The Securities and Exchange Commission (the “SEC”) recently adopted amendments (the “amendments”) to Regulation S-K1 that are designed to further modernize the SEC’s disclosure requirements and reduce the compliance burden on public companies. The amendments represent another part of the SEC’s Disclosure Effectiveness Initiative that was initiated in response to the Jumpstart Our Business Startups (JOBS) Act in 2013.2 In adopting the amendments, SEC Chair Jay Clayton stated, "Building on our time-tested, principles-based disclosure framework, the rules we adopt today are rooted in materiality and seek to elicit information that will allow today's investors to make more informed investment decisions.”3
The key changes implemented by the amendments include:
- Amendments to S-K Item 101 (Description of Business):
- making the disclosure requirements largely principles-based, calling for the disclosure of information material to an understanding of the general development of the business;
- replacing the previously prescribed five-year look-back timeframe with a requirement for registrants to disclose “information material to an understanding of the development of their business, irrespective of a specific timeframe”;4
- permitting registrants to provide only an update of the general development of the business to cover material developments that have occurred since their most recent comprehensive discussion of the business, which will be incorporated by reference with a hyperlink;
- including a non-exclusive list of topics to consider for disclosure in place of specific topics currently required under Item 101(c) (see discussion below);
- including, as a disclosure topic, a description of the registrant's human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business (see discussion below); and
- refocusing the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws.
- Amendments to S-K Item 103 (Legal Proceedings):
- allowing legal proceedings disclosure to be provided by hyperlink or cross-reference to disclosure located elsewhere in the document to avoid duplication; and
- modifying the disclosure for certain governmental environmental proceedings by increasing the existing quantitative threshold for disclosure of those proceedings from $100,000 to $300,000, while giving the registrant flexibility to select a different threshold, based on materiality to the registrant, not to exceed the lesser of $1 million or 1% of company assets.
- Amendments to S-K Item 105 (Risk Factors):
- requiring summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages, with the summary consisting of “a series of concise, bulleted or numbered statements summarizing the principal factors”;
- refining the principles-based approach of Item 105 by requiring disclosure of "material" risk factors instead of “significant” risk factors; and
- requiring risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate “General Risk Factors” caption.
As amended, S-K Item 101(c) now includes this non-exclusive list of items to be considered for disclosure:
- Revenue-generating activities, products and/or services, and any dependence on revenue-generating activities, key products, services, product families or customers, including governmental customers;
- Status of development efforts for new or enhanced products, trends in market demand and competitive conditions;
- Resources material to a registrant’s business, such as sources and availability of raw materials, and the duration and effect of all patents, trademarks, licenses, franchises and concessions held;
- A description of any material portion of the business that may be subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government;
- The extent to which the business is or may be seasonal;
- The material effects that compliance with government regulations, including environmental regulations, may have upon the capital expenditures, earnings and competitive position of the registrant and its subsidiaries, including the estimated capital expenditures for environmental control facilities for the current fiscal year and any other material subsequent period; and
- A description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).
This list of topics to consider is intended to give registrants more flexibility to decide which topics are most material to the registrant, in contrast to the former approach of Item 101(c), that listed several topics which may have been viewed as mandatory for disclosure.
The human capital topic is a new addition to Regulation S-K. Clayton stated, “I am particularly supportive of the increased focus on human capital disclosures, which for various industries and companies can be an important driver of long-term value.” The amendments do not define “human capital” or give specific guidance on determining which items to disclose under this heading. In the adopting release, the SEC noted 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 macro-economic and other conditions that affect human capital resources, such as national or global health matters.”
The amendments become effective 30 days after publication in the Federal Register, which had not yet occurred at the time of this Client Alert.
For additional information about any of the above developments, or to discuss any questions that you may have, please contact a member of Maynard Cooper’s Public Company Advisory Group.
2 See the SEC’s Spotlight on Disclosure Effectiveness page at https://www.sec.gov/spotlight/disclosure-effectiveness.shtml.
4 A similar change was made to S-K, Item 101(h), “Smaller Reporting Companies,” which contains a three-year timeline for disclosure.