On August 8, 2019, the US Securities and Exchange Commission (SEC) proposed rule amendments to modernize disclosure requirements relating to the business description, legal proceedings and risk factors in registration statements, periodic reports and certain proxy statements filed with the SEC.
The proposal replaces several bright-line categories and quantitative thresholds in Regulation S-K with a more ‘principles-based’ approach. The SEC proposal noted that “because businesses differ in terms of which aspects of these disclosures are material to them… such a flexible approach, as opposed to prescriptive requirements, may elicit more relevant disclosures.”
The Proposed Amendments
The proposed amendment to Item 101(a) relating to disclosures of general business development would:
- provide a non-exclusive list of types of information that registrants may need to disclose, but only to the extent such information is material to understanding the general development of their business;
- add material changes to business strategy as a potential disclosure topic;
- eliminate the five-year lookback as the prescribed timeframe for development of business disclosure; and
- allow registrants to omit the general development of their business disclosure from filings subsequent to their initial registration statement and instead disclose only material changes.
The proposed amendment to Item 101(c) relating to narrative business description would:
- replace the existing list of required disclosure items with a non-exclusive list of disclosure topics, to be addressed only to the extent such topics are material to an understanding of a registrant’s business;
- add human capital resources as a disclosure topic; and
- refocus regulatory compliance disclosure to include material governmental regulations and not just environmental provisions.
The proposed amendment to Item 103 relating to disclosure of legal proceedings would:
- allow registrants to hyperlink or cross-reference to disclosure about legal proceedings located elsewhere in the disclosure document, to avoid duplicative disclosure; and
- revise the $100,000 threshold for disclosure of environmental proceedings where the government is a party to $300,000, in order to adjust for inflation.
The proposed amendment to Item 105 relating to disclosure of risk factors would:
- require a summary of risk factor disclosure if the risk factor section exceeds 15 pages;
- require risk factor disclosure to focus on “material” risks, as opposed to the current SEC guidance to focus on the “most significant” factors; and
- require risk factors to be organized under relevant headings.
The proposal will be subject to a 60-day public comment period following its publication in the Federal Register. The full text of the release relating to the proposed amendments can be found here.
Foreign Private Issuers
The proposals would also affect risk factor disclosure in registration statements of foreign private issuers (FPIs) that file on Forms F-1, F-3 and F-4. Business description and legal proceeding disclosure in registration statements or periodic reports, such as Form 20-F, would not be affected. However, the proposal solicits comments on whether those requirements should be similarly amended to adopt a principles-based approach.
The SEC has been telegraphing its desire to modernize the reporting requirements for some time. These proposals are an important step in that process. We will watch eagerly as the comment period proceeds and look to 2020 for potential implementation of the new rules.
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