On August 26, 2020, the Securities and Exchange Commission (“SEC”) adopted amendments to modernize the business, litigation, and risk factor disclosure required by Regulation S-K. As the first major amendments to these disclosure requirements in 30 years, the SEC expects these requirements to better adjust to changes in businesses and the overall economy over time than the prior disclosure regime.
The amended rules take a principles-based approach that is rooted in materiality. When announcing the amendments, the SEC commissioners stressed the flexibility of these requirements and the ability for public companies to adjust the disclosure to best suit their businesses. The major updates in these amendments include:
- Focusing business description on materiality, not line items: Instead of being required to discuss line items that may not be material to the business, the new rule includes a non-exclusive list of disclosure topic examples for public companies to consider discussing when describing their businesses.
- Removing prescribed timeframe for description of the development of the business: Public companies will only be required to provide material updates about the development of their business as long as they incorporate the most recent full description by reference, and the mandatory lookback period of five or three years will be eliminated.
- Encouraging companies to shorten risk factors: If a company’s risk factor disclosure exceeds 15 pages, the amended rule requires the company to provide a bullet-point summary of material risks to the company that is no more than two pages long. The amended rule also requires risk factors to be organized under relevant headings, with risks that may generally apply to an investment in securities to be disclosed at the end of the risk factor section under its own caption.
- Updating legal proceedings disclosure: The quantitative threshold for disclosing certain governmental environmental proceedings was increased from $100,000 to $300,000 and the amended rule allows companies to elect to use a higher threshold based on the particular circumstances of the company. In addition, the rule now expressly allows hyperlinking or cross-referencing to other discussion of legal proceedings to avoid duplicative disclosure.
The amendments will be effective 30 days after publication in the Federal Register, meaning that public companies will likely have to start adjusting to these new rules by the time of their next Exchange Act reports. The members of our Securities and Capital Markets team will be digesting the new rules and are available to answer your questions about the new requirements. A more detailed description of the amendments to Regulation S-K will be included in the upcoming Securities and Capital Markets quarterly newsletter.