SEC Updates Disclosure Requirements for Risk Factors and Business and Legal Proceeding Descriptions

Exchange Act Reports; Securities Act Filings

On August 26, 2020, the Securities and Exchange Commission announced changes to Regulation S-K intended to modernize certain disclosures related to an issuer’s business description, legal proceedings, and risk factors in both current and periodic reports under the Exchange Act and filings under the Securities Act.  The adopting release can be found here and the changes will become effective 30 days after publication in the Federal Register.

The general development of business disclosures required by Regulation S-K Item 101(a) have been amended by:

• making it largely principles-based, requiring disclosure of information material to an understanding of the general development of the business;
• replacing the five-year time frame with a materiality framework; and
• permitting companies, in filings made after their initial filing, to provide only an update of the general development of the business focused on material developments that have occurred since the most recent full discussion of the development of the business, which will be incorporated by reference.

The description of business disclosures required by Regulation S-K Item 101(c) have been amended by:

• clarifying and expanding its principles-based approach, with a nonexclusive list of disclosure topic examples drawn in part from topics currently contained in Item 101(c);
• including, as a disclosure topic, a description of a company’s “human capital resources” to the extent such disclosures would be material to an understanding of the company’s business; and
• refocusing the regulatory compliance disclosure requirement by including all material government regulations, not just environmental laws.

The legal proceedings disclosures required by Regulation S-K Item 103 have been amended by:

• expressly permitting use of hyperlinks or cross-references within the document to avoid duplicative disclosure; and
• implementing a modified disclosure threshold that increases the current threshold from $100,000 to $300,000 ^[1] for certain governmental environmental proceedings.

The risk factor requirements of Regulation S-K Item 105 have been amended by:

• requiring a maximum two-page summary of risk factors if the risk factor section exceeds 15 pages;
• refining the principles-based approach of Item 105 by requiring disclosure of “material” risk factors; and
• requiring risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption, in addition to the subcaptions currently required.

SEC Chairman Jay Clayton noted, “Today we modernized our public company business disclosure rules for essentially the first time in over 30 years.  Building on our time-tested, principles-based disclosure framework, the rules we adopt today are rooted in materiality and seek to elicit information that will allow today’s investors to make more informed investment decisions. I am particularly supportive of the increased focus on human capital disclosures…”

Assistance

Please contact any member of Orrick’s Capital Markets Group for further assistance regarding coronavirus disclosures and other legal impacts of coronavirus on your company.   

^[1] Companies allowed select a different threshold that the company 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 one percent of the current assets of the company.