Risk Factors Security Filings

Risk Factors in Securities Filings: What Companies Must Disclose

Regulatory Background

Companies have some discretion with respect to drafting their disclosures. But they must satisfy certain requirements in Item 105 of Regulation S-K. Regulation S-K is a SEC regulation that lays out reporting requirements for public companies.

SEC Risk Factors
  • Active voice
  • Avoiding legal jargon to the extent possible
  • Use bullet point lists to make complex concepts more reader-friendly

Material Risks: Deciding What to Disclose

In drafting risk factors, companies must grapple with the scope and level of detail they want to present. The disclosure should include adequately-tailored factors. The order in which the company presents risk factors offers insight into management perspective. It helps investors understand how they view different risks and the extent to which the company’s leadership teams view those risks as material.

Types of Risk Factors

The biggest risk factor category is related to a company’s operations. This is unique to the company. While companies operating within a particular industry face many overlapping risks, the business risk factors also cast a spotlight on characteristics that distinguish a particular company from others within the same industry. Some examples of company risk factors include:

  • Risks related to competition
  • Lack of operating history
  • Dependence on key employees
  • Risks relating to key suppliers or key customers
  • Current material litigation
  • Risks of increased costs of raw materials
  • New regulatory regimes
  • General economic conditions
  • Seasonality of the business

Investment or Securities Risk Factors

The investment or securities risk factors relate to the risks of ownership of the company’s securities. This section should distinguish between the risks affecting the company’s debt securities and risks affecting its equity securities. For example, in the case of debt securities, a key risk is the covenant structure. These covenants might place restrictions on the company’s ability to incur additional debt in the future or to pay dividends.



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