On March 20, 2019, the SEC adopted amendments to Regulation S-K to modernize and simplify certain disclosure requirements for public companies. The amendments became effective on May 2, 2019. Under the new rules, reporting companies can take advantage of scaled-back disclosure requirements in reports and registration statements filed with the SEC.
Many of the amendments are too technical to cover in this Client Alert. Instead, we summarize below the more significant rule changes in the order of the amended Items in Regulation S-K.
Item 1.02. Description of Property.
Currently, all filers must provide detailed information on their physical properties. Under the new rule, disclosure need be made only to the extent that the information is material to the company. If it is material, then if the property is not owned or is subject to a material encumbrance, a brief description of those details must be provided. Materiality is not quantitatively defined by the SEC in any rule or guideline. The rule developed in the courts is that something is material if an ordinary investor would consider the information important in making an investment or voting decision. As a result, each company needs to assess the importance of any property to its continued operations, both quantitatively and qualitatively.
Item 1.05. Risk Factors.
New Item 1.05 replaces current Item 5.03. Under the new Item, the SEC makes clear that companies are to present only the most significant risk factors that make an investment in the company’s securities speculative or risky. The discussion is to be concise and organized logically. Specifically, issuers are instructed to not present risks that could apply generically to any issuer or any offering. With the new rule, the SEC seeks to reduce the use of generic and boilerplate risks as well as disclosure that is so lengthy as to be unlikely to be read by investors. We expect much attention to be paid to registration statements filed after the effectiveness of the rules and the SEC comments that such filers receive.
Item 3.03. Management’s Discussion and Analysis of Financial Conditions and Results of Operations.
Currently, filers who are required to provide three years of financial statements (generally accelerated filers) must provide a management’s discussion and analysis of all three years. The new rule allows that analysis to cover only the two most recent years if the discussion of that third year was previously included in prior filings. If a filer elects to not provide the analysis of the third year, it also must include a statement that identifies the filing that contains the third year’s analysis.
Item 4.01. Directors, Executive Officers, Promoters and Control Persons.
Currently, reporting companies are not required to provide information about their executive officers in their Forms 10-K, but are required to do so in their proxy and information statements. Many filers voluntarily provide the information about executive management in their Form 10-K. Under the new rule, if a filer provides the now required disclosure regarding its executive officers in its Form 10-K, that information need not also be provided in the proxy or information statement.
Item 4.05. Compliance with Section 16(a) of the Exchange Act.
Under the current rule, all filers must disclose in their proxy statements whether or not directors, executive officers and significant shareholders timely filed all Section 16 reports in the prior fiscal year. In addition, if those reports on Forms 3, 4 or 5 were not timely filed, disclosure must be provided regarding the delinquent filings. Under the new rule, only delinquent filings need be reported.
Item 6.01. Exhibits.
When the new rules are effective, companies will be able to redact from documents required to be filed as exhibits to a periodic report or a registration statement any provision of that exhibit that is both not material to an investment or voting decision and would likely cause competitive harm if publicly disclosed. Examples could be milestone target dates in license agreements, dollar thresholds that trigger payment obligations under any contract and business sensitive terms contained in employment agreements. The SEC can still object to the redaction and request a confidential treatment request be submitted. If the SEC refuses to allow one or more redactions, the company must then re-file the exhibit with any necessary restoration of text that the SEC would not allow to be treated confidentially.
Companies also will be able to redact clearly personal information without requesting confidential treatment, such as tax identification numbers, wire instructions, sensitive contact information, etc.
Further, issuers will no longer have to file schedules to agreements, provided that the schedule contains information that is both not material to an investment or voting decision and would likely cause competitive harm if publicly disclosed. The filed agreement must, however, identify the contents of all omitted schedules unless that information is readily apparent from the agreement being filed.
* * * * *
These amendments will have an impact on public company reports filed on Form 10-K and Form 10-Q, as well as proxy statements and registration statements. We anticipate that the most significant changes to public company disclosures will be found in the scope and content of risk factor discussions. As noted above, we expect registration statements filed after the effectiveness of the new rules to be closely watched, especially if they have been reviewed by the SEC and after they have been declared effective.
Final SEC rules on the amendments to Regulation S-K may be found at: https://www.sec.gov/rules/final/2019/33-10618.pdf
Alexander Donaldson, Donald Reynolds, S. Halle Vakani and Lorna Knick are members of the Capital Markets practice group of Wyrick Robbins, which represents clients across a broad range of industries in connection with their significant financing transactions. The Capital Markets group publishes Client Alerts periodically as a service to clients and friends. The purpose of this Client Alert is to provide general information, and it is not intended to provide, and should not be relied upon as, legal advice.