As part of last year’s flurry of SEC rulemakings, the Commission adopted amendments to Item 105 of Regulation S-K that were intended to make risk factor disclosure more effective. Those changes included requiring summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages, refining the principles-based approach by requiring disclosure of “material” risk factors, and requiring risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption. As companies implemented these rule changes, one big question we asked ourselves was will companies try to shorten their risk factor disclosure to fit within the 15 page “limit” and thus avoid the summary risk factor disclosure?
In the second edition of Wilson Sonsini’s Silicon Valley 150 Risk Factor Trends Report, we get a sense of what some of the largest companies in Silicon Valley ended up doing with their risk factors, and it appears that risk factor disclosures generally got longer after the SEC’s rule changes. The report reviews the disclosure practices of the Silicon Valley 150, which is comprised of the 150 largest public companies in Silicon Valley, based on annual sales. The observations from this group point toward more disclosure, not less, following the effective date of the SEC’s amendments:
The average total number of pages of risk factors increased from approximately 21 pages last year to 23.7 pages this year, a 13% increase. Similarly, the median total number of pages of risk factors increased from 20 pages last year to 23 pages this year, a 15% increase.
This represents a larger increase than what was observed for S&P 500 companies, for which the average total number of pages of risk factors increased from approximately 16.4 pages last year to 17.4 pages this year, a 6% increase (the median total number of pages of risk factors remained flat at 15 pages). The report also notes that the average number of risk factors increased 3% for the Silicon Valley 150, while going up 1% for the S&P 500. The report indicates that the prevalence of a “General Risk Factors” heading was relatively high, with 61% of the Silicon Valley 150 including such a heading while 55% of the S&P 500 did so. As for the inclusion of a risk factor summary, the report notes that 71% of the Silicon Valley 150 had more than 15 pages of risk factors, while only 39% of S&P 500 companies exceeded 15 pages.
– Dave Lynn