On August 26, 2020, the U.S. Securities and Exchange Commission (SEC) voted 3 to 2, along party lines, to adopt amendments to disclosure requirements related to the description of business, legal proceedings, and risk factors in SEC filings. The final amendments are substantially similar to the amendments proposed in August 2019 and discussed in our prior Alert, and are summarized below.

The Amendments

As noted by the SEC, many of the amendments reflect its commitment to a principles-based, registrant-specific approach to disclosure, stating "our disclosure requirements, while prescriptive in some respects, are rooted in materiality and facilitate an understanding of a registrant's business, financial condition and prospects through the lens through which management and the board of directors manage and assess the performance of the registrant."¹ In adopting these amendments, the SEC highlighted the fact that registrants' responses to the principles-based guidance regarding disclosure of COVID-19 impacts generally led registrants to provide detailed discussions of the impact of COVID-19 on their liquidity, operational constraints, and funding sources, among other things.

Item 101(a), General Development of the Business.

• Prescribed timeframe. The amendments delete the prescribed five-year, or three-year for smaller-reporting companies, timeframe for disclosure, instead permitting each registrant to limit the disclosure timeframe to the period material to an understanding of such registrant's business.
• Disclosure limited to material developments when combined with incorporation by reference. The amendments also clarify that for filings after the initial registration statement, a registrant may limit its disclosure of the general development of the business to material updates since the most recently filed full discussion of such topic, as long as the registrant incorporates by reference to a single filing (must be hyperlinked) containing such discussion. The SEC expressly notes that the intent of this change is to be more restrictive than the incorporation by reference rules generally. In practice, companies may prefer to include their full business section, similar to companies that prefer to include their full set of risk factors in each interim quarterly filing, to, among other things, 1) ensure that investors have a complete picture of the company's business in each annual filing and 2) to be able to incorporate by reference such filings into a subsequent filing such as a Form S-3.
• Non-exclusive list of disclosures. The amendments maintain from the August proposal (with some changes) the non-exclusive list of disclosures to be made in the course of describing the general development of the registrant's business; however, disclosure is only required if the information is material to an understanding of the general development of the registrant's business. In addition, the amendments delete the line item for material changes to the mode of conducting business, but add a line item for any material changes to a previously disclosed business strategy of the registrant. For those registrants that discuss their business strategy in their registration statements relating to their initial public offering, these amendments may cause some registrants to rethink whether this disclosure should be made and, if so, in how much detail.

Item 101(c), Description of Business.

• Disclosure required. The amendments clarify that when describing each segment (if applicable), only information material to an understanding of the registrant's business taken as a whole is required.
• Streamlining disclosure topics. The amendments streamline several of the previously listed disclosure topics, including removing quantitative measurements and combining related disclosure topics into single line items. For example, in the amendments, existing Items 101(c)(1)(i), (ii), and (vii) relating to products, services, and customers have been combined into a single disclosure topic. This newly combined disclosure topic has been simplified and all quantitative measurements have been deleted, including the requirement to list the name of any customer with sales equal to 10 percent or more of the registrant's consolidated revenues, the loss of which would have a material adverse effect on the registrant and its subsidiaries taken as a whole.
• Added disclosure topics. The amendments create a new disclosure topic called "resources that are material to a registrant's business" and embeds the raw materials and intellectual property disclosures as examples of disclosures that may be made under this new disclosure topic. In addition, the amendments expand the disclosure topic relating to regulatory compliance by covering not only environmental regulations, but to also include disclosure of the material effects of compliance with other government regulations, both foreign and domestic. Notably, the amendments also add a "human capital" disclosure requirement, which is intentionally not defined, but the SEC does state that this includes any measures or objectives that management focuses on in managing the business, e.g., measures or objectives that address the attraction, development, and retention of personnel.
• Deleted disclosure topics. The amendments delete the disclosure topic relating to working capital on the basis that if material, working capital should be discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (Instruction 5 of Item 303). The amendments also delete the backlog disclosure topic.

Item 103, Legal Proceedings.

• Incorporation by reference; hyperlinking. The amendments allow a registrant to hyperlink or cross reference to other legal proceedings disclosures in the applicable filing, including to the notes to the financial statements and risk factors to avoid duplicative disclosures, a practice that many companies have already adopted.
• Threshold. The quantitative threshold for disclosure of environmental claims will be increased from $100,000 to $300,000. Registrants may elect to use a different threshold if it is reasonably designed to result in disclosure of environmental claims that are material; provided it discloses the threshold and any changes to it in each quarterly and annual report, and regardless of the alternative standard adopted, discloses any environmental claim that exceeds the lesser of $1 million or 1 percent of the current assets of the registrant (on a consolidated basis).

Item 105, Risk Factors.

• Summary of risks. For filings with risk factor disclosure exceeding 15 pages, the amendments require a summary of such risk factor disclosure, which may not exceed two pages. The risk factor disclosure summary will be required in the forepart of the disclosure document and comprised of a series of concise, bulleted, or numbered statements summarizing the principal factors that make an investment in the registrant or the offering speculative or risky. We note that the requirement of summary risk factor will impact many companies, regardless of sector. For an analysis of how the practices of certain registrants will be impacted, see our Silicon Valley 150 Risk Factor Trends Report.
• Disclosure standard. The amendments modify the disclosure standard from requiring disclosure of the "most significant" risk factors to disclosure of "material" risk factors.
• Relevant headings. The amendments require that the risk factors be organized under relevant headings, with generic risk factors disclosed at the end of the risk factor section under the caption "General Risk Factors."

The final amendments are effective 30 days after publication in the Federal Register; therefore, the amendments will likely be effective during October 2020.

What to Do Now?

Given the near-term effective date (and assuming no further guidance from the SEC allowing for any transition periods), companies should start reviewing their disclosures soon, including consideration of, among other things:

• whether any of the historical business information included in their business section was included in order to comply with the previously prescribed five-year timeframe but is immaterial to an understanding of the business;
• whether the company has previously disclosed a business strategy and, if so, whether any disclosures must be made relating to changes to that business strategy;
• whether to include a full business section or incorporate it by reference from the prior year's annual report on Form 10-K or initial registration statement, and any legal considerations in making this decision;
• how much to disclose in terms of human capital disclosures and ensuring that, if already disclosed in a sustainability or similar report, ensuring that such disclosures are consistent, to the extent applicable;
• although some disclosure topics have been dropped, evaluate whether such topics are material to an understanding of the business and, therefore, should continue to be discussed; and
• how to update the risk factor section, including whether to revise the risk factors to decrease the number of pages to 15 or less and thereby avoid a risk factor summary; if including a risk factor summary, what to include in that summary; and how many and what captions to include when organizing the risk factors.

These amendments will require thoughtful consideration of existing disclosures in registration statements and annual reports, and we urge companies to start their review process early.

[1] See, “Modernization of Regulation S-K Items 101, 103, and 105,“ SEC Release No. 33-10668 (Aug. 26, 2020), available at: https://www.sec.gov/rules/final/2020/33-10825.pdf.