January 27, 2020

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SEC Looks to Modernize Disclosure Approach

On August 8, 2019, the Securities and Exchange Commission (the “SEC”) announced that it voted to propose rule amendments to modernize the description of business, legal proceedings, and risk factor disclosures that public companies are required to make pursuant to Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934.

The SEC stated that it believes these rule amendments, if implemented, would emphasize a less rigid and a more “principles-based” disclosure approach for registrants. Importantly, these proposed amendments are intended to update the SEC’s rules to account for developments since the last significant revision more than 30 years ago.

The proposed amendments are highlighted below:

  • Item 101(a): General Development of Business
    The SEC has proposed eliminating the time frame in which a registrant must describe the development of its business, allowing the registrant instead to provide any information it deems material to an overall understanding of its development.

  • Item 101(c): Narrative Description of Business
    Currently, item 101(c) lists twelve disclosure topics that should be discussed if deemed material to a registrant’s business taken as a whole. The proposed changes clarify that information on these topics should be provided only if it is material and makes clear that such list is non-exhaustive. The changes would also revise certain topics to align them with current investor expectations. Such changes include, as disclosure topics, compliance with all material government regulations (rather than just “environmental regulations”) and disclosures related to “human capital” (including measures or objectives that address the attraction, development, and retention of personnel), among others.

  • Item 103: Legal Proceedings
    The SEC proposes to increase the monetary threshold from $100,000 to $300,000 for environmental claims.

  • Item 105: Risk Factors
    The proposed amendments to Item 105 would require registrants whose risk factors sections exceed fifteen pages to provide “summary risk factor disclosures” consisting of a list of short, concise statements in summary. The amendments would also revise the requirement of disclosure from the “most significant” risks to instead the “material” risks for each registrant. The SEC release notes that this is intended to address the lengthy and generic nature of the risk factor disclosure currently presented by many registrants. As the SEC noted, one study found that registrants increased the length of risk factor disclosures from 2006 to 2014 by more than 50 percent in terms of word count, compared to the word count in other sections of Form 10-K.

The amendments also propose that certain information may be provided by including hyperlinks or cross-references to disclosures located elsewhere in a document, in an effort to discourage duplicative disclosures.

These amendments do not take immediate effect. The SEC is required to accept comments before issuing final rules.

We are encouraged by these practical developments and the shift to a more “principals-based” approach by the SEC, which approach we see as discouraging disclosure of information that is not material.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.


About this Author

Justin Anslow, Sheppard Mullin Law Firm, New York, Corporate Law Attorney

Justin Anslow is an associate in the Corporate Practice Group in the firm's New York office. Mr. Anslow’s practice focuses on advising public and private companies in securities offerings, corporate governance and SEC reporting. Mr. Anslow's experience includes representation of issuers of securities as well as investors, underwriters and placement agents in connection with both public and private offerings of equity and debt securities. Mr. Anslow assists clients with business entity formation matters, general corporate law matters and securities law compliance,...

Alexander Yarbrough, Sheppard Mullin Law Firm, New York, Corporate Law Attorney

Alexander Yarbrough is an associate in the Corporate Practice Group in the firm's New York office.

Areas of Practice

Mr. Yarbrough concentrates his practice on advising public and private companies with regard to securities offerings, corporate finance, commercial contracts, and mergers and acquisitions. Mr. Yarbrough represents issuers and underwriters in various securities transactions, including initial public offerings, SEC Rule 144A offerings, shelf registrations, registered direct transactions, PIPEs, and private placements. Additionally, Mr. Yarbrough represents issuers in connection with their SEC reporting obligations under the Securities Exchange Act of 1934 and with NASDAQ, NYSE, and other exchange listing and compliance matters.

Jeffrey Fessler, Sheppard Mullin Law Firm, New York, Corporate Law Attorney

Jeffrey Fessler is a partner in the Corporate Practice Group in the firm's New York office. Mr. Fessler is principally engaged in the practice of corporate and securities law. His practice is focused on the representation of public and private companies, principally in the biotechnology industry. Mr. Fessler has extensive experience representing investment banks and companies in public offerings and private placements as well as exchange listings and compliance. In addition, Mr. Fessler has been involved in a wide variety of corporate transactions, including mergers and...