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By: Stuart Gelfond and Joshua Wechsler, Fried, Frank, Harris, Shriver & Jacobson LLP, Hayley Cohen, Tradeweb
Item 503(c) (17 C.F.R. § 229.503) of Regulation S-K requires that an issuer include in its registration statement a risk factor disclosure, which sets forth the possible circumstances or situations that could make investing in a company’s securities risky or speculative. While it is rare that an investor will base its investment decision solely on what is included in the company’s risk factors, risk factors are a key component of a company’s offering document as well as its annual and quarterly reports.
ONE PURPOSE OF RISK FACTORS IS TO EDUCATE POTENTIAL investors on the risks of investing in a business; however, risk factors also serve as a substantial mitigating factor in any lawsuit brought against a company in the event that the company and its securities do not perform as expected. As a result, in addition to being required by the Securities and Exchange Commission (SEC), risk factors are important for liability protection reasons. If an investor loses money on an investment but is properly cautioned about the potential risks of the investment, a court may in certain circumstances find in favor of a defendant company even if the stock price falls dramatically. In addition, the securities laws provide a safe harbor for forward-looking statements if the company has set forth appropriate disclosure regarding the risks and uncertainties that may cause such forward-looking statements to be untrue.
Below are 10 practice points that can help you craft an effective risk factors section to ensure that all relevant risks relating to a company are properly disclosed.
The SEC has indicated that risks that apply to any company (or any offering) should not be disclosed as risk factors. However, many of the risks that apply across the board to all companies will often impact your company as well, and these types of risks may be among the most material risks faced by your company. Examples of such risks may include failure to compete successfully, dependence on management team, cybersecurity concerns, and general economic and/or consumer spending conditions. You should disclose these types of broad risks in your filings, assuming they are material to you, but you should tailor the risk to your specific business and include a clear explanation as to how each broad risk applies specifically to your company. For example, general economic conditions may impact all companies but housing prices in California may impact your company specifically.
To read the full practice note in Lexis Practice Advisor, follow this link.
Stuart H. Gelfond is a partner at Fried Frank and co-head of the firm’s Capital Markets practice. Mr. Gelfond concentrates his practice on corporate finance transactions, including representation of issuers and underwriters in domestic and international highyield, investment-grade, and convertible debt offerings, acquisition financings, and IPOs. Mr. Gelfond has extensive experience serving as counsel to corporations and broker-dealers on securities, corporate governance, and other regulatory issues. He has also been actively involved in corporate restructurings, including acting as lead counsel to ACA Capital Holdings and Sonic Automotive in their corporate reorganizations. He also regularly represents clients in private equity and acquisition transactions. Joshua Wechsler is a corporate partner in Fried Frank’s New York office. Mr. Wechsler concentrates his practice in corporate finance and the U.S. securities laws, representing issuers, underwriters, and sponsors in a variety of financing transactions, including initial public offerings, private placements, high-yield debt offerings, and cross-border financings. Mr. Wechsler has represented an array of underwriters including Bank of America Merrill Lynch, Credit Suisse, Goldman Sachs, JP Morgan, and UBS. Mr. Wechsler served as a staff attorney in the SEC’s Division of Corporation Finance from 1994 to 1997. Hayley Cohen was an associate at Fried, Frank, Harris, Shriver & Jacobson, LLP focusing on capital markets transactions, as well as governance and securities law reporting. She is currently corporate counsel at Tradeweb Markets LLC.
For advice on drafting or reviewing risk factors for a registration statement, see
> RISK FACTOR DRAFTING FOR A REGISTRATION STATEMENT
RESEARCH PATH: Capital Markets & Corporate Governance > IPOs > Drafting the Registration Statement > Practice Notes
For a sample risk factor form describing cybersecurity issues that may be included in a public company’s registration statement, see
> CYBERSECURITY RISK FACTOR
RESEARCH PATH: Capital Markets & Corporate Governance > IPOs > Drafting the Registration Statement > Forms
For information on drafting the risk factor disclosure for an Form S-1 registration statement, see
> FORM S-1 REGISTRATION STATEMENTS
For guidance on describing the relevant risk factors that should be included in Form 10 under Section 12 of the Securities Exchange Act of 1934, see
> FORM 10 DRAFTING
RESEARCH PATH: Capital Markets & Corporate Governance > Registration under the Exchange Act > Section 12 Registration > Practice Notes
For a list of practice points that issuers and counsel need to consider during the registration process, see
> TOP 10 PRACTICE TIPS: DRAFTING A REGISTRATION STATEMENT
For a detailed overview of the laws, rules, and regulations applicable to securities offerings registered under the Securities Act of 1933, see
> REGISTERED OFFERINGS: APPLICABLE LAWS, RULES, AND REGULATIONS
RESEARCH PATH: Capital Markets & Corporate Governance > IPOS > Conducting an IPO > Practice Notes