Regulation S-K and Risk-Related Disclosures
Regulation S-K and Risk-Related Disclosures- Today is the continuation in a Lawcast series discussing SEC disclosure requirements and in particular the 341 page Regulation S-K concept release and request for public comment issued by the SEC on April 15, 2016.
Risk-related disclosures need a thorough review and potential overhaul. Although the SEC has long stated that risk factors should not be boilerplate repetition of items applicable to the market as a whole and not necessarily applicable to a particular company, most companies use boilerplate language. I note that Item 503 contains 5 examples of risks that a company can make related to its offerings, and so, of course, those risks, in boilerplate format, are always included in registration statements and reports. These 5 risks includes: (i) lack of operating history; (ii) lack of profitable operations in recent periods; (iii) financial position; (iv) the business or proposed business; or (v) lack of a market for the company’s stock.
The instructions to Item 503 require companies to refrain from presenting risks that could apply to any company. The SEC continues to push for particular material risk factors and not boilerplate industry risks. For example a risk that refers to the general state of the economy and that a company’s business would be adversely effected by a change in that economy, would apply to every business and does not offer particular material meaningful disclosure to investors. Likewise, a risk that a company faces competition and may not complete successfully is entirely generic.
The SEC has gone so far as to suggest placing a limit on the number of allowable risk factors to force companies to provide meaningful risk information.
Currently, risk-related disclosures are included in multiple items under Regulation S-K, including Item 503 related to investment risk and Item 305 related to market risk. The SEC is also considering aggregating risk information in a more central readable format and improving the content to enhance investors’ ability to evaluate the particular risk factors.
As part of the presentation, the SEC suggests that risks should be presented in order of importance with the most significant risks first and again, only the most significant or principal risks need be included at all.
The SEC also seeks comment on whether requiring a company to explain the probability of a risk and steps taken to avoid a risk would assist in requiring companies to be more specific and precise in explaining their particular risks.