SEC Proposes Changes to Business, Legal Proceeding and Risk Factor Disclosure Requirements

Morrison & Foerster LLP
Contact

Morrison & Foerster LLP

The SEC has proposed amendments to the description of business, legal proceeding and risk factor disclosures that are required pursuant to Regulation S-K. The SEC intends to update the rules to account for developments in capital markets and the economy that have occurred over time; to improve disclosure for investors; and to reduce compliance burdens for issuers. The proposals are part of the SEC’s disclosure effectiveness initiative and reflect the SEC’s consideration of this topic in its 2013 Regulation S-K study and 2016 concept release.[1]

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

The SEC is proposing amendments to Item 101(a)(1) of Regulation S-K that “would provide more flexibility to tailor disclosures to the unique circumstances of each registrant, which in turn could result in improved disclosures for investors.” The SEC proposes to require only material updates to this disclosure for filings other than initial registration statements.

Item 101(a) requires a description of the general development of the issuer’s business during the past five years, or such shorter period as the issuer may have engaged in business. The SEC notes that it does not think it is necessary to prescribe a timeframe, and the currently required five-year timeframe may not elicit the most relevant disclosure for every issuer. For this reason, the SEC is proposing to revise Item 101(a) to eliminate the five-year disclosure timeframe and require issuers to focus on the information material to an understanding of the development of their business, without focusing on a specific timeframe. The SEC also proposes to revise Item 101(h) of Regulation S-K to eliminate the provision that currently requires smaller reporting companies to describe the development of their business during the last three years.

Disclosure regarding the general development of the business is currently required in registration statements and annual reports for all issuers. The SEC proposes to retain the requirement for initial registration statements under the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. In filings subsequent to an issuer’s initial registration statement, an issuer would be required to provide an update of this disclosure, focusing on material developments (if any) during the reporting period, including whether the issuer’s business strategy has changed. The SEC also proposes to require that an issuer incorporate by reference, and include an active hyperlink to, the most recently filed disclosure that, together with the update, would present a full discussion of the general development of its business.

The SEC is proposing to amend Item 101(a)(1) to be more principles-based by providing a non-exclusive list of the types of information that a registrant may need to disclose, and by requiring disclosure of a topic only to the extent such information is material to an understanding of the general development of an issuer’s business. The four matters proposed to be included in the non-exclusive list are (i) material bankruptcy, receivership, or any similar proceeding; (ii) the nature and effects of any material reclassification, merger or consolidation of the issuer or any of its significant subsidiaries; (iii) the acquisition or disposition on an material amount of assets otherwise than in the ordinary course of business; and (iv) to the extent material to an understanding of an issuer’s business, transactions and events that affect or may affect the issuer’s operations, including material changes to an issuer’s previously disclosed business strategy.

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

Item 101(c) of Regulation S-K requires a narrative description of the business done and intended to be done by an issuer and its subsidiaries, focusing upon the registrant’s dominant segment or each reportable segment about which financial information is presented in the financial statements. Further, to the extent material to an understanding of the issuer’s business taken as a whole, the description of each such segment must include 10 specific items listed in Item 101(c). Item 101(c) specifies two other items that must be discussed with respect to the issuer’s business in general, although, where material, the registrant must also identify the segments to which those matters are significant. In the proposing release, the SEC notes that, because the 12 items may not be relevant to all issuers, the disclosure requirement can elicit disclosure that is not material to a particular issuer. The SEC proposes to shift the requirements in Item 101(c) to an “updated and more principles-based disclosure framework” that encourages issuers to “exercise judgment in evaluating what disclosure to provide, which would result in disclosure more appropriately tailored to a registrant’s specific facts and circumstances.”

The SEC proposes to include in Item 101(c) a non-exclusive list of disclosure topics that would likely be material to many issuers. The SEC notes that these proposed topics would not be line-item requirements; however, to the extent that a topic is material to an understanding of an issuer’s business, disclosure would be required. Current topics such as working capital practices, disclosure about new segments and the dollar amount of backlog orders believed to be firm would not be included in the non-exclusive list, but issuers still would have to provide disclosure about these topics if they are material to an understanding of their business.

The SEC’s proposed rule amendments would retain the distinction between those disclosure topics for which segment disclosure should be the primary focus, and those disclosure topics for which the focus should be on the issuer’s business as a whole. The proposed amendments clarify that, for any listed topic, disclosure is required only to the extent that it is material to an understanding of the issuer’s business as a whole.

The proposed list of disclosure topics in Item 101(c) would retain information regarding revenue-generating activities, products and/or services, and any dependence on key products, services, product families or customers, including governmental customers, to the extent this information is material to an understanding of an issuer’s business. The list of disclosure topic would also retain information regarding development efforts for new or enhanced products, and trends in market demand and competition would generally be material to an investment decision. With respect to raw materials, the SEC proposes to modernize the disclosure requirements to refocus disclosure on all resources material to an issuer’s business, and to facilitate application of this standard, the SEC proposes including as examples of resources that may be material: (i) raw materials; and (ii) patents, trademarks, licenses, franchises and concessions held. The proposing release notes that the SEC chose not to expand the requirement to include copyrights and trade secrets.

The SEC proposes to retain renegotiation or termination of government contracts as an enumerated disclosure topic in Item 101(c), as well as the extent to which the business is or may be seasonal. The SEC also proposes including the material effects of compliance with material government regulations, not just environmental laws, as a listed disclosure topic in Item 101(c). The SEC expects that this disclosure topic would focus on the material effects that compliance with material governmental regulations, both foreign and domestic, may have upon the capital expenditures, earnings and competitive position of the issuer and its subsidiaries.

The SEC proposes to retain the requirement that an issuer disclose material estimated capital expenditures for environmental control facilities for the current fiscal year and any other subsequent period that the issuer deems material, while not proposing to require the disclosure of additional specific expenditures related to environmental compliance.

The SEC proposes to amend Item 101(c) to refocus requirements regarding human capital resources disclosures. The SEC proposes to replace the current requirement to disclose the number of employees with a requirement to provide information regarding the issuer’s “human capital resources,” including in such description any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the issuer’s business. The proposed amendment provides a non-exclusive list of examples of human capital measures and objectives that the SEC believes may be material, depending on the nature of the issuer’s business and workforce, including measures or objectives that address the attraction, development, and retention of personnel.

Item 103 of Regulation S-K – Legal Proceedings

In the proposing release, the SEC notes that while Item 103 of Regulation S-K and U.S. GAAP differ in certain respects with respect to disclosure of legal proceedings and contingences, these provisions also have overlapping disclosure requirements. In an effort to encourage issuers to avoid duplicative disclosure, the SEC proposes to revise Item 103 to expressly state that some or all of the required information may be provided by including hyperlinks or cross-references to legal proceeding disclosures located elsewhere in the document.

The SEC also proposes to amend Instruction 5.C. to Item 103, which specifically requires disclosure of any proceeding under environmental laws to which a governmental authority is a party, unless the issuer reasonably believes it will not result in sanctions of $100,000 or more. The proposed amendment would increase the $100,000 threshold to $300,000 to adjust for inflation.

Item 105 of Regulation S-K – Risk Factors

Item 105 of Regulation S-K “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 SEC proposes to amend Item 105 to address what the SEC considers to be the lengthy and generic nature of the risk factor disclosure presented by issuers.

The SEC proposes to require summary risk factor disclosure in the forepart of the prospectus or annual report when issuers provide risk disclosure that exceeds 15 pages. The summary would consist of a series of short, concise, bulleted or numbered statements summarizing the principal factors that make an investment in the issuer or offering speculative or risky. The SEC also proposes to update Item 105 to replace the requirement to discuss the “most significant” risks with “material” risks.

The SEC also proposes to require that issuers organize their risk factor disclosure under relevant headings. Further, under the SEC’s proposed amendments, if an issuer chooses to disclose a risk that could apply to other issuers or securities offerings, and the disclosure does not provide an explanation of why the identified risk is specifically relevant to an investor in its securities, an issuer would be required to disclose such risk factors at the end of the risk factor section, under the caption “General Risk Factors.”

Next Steps

These latest proposals in the SEC’s Disclosure Effectiveness initiative will be subject to comment for 60 days following publication in the Federal Register. The SEC has a number of other proposals seeking to make disclosure more effective that remain outstanding, including significant changes to Regulation S-X. While the SEC’s Concept Release dealt with a very wide variety of topics, these latest proposals represent a more measured approach toward modernizing and simplifying the business description, legal proceeding and risk factors disclosure requirements.


[1] See Report on Review of Disclosure Requirements in Regulation S-K (Dec. 2013), available at https://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf, and Business and Financial Disclosure Required by Regulation S-K, Rel. No. 33-10064 (Apr. 13, 2016), available at https://www.sec.gov/rules/concept/2016/33-10064.pdf (the “Concept Release”).

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP | Attorney Advertising

Written by:

Morrison & Foerster LLP
Contact
more
less

Morrison & Foerster LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.