In our Snapshot: Risk Factor Trends—Part 1 post, we reviewed the risk factor disclosures of 30 of the Lonergan Silicon Valley 150 (SV150) companies to see whether the length of the risk factor disclosure, both in terms of the number of pages of risk factors and the number of risk factors disclosed, had increased or decreased since the publication of the second edition of our Risk Factor Trends Report (2021 report).^[1] Our review suggests that both the number of pages of risk factors and the number of risk factors disclosed are continuing to increase.

In this post, we will explore the use of headings to separate subcategories of risks, including the use of the “General Risk Factors” heading, in the risk factor section of the annual report on Form 10-K, as well as risk factor disclosure practices in quarterly reports on Form 10-Q.

As discussed in our previous post, the amendments to Item 105, Risk factors, of Regulation S-K (Item 105), were intended to address, among other things, the U.S. Securities and Exchange Commission’s (SEC’s) concern about the increasing length of risk factor disclosure. The amendments were also intended to address the SEC’s concern over what it viewed as the “generic nature of the risk factor disclosure presented by many registrants.”^[2]

In addressing the latter concern the amendments to Item 105(a)—1) modified the disclosure standard for risk factors from “most significant” risks to “material” risks “to focus registrants on disclosing the risks to which reasonable investors would attach importance in making investment or voting decisions”^[3] and 2) discouraged the use of generic risk factors but, if disclosed, required generic risk factors to be disclosed at the end of the risk factor section under the heading “General Risk Factors.”^[4]      

In our inaugural Risk Factor Trends Report, published in 2020, we reviewed the risk factor disclosure practices of the SV150 prior to the amendments to Item 105. In that report, we found that 74 percent of companies included headings, but that a significant majority of those companies (73 percent) included three or fewer headings. At the time we prepared our 2021 report, only 120 SV150 companies had filed a Form 10-K under amended Item 105.^[5] Based on our review of those 120 companies, we found that the use of headings expanded both in terms of the use of headings and the number of headings used, with 97.5 percent of companies including headings, and a significant majority of those companies (71 percent) including between four and seven headings.  

Similar to our previous post, we reviewed the risk factor disclosures in the most recently filed Form 10-K for the same 30 public companies in the SV150. While this sample set is too small to summarize the results by years public, or annual sales, we tried to select a sample set that spanned a range of companies. Please see our previous post for the demographics of the companies that we reviewed.

Use and Number of Risk Factor Headings

Consistent with the requirements in Item 105(a), all 30 companies that we reviewed included risk factor headings in the risk factor section. The number of headings included in the risk factor section ranged from three to 10 headings, with 70 percent of companies including between four and seven headings. These results are consistent with our 2021 report, in which nearly all (97.5 percent) of the companies reviewed including headings, and 71 percent of those companies included between four and seven headings.

General Risk Factors Heading

Of the 30 companies reviewed, 19 companies, or approximately 63 percent, included a General Risk Factors heading. The number of risk factors included under this heading ranged from one to six risk factors, with an average of 3.8 risk factors. These results are fairly comparable to our 2021 report, in which 61 percent of the companies reviewed included a General Risk Factors heading, and the average number of risk factors under this heading was 4.6 risk factors. The higher average was due, in part, to some higher numbers at the high end of the range.

Form 10-Q Risk Factor Disclosure Practices

In addition to reviewing risk factor disclosure trends related to the amendments to Item 105, we also reviewed risk factor disclosure trends in Forms 10-Q. In Item 1A of Form 10-Q, companies are required to disclose any material changes from the risk factors previously disclosed in their Form 10-K. Risk factor disclosure practices in Forms 10-Q vary widely—some companies only provide updates (if any) from the risk factors disclosed in their previously filed Form 10-K, some companies provide the full set of risk factors from their previously filed Form 10-K and highlight (whether by asterisk or otherwise) any updates from their previously filed Form 10-K, and some companies provide the full set of risk factors from their previously filed Form 10-K without highlighting updates.

We reviewed the Form 10-Q filing that immediately preceded the Form 10-K filing in order to determine whether a company included a full set of risk factors or only included updates (if any) in their Form 10-Q. While a significant majority of companies continue to include a full set of risk factors in the Form 10-Q, the percentage of companies including a full set decreased from 75 percent in the 2021 report to approximately 63 percent this year. None of the companies that we reviewed included a full set that highlighted the material changes (whether with an asterisk or otherwise).

Takeaways

Although the sample set reviewed for this Snapshot is relatively small, our review indicates that the use of headings has become universally adopted, and the number of headings (while variable) has remained consistent with our 2021 report, with a significant majority of companies including between four and seven headings.

In addition, our review suggests that the use of the General Risk Factors heading, and the number of risk factors disclosed under this heading also remain consistent with our 2021 report, with nearly two-thirds of companies including this heading, with an average of approximately four to five risk factors disclosed thereunder.

Finally, our review suggests that the inclusion of a full set of risk factors in Forms 10-Q has decreased since our 2021 report. We are not aware of any new guidance that would explain this decrease, and it may very well be a combination of changes to the composition of the SV150 and changes to management or board preferences.

^[1] The Lonergan Silicon Valley 150 ranks the top 150 public companies with headquarters in Silicon Valley by annual sales. For more information on the methodology used to prepare the Lonergan Silicon Valley 150, please visit https://lonerganpartners.com/assets/pdfsdownloads/2023-LSV-150-Company-Ranking.pdf.

^[2] Modernization of Regulation S-K Items 101, 103, and 105, 85 Fed. Reg. at 63742 (Oct. 8, 2020).

^[3] Id. at 63729.

^[4] Item 105(a) of Regulation S-K (codified at 17 C.F.R. §229.105(a)).

^[5] For our 2021 report, we reviewed the risk factor disclosures of companies in the Lonergan 2020 Silicon Valley 150, which is available here (last accessed June 20, 2023).