On August 26, 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to the description of business, legal proceeding, and risk factor disclosures that are required pursuant to Regulation S-K. The SEC has updated these 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. These rule changes are the latest in a series of rule changes proposed and adopted as part of the SEC’s disclosure effectiveness initiative, and reflect the SEC’s consideration of the disclosure requirements in the Staff’s 2013 Regulation S-K study and the 2016 concept release on business and financial disclosure.
On August 8, 2019, the SEC proposed amendments to modernize the disclosure requirements in Items 101, 103, and 105 of Regulation S-K. These proposals were part of a comprehensive evaluation of the SEC’s disclosure requirements that was recommended in the Regulation S-K Study, which was mandated by Section 108 of the Jumpstart Our Business Startups Act. The SEC indicates in the Adopting Release that these changes to Regulation S-K “are intended to improve the readability of disclosure documents, as well as discourage repetition and the disclosure of information that is not material.” The SEC received numerous comment letters in response to the proposed amendments and made some modifications to the final rules in response to some comments.
Item 101(a) of Regulation S-K requires a description of the general development of the company’s business. The SEC adopted amendments to Item 101(a)(1) of Regulation S-K to make the disclosure requirement more principles-based and to provide companies with more flexibility to tailor the disclosure to their unique circumstances.
Prior to the amendments, Item 101(a) required a description of the general development of the company’s business during the past five years, or such shorter period as the company may have engaged in business. The SEC amended Item 101(a) to eliminate the five-year disclosure timeframe and to require companies to focus on the information material to an understanding of the development of their business, without focusing on a specific timeframe.
Item 101(h) sets forth alternative disclosure standards for smaller reporting companies that allow these smaller reporting companies to, among other things, provide a less detailed description of the smaller reporting company’s business than is required under Item 101(a). Prior to the amendments, Item 101(h) required a description of three years (rather than five years) of development of a smaller reporting company’s business. As amended, Item 101(h) no longer includes a provision requiring that smaller reporting companies describe the development of their business during the last three years, and instead directs smaller reporting companies, in describing the development of their business, to provide information for the period of time that is material to an understanding of the general development of the business.
Item 101(a)(2), as amended, specifies that a company may provide, in filings subsequent to its initial registration statement, an update of the general development of its business that discloses all of the material developments that have occurred, if any, since the most recent full discussion of the general development of its business disclosed in a previously-filed registration statement or report. If a company chooses this approach, it must incorporate by reference, and include an active hyperlink to, one registration statement or report that includes the most recent full discussion of the general development of the company’s business. Companies are only permitted to incorporate the full discussion of the general development of its business from a single previously filed document. If a company does not elect this approach, then a complete discussion of the generally development of the company’s business, including any material updates, must be included in in each filing that requires the disclosure.
The SEC amended Item 101(a)(1) to make it more principles-based. The amendments replace the list of prescribed disclosure topics with a non-exclusive list of the types of information that a company may need to disclose. The amendments also clarify that disclosure of a topic would be required only to the extent such information is material to an understanding of the general development of a company’s business. As adopted, the non-exclusive list of topics is as follows:
As amended, Item 101(c) of Regulation S-K requires a narrative description of the business done and intended to be done by a company and its subsidiaries, focusing upon the company’s dominant segment or each reportable segment about which financial information is presented in the financial statements. When describing each segment, only information material to an understanding of the business taken as a whole is required. Disclosure may include, but should not be limited to, the information specified in the list provided in Item 101(c)(1)(i) through (v), which is reduced from the 12 items previously specified in Item 101(c) prior to the amendments:
In the Adopting Release, the SEC notes that topics that were previously listed in Item 101(c)—such as working capital practices, disclosure about new segments, and the dollar amount of backlog orders believed to be firm—may still need to be addressed in the description of the company’s business if they are material to an understanding of the business.
As amended, Item 101(c)(2) specifies two other items that must be discussed with respect to the company’s business in general, although, where material, the company must also identify the segments to which those matters are significant. First, a company must address the material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings, and competitive position of the company and its subsidiaries, including the estimated capital expenditures for environmental control facilities for the current fiscal year and any other material subsequent period. Second, a company must provide a description of the company’s human capital resources, including the number of persons employed by the company, and any human capital measures or objectives that the company focuses on in managing the business (such as, depending on the nature of the company’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).
In the Adopting Release, the SEC emphasized that the examples of human capital measures and objectives are “potentially relevant subjects, not mandates.” The SEC notes that “[e]ach registrant’s disclosure must be tailored to its unique business, workforce, and facts and circumstances.” The SEC did not include more prescriptive requirements for human capital disclosure, in recognition of the fact “that the exact measures and objectives included in human capital management disclosure may evolve over time and may depend, and vary significantly, based on factors such as the industry, the various regions or jurisdictions in which the registrant operates, the general strategic posture of the registrant, including whether and the extent to which the registrant is vertically integrated, as well as the then-current macroeconomic and other conditions that affect human capital resources, such as national or global health matters.” The SEC also did not adopt a definition of the term “human capital” as recommended by some commenters “because this term may evolve over time and may be defined by different companies in ways that are industry specific.”
Item 103 of Regulation S-K requires disclosure of any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the company or any of its subsidiaries is a party or of which any of their property is the subject. Item 103 also requires disclosure of the name of the court or agency in which the proceedings are pending, the date instituted, and the principal parties thereto and a description of the factual basis alleged to underlie the proceeding and the relief sought, and similar information is to be included for proceedings known to be contemplated by governmental authorities.
In the Proposing Release, the SEC noted 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, those provisions also have overlapping disclosure requirements. In an effort to encourage issuers to avoid duplicative disclosure, the SEC amended 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, such as in MD&A, Risk Factors, or a note to the financial statements.
The SEC also amended to Item 103 to eliminate the current instructions to the Item and incorporate the contents of those instructions into the text of Item 103, as proposed.
As proposed, the SEC adopted amendments to modify the threshold for disclosure of any proceeding under environmental laws to which a governmental authority is a party. As amended, Item 103(c)(3) now provides that disclosure under Item 103(b) shall include (but shall not be limited to), among other items, administrative or judicial proceedings (including proceedings which present in large degree the same issues) arising under any Federal, State, or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment. Such proceedings shall not be deemed “ordinary routine litigation incidental to the business” and shall be described if:
The SEC stated in the Adopting Release that it was “persuaded by commenters who suggested a hybrid approach that includes a quantitative threshold while also providing registrants with the flexibility to apply a more tailored disclosure threshold that would best accomplish the Commission’s objectives.”
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 adopted amendments to Item 105 to address what the SEC considers to be the lengthy and generic nature of the risk factor disclosure presented by issuers.
As amended, Item 105(b) specifies that if a company’s risk factor disclosure exceeds 15 pages, the company must provide, in the forepart of the document, a series of concise, bulleted or numbered statements summarizing the principal factors that make an investment in the company or offering speculative or risky. The final amendments limit this risk summary to no more than two pages. The SEC notes in the Adopting Release that “[b]ecause the risk summary is not required to contain all of the risk factors identified in the full risk factor discussion, registrants may prioritize certain risks and omit others.”
The SEC also amended Item 105 to change the standard for disclosure from the “most significant” risks to “material” risks to focus companies on disclosing the risks to which reasonable investors would attach importance in making investment or voting decisions. In the Adopting Release, the SEC notes that this amendment “will result in risk factor disclosure that is more tailored to the particular facts and circumstances of each registrant, which should reduce the disclosure of generic risk factors and potentially shorten the length of the risk factor discussion, to the benefit of both investors and registrants.”
The SEC also amended Item 105 to require that companies organize their risk factor disclosure under relevant headings. Further, if a company 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, the company is required to disclose such risk factors at the end of the risk factor section, under the caption “General Risk Factors.”
The SEC states in the Adopting Release that “[w]e continue to believe that the final amendment will help to address the lengthy and generic nature of the risk factor disclosure presented by many registrants.” The final amendments do not require companies to prioritize the order in which they discuss their risk factors.
This latest round of amendments under the SEC’s disclosure effectiveness initiative will be effective 30 days following publication in the Federal Register.
 Release No. 33-10825, Modernization of Regulation S-K Items 101, 103, and 105 (Aug. 26, 2020), (the “Adopting Release”).
 See Report on Review of Disclosure Requirements in Regulation S-K (Dec. 2013), (the “Regulation S‑K Study”); and Business and Financial Disclosure Required by Regulation S-K, Rel. No. 33-10064 (Apr. 13, 2016), (the “Concept Release”).
 Release No. 33-10668, Modernization of Regulation S-K Items 101, 103, and 105 (Aug. 8, 2019), (the “Proposing Release”).