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Amendments to Regulation S-K Help Simplify Disclosure Compliance

by | Nov 5, 2020 | Tax and Accounting Desk

The Securities and Exchange Commission (“SEC”) recently issued Final Rulemaking Release No. 33-10825, “Modernization of Regulation S-K Items 101, 103, and 105,” which amends Regulation S-K disclosure Items:

  • 101, “Description of Business,
  • 103, “Legal Proceedings,” and
  • 105, “Risk Factors.”

These amendments, which are part of the SEC’s broader Disclosure Effectiveness Initiative, reflect changes that have occurred in the capital markets and the availability of information and aim to improve the information content of those items and to simplify compliance for registrants.

The main amendments to Regulation S-K from Release No. 33-10825 are as follows:

Description of Business
Item 101 has been amended to become more principles-based as follows:

  • The list of required disclosure matters has been amended to include, (1) material changes to a registrant’s previously disclosed business strategy, (2) the nature and effects of any material bankruptcy or any similar proceeding, (3) the nature and effects of any material reclassification, merger or consolidation, and (4) the acquisition or disposition of any material amount of assets other than in the ordinary course of business.
  • The five-year time period has been eliminated. Instead, registrants are required to focus on disclosing information material to an understanding of the development of their businesses, without the constraint of a specific timeframe.
  • The requirement to provide a narrative description of the registrant’s business focusing on the entity’s dominant segment or each reportable segment has been amended to require information material to an understanding of the business taken as a whole.
  • Discussions are required concerning the material effects that compliance with material government regulations, including environmental regulations, may have upon the capital expenditures, earnings, and the registrant’s competitive position; and (2) the registrant’s human capital resources.
  • As amended, for filings subsequent to a registrant’s initial registration statement, only an update of the disclosure is required, specifically in respect of material developments occurring since the most recent registration statement or report that includes a full discussion of the general development of the registrant’s business. If a registrant chooses this approach, it must incorporate by reference the most recent full discussion of the general development of the business.

Legal Proceedings
Item 103 requires disclosure of any material pending legal proceedings that are outside ordinary routine litigation incidental to the business. Added to the list of required disclosures is:

  • An administrative or judicial proceeding arising under any government provisions enacted or adopted regulating the discharge of materials into the environment to protect the environment is deemed not to be “ordinary routine litigation incidental to the business” must be disclosed if a governmental authority is a party to such proceeding that involves potential monetary sanctions, unless the registrant reasonably believes that such proceeding will result in no monetary sanctions or that such sanctions will be less than $100,000.
  • Additionally, to adjust for inflation, the $100,000 threshold has been raised to $300,000, or at the registrant’s option, another amount that is reasonably designed to result in disclosure of any proceeding material to the business or financial condition, and does not exceed the lesser of $1 million or 1% of the issuer’s consolidated current assets.
  • Item 103 now permits the required information to be provided through hyperlinks or cross-references to the disclosure of legal proceedings located elsewhere in the document.

Risk Factors
Item 105 requires a concise and logically organized discussion of the most significant factors that make an investment in the registrant’s securities offering speculative or risky.

  • The requirements have been amended to discuss “material” rather than the “most significant” risks. The term “material” is based on the definition in Securities Act Rule 405 (i.e., matters to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to purchase the security).
  • While discussions of generic risks continue to be discouraged, if they are included, they must be placed at the end of the risk factor section under the caption “General Risk Factors.”
  • If the risk factor section exceeds 15 pages, summary disclosure of no more than two pages in length, should be placed in the forepart of the prospectus or annual report, as applicable.

EFFECTIVE DATE
The amended rules for Regulation S-K become effective 30 days after publication in the Federal Register.

The full text of the release can be found on the SEC’s website at https://www.sec.gov/rules/final/2020/33-10825.pdf.

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