On March 18, 2020, the SEC issued a release announcing a rule change that exempts companies with less than $100 million in annual revenue from the internal control audit performed by an external auditor (SOX 404 audit).
The details of the release can be found here.
Previously, Emerging Growth Companies (EGCs) were exempt from the auditor’s attestation on internal controls (SOX 404 audit). However, EGC status was automatically lost five years after the IPO, regardless of revenue or market capitalization. This system placed a significant burden on biotech ventures and other ventures with investment-led business models whose company size did not grow significantly even five years post-listing.
Under the new rules, the definitions of “accelerated filer” and “large accelerated filer” have been amended. Smaller companies with less than $100 million in revenue are now classified as “non-accelerated filers,” regardless of the number of years since their IPO or their market capitalization.
Previously, companies automatically became “large accelerated filers” (and thus subject to the internal control audit) if five years had passed since their IPO or if their public float reached $700 million, regardless of their revenue.
It should be noted that even as “non-accelerated filers” with less than $100 million in revenue, management’s assessment of internal controls and the standard financial statement audit are still required (the same requirements as for EGCs).
This change can be described as a groundbreaking rule change for Japanese venture companies aiming for an IPO on Nasdaq or the NYSE. Because the SOX audit is not required until revenue exceeds $100 million, the burden on companies is reduced. This also lowers the risk for accounting auditors, which will undoubtedly lower the hurdle for U.S. listings compared to before.
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