RELATED EXPERIENCE

The SEC recently announced by publication in the Federal Register that its latest amendments to Regulation S-K will take effect on November 9, 2020. These amendments, which were adopted by the SEC on August 26, 2020, are designed to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants and reporting companies are required to make pursuant to Regulation S-K. The amendments implicate a range of SEC filings, including quarterly and annual reports on Forms 10-Q and 10-K, respectively. The timing of the SEC’s announcement and the November 9, 2020 effective date call on registrants and reporting companies to take a fresh look at disclosure controls and materiality assessments in the coming weeks and months as quarterly reports become due and fiscal years draw to a close.

Description of Business (Item 101)

With regard to Item 101 of Regulation S-K, the amendments (i) modernize the business disclosure rules “for essentially the first time in over 30 years,” (ii) broaden the scope of and add a new disclosure topic to the “narrative description of business” requirement, and (iii) modify some requirements specific to smaller reporting companies. The amendments effect these changes as follows:

  • Item 101(a) will become “largely principles based, requiring disclosure of information material to an understanding of the general development of the business,” and will no longer include the previously prescribed five-year look-back for business development disclosures;
  • Item 101(a) and (h) will clarify that registrants, in filings made after their initial filings, may provide an update (rather than a full discussion) disclosing the material developments that have occurred since the registrant’s most recent filing containing a full discussion of the general development of its business, and incorporate that prior discussion by reference;
  • Item 101(c) will provide a nonexclusive list of disclosure topic examples;
  • Item 101(c) will require, to the extent material to an understanding of the registrant’s business, “a description of the registrant’s human capital resources,” including any human capital measures or objectives that the registrant focuses on in managing its business;
  • Item 101(c) will refocus the regulatory compliance disclosure requirement by including as a topic all “material government regulations,” not just environmental laws; and
  • Item 101(h) will no longer include the three-year look-back for business development disclosures by smaller reporting companies.

Legal Proceedings (Item 103)

The amendments to Regulation S-K also implicate disclosures by registrants and reporting companies relating to their involvement in ongoing legal proceedings. In its current form, Item 103 requires disclosure of “any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries are party.” The amendments to Item 103 are designed to reduce the burden and length of disclosures by (i) allowing registrants to provide required information by hyperlink or cross-reference to legal proceedings disclosed elsewhere in the document, and (ii) raising to $300,000 the existing quantitative disclosure threshold of $100,000 for disclosure of environmental proceedings to which the government is a party, while also allowing registrants to select a different threshold that is “reasonably designed to result in disclosure of material environmental proceedings.” The intended result is a legal disclosure section that avoids repetition and limits inclusion of information that is not material.

Risk Factors (Item 105)

Item 105 of Regulation S-K currently requires a discussion of the “most significant factors that make an investment in the registrant or offering speculative or risky.” The amendments to Item 105 are designed to address “the lengthy and generic nature of the risk factor disclosure presented by many registrants,” with a specific focus on limiting inclusion of “boilerplate risks that could apply to any offering or registrant.” The amendments modify Item 105(b) to provide that if a registrant’s risk factor disclosure exceeds 15 pages, the registrant must include in the forepart of the document a series of concise, bulleted or numbered statements which summarize, in two pages or less, the principal factors that make an investment in the registrant or offering speculative or risky. The amendments also change the risk factor disclosure standard from “most significant risk factors” to “material risk factors.”

Conclusion

The above discussed amendments to Regulation S-K and their focus on a principles-based disclosure framework are consistent with other recent amendments to the SEC’s rules and regulations, which by and large seek to increase the readability of disclosure documents and limit the inclusion of information that is not material. In addition, these amendments to Regulation S-K further the trends of allowing registrants to more frequently incorporate previously disclosed information by reference, and calling for the increased use of hyperlinks within disclosure documents. Viewed in this context, the soon-to-be effective amendments are the latest in a series of steps taken by the SEC to modernize its disclosure requirements, and make disclosure documents more user-friendly for investors and less onerous for reporting companies.