Smaller Reporting Companies - Business, Risk Factor and Legal Proceedings Modernization

By George Wilson


In response to a reader comment about our recent posts delving into the SEC’s August 2020 modernization of business, risk factor and legal proceedings disclosures, this post explores the implications of these changes for smaller reporting companies or SRCs.


A review of the SRC definition and a list of SRC disclosure accommodations is included at the end of this post.  SRCs can use this system in an “à la carte” fashion, picking and choosing which disclosure accommodations they will use.


The impact of the SEC’s August 2020 Final Rule on SRCs is essentially the same as non-SRCs, with the differences described below.


Description of  Business


Consistent with the changes for non-SRCs, the requirements for how many periods to present and hyperlinking were updated for SRCs.  Notably, the prescriptive and detailed business description requirements for SRCs in S-K Item 101(h) were not changed.  They are included at the end of this post.


Number of Periods to Present


The old version of S-K Item 101(h) contained this language:


A smaller reporting company, as defined by §229.10(f)(1), may satisfy its obligations under this Item by describing the development of its business during the last three years.


This is replaced by a more principles-based requirement:


In describing developments under paragraphs (h)(1) through (3), information should be provided for the period of time that is material to an understanding of the general development of the business.


One note in this regard – remember the instructions to Form 10-K Item 1 limit this requirement to the period from the beginning of the year of the report:


Item 1. Business. 


Furnish the information required by Item 101 of Regulation S-K (§ 229.101 of this chapter) except that the discussion of the development of the registrant’s business need only include developments since the beginning of the fiscal year for which this report is filed.




The new S-K Item 101(h) also has this language about hyperlinking, which is consistent with the changes made for non-SRCs:


Notwithstanding the provisions of § 230.411(b) or § 240.12b-23(a) of this chapter as applicable, a smaller reporting company may only forgo providing a full discussion of the general development of its business for a filing other than an initial registration statement if it provides an update to the general development of its business disclosing all of the material developments that have occurred since the most recent registration statement or report that includes a full discussion of the general development of its business. In addition, the smaller reporting company must incorporate by reference, and include one active hyperlink to one registration statement or report that includes, the full discussion of the general development of the registrant’s business


Risk Factors


The August 2020 changes to risk factor disclosure did not include any special provisions for SRCs.  As a result, SRCs are subject to the new requirement to provide a risk factor summary if their risk factor disclosures are over 15 pages long.  This requirement is now in S-K Item 105(b):


(b) Concisely explain how each risk affects the registrant or the securities being offered. If the discussion is longer than 15 pages, include in the forepart of the prospectus or annual report, as applicable, a series of concise, bulleted or numbered statements that is no more than two pages summarizing the principal factors that make an investment in the registrant or offering speculative or risky.


SRC’s do have a disclosure accommodation for risk factors that was not changed by the August 2020 Final Rule.  The Instructions to Form 10-K Item 1A provide that SRCs do not have to disclose risk factors:


Item 1A. Risk Factors.


Set forth, under the caption “Risk Factors,” where appropriate, the risk factors described in Item 105 of Regulation S-K (§ 229.105 of this chapter) applicable to the registrant. Provide any discussion of risk factors in plain English in accordance with Rule 421(d) of the Securities Act of 1933 (§230.421(d) of this chapter). Smaller reporting companies are not required to provide the information required by this item.



Legal Proceedings


There are no SRC legal proceedings disclosure accommodations.  All the disclosure changes described in this post apply to both SRCs and non-SRCs.


As always, your thoughts and comments are welcome!



Here, for ease of reference are:

  • Definition of an SRC
  • SRC disclosure accommodations
  • SK Item 101(h) description of business


Definition of an SRC

As a brief reminder, the definition of a small reporting company is in Regulation S-K Item 10(f):


(1) Definition of smaller reporting company. As used in this part, the term smaller reporting company means an issuer that is not an investment company, an asset-backed issuer (as defined in §229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:


(i) Had a public float of less than $250 million; or


(ii) Had annual revenues of less than $100 million and either:


(A) No public float; or

(B) A public float of less than $700 million.


This definition was adopted in this June 2018 Final Rule which increased the public float level from $75 million to $250 million and also added the provision that companies with less than $100 million in revenue and public float less than $700 million could use the SRC system.  This allowed tech and biotech companies that are in a “pre-revenue” stage to use the SRC reduced disclosure regimen.  In the final rule the SEC estimated that approximately 966 additional registrants would meet the new SRC definition.


SRC Disclosure Accommodations


You can find a list of the Regulation S-K disclosure accommodations for SRCs in S-K Item 10(f) and the financial statement requirements for SRCs in S-X Article 8.  SRC financial statements need only comply with US GAAP.  The additional requirements in Regulation S-X, with the exception of the auditor requirements in Article 2, do not apply to SRCs.



SRC Description of Business


The detailed requirements in S-K Item 101(h) for an SRC to address in the description of its business were not changed by the August 2020 Final Rule.  They include:


(1) Form and year of organization;

(2) Any bankruptcy, receivership or similar proceeding; and

(3) Any material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of business.

(4) Business of the smaller reporting company. Briefly describe the business and include, to the extent material to an understanding of the smaller reporting company:

(i) Principal products or services and their markets;

(ii) Distribution methods of the products or services;

(iii) Status of any publicly announced new product or service;

(iv) Competitive business conditions and the smaller reporting company's competitive position in the industry and methods of competition;

(v) Sources and availability of raw materials and the names of principal suppliers;

(vi) Dependence on one or a few major customers;

(vii) Patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts, including duration;

(viii) Need for any government approval of principal products or services. If government approval is necessary and the smaller reporting company has not yet received that approval, discuss the status of the approval within the government approval process;

(ix) Effect of existing or probable governmental regulations on the business;

(x) [Reserved]

(xi) Costs and effects of compliance with environmental laws (federal, state and local); and

(xii) Number of total employees and number of full-time employees.

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