S-K Disclosure Requirements

Key issues: SEC adopts rules to update and simplify disclosure requirements In an effort to eliminate standard lengthy and generic risk information, the SEC amended Section 105 as follows: We encourage companies to first review their existing disclosure practices. Many registrants already include events outside the five-year period when such events are important to understanding business performance. In addition, the changes can provide an opportunity for companies to step back and think at a high level about key business developments and what is critical for investors today. As part of the SEC`s ongoing assessment of disclosure requirements, the amendments adopted are intended to modernize, simplify and improve financial reporting. They eliminate the requirement to disclose certain financial data and modify the additional information provided to financial reporting and MD&A. Recently, the SEC adopted amendments to the disclosure requirements of sections 101, 103 and 105 of Regulation S-K. As we discussed last year when the SEC first proposed changes to this disclosure, the amendments generally follow a principles-based approach that, as SEC Chairman Jay Clayton explained, is “rooted in materiality.” [1] The final version of the rule includes a diagram comparing the existing requirements with the final amendments for which we have included a link at the end of this disclaimer. Regulation S-K requires qualitative information for a wide range of filings, both under the securities law and those under the Exchange Act. Section 10 of Regulation S-K states that the requirements of Regulation S-K apply to registration statements for initial public offerings (IPOs) and shelf bids, registration statements pursuant to Section 12 of the Exchange Act, periodic reports, privatization statements, takeover bids, proxy circulars and any other documents required to be filed under the Exchange Act.

S-K regulation most often occurs when creating an S-1 form. Form 10-K or Form 8-K. On November 19, the SEC adopted new amendments to the disclosure requirements of Regulation S-K. The adopted amendments are broadly in line with those proposed in January and aim to reduce overlaps and highlight information in the MD&A that is important to investors. The amendments clarify the overall objective of the MD&A and promote a principles-based approach to the information to be provided on a specific basis. A summary of the most significant changes is provided below. Section 103 currently requires disclosure of ongoing court proceedings and certain related information (e.g., name of court, date of filing, principal party, and presumed factual basis of the proceeding). A direction on the current rule requires disclosure of all proceedings under environmental laws involving the government, unless the company has reason to believe that the monetary penalties resulting from the proceeding will be less than $100,000. In its analysis of the amendments to paragraph 101(c), the SEC noted that under its principles-based approach, disclosure of individual subjects is required only if it is essential to understanding a registrant`s business, and that registrants have the opportunity to disclose information in a manner that protects proprietary or competing sensitive information. In addition, the SEC noted that under the principles-based approach, registrants will have a better ability to tailor disclosures to factors important to their business.

Defining Questions: SEC Modernizes Disclosure to Reg S-K Item 101 requires a description of the registrant`s activities. Prior to the changes, the description was the last five or three years (or a shorter period during which the registrant was in business) plus previous periods if they were important to understanding the overall performance of the business. Item 101(a)(1) included in the required description certain specific events (such as bankruptcy proceedings, significant reclassifications and mergers, acquisition or disposal of significant amounts of assets otherwise in the ordinary course of business) and material changes in business. Paragraph (c) also required a narrative description focused on the dominant business of the registrant and its subsidiaries and all other sectors presented separately in the financial statements, requiring 10 to 12 specific elements in disclosure. Item 101(c) currently requires a narrative description of the operations of an entity and its subsidiaries and specifies 12 items that should generally be disclosed only if they are material to understanding the entity`s business as a whole. The SEC noted that many companies appear to interpret the current rule as requiring disclosure of each of the 12 specified elements, even if they are irrelevant, resulting in non-material disclosure. 3 The SEC adopted a corresponding amendment to Section 101(h) to allow a small reporting company to provide an update on the general evolution of corporate disclosure instead of a full discussion equivalent to Section 101(a), instead of a full discussion corresponding to Section 101(a), including the ability to provide a hyperlink to a previous filing that provides the full discussion of the General Business Development of the company. The changes are part of the ongoing disclosure effectiveness initiative led by the SEC`s Division of Corporation Finance (Corp Fin) to review and improve the effectiveness of its disclosure requirements for the benefit of investors and corporations. It has been more than 30 years since the SEC significantly revised Sections 101, 103 and 105 of Regulation S-K.

The SEC has amended these elements to make them clearer, principles-based, improve the readability of disclosures, prevent repetitive and intangible disclosures, and reduce the compliance burden on businesses. These changes respond to changes in the regulatory, business and technology environment since the adoption of Regulation S-K and the SEC`s growing demands for human capital disclosure. The changes were also informed by contributions from numerous public comments and Corp Fin`s disclosure review process, including a review of disclosures made by companies in response to the COVID-19 pandemic. The previous item 103 required disclosure of all pending lawsuits, including (by order) environmental protection proceedings with potential penalties amounting to at least $100,000. The amendments remove the specific five- and three-year disclosure periods associated with describing the company`s overall performance. In the future, registrants will be required to disclose information material to understand the evolution of their business “regardless of a specific time frame.” Even after the registrant`s initial presentation, subsequent submissions may include an update on the general evolution of the licensee`s business, disclosing all significant developments that have occurred since the last full discussion on general business development.