SEC Adopts Amendments to Regulation S-K, Key Definitions

The U.S. Securities and Exchange Commission (SEC) has adopted several significant amendments affecting disclosure requirements under Items 101, 103 and 105 of Regulation S-K and also expanded the definitions of “Accredited Investor” and “Qualified Institutional Buyer” under Rule 501(a) and Rule 144A, respectively.

As SEC Chairman, Jay Clayton, announced in the press release, Items 101, 103 and 105 have not undergone significant revisions in over 30 years. The Accredited Investor and Qualified Institutional Buyer definitions. meanwhile, have not undergone changes in some time.

The changes are part of the SEC’s larger push to streamline disclosure requirements (for example, see our post on the SEC’s disclosure simplification rule updates here) and relax entrance requirements for investing in private capital markets. The amendments come on the heels of other recent modernization efforts by the SEC, which include amendments that allow companies the ability to list directly on NYSE in certain instances, as is discussed in more detail in a recent Waller blog post which can be found here.

Regulation S-K Updates

The SEC adopted amendments to Item 101 (Description of Business), Item 103 (Legal Proceedings) and Item 105 (Risk Factors) under Regulation S-K. Items 101, 103 and 105 disclosure is required in many SEC filings, including registration statements such as Form S-1, and annual and quarterly reports on Forms 10-K and 10-Q. The SEC noted in its final rule that these amendments were made to enhance the readability of disclosures, discourage repetitive and immaterial disclosures, and reduce compliance burdens on companies. The amendments are summarized in the below table, but the full slate of changes can be found in the SEC’s August 26^th press releases that can be found here and here.

Disclosure Requirement:

Reg S-K Item 101(a) and (c) - Description of Business

Item 101(a)

• now requires only disclosure of information material to an understanding of the general development of the business, and after a registrant’s initial filing, only requires material updates of the general development of the business.
• replaces the previously described five-year timeframe with a materiality framework.

Item 101(c)

• clarifies and expands its principles-based approach, with a non-exclusive list of disclosure topic examples.
• changes disclosure topics by including (1) a description of the registrant's material human capital resources, and (2) all material government regulations, not just regulation related to environmental laws, to the extent such disclosures would be material to an understanding of the registrant's business.

Disclosure Requirement:

Reg S-K Item 103 - Legal Proceedings

• Expressly states that the required information may be provided by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the filing in an effort to avoid duplicative disclosure.
• Implements a modified disclosure threshold for certain governmental environmental proceedings resulting in monetary sanctions that increases the existing quantitative threshold for disclosure of those proceedings from $100,000 to $300,000, but that also affords a registrant some flexibility by allowing the registrant, at its election, to select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings, provided that the threshold does not exceed the lesser of $1 million or one percent of the current assets of the registrant.

Disclosure Requirement:

Reg S-K Item 105 - Risk Factors

• Requires summary risk factor disclosure of no more than two pages if the risk factor section included in the filing exceeds 15 pages.
• Item 105 now requires (1) disclosure of “material” risk factors, and (2) that the risk factors are organized under relevant headings in addition to the sub captions currently required. Further, any risk factors that may generally apply to an investment in securities must now be disclosed at the end of the risk factor section under a separate caption.

Changes to “Accredited Investor” and “Qualified Institutional Buyer” Definitions

The expanded definitions of Accredited Investor and Qualified Institutional Buyer will allow more individuals and organizations to invest freely in private capital markets. The expanded definitions reflect a shift in policy from using wealth as a proxy for investor sophistication to more directly evaluating an investor’s knowledge of private capital markets.

In addition to existing categories of Accredited Investors, the expanded definition includes the following categories of Accredited Investors:

• with respect to investments in private funds, individuals who are deemed “knowledgeable employees”;
• limited liability companies that meet certain conditions;
• any entity owning “investments” in excess of $5 million and that was not formed for the specific purpose of investing in the securities offered; and
• “family offices” with at least $5 million in assets under management.

The amendments also introduced the concept of a “spousal equivalent” to the definition, so that spousal equivalents may pool their finances for the purpose of qualifying as accredited investors.

Finally, the Qualified Institutional Buyer definition now includes limited liability companies if they meet the $100 million in securities owned and investment thresholds in the definition. Furthermore, the final rule creates a new catch-all category such that any entity type may qualify as a Qualified Institutional Buyer when it satisfies the $100 million threshold.

These amendments will become effective 30 days after publication in the Federal Register.