SEC Mandated to Update 'Small Entity' Definition Every 5 Years, Adjusting for Inflation

This bill, the Small Entity Update Act, is essentially a mandate telling the Securities and Exchange Commission (SEC) to stop letting its definition of a “small entity” gather dust. The core function is procedural: it forces the SEC to study, report, and update how it defines a small business for regulatory purposes.

Specifically, the SEC must conduct a comprehensive study within one year, and then every five years after that, to see if its current definition of a “small entity”—which dictates who gets regulatory breaks and who doesn’t—is still relevant. The bill explicitly requires the SEC to look at how much the financial markets have changed and, crucially, to suggest changes that would increase the number of businesses that actually qualify as “small.” The goal is to make sure that the definition aligns with the original intent of the Regulatory Flexibility Act (Section 2(a)).

Why Your Business Card Might Get an Upgrade

For anyone running a startup, a small investment firm, or even a small governmental jurisdiction that interacts with SEC rules, this is a big deal. When the SEC defines a company as “small,” that company often gets relief from some of the most complex, time-consuming, and expensive regulatory requirements that large corporations have to follow. Think of it like a fast pass through the regulatory airport security line.

If the SEC’s definition hasn't been updated in a while, it means that businesses that are genuinely small by today’s standards—say, a tech company doing $50 million in revenue today versus $50 million twenty years ago—might be getting lumped in with giants just because the old definition didn't account for market growth. This bill forces the SEC to fix that, making it more likely that more mid-sized or growing businesses will qualify for regulatory relief. The SEC must submit these findings and suggestions to Congress before revising its own rules (SEC. 2).

The Inflation Guardrail

One of the most practical provisions in this Act is the mandatory inflation adjustment. After the initial rule revisions, the SEC must update any dollar amounts used in the “small entity” definition every five years, using the Consumer Price Index for All Urban Consumers (CPI) published by the Bureau of Labor Statistics.

This is the policy equivalent of indexing your tax brackets for inflation. If the threshold for being considered “small” is, say, $10 million in assets, that $10 million buys a lot less today than it did a decade ago. Without periodic adjustments, inflation effectively shrinks the pool of companies that qualify as “small” over time. By mandating CPI adjustments, this bill ensures that the regulatory relief intended for small entities doesn't erode simply because the price of everything else is going up (SEC. 2).

What’s the Catch?

While the intent is clearly beneficial—to make sure regulatory burdens are appropriately tailored—the burden of implementation falls squarely on the SEC. They are required to conduct these complex studies and reports every five years, which is a significant administrative workload. Furthermore, while the bill mandates the SEC to suggest changes that increase the number of covered entities, the specific outcome relies on the SEC’s interpretation of what constitutes a “meaningful number” of businesses and how aggressively they choose to revise their rules following the public comment period.