SEC Adopts Amendments To Description Of Business, Legal Proceedings And Risk Factor Disclosures Under Regulation S-K - Securities

On Aug. 26, the Securities and Exchange Commission adopted amendments to the description of business (Item 101), legal proceedings (Item 103) and risk factor (Item 105) disclosure requirements under Regulation S-K. This is the first time in more than 30 years these items have been significantly revised, and these revisions are responsive to changes in the regulatory and business landscape that have occurred since. The SEC stated that these amendments "reflect the [SEC's] long-standing commitment to a principles-based, registrant-specific approach to disclosure"^¹ and "are intended to improve the readability of disclosure documents, as well as discourage repetition and the disclosure of information that is not material."^²

Background

On Aug. 8, 2019, the SEC proposed amendments to modernize the disclosure requirements in Items 101, 103 and 105 of Regulation S-K as part of a comprehensive evaluation of its disclosure requirements mandated by the Jumpstart Our Business Startups Act. The SEC stated that it received numerous comment letters in response to the proposed amendments and is adopting the amendments substantially as proposed, with certain modifications.

The amendments, while in some sense prescriptive, aim to provide registrants with flexibility to tailor disclosure to their specific circumstances. The SEC's principles-based approach encourages registrants to focus on material disclosure that facilitates an understanding of a registrant's business and that reasonable investors would consider important when making investment or voting decisions. In addition, the amendments aim to reduce disclosure costs and burdens to companies.

The amendments will affect a wide variety of SEC filings, including periodic reports and registration statements. The amendments to Items 101 and 103 affect only domestic registrants and foreign private issuers that choose to file on domestic forms, while the amendments to Item 105 affect foreign private issuers and domestic registrants alike.

Amendments to Regulation S-K

The table below summarizes the SEC's amendments to Regulation S-K.^³ These amendments will be effective 30 days after publication in the Federal Register.

Item No.	Current Requirements	Amendments
101(a)	Requires a description of the general development of the business of the registrant during the past five years, or for such shorter period as the registrant may have been engaged in business.	Revises Item 101(a) to: Be largely principles-based, requiring disclosure of information material to an understanding of the general development of the business and eliminating the previously prescribed five-year time frame. Revises Item 101(h) to: Eliminate the three-year time frame with respect to smaller reporting companies. Revises Items 101(a) and (h) to clarify that: Registrants, in filings made after a registrant's initial filing, may provide an update of the general development of the business rather than a full discussion. The update must disclose all of 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 by reference that prior discussion.
101(c)	Requires a narrative description of the business done and intended to be done by the registrant and its subsidiaries, focusing on the registrant's dominant segment or each reportable segment about which financial information is presented in its financial statements. To the extent it is material to an understanding of the registrant's business taken as a whole, the description of each such segment must include disclosure of several specific matters.	Revises Item 101(c) to: Clarify and expand the principles-based approach of Item 101(c), with a nonexclusive list of disclosure topic examples (drawn in part from the topics currently contained in Item 101(c)). Include, as a disclosure topic, a description of the registrant's human capital resources to the extent such disclosures would be material to an understanding of the registrant's business. Refocus the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws.
103	Requires disclosure of any material pending legal proceedings, including the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Similar information is to be included for any such proceedings known to be contemplated by governmental authorities. Contains a threshold for disclosure based on a specified dollar amount ($100,000) for proceedings related to federal, state or local environmental protection laws.	Revises Item 103 to: Expressly state that the required information may be provided by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document, to avoid duplicative disclosure. Implements a modified disclosure threshold that increases the existing quantitative threshold for disclosure of environmental proceedings to which the government is a party from $100,000 to $300,000, but that also affords a registrant the flexibility to select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings, provided that the threshold does not exceed the lesser of $1 million or 1% of the current assets of the registrant and its subsidiaries on a consolidated basis.
105	Requires disclosure of the most significant factors that make an investment in the registrant or offering speculative or risky and specifies that the discussion should be concise, organized logically and furnished in plain English. The item also states that registrants should set forth each risk factor under a subcaption that adequately describes the risk. Additionally, Item 105 directs registrants to explain how each risk affects the registrant or the securities being offered and discourages disclosure of risks that could apply to any registrant.	Revises Item 105 to: Require a summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages. Refine the principles-based approach of Item 105 by requiring disclosure of "material" risk factors. Require risk factors to be organized under relevant headings in addition to the subcaptions currently required, with any risk factors that may apply generally to an investment in securities disclosed at the end of the risk factor section under a separate caption.

Footnotes

1. https://www.sec.gov/news/press-release/2020-192 .

2. https://www.sec.gov/rules/final/2020/33-10825.pdf at 1.

3. Id. at 8.

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