On November 5, 2020, the Staff of the SEC's Division of Corporation Finance provided guidance in the form of Frequently Asked Questions (FAQs) relating to the amendments to Regulation S-K Items 101, 103 and 105, which become effective on November 9, 2020.1
Many market participants already have begun the process of updating their Risk Factor section disclosures in order to add subheadings as well as to add a brief summary to the section. The FAQs address the obligation to update as follows:
(1) Question: A registrant has a Registration Statement on Form S-3 that became effective before November 9, 2020. If the registrant files a prospectus supplement to the Form S-3 on or after November 9, 2020, must the prospectus supplement comply with the new rules?
Answer: The prospectus supplement does not need to comply with new Items 101 and 103 because Form S-3 does not expressly require Item 101 or Item 103 disclosure but rather requires the incorporation by reference from Exchange Act reports containing that information. A registrant also need not amend its Form 10-K that is incorporated by reference into the Form S-3 pursuant to Item 12(a)(1) of Form S-3 to comply with new Items 101 and 103.
In contrast, Securities Act Rule 401(a) requires that the form and contents of a prospectus supplement conform to the applicable rules and forms as in effect on the initial filing date of the prospectus supplement. Despite the fact that Item 3 of Form S-3 expressly requires Item 105 disclosure, the staff will not object if the prospectus supplement complies with old Item 105 until the next update to the Registration Statement on Form S-3 for Section 10(a)(3) purposes.
Many issuers rely on a layered approach to their structured products disclosures, with a base prospectus, which is accompanied by a prospectus supplement often relating to a medium-term note program, and that in turn is accompanied by a product supplement describing the features of particular structured products or of products having certain underlying reference assets. The terms of the offered products are usually contained in a pricing supplement and/or a free writing prospectus. Several of these documents may contain Risk Factors sections. Also, many issuers will offer their structured products through their affiliated broker-dealer, as well as through a number of third-party distributors, each of which may have its own preferred approach to risk factor disclosure. Consideration should be given to the totality of the disclosures relating to risks as well as the ordering or grouping of these risks into subheadings or categories.
Originally published in REVERSEinquiries: Volume 3, Issue
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1. See the Frequently Asked Questions at https://www.sec.gov/corpfin/transitional-faqs-amended-regulation-s-k-items-101-103-105.
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