Regulation S-K
Encyclopedia
Regulation S-K is a prescribed regulation under the US Securities Act of 1933
that lays out reporting requirements for various SEC filing
s used by public companies. Companies are also often called issuer
s (issuing or contemplating issuing shares) or filers (entities that must file reports with the SEC) or registrants (entities that must register (usually shares) with the SEC).
that companies use to register
their securities with the U.S. Securities and Exchange Commission (SEC) as the "registration statement
under the Securities Act of 1933". Thereafter Regulation S-K applies to continual reporting requirements in documents such as 10-K
, 8-K, etc.
Regulation S-K applies to
The first time a public company feels the impact of Regulation S-K is for an IPO, any initial public offering of shares that may plausibly land in the hands of the American investing public. The S-1 contains the basic business and financial information on an issuer with respect to a specific securities offering. Investors may use the prospectus
to consider the merits of an offering and make educated investment decisions. A prospectus is one of the main documents used by an investor to research a company prior to an initial public offering.
The S-1 form has an OMB approval number of 3234–0065 and the online form is only 8 pages. However the simplicity of the form's design is belied by the OMB Office's figure of the estimated average burden – 849.2 hours. Much of the length of this document is due to the high quality level of reporting requirements required by Regulation S-K.
Regulation S-K (the "K" can be thought of as a reporting classification as for Form 10-K
) cannot be considered in a vacuum and indeed all the securities regulations and associated law may form a very large body of information. Professionals in the field of securities compliance reporting will need to be aware of other rules and regulations as noted at the Division of Corporation Finance Rules, Regulations and Schedules.
Item 10 suggests management make reasonable projections for the future; the tone is mild. More nervously, security ratings are voluntarily permitted for classes of debt securities, convertible debt securities
and preferred stock
.
Incorporation by reference
is rationally defined and implemented, no piggy-back referencing (no reference to a reference in another filed document) is allowed;
non-GAAP financial measures are politely deprecated;
Provision is made for smaller companies to escape the reporting tangle by only filling in items 101, 201, 301, 302, 303, 305, 402, 404, 407, 503, 504, 601.
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It would seem that the business might be described initially in a mechanical fashion (incorporation
, address, etc.) but item 101 then leads into querying how the company is doing in its various industry segments and then asks for a very revealing narrative of the company's business and how it intends to do business in future, in detail that could be of great help to the company's competitors.
Practices for reports to shareholders are laid out but don't matter much in contrast to today's common online dissemination. They do catch up those who do not disseminate information online.
This item can entail quite a bit of disclosure of information on physical property, land and buildings, plants, mines, oil and gas,... again, comfort for a company's competition. Industry Guides help companies know what to disclose.
Potentially embarrassing – any material pending legal proceedings (other than ordinary routine litigation incidental to the business) to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. especially environmental actions. Must include a description of the factual basis alleged to underlie the proceeding and the relief sought. Include similar information as to any such proceedings known to be even contemplated by governmental authorities. No one likes to discuss accusations against themselves, but one may first disclose all the nasty words, and then gloat later after the judge rules in the company's favor.
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As such items are usually available through Internet search engines, why specify this in detail here? First some smaller companies with thin markets will need to disclose here, and search engines may not catch that basic trading data, and all companies with multiple markets (including more than one market per equity share) will be revealed. The number of shareholders and all holders of >= 5% of shares must be revealed. See attached image from a Random Example
Dividend history and intent to pay or not pay dividends must be revealed or discussed.
Securities authorized for issuance under equity compensation plans must be revealed. This is also a matter for Regulation S-X and while it can be prepared in table format by a careful layman it is close to needing expert help.
Performance graph- expert help may well be needed to prepare "yearly percentage change in the registrant's cumulative total shareholder return on a class of common stock" and then compare figures with those of "peer issuer(s) selected in good faith." Fortunately this is only required for Annual reports or proxies, and it is deemed non-promotional.
This item could be a tedious burden on a company's paperwork processing resources but fortunately once the information has been collected, collated and set-up, then it needs only to be updated and re-calculated, usually in accordance with Regulation S-X and the financial statements.
A tedious legal description of the securities is not used, but rather key questions are asked such as "any provision of the registrant's charter or by-laws that would have an effect of delaying, deferring or preventing a change in control of the registrant and that would operate only with respect to an extraordinary corporate transaction involving the registrant (or any of its subsidiaries), such as a merger, reorganization, tender offer, sale or transfer of substantially all of its assets, or liquidation." (for example)
In other words, traps and tricks in the share descriptions and indentures must be placed in the sun. There are many pitfalls (including some one might not think of at first glance, such as liability of shares to foreign tax) and so the instructions provided to complete what might initially seem to be a simple matter – what the shares are – are rather comprehensive instructions.
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This item asks for a small important subset of the company's financial information, an abstract from the financial statements. No company should have much difficulty completing this item.
Relevant to quarterly financial data, this vague item looks for changes in figures and also other changes caused by such as disposals of segments of a business, and extraordinary, unusual or infrequently occurring items, and matters related to gas and oil. Regulation S-X is relevant to this item.
This is a critical item and must be completed thoroughly and diplomatically. In its last 10-K filing, Google, Inc.'s "Management's discussion and analysis of financial condition and results of operations" was 20 HTML pages long. In the 'Management's discussion' the company must reveal its strategies to the curiosity of its competitors and also reveal its weaknesses so that they may be viewed by litigation-minded persons worldwide.
This item highlights any squabbles between the company its accountants and auditors. "Disagreements contemplated by this Item are those that occur at the decision-making level, i.e., between personnel of the registrant responsible for presentation of its financial statements and personnel of the accounting firm responsible for rendering its report." However such disagreements will cause the financial statements to be called into question and throw their relationship with Regulation S-X out of whack, so that is rare for any response other than a terse "none" to be found reported under this item.
Companies are given a choice of three disclosure alternatives: (1) Tabular presentation of information related to market risk sensitive instruments (2) Sensitivity analysis of potential loss in future earnings, fair values, or cash flows of market risk sensitive instruments, or (3) Value-at-risk disclosures of the potential loss in future earnings, fair values, or cash flows of market risk sensitive instruments from relevant market rates or prices. While this item could seem to lead easily to large and convoluted mathematical analyses, instead it is common for large firms to use common sense and answer this item in the manner of Wal-Mart, for example, on market risk by providing a narrative explanation within its Annual Report.
This extremely brief item asks "Disclose the conclusions of the registrant's principal executive and principal financial officers, ... regarding the effectiveness of the registrant's disclosure controls and procedures ... as of the end of the period covered by the report, based on the evaluation of these controls and procedures .....".
The brevity of the question posed by the item misleads because for this response to item 307 to be well-founded, enormous IT , accountant and audit work must have been carried out, coordinated and reviewed. The consequences of ineffective or even slightly ineffective controls are serious; most companies respond with highly similar wording typified, for example, in Exxon Mobile's 2009 10K, item 9A. "Based on this evaluation, management concluded that Exxon Mobil Corporation’s internal control over financial reporting was effective as of December 31, 2009."
Like the closely related Item 307, Item 308 is just a few lines long, but casts a long compliance shadow.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted the rule that is now Item 308 requiring subject companies to include in their annual reports a report of management on the company's internal control over financial reporting. The tone is harsh. The word 'reasonable' appears but is rare. The internal control report must include:
Under the rules, a company is required to file the registered public accounting firm's attestation report as part of the annual report. Thus both the company and accountant must sign off that everything is prepared to a very high standard. Then management must sign off to provide certifications required by Sections 302 and 906 of Sarbanes-Oxley Act.
In its 10-K for 2009 IBM
responds to Item 308 in this simple manner "The company's management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report."
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Although some of Item 401 is technical or related to proxies, the utility for investors is simply seeing who is running the company and what stake they have in it. Also revealed are relationships such as family members; significant employees who are not directors or officers; backgrounds and experience in business of all parties, and other directorships, and promoters and control persons.
Who gets the money is of great importance in the pecking order of the hierarchy of a major corporation and Item 402 goes into this in great detail.
There is a trend among large companies to take their response to this item as required by Form 10-K and spin this off to the Annual Report and note it back to the 10-K by incorporation-by-reference; there is nothing wrong with this, it is valid disclosure, but may make it slightly harder for the average investor or researcher to access the information. An example is Pfizer Inc.'s 10-K which references the executive compensation report to be found in the Proxy Information Pfizer's response to this item comprised p. 38–77 pages of the 2009 Annual Report.
Who owns the big share positions partly defines the importance of each stake in the corporate identity. The Company must carefully furnish to the very best of its knowledge information about major shareholders in tabular format, as of the most recent practicable date, with respect to any person or "group" (as in 13(d) (3) of the Exchange Act, determining beneficial ownership even if a member of a group just for the purpose of acquiring, holding, or disposing of securities of an issuer), who is the beneficial owner of more than five percent of any class of the registrant's voting securities, the total number of shares beneficially owned and the amount the owner has the right to acquire, plus address of each person or entity.
Ford Motor Company
, in its 10-K for the period ending Dec. 31, 2010, refers the reader to the captions "Equity Compensation Plan Information" and "Management Stock Ownership" in Ford's Proxy Statement. This information is, like the 10-K, filed with the SEC's EDGAR system but is non-intuitively known as a DEF 14 A (DEF 14 A (Definitive Proxy Statement)
) which does provide the disclosure required by Item 403.
This Item aims to root out disclosure of conflicts and potential conflicts of interests
, with a cut-off lower limit of $US120,000. A wide net is thrown, to include “any other information regarding the transaction or the related person in the context of the transaction that is material to investors in light of the circumstances of the particular transaction.” And the wide net takes in many possible parties such as directors, nominees for directorship, fathers-in-law and all entities with indirect interests, as a few examples.
The Microsoft
2009 Proxy Statement responds clearly to these concerns about potential conflicts. In summary, the proxy says that because Microsoft is an active diversified global entity, there may indeed by ‘related-party transactions'. Microsoft handles this by assigning authority to the Audit Committee
which has established a written policy and procedures for review and approval of related-party transactions. To receive Audit Committee approval, related party transactions "must have a Microsoft business purpose and be on terms that are fair and reasonable to Microsoft, and as favorable to the Company as would be available from non-related entities in comparable transactions."
This is a tardiness report. Under Section 16 of the Securities Exchange Act of 1934 directors, officers, and principal stockholders must file reports and must do so within certain time deadlines. Item 405 requires the company to examine those filings and then if any were late to reveal this tardiness in a report in this section.
A company need not have a Code of Ethics but if not it explain why it has not done so, so that almost all operating filing companies do have one as envisioned by the Sarbannes-Oxley Act. If the company has a website then the Code must be on it, although not necessarily on the front page. But as an example consider Wells Fargo
("WFC") whose front page has a search box; inputting "Code of Ethics" leads directly (August 2010) to a link to the Code of Ethics. Other simple searches lead to further information on Wells Fargo's Corporate Governance page.
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a. Director independence b. Board meetings and committees; annual meeting attendance c. Nominating committee
d. Audit committee e. Audit committee financial expert f. Compensation committee g. Communications from Shareholders
Other than b., which is an attendance check with the count to be publicly reported, the other clauses allow quite a bit of flexibility in implementation (or even non-compliance, if an explanation is given). Most major corporations have adopted similar measures and as a result it is more easy to see, as compared to the era before passage of the Sarbanes-Oxley Act, how companies comparatively implement corporate governance; in a sense corporate governance becomes conceptually 'portable' by being squeezed into the Sarbanes-Oxley framework.
WFC's Corporate Governance page covers the issues raised by Item 407 and includes these, as an example:
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The Covers
There is no reason to consider Item 501 and Item 502 apart. There are many examples of these items available, namely any Form S-1 filing: here is a Random Example taken from a Form S-1 search on www.sec.gov on August 8, 2010. But because paper remains difficult to transmit over the Internet, a copy that was physically printed cannot be displayed here.
Even today a physical paper prospectus may be printed and handed or given to potential investors but the use of online prospectuses continues to become more common, and both versions must contain essentially the same information, in plain English; also this must agree with the information in the Form S-1. Some specifications of 501 and 502 clearly apply to paper prospectuses but then the same format can be used for online prospectuses.
Basic information is required: Name (and explanation if the name is like a ‘famous’ name), address, phone, title and amount of securities, offering price of the securities, whether there is already a market for the securities, name(s) of the lead or managing underwriter(s), if any, and the underwriting arrangements; and date of the prospectus.
Beyond the basics, the following are also required (these include legends, much like disclaimers): 'Market risk' must be prominent and index the page where this is covered in the prospectus; 'State legend' – any legend or statement required law of any state in which securities are to be offered; the strongly worded 'Commission legend' – indicating that "neither the SEC nor any state securities commission has approved or disapproved of the securities or passed upon the accuracy or adequacy of the disclosures in the prospectus and that any contrary representation is a criminal offense." Finally there is an optional prospectus "Subject to Completion" legend to allow a prospectus to be viewed while incomplete provided this legend is prominently displayed and that no sales effort is made.
Between the Covers
Item 503 continues in the vein of true and plain disclosure and requires the company present a summary of itself that is a self-portrait with warts and all. The emphasis is on risks that are specific to the company, "This discussion must be concise and organized logically." Typical risk factors for new companies are lack of an operating history; lack of profitable operations in recent periods; weak financial position; weaknesses in the business or proposed business; or even a lack of a market for your common equity securities.
Item 503 also covers ratio of earnings to fixed charges disclosure but this is for companies that register debt securities.
The question is simple- where will the money be spent: State the purposes for which the proceeds from the securities to be offered should be used and the approximate amount intended for each purpose. If there no clear plan for the proceeds, say so and then explain reasons for the offering.
Although the wording is flexible, and allows for changes to a company's plans, the last instruction 504(7) notes that "The registrant may reserve the right to change the use of proceeds, provided that such reservation is due to certain contingencies that are discussed specifically and the alternatives to such use in that event are indicated."
This item has – quite unusually for securities legislation – remained unchanged since passed into law on Mar. 16, 1982.
It seems simple enough: for common equity, where common equity is being registered when is no established public trading market, or where there is a gap between the offering price and the market price, describe the various factors considered in determining such offering price. And of course many factors must be considered to arrive at a price that may seem arbitrary, including extensive negotiation between parties and advisers.
When there is no rational algorithm for determining a price point for the offering it is common to plainly say so as in this Random Example: "The offering price has been arbitrarily determined by the Company and bears no relationship to assets, earnings, or any other valuation criteria. No
assurance can be given that the shares offered hereby will have a market value or that they may be sold at this, or at any price.
Applicable mainly to new or unprofitable ventures, Item 506 requires calculation and disclosure of how much dilution – a sort of built-in mathematical instant loss – the new shareholder endures upon buying the shares. The company must display 1. The net tangible book value per share before and after the distribution; 2. The increase in such net tangible book value per share attributable to the cash paid by purchasers of the shares being offered; and 3. The amount of the immediate dilution to be suffered by the purchasers.
Along with offering new shares in the Form S-1 prospectus, prior shareholders may also register some or all of their shares for sale. This Item asks for disclosure of such share amounts and who is intending to sell and how many shares they will have left over after the sale.
To understand this Item, definitions are needed:
Taken with the above definitions Item 508 can be understood as follows:
If the securities will be underwritten, identify the underwriters, any relationships with the underwriters, and note if the underwriting is committed or just a best-efforts and note any market-out clauses.
Define other types of underwritings such as dividend or interest reinvestment plans. Note plans of non-cash outlays such as acquisition, reorganization, readjustment or succession.
Describe details of any distributions through broker-dealers. If the securities are to be offered on an exchange, indicate the exchange. If the registered securities are to be offered in connection with the writing of exchange-traded call options, describe briefly such transactions.
Underwriters' compensation. Provide a table that sets out the nature of the compensation and the amount of discounts and commissions to be paid to the underwriter for each security and in total. The table must show the separate amounts to be paid by the company and the selling shareholders.
Disclose the offering expenses, in the manner specified in Item 511 of Regulation S-K.
In case an underwriter has or may place a member on the company’s board of directors, disclose this and also disclose any indemnification of underwriters. If the underwriting agreement provides for indemnification of the underwriters or their controlling persons against any liability arising under the Securities Act, furnish a brief description of such indemnification provisions.
Dealers' compensation. State briefly all discounts and commissions to be allowed or paid to dealers.
Finders. Identify any finder and, if applicable, describe the relationship between such finder and the company and any underwriter.
Discretionary accounts. Identify any principal underwriter that intends to sell to any accounts over which it exercises discretionary authority and include an estimate of the amount of securities so intended to be sold.
Passive market making. If the underwriters or any selling group members intend to engage in passive market making, briefly describe such passive market making.
Stabilization and other transactions. Briefly describe any transaction that the underwriter intends to conduct or has conducted during or before the offering that stabilizes, maintains, or otherwise affects the market price of the offered securities.
Item 508 also specifies disclosure treatment of certain warrants or rights offerings.
This item covers any kind of expert that might prepare a report to be included in or referenced by a registration statement, including lawyers and accountants. Accountants are special and 'should note Rule 2–01 of Regulation S-X for the Commission's requirements regarding "Qualification of Accountants" which discusses disqualifying interests.' In a registration statement it is reasonable that the company's lawyer will offer the expert opinion on the validity of the shares to be issued and the accountants to offer the expert opinion that the financial statements are correct. In general all material connections between the expert and the company and its principals must be disclosed, but such connections are not common.
Here is a Random Example from Queensridge Mining Resources, Inc., S-1 filing August 12, 2010. It says in "Interests of Named Experts and Counsel" that
Item 510 demands that boilerplate be included in registration statements to the effect that "Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable."
The wording is not absolute and alternate phrasing is to be found which adds statements such as: "in the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director or officer of ours in the successful defense of the action, suit or proceeding) is asserted by the director or officer in connection with securities which may have been registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court or appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issues."
Item 511 requires an itemized statement of all expenses for the issuance and distribution of the securities to be registered. Typical expenses to be included are registration fees Federal taxes States taxes and fees trustees' and transfer agents' fees costs of printing and engraving legal fees accounting fees and engineering fees.
While largely of a technical nature, the items regarding incorporation by reference require care to remain in compliance.
This mixed bag includes undertakings that are applicable to which of 12 types of offering is being registered: Rule 415 Offering Subsequent Exchange Act documents by reference Warrants and rights offerings Competitive bids Incorporated annual and quarterly reports Equity offerings of nonreporting registrants Registration on Form S-4 or F-4 of securities offered for resale acceleration of becoming effective of registration statement Qualification of trust indentures under the Trust Indenture Act of 1939 for delayed offerings registration statement permitted by Rule 430A Filings regarding asset-backed securities incorporating by reference subsequent Exchange Act documents by third parties Filings regarding asset-backed securities that provide certain information through an Internet Web site. Details available at the reg. S-K Item 512 of the Securities Lawyer Deskbook.
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Registration statement
s filed online with EDGAR will invariably require the attachment of exhibits. These filings include continuing reporting requirements, so expect exhibits to accompany filings of S-1, 10-K, 10-Q and 8-K forms. The following Securities Act forms commonly have exhibits: S-1, S-3, S-4, S-8, S-11, F-1, F-3 and F-4. The following Exchange Act forms commonly have exhibits: 10, 8-K, 10-D, 10-Q, and 10-K. Here is a complete list of exhibits.
Exhibits are not 'merely exhibits' or accessories but are important documents in their own right and must include proper complete disclosure. Also critical are director and officer certifications and any Codes of Ethics.
On the other hand a filer may also add even more disclosure, often news items, under Exhibit 99 "Additional Exhibits". These are often to be found in 8-K's, which are very broad forms used to notify investors of any unscheduled material event that is important to shareholders, but Exhibit 99 may show up in other places such as in this Random Example, which is part of a SC14D9C filing (which is Solicitation/Recommendation Statement Under Section 14(d) (4) of the Securities Exchange Act of 1934) by
Potash Corp of Saskatchewan Inc.
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Aside from mining and petroleum, guidance is also given on (Items 801 and 802) statistical disclosure by bank holding companies, unpaid claims and claim adjustment expenses of property-casualty insurance underwriters and (Item 801 only) interests in real estate limited partnerships.
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Item 901—Definitions;
Item 902—Individual Partnership Supplements;
Item 903—Summary;
Item 904—Risk Factors and Other Considerations;
Item 905—Comparative Information;
Item 906—Allocation of Roll-up Consideration;
Item 907—Background of the Roll-up Transaction;
Item 908—Reasons for and Alternatives to the Roll-up Transaction;
Item 909—Conflicts of Interest;
Item 910—Fairness of the Transaction;
Item 911—Reports, Opinions and Appraisals;
Item 912—Source and Amount of Funds and Transactional Expenses;
Item 913—Other Provisions of the Transaction;
Item 914—Pro Forma Financial Statements; Selected Financial Data;
Item 915—Federal Income Tax Consequences.
-related disclosure requirements, all contained in Regulation S-K: Item 101, Description of Business; Item 103, Legal Proceedings; Item 503(c), Risk Factors; and Item 303, Management's Discussion and Analysis ("MD&A"). These are also the items concerned with environmental laws and environmental impact.
Item 101 expressly requires disclosure regarding certain costs of complying with environmental laws. Item 101(c)(1)(xii) requires appropriate disclosure must be made as to the material effects that compliance with Federal, State and local provisions regulating the discharge of materials into the environment, or otherwise relating to protection of the environment, may have upon the expenditures, earnings and competitive position of the registrant and its subsidiaries.
Item 103 requires a registrant to briefly describe pending legal proceedings to which it or its property is a party, in particular with respect to the environmental impact. A registrant also must describe material pending legal actions in which its property is the subject of the litigation. If a registrant is aware of similar actions contemplated by governmental authorities, Item 103 requires disclosure of those proceedings as well. Instruction 5 to Item 103 provides requirements that apply to disclosure of certain environmental litigation. Proceedings arising under any Federal, State or local provisions regulating the discharge of materials into the environment shall be described if material, i.e. exceeding 10 percent of the current assets of the registrant; or a governmental authority that is a party to such proceeding and such proceeding involves potential monetary sanctions, unless monetary sanctions are to be less than $100,000.
Environmental considerations may equally likely impact any company big or small but climate change is likely only to affect large companies.
Climate change disclosure remains a fuzzy topic but four principal themes are discussed in SEC guidance: (1) impact of legislation and regulation; (2) the impact of international accords; (3) indirect consequences of regulation or business trends; and (4) physical impacts of climate change
.
Securities Act of 1933
Congress enacted the Securities Act of 1933 , in the aftermath of the stock market crash of 1929 and during the ensuing Great Depression...
that lays out reporting requirements for various SEC filing
SEC filing
An SEC filing is a financial statement or other formal document submitted to the U.S. Securities and Exchange Commission . Public companies, certain insiders, and broker-dealers are required to make regular SEC filings. Investors and financial professionals rely on these filings for information...
s used by public companies. Companies are also often called issuer
Issuer
Issuer is a legal entity that develops, registers and sells securities for the purpose of financing its operations.Issuers may be domestic or foreign governments, corporations or investment trusts...
s (issuing or contemplating issuing shares) or filers (entities that must file reports with the SEC) or registrants (entities that must register (usually shares) with the SEC).
Applicability
An example where Regulation S-K applies is the Form S-1Form S-1
Form S-1 is an SEC filing used by public companies to register their securities with the U.S. Securities and Exchange Commission as the "registration statement under the Securities Act of 1933". The S-1 contains the basic business and financial information on an issuer with respect to a specific...
that companies use to register
Registration statement
In the United States, a registration statement is a set of documents, including a prospectus, that a company must file with the U.S. Securities and Exchange Commission before it proceeds with an initial public offering....
their securities with the U.S. Securities and Exchange Commission (SEC) as the "registration statement
Registration statement
In the United States, a registration statement is a set of documents, including a prospectus, that a company must file with the U.S. Securities and Exchange Commission before it proceeds with an initial public offering....
under the Securities Act of 1933". Thereafter Regulation S-K applies to continual reporting requirements in documents such as 10-K
Form 10-K
A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission , that gives a comprehensive summary of a public company's performance...
, 8-K, etc.
Regulation S-K applies to
- registration statements under the Securities Act to the extent provided in the forms to be used for registration under such Act; and also to
- registration statements under section 12 ( also known as subpart C of part 249 of this chapter (17 CFR Part 229)),
- annualAnnual reportAn annual report is a comprehensive report on a company's activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people information about the company's activities and financial performance...
or other reports under sections 13 and 15(d), - going-private transaction statements under section 13,
- tender offer statements under sections 13 and 14 ,
- annual reportAnnual reportAn annual report is a comprehensive report on a company's activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people information about the company's activities and financial performance...
s to security holders and proxyProxy statementA proxy statement is a statement required of a United States firm when soliciting shareholder votes. This statement is filed in advance of the annual meeting. The firm needs to file a proxy statement, otherwise known as a Form DEF 14A , with the U.S. Securities and Exchange Commission...
and information statements under section 14, and - any other documents required to be filed under the Exchange Act, to the extent provided in the forms and rules under that Act.
The first time a public company feels the impact of Regulation S-K is for an IPO, any initial public offering of shares that may plausibly land in the hands of the American investing public. The S-1 contains the basic business and financial information on an issuer with respect to a specific securities offering. Investors may use the prospectus
Prospectus (finance)
In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements,...
to consider the merits of an offering and make educated investment decisions. A prospectus is one of the main documents used by an investor to research a company prior to an initial public offering.
The S-1 form has an OMB approval number of 3234–0065 and the online form is only 8 pages. However the simplicity of the form's design is belied by the OMB Office's figure of the estimated average burden – 849.2 hours. Much of the length of this document is due to the high quality level of reporting requirements required by Regulation S-K.
Regulation S-K (the "K" can be thought of as a reporting classification as for Form 10-K
Form 10-K
A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission , that gives a comprehensive summary of a public company's performance...
) cannot be considered in a vacuum and indeed all the securities regulations and associated law may form a very large body of information. Professionals in the field of securities compliance reporting will need to be aware of other rules and regulations as noted at the Division of Corporation Finance Rules, Regulations and Schedules.
Rules, regulations, and schedules commonly associated with Regulation S-K
| Rules, Regulations and Schedules Commonly Associated with Regulation S-K |
|---|
| Regulation S-X Regulation S-X Regulation S-X is a prescribed regulation that lays out the specific format and content of financial reports. It is cited as Title 17:Commodity and Securities Exchanges, Part 210—Form and Content of and Requirements for Financial Statements, Securities Act of 1933, Securities Exchange Act of 1934,... [17 CFR Part 210] * Form and content of and requirements for financial statements |
| Regulation M-A [17 CFR 229.1000 – 229.1016] * Mergers and acquisitions |
| Regulation AB [17 CFR 229.1100 – 229.1123] * Asset-backed securities |
| Industry Guides * Securities Act and Exchange Act Industry Guides |
| General Rules and Regulations, Securities Act of 1933 [17 CFR Part 230] |
| Rule 144 [17 CFR 230.144] * Persons deemed not to be engaged in a distribution and therefore not underwriters |
| Regulation C [17 CFR 230.401 – 230.498] * Registration and filing requirements |
| Regulation D [17 CFR 230.501 – 230.508] * Rules for limited offer and sale of securities without registration |
| Regulation S [17 CFR 230.901 – 230.905] * Rules governing offers and sales made outside the United States |
Regulation S-K highlights by item
These are only highlights of complex law and corporate governance and do not constitute any form of legal advice, and are for educational purposes or general interest only.General
- Item 10 – General
Item 10 suggests management make reasonable projections for the future; the tone is mild. More nervously, security ratings are voluntarily permitted for classes of debt securities, convertible debt securities
Convertible security
A convertible security is a security that can be converted into another security. Most convertible securities are bonds or preferred stocks that pay regular quarterly interest and can be converted into shares of common stock if the stock price appreciates to a predetermined...
and preferred stock
Preferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
.
Incorporation by reference
Incorporation by reference
Incorporation by reference is the act of including a second document within another document by only mentioning the second document. This act, if properly done, makes the entire second document a part of the main document...
is rationally defined and implemented, no piggy-back referencing (no reference to a reference in another filed document) is allowed;
non-GAAP financial measures are politely deprecated;
Provision is made for smaller companies to escape the reporting tangle by only filling in items 101, 201, 301, 302, 303, 305, 402, 404, 407, 503, 504, 601.
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Business
- Item 101—Description of Business
It would seem that the business might be described initially in a mechanical fashion (incorporation
Incorporation (business)
Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town...
, address, etc.) but item 101 then leads into querying how the company is doing in its various industry segments and then asks for a very revealing narrative of the company's business and how it intends to do business in future, in detail that could be of great help to the company's competitors.
Practices for reports to shareholders are laid out but don't matter much in contrast to today's common online dissemination. They do catch up those who do not disseminate information online.
- Item 102—Description of Property
This item can entail quite a bit of disclosure of information on physical property, land and buildings, plants, mines, oil and gas,... again, comfort for a company's competition. Industry Guides help companies know what to disclose.
- Item 103—Legal Proceedings
Potentially embarrassing – any material pending legal proceedings (other than ordinary routine litigation incidental to the business) to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. especially environmental actions. Must include a description of the factual basis alleged to underlie the proceeding and the relief sought. Include similar information as to any such proceedings known to be even contemplated by governmental authorities. No one likes to discuss accusations against themselves, but one may first disclose all the nasty words, and then gloat later after the judge rules in the company's favor.
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Securities of the Registrant
- Item 201—Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters
As such items are usually available through Internet search engines, why specify this in detail here? First some smaller companies with thin markets will need to disclose here, and search engines may not catch that basic trading data, and all companies with multiple markets (including more than one market per equity share) will be revealed. The number of shareholders and all holders of >= 5% of shares must be revealed. See attached image from a Random Example
Dividend history and intent to pay or not pay dividends must be revealed or discussed.
Securities authorized for issuance under equity compensation plans must be revealed. This is also a matter for Regulation S-X and while it can be prepared in table format by a careful layman it is close to needing expert help.
Performance graph- expert help may well be needed to prepare "yearly percentage change in the registrant's cumulative total shareholder return on a class of common stock" and then compare figures with those of "peer issuer(s) selected in good faith." Fortunately this is only required for Annual reports or proxies, and it is deemed non-promotional.
- Item 202—Description of Registrant's Securities
This item could be a tedious burden on a company's paperwork processing resources but fortunately once the information has been collected, collated and set-up, then it needs only to be updated and re-calculated, usually in accordance with Regulation S-X and the financial statements.
A tedious legal description of the securities is not used, but rather key questions are asked such as "any provision of the registrant's charter or by-laws that would have an effect of delaying, deferring or preventing a change in control of the registrant and that would operate only with respect to an extraordinary corporate transaction involving the registrant (or any of its subsidiaries), such as a merger, reorganization, tender offer, sale or transfer of substantially all of its assets, or liquidation." (for example)
In other words, traps and tricks in the share descriptions and indentures must be placed in the sun. There are many pitfalls (including some one might not think of at first glance, such as liability of shares to foreign tax) and so the instructions provided to complete what might initially seem to be a simple matter – what the shares are – are rather comprehensive instructions.
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Financial Information
- Item 301—Selected Financial Data
This item asks for a small important subset of the company's financial information, an abstract from the financial statements. No company should have much difficulty completing this item.
- Item 302—Supplementary Financial Information.
Relevant to quarterly financial data, this vague item looks for changes in figures and also other changes caused by such as disposals of segments of a business, and extraordinary, unusual or infrequently occurring items, and matters related to gas and oil. Regulation S-X is relevant to this item.
- Item 303—Management's discussion and analysis of financial condition and results of operations.
This is a critical item and must be completed thoroughly and diplomatically. In its last 10-K filing, Google, Inc.'s "Management's discussion and analysis of financial condition and results of operations" was 20 HTML pages long. In the 'Management's discussion' the company must reveal its strategies to the curiosity of its competitors and also reveal its weaknesses so that they may be viewed by litigation-minded persons worldwide.
- Item 304—Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
This item highlights any squabbles between the company its accountants and auditors. "Disagreements contemplated by this Item are those that occur at the decision-making level, i.e., between personnel of the registrant responsible for presentation of its financial statements and personnel of the accounting firm responsible for rendering its report." However such disagreements will cause the financial statements to be called into question and throw their relationship with Regulation S-X out of whack, so that is rare for any response other than a terse "none" to be found reported under this item.
- Item 305—Quantitative and Qualitative Disclosures about Market Risk
Companies are given a choice of three disclosure alternatives: (1) Tabular presentation of information related to market risk sensitive instruments (2) Sensitivity analysis of potential loss in future earnings, fair values, or cash flows of market risk sensitive instruments, or (3) Value-at-risk disclosures of the potential loss in future earnings, fair values, or cash flows of market risk sensitive instruments from relevant market rates or prices. While this item could seem to lead easily to large and convoluted mathematical analyses, instead it is common for large firms to use common sense and answer this item in the manner of Wal-Mart, for example, on market risk by providing a narrative explanation within its Annual Report.
- Item 307—Disclosure Controls and Procedures
This extremely brief item asks "Disclose the conclusions of the registrant's principal executive and principal financial officers, ... regarding the effectiveness of the registrant's disclosure controls and procedures ... as of the end of the period covered by the report, based on the evaluation of these controls and procedures .....".
The brevity of the question posed by the item misleads because for this response to item 307 to be well-founded, enormous IT , accountant and audit work must have been carried out, coordinated and reviewed. The consequences of ineffective or even slightly ineffective controls are serious; most companies respond with highly similar wording typified, for example, in Exxon Mobile's 2009 10K, item 9A. "Based on this evaluation, management concluded that Exxon Mobil Corporation’s internal control over financial reporting was effective as of December 31, 2009."
- Item 308—Internal Control over Financial Reporting
Like the closely related Item 307, Item 308 is just a few lines long, but casts a long compliance shadow.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted the rule that is now Item 308 requiring subject companies to include in their annual reports a report of management on the company's internal control over financial reporting. The tone is harsh. The word 'reasonable' appears but is rare. The internal control report must include:
- a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting for the company; management's assessment of the effectiveness of the company's internal control over financial reporting as of the end of the company's most recent fiscal year;
- a statement identifying the framework used by management to evaluate the effectiveness of the company's internal control over financial reporting; and
- a statement that the registered public accounting firm that audited the company's financial statements included in the annual report has issued an attestation report on management's assessment of the company's internal control over financial reporting.
Under the rules, a company is required to file the registered public accounting firm's attestation report as part of the annual report. Thus both the company and accountant must sign off that everything is prepared to a very high standard. Then management must sign off to provide certifications required by Sections 302 and 906 of Sarbanes-Oxley Act.
In its 10-K for 2009 IBM
IBM
International Business Machines Corporation or IBM is an American multinational technology and consulting corporation headquartered in Armonk, New York, United States. IBM manufactures and sells computer hardware and software, and it offers infrastructure, hosting and consulting services in areas...
responds to Item 308 in this simple manner "The company's management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report."
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Management and Certain Security Holders
- Item 401—Directors, Executive Officers, Promoters and Control Persons
Although some of Item 401 is technical or related to proxies, the utility for investors is simply seeing who is running the company and what stake they have in it. Also revealed are relationships such as family members; significant employees who are not directors or officers; backgrounds and experience in business of all parties, and other directorships, and promoters and control persons.
- Item 402—Executive Compensation
Who gets the money is of great importance in the pecking order of the hierarchy of a major corporation and Item 402 goes into this in great detail.
There is a trend among large companies to take their response to this item as required by Form 10-K and spin this off to the Annual Report and note it back to the 10-K by incorporation-by-reference; there is nothing wrong with this, it is valid disclosure, but may make it slightly harder for the average investor or researcher to access the information. An example is Pfizer Inc.'s 10-K which references the executive compensation report to be found in the Proxy Information Pfizer's response to this item comprised p. 38–77 pages of the 2009 Annual Report.
- Item 403—Security Ownership of Certain Beneficial Owners and Management
Who owns the big share positions partly defines the importance of each stake in the corporate identity. The Company must carefully furnish to the very best of its knowledge information about major shareholders in tabular format, as of the most recent practicable date, with respect to any person or "group" (as in 13(d) (3) of the Exchange Act, determining beneficial ownership even if a member of a group just for the purpose of acquiring, holding, or disposing of securities of an issuer), who is the beneficial owner of more than five percent of any class of the registrant's voting securities, the total number of shares beneficially owned and the amount the owner has the right to acquire, plus address of each person or entity.
Ford Motor Company
Ford Motor Company
Ford Motor Company is an American multinational automaker based in Dearborn, Michigan, a suburb of Detroit. The automaker was founded by Henry Ford and incorporated on June 16, 1903. In addition to the Ford and Lincoln brands, Ford also owns a small stake in Mazda in Japan and Aston Martin in the UK...
, in its 10-K for the period ending Dec. 31, 2010, refers the reader to the captions "Equity Compensation Plan Information" and "Management Stock Ownership" in Ford's Proxy Statement. This information is, like the 10-K, filed with the SEC's EDGAR system but is non-intuitively known as a DEF 14 A (DEF 14 A (Definitive Proxy Statement)
Proxy statement
A proxy statement is a statement required of a United States firm when soliciting shareholder votes. This statement is filed in advance of the annual meeting. The firm needs to file a proxy statement, otherwise known as a Form DEF 14A , with the U.S. Securities and Exchange Commission...
) which does provide the disclosure required by Item 403.
- Item 404—Transactions with Related Persons, Promoters and Certain Control Persons
This Item aims to root out disclosure of conflicts and potential conflicts of interests
Conflict of interest
A conflict of interest occurs when an individual or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other....
, with a cut-off lower limit of $US120,000. A wide net is thrown, to include “any other information regarding the transaction or the related person in the context of the transaction that is material to investors in light of the circumstances of the particular transaction.” And the wide net takes in many possible parties such as directors, nominees for directorship, fathers-in-law and all entities with indirect interests, as a few examples.
The Microsoft
Microsoft
Microsoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
2009 Proxy Statement responds clearly to these concerns about potential conflicts. In summary, the proxy says that because Microsoft is an active diversified global entity, there may indeed by ‘related-party transactions'. Microsoft handles this by assigning authority to the Audit Committee
Audit committee
In a U.S. publicly-traded company, an audit committee is an operating committee of the Board of Directors charged with oversight of financial reporting and disclosure. Committee members are drawn from members of the company's board of directors, with a Chairperson selected from among the committee...
which has established a written policy and procedures for review and approval of related-party transactions. To receive Audit Committee approval, related party transactions "must have a Microsoft business purpose and be on terms that are fair and reasonable to Microsoft, and as favorable to the Company as would be available from non-related entities in comparable transactions."
- Item 405—Compliance with Section 16(a) of the Exchange Act
This is a tardiness report. Under Section 16 of the Securities Exchange Act of 1934 directors, officers, and principal stockholders must file reports and must do so within certain time deadlines. Item 405 requires the company to examine those filings and then if any were late to reveal this tardiness in a report in this section.
- Item 406—Code of ethics
A company need not have a Code of Ethics but if not it explain why it has not done so, so that almost all operating filing companies do have one as envisioned by the Sarbannes-Oxley Act. If the company has a website then the Code must be on it, although not necessarily on the front page. But as an example consider Wells Fargo
Wells Fargo
Wells Fargo & Company is an American multinational diversified financial services company with operations around the world. Wells Fargo is the fourth largest bank in the U.S. by assets and the largest bank by market capitalization. Wells Fargo is the second largest bank in deposits, home...
("WFC") whose front page has a search box; inputting "Code of Ethics" leads directly (August 2010) to a link to the Code of Ethics. Other simple searches lead to further information on Wells Fargo's Corporate Governance page.
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Item 407 – Corporate Governance
This has seven clausesa. Director independence b. Board meetings and committees; annual meeting attendance c. Nominating committee
d. Audit committee e. Audit committee financial expert f. Compensation committee g. Communications from Shareholders
Other than b., which is an attendance check with the count to be publicly reported, the other clauses allow quite a bit of flexibility in implementation (or even non-compliance, if an explanation is given). Most major corporations have adopted similar measures and as a result it is more easy to see, as compared to the era before passage of the Sarbanes-Oxley Act, how companies comparatively implement corporate governance; in a sense corporate governance becomes conceptually 'portable' by being squeezed into the Sarbanes-Oxley framework.
WFC's Corporate Governance page covers the issues raised by Item 407 and includes these, as an example:
| Corporate Governance page |
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| Executive Officers; Read profiles of the WFC executive officers. |
Codes of Ethics
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| Board of Directors
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| Committees of the WFC Board
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| Governance Documents
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Registration Statement and Prospectus Provisions
This section has a well-established "regulatory history" and is not prone to sudden large changes. It makes for very dry reading. However its main use to cleanly and clearly specify a consistent format that can be used to define the material needed for a prospectus and how to assemble the material together in a 'disclosure-friendly' way.The Covers
- Item 501—Forepart of Registration Statement and Outside Front Cover Page of Prospectus
- Item 502—Inside Front and Outside Back Cover Pages of Prospectus
There is no reason to consider Item 501 and Item 502 apart. There are many examples of these items available, namely any Form S-1 filing: here is a Random Example taken from a Form S-1 search on www.sec.gov on August 8, 2010. But because paper remains difficult to transmit over the Internet, a copy that was physically printed cannot be displayed here.
Even today a physical paper prospectus may be printed and handed or given to potential investors but the use of online prospectuses continues to become more common, and both versions must contain essentially the same information, in plain English; also this must agree with the information in the Form S-1. Some specifications of 501 and 502 clearly apply to paper prospectuses but then the same format can be used for online prospectuses.
Basic information is required: Name (and explanation if the name is like a ‘famous’ name), address, phone, title and amount of securities, offering price of the securities, whether there is already a market for the securities, name(s) of the lead or managing underwriter(s), if any, and the underwriting arrangements; and date of the prospectus.
Beyond the basics, the following are also required (these include legends, much like disclaimers): 'Market risk' must be prominent and index the page where this is covered in the prospectus; 'State legend' – any legend or statement required law of any state in which securities are to be offered; the strongly worded 'Commission legend' – indicating that "neither the SEC nor any state securities commission has approved or disapproved of the securities or passed upon the accuracy or adequacy of the disclosures in the prospectus and that any contrary representation is a criminal offense." Finally there is an optional prospectus "Subject to Completion" legend to allow a prospectus to be viewed while incomplete provided this legend is prominently displayed and that no sales effort is made.
Between the Covers
- Items 503 to 512 cover a diversity of matters and although perhaps not as vibrant as items 101–103 under Business, various important matters are covered here that affect an investor's interest.
- Item 503—Prospectus Summary, Risk Factors, and Ratio of Earnings to Fixed Charges
Item 503 continues in the vein of true and plain disclosure and requires the company present a summary of itself that is a self-portrait with warts and all. The emphasis is on risks that are specific to the company, "This discussion must be concise and organized logically." Typical risk factors for new companies are lack of an operating history; lack of profitable operations in recent periods; weak financial position; weaknesses in the business or proposed business; or even a lack of a market for your common equity securities.
Item 503 also covers ratio of earnings to fixed charges disclosure but this is for companies that register debt securities.
- Item 504—Use of Proceeds
The question is simple- where will the money be spent: State the purposes for which the proceeds from the securities to be offered should be used and the approximate amount intended for each purpose. If there no clear plan for the proceeds, say so and then explain reasons for the offering.
Although the wording is flexible, and allows for changes to a company's plans, the last instruction 504(7) notes that "The registrant may reserve the right to change the use of proceeds, provided that such reservation is due to certain contingencies that are discussed specifically and the alternatives to such use in that event are indicated."
- Item 505—Determination of Offering Price
This item has – quite unusually for securities legislation – remained unchanged since passed into law on Mar. 16, 1982.
It seems simple enough: for common equity, where common equity is being registered when is no established public trading market, or where there is a gap between the offering price and the market price, describe the various factors considered in determining such offering price. And of course many factors must be considered to arrive at a price that may seem arbitrary, including extensive negotiation between parties and advisers.
When there is no rational algorithm for determining a price point for the offering it is common to plainly say so as in this Random Example: "The offering price has been arbitrarily determined by the Company and bears no relationship to assets, earnings, or any other valuation criteria. No
assurance can be given that the shares offered hereby will have a market value or that they may be sold at this, or at any price.
- 506 – Dilution
Applicable mainly to new or unprofitable ventures, Item 506 requires calculation and disclosure of how much dilution – a sort of built-in mathematical instant loss – the new shareholder endures upon buying the shares. The company must display 1. The net tangible book value per share before and after the distribution; 2. The increase in such net tangible book value per share attributable to the cash paid by purchasers of the shares being offered; and 3. The amount of the immediate dilution to be suffered by the purchasers.
- Item 507 – Selling Security Holders
Along with offering new shares in the Form S-1 prospectus, prior shareholders may also register some or all of their shares for sale. This Item asks for disclosure of such share amounts and who is intending to sell and how many shares they will have left over after the sale.
- Item 508 – Plan of Distribution
To understand this Item, definitions are needed:
| Definitions |
|---|
| • Distribution – The shares to be sold and the way and manner in which they will be sold |
| • Underwriter – An investment banker who assumes the risk of bringing a new securities issue to market. Securities Underwriting |
| • To take the securities – When an underwriter actually purchases the securities |
| • Agency or Type of Best efforts – An underwriter only purchases the amount of shares actually sold to the public |
| • Market-outs – Conditions of the stock markets under which the underwriter may abandon the offering |
| • Managing underwriters – In a large offering certain senior underwriters who make decisions for all underwriters in the group |
| • Broker-dealer – U.S. – a company or other organization that trades securities for its own account or on behalf of its customers Broker-dealer A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers.... |
| • Dividend or interest reinvestment plan – Wikipedia – plan |
| • Exchange-traded call options – a call option Call option A call option, often simply labeled a "call", is a financial contract between two parties, the buyer and the seller of this type of option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity or financial instrument from the seller... traded on a recognized US exchange |
| • Selling security holders – Large shareholders of the company selling shares with an offering to the public |
| • Finders – Persons or entities who connect two parties for a fee |
| • Discretionary accounts – Accounts of clients who have permitted their brokers to initiate trades on the client's behalf |
| • Passive market making – A process where a market maker is both underwriter and buyer of a company's securities in a secondary offering. |
| • Stabilization – Transactions initiated by a broker to minimize price swings or adhere to a price range |
| • Indemnification of underwriters – Pay for losses of an underwriter while conducting an underwriting |
Taken with the above definitions Item 508 can be understood as follows:
If the securities will be underwritten, identify the underwriters, any relationships with the underwriters, and note if the underwriting is committed or just a best-efforts and note any market-out clauses.
Define other types of underwritings such as dividend or interest reinvestment plans. Note plans of non-cash outlays such as acquisition, reorganization, readjustment or succession.
Describe details of any distributions through broker-dealers. If the securities are to be offered on an exchange, indicate the exchange. If the registered securities are to be offered in connection with the writing of exchange-traded call options, describe briefly such transactions.
Underwriters' compensation. Provide a table that sets out the nature of the compensation and the amount of discounts and commissions to be paid to the underwriter for each security and in total. The table must show the separate amounts to be paid by the company and the selling shareholders.
Disclose the offering expenses, in the manner specified in Item 511 of Regulation S-K.
In case an underwriter has or may place a member on the company’s board of directors, disclose this and also disclose any indemnification of underwriters. If the underwriting agreement provides for indemnification of the underwriters or their controlling persons against any liability arising under the Securities Act, furnish a brief description of such indemnification provisions.
Dealers' compensation. State briefly all discounts and commissions to be allowed or paid to dealers.
Finders. Identify any finder and, if applicable, describe the relationship between such finder and the company and any underwriter.
Discretionary accounts. Identify any principal underwriter that intends to sell to any accounts over which it exercises discretionary authority and include an estimate of the amount of securities so intended to be sold.
Passive market making. If the underwriters or any selling group members intend to engage in passive market making, briefly describe such passive market making.
Stabilization and other transactions. Briefly describe any transaction that the underwriter intends to conduct or has conducted during or before the offering that stabilizes, maintains, or otherwise affects the market price of the offered securities.
Item 508 also specifies disclosure treatment of certain warrants or rights offerings.
- Item 509—Interests of Named Experts and Counsel
This item covers any kind of expert that might prepare a report to be included in or referenced by a registration statement, including lawyers and accountants. Accountants are special and 'should note Rule 2–01 of Regulation S-X for the Commission's requirements regarding "Qualification of Accountants" which discusses disqualifying interests.' In a registration statement it is reasonable that the company's lawyer will offer the expert opinion on the validity of the shares to be issued and the accountants to offer the expert opinion that the financial statements are correct. In general all material connections between the expert and the company and its principals must be disclosed, but such connections are not common.
Here is a Random Example from Queensridge Mining Resources, Inc., S-1 filing August 12, 2010. It says in "Interests of Named Experts and Counsel" that
- no expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed on a contingency basis, or had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in the registrant or any of its parents or subsidiaries. Nor was any such person connected with the registrant or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
- The independent legal counsel provided an opinion on the validity of the common stock.
- The Certified Public Accountants has audited the financial statements included in the prospectus and registration statement to the extent and for the periods set forth in their audit report. They presented their report with respect to our audited financial statements. The report of the CPA is included in reliance upon their authority as experts in accounting and auditing.
- A Consulting Geologist provided a geological evaluation report on the company's mineral property. He was employed on a flat rate consulting fee and he has no interest, nor does he expect any interest in the property or securities of the company.
- Item 510—Disclosure of Commission Position on Indemnification for Securities Act Liabilities
Item 510 demands that boilerplate be included in registration statements to the effect that "Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable."
The wording is not absolute and alternate phrasing is to be found which adds statements such as: "in the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director or officer of ours in the successful defense of the action, suit or proceeding) is asserted by the director or officer in connection with securities which may have been registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court or appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issues."
- Item 511—Other Expenses of Issuance and Distribution
Item 511 requires an itemized statement of all expenses for the issuance and distribution of the securities to be registered. Typical expenses to be included are registration fees Federal taxes States taxes and fees trustees' and transfer agents' fees costs of printing and engraving legal fees accounting fees and engineering fees.
- Item 512—Undertakings
While largely of a technical nature, the items regarding incorporation by reference require care to remain in compliance.
This mixed bag includes undertakings that are applicable to which of 12 types of offering is being registered: Rule 415 Offering Subsequent Exchange Act documents by reference Warrants and rights offerings Competitive bids Incorporated annual and quarterly reports Equity offerings of nonreporting registrants Registration on Form S-4 or F-4 of securities offered for resale acceleration of becoming effective of registration statement Qualification of trust indentures under the Trust Indenture Act of 1939 for delayed offerings registration statement permitted by Rule 430A Filings regarding asset-backed securities incorporating by reference subsequent Exchange Act documents by third parties Filings regarding asset-backed securities that provide certain information through an Internet Web site. Details available at the reg. S-K Item 512 of the Securities Lawyer Deskbook.
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Exhibits
- Item 601—Exhibits
Registration statement
Registration statement
In the United States, a registration statement is a set of documents, including a prospectus, that a company must file with the U.S. Securities and Exchange Commission before it proceeds with an initial public offering....
s filed online with EDGAR will invariably require the attachment of exhibits. These filings include continuing reporting requirements, so expect exhibits to accompany filings of S-1, 10-K, 10-Q and 8-K forms. The following Securities Act forms commonly have exhibits: S-1, S-3, S-4, S-8, S-11, F-1, F-3 and F-4. The following Exchange Act forms commonly have exhibits: 10, 8-K, 10-D, 10-Q, and 10-K. Here is a complete list of exhibits.
Exhibits are not 'merely exhibits' or accessories but are important documents in their own right and must include proper complete disclosure. Also critical are director and officer certifications and any Codes of Ethics.
On the other hand a filer may also add even more disclosure, often news items, under Exhibit 99 "Additional Exhibits". These are often to be found in 8-K's, which are very broad forms used to notify investors of any unscheduled material event that is important to shareholders, but Exhibit 99 may show up in other places such as in this Random Example, which is part of a SC14D9C filing (which is Solicitation/Recommendation Statement Under Section 14(d) (4) of the Securities Exchange Act of 1934) by
Potash Corp of Saskatchewan Inc.
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Industry Guides
Item 801—Securities Act Industry Guides and Item 802—Exchange Act Industry Guides provide instruction sets on disclosure compliance for particular industries. Primarily affected are companies with oil and gas operations and interests in oil and gas and programs or companies that are engaged or to be engaged in significant mining operations. The guides are divided into compliance with the Securities Act and the Securities Exchange Act but included in one PDF document, the SEC Industry Guides.Aside from mining and petroleum, guidance is also given on (Items 801 and 802) statistical disclosure by bank holding companies, unpaid claims and claim adjustment expenses of property-casualty insurance underwriters and (Item 801 only) interests in real estate limited partnerships.
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Roll-up Transactions
In these transactions, small, private firms merge into a shell company, which goes public at the same time. This has the effect of several small competitors merging into a (theoretically) larger and more competitive entity. This has not worked out too well – see Corporate Governance, Incentives, and Industry Consolidations . Thus roll-ups are out of style and these Items are rarely seen in filings.Item 901—Definitions;
Item 902—Individual Partnership Supplements;
Item 903—Summary;
Item 904—Risk Factors and Other Considerations;
Item 905—Comparative Information;
Item 906—Allocation of Roll-up Consideration;
Item 907—Background of the Roll-up Transaction;
Item 908—Reasons for and Alternatives to the Roll-up Transaction;
Item 909—Conflicts of Interest;
Item 910—Fairness of the Transaction;
Item 911—Reports, Opinions and Appraisals;
Item 912—Source and Amount of Funds and Transactional Expenses;
Item 913—Other Provisions of the Transaction;
Item 914—Pro Forma Financial Statements; Selected Financial Data;
Item 915—Federal Income Tax Consequences.
Environmental Law and Climate Change Disclosure
Although never explicitly mentioned in Regulation S-K, SEC Guidance points to the four most pertinent sources of climate changeClimate change
Climate change is a significant and lasting change in the statistical distribution of weather patterns over periods ranging from decades to millions of years. It may be a change in average weather conditions or the distribution of events around that average...
-related disclosure requirements, all contained in Regulation S-K: Item 101, Description of Business; Item 103, Legal Proceedings; Item 503(c), Risk Factors; and Item 303, Management's Discussion and Analysis ("MD&A"). These are also the items concerned with environmental laws and environmental impact.
Item 101 expressly requires disclosure regarding certain costs of complying with environmental laws. Item 101(c)(1)(xii) requires appropriate disclosure must be made as to the material effects that compliance with Federal, State and local provisions regulating the discharge of materials into the environment, or otherwise relating to protection of the environment, may have upon the expenditures, earnings and competitive position of the registrant and its subsidiaries.
Item 103 requires a registrant to briefly describe pending legal proceedings to which it or its property is a party, in particular with respect to the environmental impact. A registrant also must describe material pending legal actions in which its property is the subject of the litigation. If a registrant is aware of similar actions contemplated by governmental authorities, Item 103 requires disclosure of those proceedings as well. Instruction 5 to Item 103 provides requirements that apply to disclosure of certain environmental litigation. Proceedings arising under any Federal, State or local provisions regulating the discharge of materials into the environment shall be described if material, i.e. exceeding 10 percent of the current assets of the registrant; or a governmental authority that is a party to such proceeding and such proceeding involves potential monetary sanctions, unless monetary sanctions are to be less than $100,000.
Environmental considerations may equally likely impact any company big or small but climate change is likely only to affect large companies.
Climate change disclosure remains a fuzzy topic but four principal themes are discussed in SEC guidance: (1) impact of legislation and regulation; (2) the impact of international accords; (3) indirect consequences of regulation or business trends; and (4) physical impacts of climate change
Physical impacts of climate change
This article is about the physical impacts of climate change. For some of these physical impacts, their effect on social and economic systems are also described.-Definition of climate change:This article refers to reports produced by the IPCC...
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