Given how important public companies are to retirement savings and American household finances, the decline in listed companies and the increasing age of IPOs are something we should try to correct.
The two common complaints (from companies) are:
- Going public is very expensive and complicated – partly because of all the reporting they need to do.
- Executing long-term growth strategies is more challenging with quarterly reporting and stock reactions.
Nasdaq has long advocated reduced reporting obligations – either with a greater focus on materiality or through less frequent reporting. Recently, both President Donald Trump and US Securities and Exchange Commission (SEC) Chairman Paul Atkins have supported moving US companies from quarterly to semi-annual reporting. The move would also align US public company obligations with places like the EU and UK
More importantly, as we show today, it can save companies from having to prepare hundreds of pages of disclosures each year.
Company accounting is important for efficient valuation
Public disclosure of accounting data is an important factor in helping investors value stocks. This, in turn, helps ensure that stock markets contribute to efficient asset allocation, thereby growing the economy.
US-listed companies are required to make certain disclosures on SEC forms. There are different rules depending on their status as a domestic issuer or foreign private issuer (FPI). For example:
- 10-K, 20-F, and 40-F: Annual reports including audited financial statements.
- 10-Question: Quarterly report, which contains unaudited financial statements.
- 8-K or 6-K: Ad-hoc in connection with material (or current) events, or SEC-required disclosures, and semi-annual reports (for FPIs).
Table 1: SEC Reporting Requirements
What’s in these SEC filings?
There is much overlap in the content of most routine filings, although annual filings are the most extensive, as Table 2 below shows:
Table 2: What is required in each SEC report
While annual reports are obviously the most comprehensive, the 10-Q and 6-K may also include certain items marked with a red “X” if there is a material development to trigger a company disclosure. Additionally, foreign companies must include in their SEC filings everything they are required to disclose in their home country.
How big are all these filings?
To understand how much work goes into each filing, we counted the number of pages in the latest annual and quarterly (for US companies) or semi-annual reports for all Nasdaq-100® components.
As the data in Chart 1 shows:
- 20-Fs are typically the longest of all the filings (although they usually include copy-pasted data and visualizations from their home country’s filings).
- The 10-K is about twice as long as the 10-Q.
- 6-K are the smallest reports.
Although the 10-Q and semi-annual 6-K reports are similar in length, US companies are preparing 10-Qs three times a year (versus just once for foreign private issuers).
Chart 1: Number of pages in SEC reports for Nasdaq-100® components
Interestingly, the size of the circle reflects the market cap of each company. Visually, the data appears to show that smaller 10-K and 10-Q filings are often filed by the largest companies.
Eliminating the additional two quarterly reports for domestic issuers will save an average of 116 pages of filings per company – approximately 10,000 pages less for the Nasdaq-100® alone.
What is FPI?
At a basic level, foreign private issuers (FPIs) are companies that incorporated abroad But List your stock in the US however, The rules look at the proportion of their shares held by US residents as well as the location of the company’s officers, directors, assets and headquarters. The substantive tests for FPIs are found in Securities Act Rule 405 and Exchange Act Rule 3b-4.
Unlike domestic issuers, FPIs file SEC reports semi-annually (twice a year). FPIs are also able to:
- Use existing reports and presentations that were used for household filing.
- Reduce disclosures for executive compensation, market risk and financial position.
- Use international accounting standards (IFRS) instead of US generally accepted accounting principles (GAAP).
FPIs are also exempt from certain reporting, including insider transactions (although recently enacted US law directs the SEC to require FPIs to file beneficial ownership reports), human capital management resources and objectives, exchange corporate governance rules, SEC proxy solicitation rules, and Regulation FD (for example, FPIs may selectively disclose non-public information).
What is 8-K?
One thing we haven’t talked about much here is content (and current) incident reporting. Domestic issuers must report significant events or corporate changes using SEC Form 8-K.
FPIs use SEC Form 6-K (the same form used for their semi-annual reports) to report current events.
Both the 8-K and the ad hoc 6-K typically cover events such as leadership changes, mergers, auditor changes, changes in securities, bankruptcy, financial results/earnings, or amended financial statements, among many other events.
Although we do not analyze the length or frequency of material event reports in this study, a quick review of EDGAR for some stocks indicates:
- It is not unusual to see 10 material incident reports filed in a year.
- The length of these reports can range from very short (one sentence) to very long, such as the length of a “Super 8-K”, which is used when a D-SPAC merger occurs.
The annual cost of public filings is estimated at $9 billion each year
In addition to staff time spent preparing reports and disclosures, the costs of SEC filings include audit fees, consulting fees, and maintaining systems and technology.
Experts estimate that total annual SEC compliance costs, including audit costs, range from $0.5 million for small companies to $5+ million for larger companies – an average of about $2.3 million per company. For all American companies, this adds up to about $9 billion per year.
If these costs were halved by simply moving US companies from quarterly to semi-annual reporting, using a PE multiple of 10, this could add about $45 billion to US market valuations. This, in turn, will reduce the cost of capital and make going public more attractive.
Most other countries are already semi-annual
Interestingly, less than 20 countries require quarterly reporting. Over the past 25 years, many countries, including the UK, all EU countries and Australia, have moved towards semi-annual reporting.
Moving toward semi-annual reporting for U.S. companies will not only align U.S. public company obligations with other countries, but also help reduce short-termism and reduce reporting costs and cost of capital. This, in turn, should make public companies more attractive to issuers and investors.
