As part of its ongoing effort to modernize and simplify disclosure obligations applicable to public companies, the US Securities and Exchange Commission (SEC) recently adopted amendments to certain requirements set forth in Regulation S-K. These amendments impact the description of business (Item 101), disclosure of legal proceedings (Item 103) and disclosure of risk factors (Item 105), areas that have not undergone significant modification in more than 30 years.
The amendments are intended to improve the readability of the disclosure while discouraging repetition and eliminating disclosure of immaterial information. In light of these amendments, public companies are encouraged to carefully review their current disclosure, as significant modifications to existing disclosure may be warranted in future filings and registration statements. These amendments will become effective 30 days following publication in the Federal Register and are expected to have the most immediate impact on companies with fiscal years ending on September 30, 2020.
Among others, these amendments implement the following key changes:
- Description of business (Item 101(a)): Replace the requirement to disclose the general development of the registrant’s business over a five-year period (three years for smaller reporting companies) with an obligation to disclose the information material to an understanding of the general development of the registrant’s business, without a specified timeframe. Registrants are now authorized to provide, in filings made after their initial registration statement and following certain requirements, an update (as opposed to a full discussion) on material developments to their business
- Description of business (Item 101(c)): The list of disclosure topics has been replaced with a non-exhaustive list of disclosure topic examples; the list includes a disclosure topic related to the registrant’s human capital resources, measures and objectives. The amendments also expand the previously required disclosure related to the material effects of environmental laws to include the material effects of all applicable government regulations.
- Legal proceedings (Item 103): The disclosure threshold in connection with environmental proceedings involving a governmental authority is increased to $300,000, although the use of an alternative threshold is allowed under certain conditions. The amendments also authorize and encourage companies to include hyperlinks or cross-references to legal proceedings disclosures included elsewhere in the filing.
- Risk factors (Item 105): Under the new amendments, risk factors must be organized under relevant headings. Any such risk factors that may generally apply to any company or investment must be grouped and presented at the end of the risk factor section under a separate “General Risk Factors” heading. The risk factor disclosure standard has been changed from “most significant” to “material” risks. Registrants with risk-factor sections exceeding 15 pages must prepare and provide at forefront of the applicable filing a series of concise, bulleted or numbered statements, which presentation must be no more than two pages in length.