During 2020, the Securities and Exchange Commission (“SEC”) continued with its disclosure simplification project by issuing two adopting releases to streamline and modernize certain Regulation S-K disclosure requirements.

The first adopting release, which became effective November 9, 2020, covers Regulation S-K, Item 101 (Description of Business), Item 103 (Legal Proceedings) and Item 105 (Risk Factors) (the “Item 100 Amendments”). The second adopting release covers Regulation S-K, Item 301 (Selected Financial Data), Item 302 (Supplementary Financial Information) and Item 303 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) (the “Item 300 Amendments”). The Item 300 Amendments become effective 30 days after publication in the Federal Registrar and companies will be required to comply with the Item 300 Amendments for their first fiscal year ending on or after the date that is 210 days after publication of the amended rules in the Federal Registrar (the “Mandatory Compliance Date”). As a result, with respect to Exchange Act reports, calendar year companies will first be required to comply with the Item 300 Amendments for their 2021 Form 10-K and Form 10-Qs thereafter. Additionally, companies will be required to comply with the Item 300 Amendments in a registration statement and prospectus that, on its initial filing date, is required to contain financial statements for a period on or after the Mandatory Compliance Date. However, once the rules are effective, early application of the amended rules is permitted at any time; provided, however, companies must provide disclosure responsive to an amended item in its entirety and continue to provide such disclosure in any applicable filings going forward. Following are summaries of the Item 100 Amendments and Item 300 Amendments.

Item 100 Amendments

Item 101: Description of Business

Item 101(a)(1). The SEC eliminated the previously prescribed five-year disclosure timeframe, or three-year timeframe for smaller reporting companies.

Previously mandated disclosure topics as to the development of the business have been replaced by a non-exclusive list of the types of information that a registrant may need to disclose, if material to an understanding of the general development of the business. The Item 100 Amendments include a new topic requiring disclosure of any material changes to a previously disclosed business strategy, and eliminate the requirements to discuss the year in which the registrant was organized and its form of organization as well as any material changes in the mode of conducting business, although such disclosure would still be required if material to an understanding of the general development of the registrant’s business.

Item 101(a)(2). The Item 100 Amendments allow a registrant to forgo providing a full discussion of the general development of its business in any filing other than an initial registration statement if it provides an update to the general development of its business and incorporates by reference, and includes one active hyperlink to one registration statement or report that includes, the full discussion of the general development of the registrant’s business. The utility of this provision, however, is limited by general SEC rules regarding incorporation by reference under which a filing that includes an update and incorporates by reference the more complete Item 101(a) discussion could not be incorporated by reference into a subsequent filing, such as a Form S-3 or Form S-4.

Item 101(c). The Item 100 Amendments revise Item 101(c) to be more clearly principles-based, generally requiring disclosure of information material to an understanding of the registrant’s business as a whole. The Item 100 Amendments replace the current list of specified disclosure items with a non-exclusive list of disclosure topic examples, if material. Under the new rules, the following information should be included when describing each segment, if material to an understanding of the registrant’s business taken as a whole:

• 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; and
• The extent to which the business is or may be seasonal.

In addition, the Item 100 Amendments provide that the following information should be included to the extent material to an understanding of the registrant’s business taken as a whole (and if it is material to a particular segment, the discussion should identify that segment):

• 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.

Although much of the SEC’s disclosure rulemaking has focused on streamlining various disclosures and eliminating duplicative or outdated disclosures, the new human capital disclosures created by the Item 100 Amendments will likely require significant attention when preparing upcoming Form 10-K reports. The SEC has advised that each registrant’s human capital disclosures must be tailored to its unique business, workforce, and facts and circumstances. The exact measures and objectives to be included in the disclosure may depend on factors such as the registrant's industry, regions in which the registrant operates, the general strategic posture of the registrant, and macro-economic and other conditions that affect human capital resources, such as national or global health matters. In a statement relating to the Item 100 Amendments, SEC Chairman, Jay Clayton, stated that he expects to see “meaningful qualitative and quantitative disclosure, including, as appropriate, disclosure of metrics that companies actually use in managing their affairs.”

Item 103: Legal Proceedings

• Registrants are now permitted to provide disclosure responsive to Item 103 by hyperlink or cross-reference to legal proceedings disclosure elsewhere in the document, such as in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), risk factors or notes to the financial statements.
• Prior to the Item 100 Amendments, a registrant was required to disclose any proceeding under environmental laws to which a governmental authority was a party unless the registrant reasonably believed it would not result in sanctions of $100,000 or more. This amount has been increased to $300,000, or such other amount that the registrant determines is reasonably designed to result in disclosure of any such proceeding that is material to its business or financial condition; provided, however, disclosure will be required in all cases for any proceeding when the potential monetary sanctions exceed the lesser of $1 million or one percent of the current assets of the registrant.

Item 105: Risk Factors

In order to make risk factor disclosure more understandable, more focused on material risks only and on the particular circumstances and risk profile of each registrant and less general and boilerplate, the SEC has adopted the following amendments to Item 105:

• If a registrant’s risk factor disclosure exceeds 15 pages, the registrant must include in the forepart of the document a series of concise, bulleted or numbered statements summarizing the principal factors that make an investment in the registrant or offering speculative or risky. The risk summary itself is limited to no more than two pages.
• Replace the requirement to disclose the “most significant” factors with a standard to disclose the “material” factors. The change is designed to lead to presentation of risks that are more tailored to the particular facts and circumstances of each registrant and to reduce the disclosure of generic risk factors.
• Registrants must organize their risk factor disclosure under relevant headings in addition to the sub-captions that are currently required. The Item 100 Amendments also require registrants to present risks that could apply generally to any company or offering of securities at the end of the risk factor section under the caption “General Risk Factors.”

Item 300 Amendments

Item 301: Selected Financial Data

The Item 300 Amendments eliminate the requirement to provide the five years of selected financial data in tabular form.

Item 302: Supplementary Financial Information

The Item 300 Amendments limit the requirement to disclose information about quarterly financial results to only where there have been material retroactive changes to the income statements which pertain to any quarter within the two most recent fiscal years or any subsequent interim period for which financial statements are included or required to be included by Article 3 of Regulation S-X.

Item 303: Management’s Discussion and Analysis of Financial Condition and Results Operations (“MD&A”)

In what may be the most substantive changes made to date as part of the SEC’s disclosure simplification project, the Item 300 Amendments overhaul, update and modernize Regulation S-K, Item 303, which sets forth the disclosure requirements and principles for MD&A. Following is a high-level summary of the changes.

• Provides for a new Item 303(a), which sets forth the overall objective of MD&A.
• Restructures the current Item 303(a) into Item 303(b), covering the following topics:
• Liquidity and Capital Resources
• Results of Operations
• Critical Accounting Estimates
• Eliminates the current requirement to provide in Form 10-K the tabular disclosure of contractual obligations. However, the Item 300 Amendments update the Liquidity and Capital Resources item to require a principles-based discussion of the registrant’s “material cash requirements”, including those from contractual and other obligations; including commitments for capital expenditures, the anticipated source of such cash requirements and the general purpose of such requirements.
• Eliminates the current requirement to provide a separately captioned section in MD&A titled “Off-Balance Sheet Arrangements”, replacing it with an instruction requiring a discussion of commitments and obligations, including contingent obligations, arising from arrangements with unconsolidated entities that have, or are reasonably likely to have, a material current or future effect on the registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources, even when such commitments or obligations are not reported on the registrant’s balance sheet.
• Clarifies that where there are material changes in a financial statement line item, including where material changes within a line item offset one another, a discussion of the underlying reasons for these material changes is required, in both quantitative and qualitative terms.
• Significantly updates and refines the Results of Operations discussion, including:
• Adopting a “reasonably likely” standard as the disclosure threshold for MD&A, including with respect to known trends, demands, commitments, events and uncertainties. A discussion of the implications of this change is beyond the scope of this summary. In short, the SEC’s explanation of the application of this new standard would require disclosure if a known trend, demand, commitment, event or uncertainty is likely to come to fruition and “would reasonably be likely to have a material effect on the registrant’s future results or financial condition.” Also, in the SEC’s view, for known trends, demands, commitments, events or uncertainties that are not remote, or where management cannot make an assessment of the likelihood of fruition, if the known trend, demand, commitment, event or uncertainty would be reasonably likely to have a material effect on the registrant’s future results or financial condition if they come to fruition, disclosure should be made if a reasonable investor would consider the information material.
• Clarifying that the current requirement to discuss the reasons for material increases in net sales or revenues applies to any material change (increase or decrease).
• Eliminating the specific instructions to require a discussion of the impact of inflation and changing prices (although the SEC did make clear in the adopting release that disclosure may still be required where the impact of inflation or changing prices is part of a material known trend or uncertainty or where relevant to a discussion of material changes from period to period in one or more line items).
• Expanding the requirement to discuss segment information and/or other subdivisions to cover relevant product lines in addition to geographic areas.
• For interim periods, the Item 300 Amendments will allow for registrants to choose whether to compare the most recently completed quarterly period to either the corresponding period of the prior year (current requirement) or the immediately preceding quarter, subject to certain provisions where a registrant later changes its method.
• Adds a new explicit requirement to disclose critical accounting estimates, including extensive disclosures concerning why the estimate is subject to uncertainty, how much each estimate has changed during the relevant period and changes in assumptions during the period, and the sensitivity of the reported amounts to the methods, assumptions and estimates underlying the estimate’s calculation.