On August 26, 2020, the Securities and Exchange Commission (the SEC) adopted rule amendments to the description of business (Item 101), legal proceedings (Item 103), and risk factor (Item 105) disclosures required by Regulation S-K (the Final Rules).1 The SEC has not significantly revised these specific disclosure items in Regulation S-K in over 30 years and these changes will affect quarterly reports on Form 10-Q and annual reports on Form 10-K. Other than the specific amendments described below, the Final Rules principally reflect a shift from a “prescriptive” disclosure regime to a “principles-based” approach, which focuses on tailored, material disclosure while eliminating redundant, immaterial disclosure.
The amendments in the Final Rules were initially proposed in August 2019 and the SEC adopted the Final Rules with certain modifications to the proposed rule. The Final Rules will go into effect 30 days after publication in the Federal Register, which has not been published as of the date hereof.
The chart below summarizes the existing requirements and the amendments under the Final Rule.
| Regulation S-K Item |
Existing requirement |
Amendment under Final Rules |
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Description of business
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General development of business - Item 101(a)
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Describe the general development of the registrant’s business during the past five years, or such shorter period as the registrant has been in engaged in business.2
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- Eliminates the specific timeframe for describing the registrant’s business, and instead requires a registrant to disclose information material to an understanding of the general development of the business.3
- In filings subsequent to the initial registration statement, a registrant has the option to disclose only material developments if it (a) incorporates by reference to the most recent full discussion of the general developments of its business and (b) includes a hyperlink to the filing including such full discussion.
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In describing developments, include disclosure covering the list of prescribed topics under Item 101(a)(1).
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- Replaces the list of prescribed disclosure topics with a non-exhaustive list of the type of information that a registrant may be required to disclose to the extent material, which (a) adds a requirement to disclose material changes to a previously disclosed business strategy4 and (b) no longer requires (i) the registrant’s year of organization and its form of organization and (ii) any material changes in the mode of conducting business.
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Narrative description of business – Item 101(c)
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Requires a narrative description of the registrant’s business, including information relating to 12 specific items.
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- Replacing the existing requirement with a non-exhaustive list of 10 disclosure topics, which are, in part, from the existing list of topics.
- While the amendments to Item 101(c) are incremental (as described below), the changes are intended to drive more principle-based and substantive disclosure about a registrant’s business, rather than disclosure that is more focused on adhering to an enumerated list:
- Eliminating the reference to the disclosure of working capital practices, new business segments, and the dollar amount of firm backlog;
- Expanding the current requirement to disclose the number of employees of the registrant to include a description of the registrant’s “human capital resources,” including any human capital measures or objectives that management focuses on in managing the business (including to address the development, attraction, and retention of personnel),5 to the extent material to an understanding of the registrant’s business; and
- Broadening the current disclosure topic covering environmental law compliance to include disclosure of the material effects of compliance with all governmental regulations.
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| Legal proceedings |
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Item 103
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- 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.
- A registrant is required to disclose any proceeding under environmental laws to which a governmental authority is a party if the registrant reasonably believes it will result in sanctions of more than $100,000.
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- Expressly allows a registrant to include cross-references or hyperlinks to legal proceeding disclosure elsewhere in the filing, such as the MD&A, risk factors, and the notes to the financial statements.
- Increases the threshold to disclose certain environmental proceedings by increasing the minimum dollar value of such matters to $300,000 and, as an alternative, to allow the registrant to elect a different threshold so long as (i) the threshold does not exceed the lesser of (a) $1,000,000 or (b) 1% of the current assets of the registrant and its subsidiaries on a consolidated basis, (ii) the registrant determines that the threshold is reasonably designed to result in disclosure of any environmental proceeding that is material to its business or financial condition, and (iii) the registrant discloses the threshold, and any subsequent change thereto, in each annual report and quarterly report.
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| Risk factors |
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Item 105
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- Requires disclosure of the most significant factors that make an investment in the registrant or offering speculative or risky.
- Specifies that the discussion should be concise and organized logically.
- Requires each risk factor to be set forth under a sub-caption that adequately describes the risk.
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In an effort to address the length and generic nature of the risk factor disclosure presented by many registrants, the SEC amended Item 105 to encourage more concise disclosure that is tailored to the specific risks applicable to the registrant by:
- Requiring a two-page summary risk factor section in a series of concise bulleted or numbered statements if the risk factor section exceeds 15 pages. Because the summary of risk factors is not required to contain all of the risk factors identified in the full risk factor section, a registrant may prioritize certain risk factors and omit others.
- Changing the standard for disclosure from the “most significant” risks to “material” risks, reasoning that this standard aligns with the standard of disclosure used elsewhere in the federal securities laws (information is generally considered to be “material” if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision). The SEC believes this amendment should reduce disclosure of generic risk factors and potentially shorten the length of the discussion.
- Changing the organization of risk factors (a) to require that risk factors be organized under relevant headings in addition to sub-captions currently required and (b) to place general risk factor disclosure under a separate caption “General Risk Factors” (i.e., risk factors that generally apply to any company or offering of securities and does not explain why such risk is specifically relevant to an investor in the registrant) at the end of the risk factor section.
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Planning ahead
Registrants should begin reviewing their disclosure now to prepare for the Final Rules going into effect. For most registrants (other than those with fiscal years ending September 30, 2020), the amendments to the description of the business and risk factors will not be implemented until a registrant’s next annual report on Form 10-K. However, the changes to the legal proceedings disclosure will likely affect the upcoming quarterly report on Form 10-Q for the quarter ending September 30, 2020.
In addition, a registrant should begin reviewing its business description to consider how to address the changes in the Final Rule, including:
- whether the current discussion of the general development of its business is appropriate or whether a shorter or longer timeframe is more appropriate for its business, or, alternatively, whether to use incorporation by reference to reduce the disclosure to only material updates;
- whether there has been any material change to a previously disclosed business strategy; and
- how to address the new disclosure topics, including compliance with governmental regulations and human capital resources.
Similarly, a registrant should review its risk factors to ensure they are grouped under subheadings and either to tailor any general risk factor disclosure to be specific to the registrant’s business or to move such disclosure under a separate caption titled “General Risk Factors.” In addition, if the updated risk factor section is longer than 15 pages, a registrant will need to prepare a two-page risk factor summary section.
Finally, a registrant should consider whether any other updates are required to its disclosure in light of the SEC’s heightened focus on principles-based disclosure.
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1 The full text of the Final Rule is available here.
2 Under Item 101(h) of Regulation S-K, a smaller reporting company is required to disclose the general development of its business for its business during the last three years.
3 The Final Rules also eliminate the three-year timeframe applicable to smaller reporting companies under Item 101(h) of Regulation S-K.
4 The SEC is not adding a requirement that a registrant disclose its business strategy. Instead, once a registrant has disclosed its business strategy, it must discuss any material changes to such strategy.
5 The SEC declined to define “human capital resources” explaining that such disclosure must be tailored to the registrant’s unique business, workforce, and facts and circumstances. Instead, the SEC identified the attraction, development, and retention of personnel as non-exhaustive examples of topics that may be material to a registrant’s business.
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