Regulation S-K Definition
Regulation S-K outlines the disclosure requirements for different SEC filings by public companies. These requirements include registration statements, periodic reports, proxy statement, and other filings. The US Securities Act of 1933 and Securities Exchange Act of 1934 makes certain reporting requirement mandatory for the companies who sell their securities on a public exchange. These regulations are in place to protect the investors from any fraudulent activities.
A Little More on What is Regulation S-K
Generally, companies need to register their securities with the U.S. Securities and Exchange Commission (SEC) in order to sell it to the public. These public companies are obligated to disclose certain information prescribed under Regulation S-K. They are required to file Form S-1 as the registration statement this is the first time the Regulation S-K applies to a company. After that, they need to fulfill the ongoing filing requirements using forms 10-K and 8-K.
This regulation helps the investors to make informed decisions while investing in a company.
The issuers need to report the basic business and financial information with respect to the specific securities offering through Form S-1 prior to its initial public offering. This online form contains 8 pages that cover all the necessary points.
Regulation S-K applies to the following areas:
- Registration statements under the Securities Act of 1933.
- Registration statements under section 12 of the Securities Exchange Act of 1934.
- Annual and other ongoing reports.
- Transaction statements of going private.
- Statements of offering a tender.
- Annual reports to security holders, and proxy and information statements.
- Any other documents prescribed to be filed under the Securities Exchange Act of 1934.
Some of the information that is required to be disclosed under Regulation S-K
- Details of Business
- Incorporation and the address.
- The performance of the company in its different industry segment with a detailed description of the current business.
- Plans for running the business in the future.
- Details of Property
- Description of physical property including land, plants, oil and gas reserves, mines and others.
- Legal Proceedings
- Any legal proceedings that are pending in a court of law, except the ordinary routine litigation incidental to the business.
- Any such proceedings where the issuer or any of its subsidiaries is a party need to be reported.
- If any of its properties is subject to such litigation, that also must be reported.
- Details of the Securities
- Description of different share classes and any provisions that may affect them. Such as poison pill and other provisions described by law or by the charter of the issuer.
- The market price of the common equity and related stockholder matters.
- Dividends of the common equity, dividend history and whether the dividend will be paid or not.
- A performance graph that describes the change in the cumulative total shareholder return on a class of common stock.
- These figures need to be compared with at least one peer issuer chosen in good faith.
- Financial Data
- Financial data includes operating revenues, total assets, long term obligations and redeemable preferred stock, income and cash dividends declared per common shares.
- These data need to be presented in comparative columnar form mentioning each of these for the last five fiscal years. The companies may need to include financial data of additional fiscal years so that the data truthfully reflect their financial performance.
- Companies may include other financial information if that is necessary for a clear understanding.
- Analysis of the financial condition and results of operations. This analysis must be done by the management and it should meaningfully reflect the real condition.
- Any occasion of disagreements between the company and its auditors and accountants must be reported.
- Detail reporting on market risk. This report should cover both qualitative as well as quantitative aspects.
- Report on the controls and procedures.
- Statement on the company’s internal control over financial reporting.
- Executive compensation details.
- Details about who is running the company and what financial stake they have in it.
- Details about executive officers, promoters and control persons.
- Information about the major shareholders.
- The company’s code of ethics. If it doesn’t have a code of ethics, then it is needed to be mentioned with the explanation. The company’s website (if there is any) must also include the information on its code of ethics.
- Details about the corporate governance of the business.
- Registration Statement with prospectus
- A printed or online prospectus must be compiled in easy to understand English.
- It must include all the basic information and must agree with the information furnished in Form S-1.
Apart from the above-mentioned information, the companies are required to furnish some other details that cover environmental liabilities and others. The process of filing is often costly and time-consuming.
References for Regulation S-K
Academic Research on Regulation S-K
SEC disclosure policy regarding management integrity, Longstreth, B. (1982). Bus. Law., 38, 1413. The paper written by Bevis Longstreth, a commissioner of Securities and Exchange Commission discusses the debate surrounding the disclosure policy of SEC concerning management integrity. It analyzes recent judicial and administrative developments and proposes certain policies to be followed in formulating SEC’s disclosure rules regarding management integrity in the future.
Pro Forma adjustments to GAAP earnings: Bias, materiality, and SEC action, Nichols, N. B., Gray, S. J., & Street, D. L. (2005). Research in Accounting Regulation, 18, 29-52.This paper uses data of the earnings releases of a sample of companies reporting pro forma results from 1999 to 2004. It presents a longitudinal analysis of this data in the context of SEC’s introduction of Regulation G. It looks into the specific items that were included in pro forma adjustments and its frequency. It compares the magnitude of the adjustments to GAAP and analyzes the stated rationale for the adjustments. The research specifically examines the effect of the SEC’s recent regulation and to what extent it has modified pro forma reporting behavior.
Barings’s Ghost: Item 305 in SEC Regulations SK and Market Risk Disclosures of Financial Derivatives, Dozier, M. H. (1999). Ga. L. Rev., 34, 1417. This article analyzes the item 305 in SEC Regulation S-K. It discusses the importance of market risk disclosures of financial derivatives. It discusses the downfall of the 233 year old prestigious Barings Bank in this context.
Diversification’s effect on firm value, Berger, P. G., & Ofek, E. (1995). Journal of financial economics, 37(1), 39-65. This paper aims to estimate the effect of diversification on firm value. It imputes stand-alone values for individual business segments to measure the impact. It compares the sum of these stand-alone values to the firm’s actual value and finds there was an average 13% to 15% value loss from diversification during the period of 1986-1991. The result shows if the segments of the diversified firm are in the same two-digit SIC code, the value loss is comparatively less. The value loss occurs due to overinvestment and cross-subsidization. Tax benefits of diversification reduce the loss to a certain extent.
Regulation SK, Item 402: The New Executive Compensation Disclosure Rules, Terrion, H. F. (1992).Case W. Res. L. Rev., 43, 1175. On October 15, 1992, the Securities and Exchange Commission adopted major revisions to Item 402 of Regulation S-K. This item governs the disclosure of issues pertaining to executive compensation. This article analyzes this revision in the lights of the debates around executive compensation.
The impact of the SEC’s regulation of non-GAAP disclosures, Heflin, F., & Hsu, C. (2008). Journal of Accounting and Economics, 46(2-3), 349-365. In 2003, the Securities and Exchange Commission imposed additional disclosure and filing requirement on firms publicly disclosing non-GAAP earning. This study attempts to measure the impact of this change in this regulation. Based on its observation the study concludes, after the implementation of this regulation the use of non-GAAP disclosure has been reduced by the firms to improve performance perceptions. But at the same time, it also reduced the willingness of the firms to use non-GAAP earnings to convey permanent earnings.
Evidence on opinion shopping from audit opinion conservatism, Krishnan, J., & Stephens, R. G. (1995). Journal of Accounting and public Policy, 14(3), 179-201. This paper extends an earlier study that examined the audit opinion decisions for clients who switched from one auditor to another. That study found that auditors treated prospective switchers more conservatively than non-switchers in the year prior to a switch. This current paper compares the audit opinion decisions of the predecessor and successor auditors for clients who switched, relative to auditor’s treatment of non-switching clients.
Environmental Disclosures and SEC Reporting Requirements, Ferman, R. V. (1992). Del. j. Corp. L., 17, 483. This paper deals with the question of environmental liabilities of the corporations and analyzes whether the SEC reporting requirements address this question adequately.
SEC Disclosure Requirements for Contingent Environmental Liability, Caron, G. A. (1986). BC Envtl. Aff. L. Rev., 14, 729. This article discusses the disclosure obligations imposed by the SEC on the companies regarding their contingent liability arising under federal, state and local environmental control law.
SEC REGULATIONS G, SB, AND SK: REPORTING NON-GAAP FINANCIAL MEASURES, Bloom, R., & Schirm, D. (2003). The CPA Journal, 73(12), 10. This article discusses the adoption of SEC Regulation G which deals with non-GAAP measures in financial reporting. It discusses the provisions of Regulation G in details and analyzes it.
Regulation SK Item 402 (s): regulating compensation incentive-based risk through mandatory disclosure, Higgins, D. A. (2010). Case W. Res. L. Rev., 61, 1049. This article discusses the Item 402 (s) of Regulation S-K and analyzes its impact. It discusses how this mandatory disclosure of executive compensation helps to regulate compensation incentive-based risk.