The SEC’s May 2020 risk factor disclosure modernization created a great opportunity to rethink risk factor disclosures and focus on communicating material risks.
The prior S-K disclosure requirements for risk factors included this language:
229.105 (Item 105) Risk factors.
Where appropriate, provide under the caption “Risk Factors” a discussion of the most significant factors that make an investment in the registrant or offering speculative or risky. This discussion must be concise and organized logically. Do not present risks that could apply generically to any registrant or any offering. Explain how the risk affects the registrant or the securities being offered. Set forth each risk factor under a subcaption that adequately describes the risk.
The May 2020 Final Rule revised the requirements with this language:
229.105 (Item 105) Risk factors.
(a) Where appropriate, provide under the caption “Risk Factors” a discussion of the material factors that make an investment in the registrant or offering speculative or risky. This discussion must be organized logically with relevant headings and each risk factor should be set forth under a subcaption that adequately describes the risk. The presentation of risks that could apply generically to any registrant or any offering is discouraged, but to the extent generic risk factors are presented, disclose them at the end of the risk factor section under the caption “General Risk Factors.”
(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 pagessummarizing the principal factors that make an investment in the registrant or offering speculative or risky.
(Note: the entire new text of S-K Item 105 can be found here.)
Three aspects of this rule change create opportunities to rethink this disclosure:
The change in language from “significant factors” to “material factors,”
The requirement to put “generic” risk factors at the end of the discussion and use the heading “General Risk Factors,” and
The requirement to include a summary if risk factors are longer than 15 pages.
Lumen Technologies took advantage of this opportunity in a meaningful way. In Lumen Technologies’ Form 10-K for the year-ended December 31, 2019, risk factors are on pages 20 to 48, 28 pages long. Risks described range from “Risks Affecting Our Business” to “Other Risks.” It would be fair to say that some of the risk factors, such as “We may not be able to compete successfully against current and future competitors” might be “risks that could apply generically to any registrant or any offering.”
After implementing the new disclosure requirements, and a major amount of work, in Lumen Technologies’ Form 10-K for the year ended December 31, 2020, risk factors are on pages 21 to 32. This is a reduction from 28 to 11 pages! The revised disclosures start with “Business Risks,” a simpler and more direct heading, and finish with “General Risks” as required by the new rule. Interestingly, the General Risks are less than one page. Competitive issues are addressed in a more tailored risk factor titled “We operate in an intensely competitive industry and existing and future competitive pressures could harm our performance.”
“We took the SEC’s changes to S-K Item 105 as an opportunity to take a fresh look at our risk factors,” said David Hamm, Associate General Counsel at Lumen Technologies. “After a robust cross-functional effort, we believe we enhanced and streamlined our risk factors while maintaining existing protections.”
Lumen Technologies’ revised presentation is more direct and clearly more investor friendly.
As always, your thoughts and comments are welcome!