SEC Modernizes Regulation S-K Disclosure Requirements

The US Securities and Exchange Commission (SEC) issued final rule 33-10825, Modernization of Regulation S-K Items 101, 103, and 105, on August 26, 2020. The final rule amends the required Regulation S-K disclosures about a registrant’s business, legal proceedings, and risk factors.

The amendments are effective 30 days after publication in the Federal Register.

Key Provisions

In December 2013, the SEC issued a staff report, Report on Review of Disclosure Requirements in Regulation S-K, as mandated by the Jumpstart Our Business Startups (JOBS) Act. Based on a recommendation in this report, the SEC staff initiated an evaluation of disclosure requirements to assess the information required, how and where the information is presented, and how technology can be better leveraged in an effort to improve the disclosure requirements for both investors and registrants.

On August 8, 2019, in connection with this study, the SEC issued proposed amendments to modernize the following Regulation S-K disclosure requirements:

  • Item 101, Description of Business
  • Item 103, Legal Proceedings
  • Item 105, Risk Factors

After considering the received public comments, the SEC is adopting the amendments substantially as proposed—summarized below.

The final rule intends to improve the readability of disclosures and discourages repetition and disclosure of nonmaterial information. The amendments are primarily principles based, which allow registrants to tailor disclosures and provide information material to understanding their business. 

Considered to be one of the more significant changes, the final rule also includes a new requirement to provide disclosures about the registrant’s human capital resources. 

Item 101, Description of Business

Item 101 currently requires registrants to provide a description of the general development of the business during the past five years. 

The amendments eliminate the prescribed five-year timeframe and require registrants to disclose information material to an understanding of the general development of the business. The current list of prescribed disclosure topics is replaced with a nonexclusive list of types of information that may need to be disclosed.

For filings subsequent to the initial registration statement, registrants will be permitted to provide an update of material business developments that occurred in the current reporting period and a hyperlink to the most recent filing containing the full disclosure.

As noted above, the amendments expand the required disclosures about human capital resources.

In addition to the current requirement to disclose number of employees, registrants will now be required to provide a description of the registrant’s human capital resources.

This includes any human capital measures or objectives that management focuses on in managing the business to the extent such disclosures are material to an understanding of the registrant’s business.

Item 103, Legal Proceedings

Item 103 currently requires disclosure of any material pending legal proceedings and all governmental environmental proceedings that are expected to result in sanctions of $100,000 or more.

To reduce duplicative disclosure, the amendments allow for required information to be provided by hyperlink or cross referenced with legal-proceedings disclosures located elsewhere in the document.

The amendments also increase the quantitative disclosure threshold from $100,000 to $300,000 for certain governmental environmental proceedings. Registrants may elect a higher threshold if it’s reasonably designed to result in the disclosure of material environmental proceedings, and it’s the lesser of either $1 million or 1% of current assets.

Item 105, Risk Factors

Item 105 requires disclosure of the most significant factors that make an investment in the registrant speculative or risky. Registrants should present each risk factor under a subcaption that adequately describes the risk and explains how it affects the registrant.

The amendments refine the principles-based approach of Item 105 by requiring disclosure of material risk factors—rather than the most significant risk factors—organized under relevant headings in addition to the subcaptions currently required.

Risk factors that apply generally to any investment in securities are now located under a separate caption at the end of the risk-factors section.

A summary risk-factor disclosure of no more than two pages is required if the risk-factors section exceeds 15 pages.

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