SEC Proposes to Modernize Certain Disclosures Under Regulation S-K
The Situation: In an effort to update the rules to improve disclosures for investors and to simplify compliance efforts for registrants, the U.S. Securities and Exchange Commission ("SEC") has proposed amendments to modernize certain disclosures under Regulation S-K.
The Result: The proposed modifications modernize business, legal proceedings, and risk factor disclosures, and reflect a shift towards a more principles-based disclosure framework.
Looking Ahead: All Exchange Act filers will need to consider the proposed amendments, if adopted, when preparing future SEC reports.
On August 8, 2019, the SEC proposed amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. The proposed amendments seek to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.
The Proposed Amendments
Among other changes, the proposed amendments contemplate the following modifications to Regulation S-K:
General Development of Business (Item 101(a)):
- Eliminate the five-year disclosure time frame and require registrants to focus on the information material to an understanding of the development of their business, irrespective of the time frame;
- Retain the requirement for registrants (including smaller reporting companies) to describe the general development of business in initial registration statements and, for subsequent filings, only require an update—with a focus on material developments, if any, in the reporting period—and an active hyperlink to the most recent filing that, with the update, provides the full discussion;
- Make the disclosure requirements largely principles-based by providing a nonexclusive list of the types of information that a registrant may need to disclose, and require disclosure only to the extent such information is material to an understanding of the development of the registrant's business; and
- Add "transactions and events that affect or may affect the company's operations, including material changes to a registrant's previously disclosed business strategy" to the nonexclusive list of the types of information that a registrant may need to disclose.
Smaller Reporting Companies (Item 101(h)):
Eliminate the three-year disclosure time frame; and
Retain the requirement for smaller reporting companies that have not been in business for three years to provide the same information for their predecessors, if any.
Narrative Description of Business (Item 101(c)):
- Shift to an updated and more principles-based disclosure framework to encourage registrants to exercise judgment in evaluating which disclosures to provide;
- Require disclosure, to the extent that a topic is material to an understanding of a registrant's business, taken as a whole, of an updated nonexclusive list of topics; and
- Include, as disclosure topics, compliance with material government regulations (including environmental regulations) and human capital disclosures (including measures or objectives that address the attraction, development, and retention of personnel), among others.
Legal Proceedings (Item 103):
- Expressly permit some or all of the required information to be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document; and
- Increase the disclosure threshold for environmental proceedings in which the government is a party from $100,000 to $300,000.
Risk Factors (Item 105):
- Require summary risk factor disclosure, in the forepart of the prospectus or annual report, as applicable, if the risk factor section exceeds 15 pages;
- Revise the standard for disclosure from the "most significant" risks to "material" risks;
- Require registrants to organize their risk factor disclosure under relevant headings; and
- If a registrant chooses to disclose generic risk factors (though actively discouraged and not required), require the registrant to disclose such risk factors at the end of the risk factor section under the caption "General Risk Factors."
Foreign Private Issuers:
- The proposed amendments to Items 101 and 103 will affect only domestic registrants and "foreign private issuers" that have elected to file on domestic forms as Regulation S-K does not apply to foreign private issuers unless a form reserved for foreign private issuers (such as Securities Act Forms F-1, F-3, or F-4) specifically refers to Regulation S-K.
- The proposed amendment to Item 105 will affect both domestic and foreign registrants because Forms F-1, F-3, and F-4, like their domestic counterparts, all refer to that Item.
The full release detailing the proposed amendments can be found on the SEC's website. Comments on the proposed amendments are due on or before October 22, 2019.
Two Key Takeaways:
- The proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.
- The proposed amendments, in most instances, reflect a shift towards a more principles-based disclosure framework, encouraging registrants to exercise judgment when deciding what disclosures to provide.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.