SEC Adopts Rules Updating Regulation S-K and Accredited Investor and Qualified Institutional Buyer Definitions

On August 26, 2020, the Securities and Exchange Commission (the “SEC”) once again took action designed to simplify and modernize disclosure requirements for reporting issuers, by amending Item 101 (Description of Business), Item 103 (Legal Proceedings), and Item 105 (Risk Factors) of Regulation S-K.¹ In addition, it broadened the definitions of “accredited investor” and “qualified institutional buyer” in order to expand the pool of investors eligible to participate in the U.S. private capital markets.²

Latest Updates to Regulation S-K

The SEC’s amendments to Items 101, 103, and 105 of Regulation S-K are the first meaningful amendments to these items in over 30 years. By reducing the need for repetitive disclosure across filings and enhancing the readability of such information, these amendments are designed to improve disclosures for investors and make compliance more efficient for reporting companies. These changes support the SEC’s movement to principles-based, registrant-specific disclosure, and are in line with the SEC’s efforts in recent years to add efficiency and flexibility to the disclosure framework, including, for example, its adoption of rules requiring reporting companies to hyperlink exhibits to their periodic reports and registration statements to the original filings and the sweeping changes to Regulation S-K set forth in the Fixing America’s Surface Transportation (FAST) Act.

While compliance may become more efficient in the long term, the updates will require reporting companies to invest additional time in the short term to revise their standard disclosure language for use in future filings. As some of the required changes could prove to be time consuming, registrants should plan accordingly and evaluate the likely impact of the amendments on their upcoming periodic reports and other disclosure documents. For example, the updates to Item 101(a), (c), and (h) may require a registrant to rework its “Business” section generally and add specific disclosure topics related to its human capital resources and material government regulations applicable to its business. Item 105 now requires risk factor disclosure to be organized under relevant headings, as well as summary risk factor disclosure in certain circumstances. When evaluating the impact of the new requirements on corporate filing calendars and transaction timelines, registrants should build in sufficient time for any scheduled review by outside advisors, including their independent registered public accounting firm and outside securities counsel.

Below is a summary of the amendments from the SEC’s Final Rule (Release Nos. 33-10825 and 34-89670). These amendments will go into effect 30 days after publication in the federal registrar.

Regulation S-K Item	Summary of Existing Requirements	Summary of Final Amendments
Item 101(a) and (h) (Description of Business)	Requires a description of the general development of the business of the registrant during the past five years, or such shorter period as the registrant may have been engaged in business.	Revises Item 101(a)to: Be largely principles-based, requiring disclosure of information material to an understanding of the general development of the business, and eliminating the previously prescribed five-year timeframe. Revises Item 101(h) to: Eliminate the three-year timeframe with respect to smaller reporting companies. Revises Items 101(a)and (h) to clarify that: Registrants, in filings made after a registrant’s initial filing, may provide an update of the general development of the business rather than a full discussion. The update must disclose all of the material developments that have occurred since the registrant’s most recent filing containing a full discussion of the general development of its business, and incorporate by reference that prior discussion.
Item 101(c) (Description of Business)	Requires a narrative description of the business done and intended to be done by the registrant and its subsidiaries, focusing upon the registrant’s dominant segment or each reportable segment about which financial information is presented in its financial statements. To the extent material to an understanding of the registrant’s business taken as a whole, the description of each such segment must include disclosure of several specific matters.	Revises Item 101(c)to: Clarify and expand the principles-based approach of Item 101(c), with a non-exclusive list of disclosure topic examples (drawn in part from the topics currently contained in Item 101(c)); Include, as a disclosure topic, a description of the registrant’s human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business; and Refocus the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws.
Item 103 (Legal Proceedings)	Requires disclosure of any material pending legal proceedings including the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Similar information is to be included for any such proceedings known to be contemplated by governmental authorities. Contains a threshold for disclosure based on a specified dollar amount ($100,000) for proceedings related to Federal, State, or local environmental protection laws.	Revises Item 103 to: Expressly state that the required information may be provided by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document to avoid duplicative disclosure; and Implements a modified disclosure threshold that increases the existing quantitative threshold for disclosure of environmental proceedings to which the government is a party from $100,000 to $300,000, but that also affords a registrant the flexibility 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 and its subsidiaries on a consolidated basis.
Item 105 (Risk Factors)	Requires disclosure of the most significant factors that make an investment in the registrant or offering speculative or risky and specifies that the discussion should be concise, organized logically, and furnished in plain English. The Item also states that registrants should set forth each risk factor under a subcaption that adequately describes the risk. Additionally, Item 105 directs registrants to explain how each risk affects the registrant or the securities being offered and discourages disclosure of risks that could apply to any registrant.	Revises Item 105 to: Require summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15pages; Refine the principles-based approach of Item 105 by requiring disclosure of “material” risk factors; and Require risk factors to be organized under relevant headings in addition to the subcaptions currently required, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.

Updates to Accredited Investor and Qualified Institutional Buyer Definitions

The SEC also adopted amendments to the definition of “accredited investor” in Regulation D and the definition of “qualified intuitional buyer” in Rule 144A promulgated under the Securities Act of 1933, as amended (the “Securities Act”). These amendments expand the definitions to allow more individuals and entities to qualify as “accredited investors” and more entities to qualify as “qualified institutional buyers,” and are aimed at providing increased access to private capital markets, while retaining appropriate safeguards. Notably, the revised definition of “accredited investor” now enables individuals who were previously unable to meet income or net worth tests to qualify as “accredited investors” based on their financial sophistication.

Below is a summary of these amendments from the SEC’s Final Rule (Release Nos. 33-10824 and 34-89669). These amendments will go into effect 60 days after publication in the federal registrar.

• Rule 501(a) — Expands the definition of “accredited investor” to:
  • Add a new category of qualifying persons based on professional or academic certifications, designations or credentials, which the SEC may designate from time to time. These credentials initially include holders of Series 7, 65, and 82 licenses;
  • Allow “knowledgeable employees” of a private fund to qualify with respect to investments in that fund;
  • Clarify that limited liability companies with $5 million in assets qualify;
  • Add SEC and state-registered investment advisors, exempt reporting advisors, and rural business investment companies (“RBICs”) as qualifying entities;
  • Add Indian tribes, governmental bodies, funds, and foreign entities that own $5 million or more of “investments” (defined in Rule 2a51-1(b) under the Investment Company Act of 1940, as amended) to qualify, as long as those entities were not formed for the specific purpose of investing in the securities offered;
  • Add “family offices” with at least $5 million in assets under management who meet certain intent and knowledge requirements and their “family clients” (each, as defined under the Investment Advisors Act of 1940, as amended) to qualify; and
  • Allow “spousal equivalents” to pool their financial resources in order to qualify.
• Rule 215
  • Replaces existing definition with a cross-reference to Rule 501(a).
• Rule 144A – Expands the definition of “qualified institutional buyer” to:
  • Add limited liability companies and RBICs if they meet the $100 million in securities owned and invested threshold set forth in the definition; and
  • Add any institutional investors qualifying under the accredited investor definition if they meet the $100 million in securities owned and invested threshold set forth in the definition.

The SEC also adopted amendments to Rule 163B under the Securities Act and Rule 15g-1 under the Securities Exchange Act of 1934, as amended, to make conforming changes consistent with the above-outlined definitional changes.