Training Material
2000 Edition (3.31.00)

Division of Corporation Finance
an Overview

Accounting Disclosure Rules and Practices

Topic Five: Small Business Issuers
Regulation S-B

Table of Contents

I. Definition and Eligibility

A. Must meet all of the following five conditions [SB 10]:

1. Annual revenues of less than $25 million, as reported in its most recent fiscal year (12 months) for which audited financial statements are prepared in accordance with U.S. GAAP.

a) New reporting companies A company that has not previously reported to the  Commission must meet the revenues test based on the most recent fiscal year for which audited financial statements are included in the initial registration statement. However, if, consideration of the pro forma effect of (1) businesses acquired during the latest fiscal year, and (2) consummation of business combinations identified as probable at the time of filing the initial registration statement would result in the issuer exceeding the revenue limit, the issuer would not qualify for use of the S-B form.

b) Previously reporting companies A previously reporting company must meet the revenues test based on its annual audited financial statements as originally filed with the Commission (not restated for subsequent pooling-of-interests transactions or discontinued operations) for the two most recent fiscal years.

c) Banks and similar financial institutions For purposes of the test, a bank must include all  gross revenues from traditional banking activities. Banking activity revenues include interest on loans and investments, dividends on investments, fees from loan origination, fees from trust and investment services, commissions, brokerage fees, mortgage servicing revenues, and any other fees or income from banking or related services. Revenues do not include gains and losses on dispositions of investment portfolio securities (although it may include gains on trading account activity if that is a regular part of the institution's activities).

2. U.S. or Canadian issuer. A small business issuer that ceases to be incorporated in the U.S. or Canada is immediately disqualified from the S-B reporting system.

3. Not an investment company. A small business issuer that becomes an investment company is immediately disqualified from the S-B reporting system.

4. Parent, if any, must qualify. If the issuer is a majority owned subsidiary, the parent entity also must be a small business issuer. An entity that is to be spun off from its parent coincident with or prior to its initial registration may register as a small business issuer if it will otherwise qualify as small business issuer upon consummation of the spin-off.

5. Public float less than $25 million. An entity is not a small business issuer if it has a public float (the aggregate market value of the issuer's outstanding securities held by non-affiliates) of $25 million or more. Apply the public float test as follows:

B. Regular Reporting Company Changing to S-B Reporting System

A reporting company may enter the S-B system only at the beginning of a fiscal year, and must determine at the time of its first filing in a fiscal year (first quarterly report, Form 8-K, or registration statement) whether it will enter the S-B reporting system. A reporting issuer cannot enter the S-B system during a fiscal year if it has already filed Exchange Act reports for periods included in that fiscal year under Regulation S-X. A reporting company may enter the S-B system if it meets both the revenue and the public float test for each of the last two fiscal years.

C. Continued Eligibility to Use the S-B Reporting System

1. Small business issuers wishing to remain in the S-B system must file all Exchange Act reports including Form 8-K, following the requirements of Regulation S-B beginning with the first Exchange Act report in a given fiscal year, or with the first Exchange Act report following effectiveness of the initial S-B registration statement.

2. A company may continue to use the Small Business Issuer forms until it exceeds the revenue limit for two successive fiscal years or it exceeds the public float limit at the end of two consecutive fiscal years. The revenue test is applied to the annual financial statements originally filed with the Commission, not as restated for subsequent discontinued operations or pooling of interests.

3. S-B issuers are permitted to use Form S-1, or any other form for which they qualify, at any time provided that all the requirements of that form are met (including the financial statement requirements). The use of Form S-1 does not disqualify the registrant from filing subsequent Exchange Act reports pursuant to S-B so long as it continues to meet the S-B eligibility requirements. [SB 10(a)(2)(v)]

4. A company may exit the S-B reporting system voluntarily at any time by filing a required report or registration statement on a non-S-B form. After a company has filed using a non-S-B form, it may not re-enter the S-B reporting system until the following fiscal year (with the exception of 3 above), at which time it must satisfy the requirements for a reporting company entering the S-B system.

5. If a S-B issuer becomes a majority-owned subsidiary of a domestic company that is not a small business issuer or a foreign private issuer during the year, the S-B issuer may finish the year reporting under the S-B system. With the start of the next new year, the registrant must report under the S-X/S-K system.

6. For purposes of proxy and information statements, as well as subsequent Form 10-Ks, the small business issuer that has exited the S-B reporting system need not provide the additional disclosures required by Regulations S-X and S-K with respect to fiscal years during which it was an S-B filer. However, registration statements filed by former S-B filers must comply fully with the requirements of the registration form.

II. Other Eligibility Issues

A. Date for determining eligibility

Eligibility for Forms SB-1 and SB-2 with respect to the revenues and public float tests is determined on the date that the form is filed and at 33A-10(a)(3) update time, with the exception of C below. Therefore, transactions subsequent to the filing date and prior to the date of effectiveness do not affect the use of the form.

B. 3-05 or 3-09 financial statements of SX filer

A non-S-B registrant required to furnish financial statements under SX 3-05 or 3-09 may not rely on accommodations in Regulation S-B with respect to the acquired business or investee even though that business would satisfy the tests as a small business or investee.

C. Finalization of year end financial statements

If a reporting company believes it has met the test as a small business issuer for each of the past two fiscal years it may file, immediately after the latest year end, a registration statement using an S-B Form. If it is determined after the financial statements for the latest fiscal year has been finalized that the company does not qualify as a small business issuer, then an amendment must be filed before effectiveness converting the filing to a non-S-B form and complying with the requirements of Regulation S-K and Regulation S-X.

D. Business acquisitions

An S-B reporting company generally continues to qualify for use of S-B forms after the acquisition of another company that is not S-B reporting or S-B eligible until the revenue or public float limits are exceeded for two successive fiscal years.

E. Reverse acquisitions

• The staff considers "reverse acquisitions" with nonoperating public shells to be capital transactions in substance, rather than business combinations. Accordingly, the staff looks to the accounting acquirer's eligibility as a small business issuer.
• If a reverse acquisition occurs in which a non-public operating company is deemed to be the acquirer of an SB public operating company (registrant), the registrant (the legal acquirer) would continue to be SB eligible. In circumstances where the transaction appears to be an initial public offering of a larger, dominant accounting acquirer, the staff may look to the accounting acquirers eligibility as a small business issuer. Refer to Appendix B.
• If the accounting acquirer is a public operating company that reports under Regulations SK and SX, the registrant will no longer be S-B eligible.

F. Other financial statements may be required  

A primary goal of the S-B reporting system is to reduce the impediments to small business financing in the securities markets without compromising the basic protection of investors. Where consistent with the protection of investors, the staff may require the filing of other financial statements where necessary or appropriate. In situations where a small business issuer acquires a company reporting under the Exchange Act pursuant to Regulations S-K and S-X, the staff may require 3 years of audited financial statements for the acquired entity, since those financial statements are already required to be furnished. Further, the staff may raise additional questions as to the eligibility to use the S-B forms after the acquisition.

III.Form and Content Disclosures Required by Regulation S-X
are Not Applicable

A. General

Small business issuers need not comply with the disclosure requirements of Regulation S-X, except as indicated under the "NOTES" to Item 310 of Regulation S-B.

The staff, based on the AICPA Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles in the Independent Auditor's Report, views Staff Accounting Bulletins (SABs) and Financial Reporting Releases (FRRs) to be interpretations of GAAP, and, in most cases, should be applied.

Small Business Issuers must provide all information required by the Industry Guides, and real estate companies should also refer to Item 13 [Investment Policies of Registrant], Item 14 [Description of Real Estate], and Item 15 [Operating Data] of Form S-11.

B. Pro Forma Information

Pro forma financial statements are required in transactional filings whenever a significant business combination has occurred or is probable, and the transaction has not been reflected in at least nine months of historical audited financial statements of the issuer. In addition, pro forma financial information should be furnished whenever consummation of an event or transaction has occurred or is probable for which disclosure of pro forma information would be material to investors. Issuers should consider the guidance in SX Article 11.

NOTE: SB issuers are not required to present pro forma information for periods prior to the periods for which financial statements are required.

For example: Pro forma information depicting a business combination to be accounted for as a pooling of interests requires two years and interim period, not three years.

C. Significant Equity Investees

The disclosure about significant equity investees cited under Item 310(b)(iii) of Regulation S-B is required in both interim and annual financial statements.

D. Canadian Issuers

Canadian small business issuers that present financial statements in accordance with Canadian GAAP shall include a reconciliation to U.S. GAAP that complies with Item 18 of Form 20-F for registration statements (with certain exceptions). The requirements of Item 17 need only be met for financial statements included in periodic reports and certain registration statements. [Note 2 to SB 310]