On August 8, 2019, the SEC proposed amendments aimed at modernizing the disclosure requirements contained in Items 101, 103, and 105 of Regulation S-K in an effort to provide companies with more disclosure flexibility. On August 26, 2020, the SEC adopted the proposed amendments to Regulation S-K substantially as they were proposed, and they will become effective 30 days after publication in the Federal Register.
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 101. Description of Business
Elimination of Five-Year Time Frame
Previously, Item 101(a) required a description of the general business of the registrant during the previous five years, or three years for smaller reporting companies, or such shorter period as the registrant has been engaged in business. Item 101(a) further required information to be disclosed for earlier periods if material to an understanding of the general development of business.
The new regulation requires disclosure of information material to an understanding of the development of the registrant’s business, without regard to any specific timeframe.
Disclosure Regarding Business Strategy
Previously, Item 101(a)(1) set forth a list of prescribed disclosure topics to include in the general development of business disclosures.
The new rule modifies Item 101(a)(1) to instead include a non-exclusive list of the types of information a registrant might need to disclose, to the extent that such disclosure is material to an understanding of the general development of the registrant’s business. The new rule emphasizes a principles-based approach that provides a registrant with flexibility to determine what disclosures should be made.
Updated Disclosure in Subsequent Filings
Item 101(a)(2) is amended to allow registrants, in filings made after an initial disclosure of a business development, to only provide updates of material developments that have occurred since the previous disclosure. However, the previously filed registration statement or report must be incorporated by reference, and, when read together with the update, must contain the full discussion.
Narrative Description of Business
Previously, Item 101(c) required the registrant to provide a narrative description of its business and that description was to include a discussion of 12 specific items.
Pursuant to the new rule, the specific items required for disclosure have been replaced by a non-exclusive list of disclosure topics. Some of these disclosure topics were drawn from the previous Item 101(c) and some of the topics are new, including a description of the registrant’s human capital resources.
Item 103. Legal Proceedings
Item 103 requires the disclosure of any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant is a party or of which any of its property is the subject.
Under the new rule, in an effort to eliminate duplicative disclosure, registrants are now explicitly permitted to hyperlink or cross-reference to applicable disclosure elsewhere in the document, such as in the MD&A, Risk Factors, or a note to the financial statements.
Modified Threshold Increase for Governmental Environmental Proceedings
Previously, Item 103 required the registrant to disclose any governmental environmental proceeding to which the registrant is a party, unless the registrant reasonably believed the proceedings would not result in sanctions of $100,000 or more.
The new rule increases the above reporting threshold to $300,000. However, the new rule also allows a registrant to exercise some flexibility and select a different reporting threshold, provided the custom threshold is designed to result in disclosure of material environmental proceedings and does not exceed the lesser of $1 million or one percent of the current assets of the registrant.
Item 105. Risk Factors
Risk Factor Summary
Item 105 requires a registrant to disclose the most significant factors that make an investment in the registrant or offering speculative or risky.
Under new Item 105(b), if a registrant’s risk factor disclosure section exceeds 15 pages, the registrant will be required to include a risk factor summary in the forepart of the document. The risk factor summary does not need to include all of the risk factors identified in the full risk factor section. The summary should not exceed two pages and must be set forth in a bulleted or numbered format.
“Materiality” Language Amendment
Previously, Item 105 required a registrant to disclose what it deemed to be the “most significant” factors that made investment in the registrant or offering risky or speculative.
Under the new rule, that language has been amended so that registrants are now required to disclose the “material” factors that make an investment in the registrant or offering speculative or risky.
Finally, Rule 105 is amended to require registrants to organize risk factors under relevant headings in addition to the sub captions that are currently required. Additionally, registrants will now be required to include a section titled “General Risk Factors” at the end of the risk factor section that presents and describes risks that could apply to any company or offering.
Final SEC rules on the amendments to Regulation S-K may be found at: https://www.sec.gov/rules/final/2020/33-10825.pdf
Lorna Knick and S. Blake Leger 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.