Securities Regulation Daily CorpFin issues 'transitional’ FAQs ahead of Reg S-K modernization effectiveness
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Thursday, November 5, 2020

CorpFin issues 'transitional’ FAQs ahead of Reg S-K modernization effectiveness

By John M. Jascob, J.D., LL.M.

Three new FAQs clarify certain aspects of disclosures required under Regulation S-K once the new rules become effective on November 9, 2020.

Staff of the SEC’s Division of Corporation Finance has issued responses to three "frequently asked questions" (FAQs) that clarify certain disclosure requirements under Securities Act Regulation S-K that will take effect when the "new" rules become effective on November 9, 2020. The "transitional" FAQs regarding amended Regulation S-K Items 101, 103, and 105 provide guidance regarding: (1) the requirements for prospectus supplements for Form S-3 registration statements that became effective before November 9, 2020; (2) the applicable time period for disclosures regarding the development of the registrant’s business under Item 101; and (3) whether a registrant always needs to provide a full discussion of the general development of its business under new Items 101(a) or 101(h).

On August 26, 2020, the SEC adopted rule amendments to Regulation S-K designed to advance the Commission’s ongoing disclosure modernization and effectiveness initiative by updating the disclosures that registrants are required to make under the rule. The revisions, which were the first significant changes to Regulation S-K in over 30 years, address the requirements for making disclosures about a company’s business description, a company’s risk factors, and environmental and human capital issues. In the transitional FAQs, which supplement the Division’s set of Compliance & Disclosure Interpretations (C&DIs) for Regulation S-K, staff refers to the items containing these recently amended requirements as the "new" items and those containing the previous requirements as "old" items.

Prospectus supplements to Form S-3. The first FAQ clarifies that a prospectus supplement filed for a registration statement on Form S-3 that became effective before November 9, 2020, does not need to comply with new Items 101 (description of business) and 103 (legal proceedings). The FAQ explains that compliance with the new items is not required because Form S-3 does not expressly require Item 101 or Item 103 disclosure but rather requires the incorporation by reference from Exchange Act reports containing that information. A registrant also does not need to amend a Form 10-K that is incorporated by reference into the Form S-3 pursuant to Item 12(a)(1) of Form S-3 in order to comply with new Items 101 and 103.

The FAQ notes that Securities Act Rule 401(a) requires that the form and contents of a prospectus supplement conform to the applicable rules and forms as in effect on the initial filing date of the prospectus supplement. Despite the fact that Item 3 of Form S-3 expressly requires risk factor disclosures under Item 105, however, the staff will not object if the prospectus supplement complies with old Item 105 until the next update to the registration statement on Form S-3 for purposes of Securities Act Section 10(a)(3).

Fiscal year disclosure. The second FAQ states that new Item 101 does not require registrants to disclose information in the annual report on Form 10-K for more than the fiscal year covered by the report. The staff response explains that the new rules did not change Item 1 of Form 10-K, which only requires disclosures regarding the development of the registrant’s business for the fiscal year covered by the Form 10-K.

Scope of general business development. The third FAQ clarifies that a registrant may not always need to provide a full discussion of the general development of its business under new Item 101(a) (or new Item 101(h) for a smaller reporting company) in an annual report or registration statement that requires Item 101 disclosure, provided that certain requirements are met. For a filing other than an initial registration statement, subject to Securities Act Rule 411(e) and Exchange Act Rule 12b-23(e), new Items 101(a)(2) and (h) permit a registrant to omit the full discussion of the general development of its business if the registrant: (1) provides an update to the general development of its business, disclosing all material developments since the most recent registration statement or report that includes the full discussion; (2) includes one active hyperlink to the registration statement or report that includes the full discussion; and (3) incorporates the full discussion by reference to the registration statement or report.

A registrant is not required to use this updating method, however, and the staff anticipates that the updating method will apply mainly to registration statements.

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