regulatory relief to these entities. In addition to an SRC, public company size categories include “non-accelerated filer,” an “accelerated filer” and a “large accelerated filer.”
To complicate matters and although not technically an Exchange Act public company category, the JOBS Act initially enacted on April 5, 2012, created a new category of issuer called an “emerging growth company” (“EGC”). Like an SRC, an EGC can avail itself of certain scaled disclosure requirements. The only difference between the requirements for accelerated and large accelerated filers is that large accelerated filers are subject to a filing deadline for their annual reports on Form 10-K that is 15 days shorter than the deadline for accelerated filers.
Scaled disclosure and the timing of reports is not the only difference between filing categories. Importantly, only certain SRCs, accelerated and large accelerated filers are required to comply with Section 404(b) of the Sarbanes Oxley Act (“SOX”), which requires an outside auditor to attest to, and report on, management’s assessment of the effectiveness of the issuer’s internal control over financial reporting (ICFR). The cost of SOX Section 404(b) compliance is substantial and as such, an accurate determination of reporting company category (and affiliation) has substantial consequences.
The determination of each category of filer requires a calculation of the company’s non-affiliate public float. I will give a brief overview of each category.
Large Accelerated Filer
The term large accelerated filer means an issuer after it first meets the following conditions as of the end of its fiscal year:
(i) The issuer had an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $700 million or more, as of the last business day of the issuer’s most recently completed second fiscal quarter (for a December 31 year-end company, this would be as of June 30);
(ii) The issuer has been subject to the requirements of Section 13(a) or 15(d) of the Act for a period of at least twelve calendar months; and
(iii) The issuer has filed at least one annual report pursuant to Section 13(a) or 15(d) of the Act; and
(iv) The issuer is not eligible to use the requirements for smaller reporting companies under the revenue test in paragraph (2) or (3)(iii)(B) of the “smaller reporting company” definition (i.e., revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available).
To summarize, determining large-accelerated filer status requires an analysis as of two key dates: (i) the last business day of the issuer’s most recently completed second fiscal quarter (for a December 31 year-end company, this would be as of June 30); and (ii) the last date of the issuer’s fiscal year-end. Affiliate status is relevant only on the first date.
An SRC can never be a large accelerated filer.
Accelerated Filer
The term accelerated filer means an issuer after it first meets the following conditions as of the end of its fiscal year:
(i) The issuer had an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $75 million or more, but less than $700 million, as of the last business day of the issuer’s most recently completed second fiscal quarter;
(ii) The issuer has been subject to the requirements of Section 13(a) or 15(d) of the Act for a period of at least twelve calendar months; and
(iii) The issuer has filed at least one annual report pursuant to Section 13(a) or 15(d) of the Act; and
(iv) The issuer is not eligible to use the requirements for smaller reporting companies under the revenue test in paragraph (2) or (3)(iii)(B) of the “smaller reporting company” definition (i.e., revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available).
Like a large accelerated filer, determining non-accelerated filer status requires an analysis as of two key dates: (i) the last business day of the issuer’s most recently completed second fiscal quarter (for a December 31 year-end company, this would be as of June 30); and (ii) the last date of the issuer’s fiscal year end. Affiliate status is relevant only on the first date.
A company that qualifies as an SRC based on the non-affiliated public float test but has in excess of $100 million in annual revenue would be both an SRC and an accelerated filer. A company that is both an SRC and an accelerated filer would: (i) be able to avail itself of the scaled disclosure requirements available to an SRC; (ii) need to file reports based on the timing for an accelerated filer; and (iii) be required to comply with SOX Section 404(b).
Entering and Exiting Accelerated and Large Accelerated Filer Status
Once an issuer becomes either an accelerated or large accelerated filer, the thresholds to exit such status are different than the thresholds to enter the status. In particular, to exit large accelerated filer status an issued must have a worldwide market value of the voting and non-voting common equity held by its non-affiliates of less than $560 million, as of the last business day of its most recently completed second fiscal quarter; or it determines that it is eligible to use the requirements for smaller reporting companies under the revenue test. If the issuer’s non-affiliate market value is greater than $60 million but less than $560 million (and it can’t rely on the SRC revenue test), it becomes an accelerated filer, and if its market value is less than $60 million it becomes a non-accelerated filer.
To exit accelerated filer status, an issuer must have a worldwide market value of the voting and non-voting common equity held by its non-affiliates of less than $60 million, as of the last business day of its most recently completed second fiscal quarter; or it determines that it is eligible to use the requirements for smaller reporting companies under the revenue test. An issuer that makes either of these determinations becomes a non-accelerated filer (not an SRC unless it meets the full definition of an SRC as discussed below).
The following chart illustrates entering and exiting large accelerated and accelerated filer status:
| Initial Public Float Determination |
Resulting Filer Status |
Subsequent Public Float Determination |
Resulting Filer Status |
|
$700 million or more |
Large Accelerated Filer |
$560 million or more |
Large Accelerated Filer |
|
Less than $560 million but $60 million or more |
Accelerated Filer |
||
|
Less than $60 million |
Non-Accelerated Filer |
||
|
Less than $700 million but $75 million or more |
Accelerated Filer |
Less than $700 million but $60 million or more |
Accelerated Filer |
|
Less than $60 million |
Non-Accelerated Filer |
For more on accelerated filer, large accelerated filer and SOX 404(b), see HERE.
Smaller Reporting Company
The term smaller reporting company means an issuer that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:
(1) Had an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of less than $250 million as of the last day of its most recent completed fiscal quarter; or
(2) Had annual revenues of less than $100 million as of the most recently completed fiscal year for which audited financial statements are available, and either:
(i) No public float; or
(ii) A public float of less than $700 million.
A company can be an SRC from the first moment it files a registration statement under either the Exchange Act or Securities Act. Where a company is filing its first registration statement, it can determine the public float value by using any day within 30 days of filing the registration statement. Where the registration statement is filed under the Securities Act (such as an S-1), the company must include the pre-filing equity, plus the number of shares included in the registration statement multiplied by the estimated public offering price.
A company that qualifies as an SRC based on the non-affiliated public float test but has in excess of $100 million in annual revenue would be both an SRC and an accelerated filer. A company that is both an SRC and an accelerated filer would: (i) be able to avail itself of the scaled disclosure requirements available to an SRC; (ii) need to file reports based on the timing for an accelerated filer; and (iii) be required to comply with SOX Section 404(b).
Returning to Smaller Reporting Company Status After an Exit
Although exiting SRC status is pretty straightforward (the company no longer meets the qualifications), to return to SRC status, the company must:
- Have an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of less than $200 million as of the last day of its most recent completed fiscal quarter; or
- Meet the requirements in the following chart:
| Prior annual revenues | Prior public float | |
| None or less than $700 million | $700 million or more | |
| Less than $100 million | Neither threshold exceeded | Public float—Less than $560 million; and |
| Revenues—Less than $100 million. | ||
| $100 million or more | Public float—None or less than $700 million; and | Public float—Less than $560 million; and |
| Revenues—Less than $80 million | Revenues—Less than $80 million. | |
For more on SRC status, see HERE.
Non-Accelerated Filer
Although referred to in rules and statues, the term “non-accelerated filer” is not defined in the federal securities laws. Rather, through dicta and practice, a non-accelerated filer has become known to be a company that is not a large accelerated filer, accelerated filer or an SRC.
Filing Deadlines Based on Filer Category
| Filer Category | Form 10-K | Form 10-Q |
| Large Accelerated Filer | 60 days after fiscal year-end | 40 days after quarter-end |
| Accelerated Filer | 75 days after fiscal year-end | 40 days after quarter-end |
| Non-Accelerated Filer | 90 days after fiscal year-end | 45 days after quarter-end |
| Smaller Reporting Company | 90 days after fiscal year-end | 45 days after quarter-end |
Emerging Growth Companies
The term emerging growth company means an issuer that had total annual gross revenues of less than $1,235,000,000 during its most recently completed fiscal year.
(2) An issuer that is an emerging growth company as of the first day of that fiscal year shall continue to be deemed an emerging growth company until the earliest of:
(i) The last day of the fiscal year of the issuer during which it had total annual gross revenues of $1,235,000,000 or more;
(ii) The last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933;
(iii) The date on which such issuer has, during the previous three-year period, issued more than $1,000,000,000 in non-convertible debt; or
(iv) The date on which such issuer is deemed to be a large accelerated filer, as defined in Rule 12b–2 of the Exchange Act.
For purposes of this blog, the term “affiliate” is important as related to emerging growth company status as a company loses such status when it becomes a large accelerated filer as discussed above.
Although a full discussion of the benefits of emerging growth company status are beyond the scope of this blog, in short, an emerging growth company: (i) benefits from scaled disclosure requirements which are largely similar to SRC status; and (ii) does not need to comply with SOX Section 404(b).
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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