SEC proposes amendments to disclosure requirements under Regulation S-K

Regulation S-K Item 101(a): General Development of Business

Requires a description of the general development of the business of the company during the past five years, or such shorter period as the company may have been engaged in business.

In describing the general development of the business, Item 101(a)(1) requires disclosure of:

1. The year in which the company was organized and its form of organization;
2. The nature and results of any bankruptcy, receivership, or similar proceedings with respect to the company or any of its significant subsidiaries;
3. The nature and results of any other material reclassification, merger, or consolidation of the company or any of its significant subsidiaries;
4. The acquisition or disposition of any material amount of assets otherwise than in the ordinary course of business; and
5. Any material changes in the mode of conducting the business.

Eliminates the five-year disclosure timeframe[1] and requires companies to focus on the information material to an understanding of the development of their business, irrespective of a specific timeframe.

Permits only an update that focuses on material developments in the reporting period, along with a hyperlink to connect the updated disclosure with the previous disclosure, which together would result in a full discussion of the company’s general business development.

Disclosure may include, but should not be limited to, these topics:

1. Transactions and events that affect or may affect the company’s operations, including material changes to a previously disclosed business strategy;
2. Bankruptcy, receivership, or any similar proceeding;
3. The nature and effects of any material reclassification, merger, or consolidation of the company or any of its significant subsidiaries; and
4. The acquisition or disposition of any material amount of assets otherwise than in the ordinary course of business.

Item 101(c): Narrative Description of Business

To the extent material to an understanding of the company’s business taken as a whole, the description must include:

1. Principal products produced and services rendered;
2. New products or segments;
3. Sources and availability of raw materials;
4. Intellectual property;
5. Seasonality of the business;
6. Working capital practices;
7. Dependence on certain customers;
8. Dollar amount of orders in backlog believed to be firm;
9. Business subject to renegotiation or termination of government contracts;
10. Competitive conditions;
11. The material effects of compliance with environmental laws; and
12. Number of employees.

Provides a non-exclusive list of items that should be considered and described, to the extent material to the company’s business, including:

1. Revenue-generating activities, products, and/or services, and any dependence on key products, services, product families, or customers, including governmental customers;
2. Status of development efforts for new or enhanced products, trends in market demand and competitive conditions;
3. Resources material to the company’s business;
4. Material portion of the business that may be subject to renegotiation of profits or termination of contracts at the election of the government;
5. Seasonality of the business;
6. Compliance with material government regulations, including but not limited to environmental regulations; and
7. Human capital disclosure, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the company’s business, such as measures or objectives that address the attraction, development, and retention of personnel.

Item 103: Legal Proceedings

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. Disclosure shall include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, and a description of the factual basis alleged to underlie the proceeding and the relief sought. Similar information is to be included for such proceedings known to be contemplated by governmental authorities.

Disclosure of any proceeding under environmental laws to which a governmental authority is a party must be included unless the company reasonably believes it will not result in sanctions of $100,000 or more.

Current disclosure requirements are retained. However, the proposed amendments allow companies to use hyperlinks or cross-references to legal proceedings disclosure elsewhere in the filing (such as in MD&A, risk factors, or the notes to the financial statements).

The amendments also update the disclosure threshold for environmental proceedings in which the government is a party to $300,000, to account for inflation (the current $100,000 threshold was set in 1982).

Item 105: Risk Factors

Requires disclosure of the most significant factors that make an investment in the company or offering speculative or risky, and specifies that the discussion should be concise and organized logically.

1. Requires summary risk factor disclosure if the risk factor section exceeds 15 pages;
2. Replaces the requirement to disclose the “most significant” factors with the “material” factors; and
3. Requires companies to organize risk factors under relevant headings.