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August 14, 2019

SEC Proposes Amendments to Regulation S-K Disclosure


As part of its initiative to modernize and simplify the disclosure requirements of Regulation S-K, as contemplated by the Jumpstart Our Business Startups Act and the Fixing America's Surface Transportation Act, on August 8, 2019, the SEC proposed amendments to the description of business, legal proceedings and risk factor disclosure requirements of Regulation S-K. The amendments generally reflect a shift towards principles-based disclosure and away from prescribed disclosure of specific information.

S-K Item 101(a) - General Development of the Business

Current Regulation: Item 101(a) currently requires a description of the general development of the registrant's business during the past five years, or such shorter period as the registrant may have been engaged in business. This item also requires specified disclosures, including a description of: the year and form of organization; any bankruptcy or similar proceedings; any other material reclassification, merger or consolidation; the acquisition or disposition of any material amount of assets other than in the ordinary course of business; and any material changes in the mode of conducting the business. The proposal would revise 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 five-year disclosure timeframe. S-K Item 101(h), which applies to smaller reporting companies, would also be revised to eliminate the three-year period contained in that item. However, the requirement to provide information with respect to any predecessors if the smaller reporting company has not been in business for three years would be retained.

Proposed Changes: Instead of the prescriptive requirements of the existing rule, proposed Item 101(a)(1) would include a non-exclusive list of the types of information that a registrant may need to disclose if material. The list would include most of the topics currently covered by the item, as well as a description of transactions and events that affect or may affect the company's operations, including material changes to a registrant's previously disclosed business strategy. If a registrant has not previously disclosed its business strategy, however, disclosure of that strategy would not be mandatory (to avoid forcing registrants to disclose proprietary information that could be harmful to their competitive position). To the extent matters beyond those in the proposed list are material to an understanding of the general development of a registrant's business, those would be required to be disclosed as well.

Item 101(a) currently applies to registration statements and annual reports. The proposal would require the disclosure described above in initial registration statements (generally initial registration statements on Form S-1). With respect to filings made after a registrant's initial filing, however, only an update would be required, with a focus on material developments in the reporting period (including if a previously-disclosed business strategy has changed). Reports including only an update would also be required to include a hyperlink to the registrant's most recent filing that, together with the update, would contain the full discussion of the registrant's business contemplated by Item 101. Alternatively, a registrant may continue to provide a complete discussion of its business development, including material updates, in which case no hyperlink would be required. Item 101(h) would be similarly revised.

S-K Item 101(c) - Narrative Description of the Business

Current Regulation: Item 101(c) currently requires a narrative description of the current and proposed business of the registrant and its subsidiaries, focusing on the registrant's dominant segment or each reportable segment. To the extent material to an understanding of the registrant's business taken as a whole, the description of each such segment must include the following specific items: principal products and services; new products or segments; sources and availability of raw materials; specified intellectual property; seasonality; working capital practices; dependence on certain customers; firm backlog orders; business subject to renegotiation or termination of government contracts; and competitive conditions. Item 101(c) specifies two additional items (material effects of compliance with environmental laws, and the number of employees) that must be discussed with respect to the registrant's business in general, although, where material, the registrant must also identify the segments to which those matters are significant.

Proposed Changes: The proposal would revise Item 101(c) to: (i) clarify and expand its principles-based approach, with a non-exclusive list of disclosure topics drawn from a subset of the topics currently contained in Item 101(c); (ii) replace the current reference to the number of employees with a disclosure topic regarding human capital resources, including any human capital measures or objectives that management focuses on in managing the business (with non-exclusive examples that may be material, including with respect to the attraction, development and retention of personnel), to the extent such disclosures would be material to an understanding of the registrant's business; and (iii) refocus the regulatory compliance requirement by including material foreign and domestic government regulations, not just environmental laws, as a topic.

The proposed rule would no longer list the following: working capital practices (with the expectation that this topic would be disclosed in MD+A, where material); disclosure about new segments; and the dollar amount of backlog orders believed to be firm. Nevertheless, disclosure about these topics, as well as any other topics regarding the registrants' business, would still be required if material to an understanding of the registrant's business. The proposal would retain Item 101(c)'s distinction between disclosure topics for which segment disclosure should be the primary focus, and those for which the focus should be on the registrant's business taken as a whole, while clarifying that for any listed topic, disclosure is required only to the extent that it is material to an understanding of the registrant's business taken as a whole.

S-K Item 103 - Legal Proceedings

Current Regulation: Item 103 currently requires disclosure of any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Similar information is to be included for such proceedings known to be contemplated by governmental authorities. An instruction to this item specifically requires disclosure of any proceeding under environmental laws to which a governmental authority is a party, unless the registrant reasonably believes it will not result in sanctions of $100,000 or more; provided, however, that such proceedings which are similar in nature may be grouped and described generally.

Proposed Changes: The proposal would revise Item 103 to: (i) expressly state that the required information may be provided by including hyperlinks or cross-references to legal proceedings disclosure located elsewhere in the document; and (ii) increase the current $100,000 threshold for environmental proceedings to which the government is a party to $300,000 to adjust for inflation.

S-K Item 105 - Risk Factors

Current Regulation: Item 105 currently 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 and organized logically. The principles-based requirement further directs registrants to explain how each risk affects the registrant or the securities being offered, discourages disclosure of risks that could apply generically to any registrant and requires registrants to set forth each risk factor under a sub-caption that adequately describes the risk. The SEC observed that length of risk factor disclosure has increased significantly over time, but that this increase "may not be associated with better disclosure." The proposed revisions to this item are intended to address the lengthy and generic nature of the risk factor disclosure presented by many registrants.

Proposed Changes: The proposal would revise Item 105 to: (i) require summary risk factor disclosure under an appropriately captioned heading if the risk factor section exceeds 15 pages (without defining what constitutes a "page" in an html document for this purpose), consisting of a series of short bulleted or numbered statements summarizing the principal factors that make an investment in the registrant or offering speculative or risky; (ii) refine the principles-based approach of Item 105 by changing the disclosure standard from the "most significant" factors to the "material" factors; and (iii) require 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.

Who is Affected: The proposed amendments to Items 101 and 103 would only impact domestic registrants and foreign private issuers that have elected to file on domestic forms. In contrast, the proposed amendment to Item 105 would affect both domestic and foreign registrants using Forms F-1, F-3, and F-4.

Part of Disclosure Modernization Initiative: The SEC has been considering and soliciting input on changes to Regulation S-K for the past several  years. In developing the proposed amendments, the SEC considered input from comment letters received in response to a Concept Release issued in 2016 with respect to the business and financial disclosure requirements in Regulation S-K, as well as public input in response to the SEC's Report on Review of Disclosure Requirements in Regulation S-K prepared pursuant to the Jumpstart Our Business Startups Act, and a related disclosure effectiveness initiative.

Comment Period: The proposals are subject to a 60-day comment period. Extensive specific and general comments are solicited, including whether any of the proposals described above should apply to foreign private issuers filing on Form 20-F.

© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.