With respect to public companies, the most significant Amendments are the following:
Item 101 of Regulation S-K
- Business Developments: The Amendments eliminate the requirement to provide a description of the general development of the business of the registrant during the past five years (three years if the registrant is a smaller reporting company) and replace it with a largely principles-based approach that requires disclosure of the information material to an understanding of the general development of the registrant’s business. In addition, after an initial filing, a registrant may elect to provide an update disclosing all the material developments that have occurred since the registrant’s most recent filing containing a full discussion of the business, rather than repeating the full description each time. If a registrant elects to provide this scaled disclosure, it must do so by including one (and no more than one) hyperlink to the full discussion. Because only one hyperlink may be included, registrants with frequent material updates may instead decide to provide the full disclosure in each filing (or every few filings) to increase the readability of the business description.
- Narrative Description of Business: The Amendments replace the current list of disclosure topics, many of which date to 1973, with an updated and principles-based disclosure framework, with disclosure being required only to the extent that a topic is material to an understanding of the registrant’s business. The Amendments also include a requirement to provide, to the extent material to the registrant’s business as a whole, (i) a description of the registrant’s human capital resources, including the number of persons employed, and any human capital measures or objectives that the registrant focuses on in managing the business and (ii) a description of the material effects that compliance with all government regulations might have on the registrant, rather than the previous requirement limiting this only to environmental laws.
Item 103 of Regulation S-K
- Legal Proceedings: The Amendments expressly state that the disclosure required by Item 103 may be provided through one or more hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document, such as Management’s Discussion and Analysis, Risk Factors, or a note to the financial statements, to avoid duplicative disclosure. The Amendments also increase the threshold for disclosure of environmental proceedings to which the government is a party from $100,000 to $300,000, but also allows registrants to choose a higher materiality threshold so long as it does not exceed the lesser of $1 million or 1% of the current assets of the registrant on a consolidated basis.
Item 105 of Regulation S-K
- Summary Risk Factor Disclosure: Registrants will now be required to provide in the forepart of a prospectus or annual report, as applicable, summary risk factor disclosure if the risk factor section exceeds 15 pages. The summary risk factor disclosure may not exceed two pages and should include bulleted or numbered statements which concisely summarize the principal risk factors affecting the registrant. The SEC noted in the final rules that, based on its analysis of filings, this new requirement would affect approximately 40 percent of filers. Current practice for initial public offering (IPO) prospectuses has been to include summary risk factor disclosure in the prospectus summary, so the main effect of this change will be on annual reports and on prospectuses for follow-on offerings (to the extent the summary risk factor disclosure is not otherwise able to be incorporated by reference from an annual report). In addition, an issuer contemplating a registration statement filing in the coming months should be cognizant of this requirement in preparing its prospectus.
- Material Risk Factors: To reduce “boiler-plate” risk factor disclosure, the Amendments redefine the type of risks that should be disclosed from the “most significant” risks to “material” risks. The SEC also encouraged registrants to tailor their risk factor disclosure to the particular facts and circumstances of each registrant, disclosing only those risks that make an investment in the registrant or offering speculative or risky.
- Formatting and Organization: Registrants will now be required to organize their risk factor disclosure under relevant headings, with risk factors that could apply generally to any investment in securities, if disclosed, required to appear at the end of the risk factor section under a separate caption entitled “General Risk Factors.” Other than the new category of “General Risk Factors,” the Amendments do not specify risk factor headings that registrants should use. Additionally, the SEC noted in the final rules that the Amendments do not require registrants to prioritize the order in which risk factors are discussed, as this would run counter to the principles-based goal. We note that many registrants already categorize their risk factors, a practice that generally began in response to SEC staff comments in connection with review of IPO registration statements and became more commonplace as risk factors expanded in length.
The Amendments will become effective 30 days after they are published in the Federal Register. Given the usual timing for publishing in the Federal Register, it is likely that the Amendments will become effective before the third quarter reporting season for calendar-year companies, who should make plans now to implement these changes in their upcoming quarterly reports.