Introduction to the SEC and Company Filings Overview

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1 Morningstar Document Research 1 Introduction to the SEC and Company Filings Overview 1 About the SEC 2 Who Files with the SEC? 3 SEC Filings Overview 4 Why Can t I Find What I Need? 5 Material Events 6 SEC Filings what do all those numbers and letters mean? 7 Major Corporate Forms 8 Registration Statements 9 Ownership Filings 10 Foreign Filings About the SEC The Securities and Exchange Commission (SEC) is one of the regulatory watchdogs of the U.S. government, created in the 1930s to protect investors, maintain fair and efficient markets, and facilitate capital formation. This is accomplished by collecting and disseminating documents that disclose financial and other company information so the public can make sound investment decisions. To fulfill this responsibility, the SEC has the authority to require publicly-traded companies to file disclosure documents, which are then made available to the investing public via EDGAR, the SEC s online database of public company filings. Morningstar Document Research provides subscriber access to the full EDGAR database, with enhanced search and download functionality. Who Files with the SEC? All companies (including foreign entities) that publicly sell securities in the U.S. must be registered with the SEC and comply with its filing requirements. There are about 15,000 publicly-traded companies in the U.S., and many foreign companies and government entities also submit filings to the SEC. Privately-held companies such as SC Johnson and Levi Strauss are generally not subject to SEC regulation and are therefore not required to disclose company information, ownership records, or financial results. SEC Filings Overview Every public company must file certain forms with the SEC some are submitted on a regular schedule, and others are filed on an as-needed basis. While there are hundreds of active form types, the filing requirements for any given company are determined by factors such as its business activities, financial status, and domicile. 4 For example, when a private company elects to go public, i.e., sell shares of the company to the public on a stock exchange like NASDAQ, it files a Form S-1, also called the Initial Public Offering, or IPO. The S-1 is one type of Registration Statement a class of filings generated by companies in connection with the sale of securities. Once it has gone public, the typical U.S.-based company is required to file Quarterly and Annual Reports on a schedule determined by its fiscal year. It must also file a Proxy Statement in connection with its annual shareholder meeting. Finally, any major developments that arise throughout the year are disclosed immediately in the Current Report. These four filing types are commonly referred to as the Major Corporate Forms, and are described more fully in Section 7, below. Foreign entities are also subject to SEC filing requirements, if they list equity shares on a U.S. stock exchange. A foreign issuer is a foreign government or a company organized under the laws of a foreign country. A foreign private issuer may file forms like the 20-F, 6-K, and F-1. Companies that do not qualify as a foreign private issuer are subject to the same reporting requirements as their U.S.-based counterparts. See Section 10, below, for more information about foreign issuers and foreign filings. Why Can t I Find What I Need? When searching for information within SEC filings, remember that public companies disclose information such as financials and business plans pursuant to legal requirements, not out of a general commitment to openness. The details provided can and will be scrutinized by investors, regulators, competitors, the media, and even business partners, to reveal corporate strengths and weaknesses. For this reason, it is in a company s interest to disclose no more than the minimum required

2 Morningstar Document Research and in ways that may escape casual readers. As a result, media outlets have been known to call companies out for being less than candid about certain matters, or to claim relevant information was buried in the footnotes. The key take-away is that researchers should closely scrutinize filings, keeping in mind that a company is unlikely to provide as much detail as desired, and that silence on an issue is an unreliable indicator of no relevant activity. The intended audience for SEC-regulated disclosures is the investing public, and the primary goal is a safe and stable financial equity market. While researchers from practically every industry are able to discover significant information from the filings from the corporate analyst seeking competitive intelligence to the university development officer tracking alumni & prospective donors these are secondary uses of the data provided. Material Events Disclosure rules and reporting requirements for public companies rely upon the concept of materiality, or whether certain information about a company could affect its market value and/or influence investment decisions. Companies are required to disclose material events such as bankruptcy or merger activity, new credit and licensing agreements, earnings results, changes in control, and stock splits, because failure to do so would be unfair to current and prospective investors. Materiality is a somewhat imprecise and subjective determination that can be influenced by several factors, including company size, industry practice, and generally accepted accounting principles (GAAP). Consider employment and compensation agreements the CEO s contract passes the materiality test, while that of a branch manager does not. SEC Filings What Do All Those Numbers and Letters Mean? It can be hard to navigate hundreds of filing types with obscure titles like 485BPOS and N-8B-2/A! Here are a few helpful guidelines to ease the confusion: [Form Type]/A (i.e., 10-K/A) when a company first submits a filing like the Annual Report, it is identified by its Form Type in this case, the Form 10-K. If the company needs to make any changes to the original filing, such as correcting erroneous statements or providing additional disclosures, an amended filing is submitted to the SEC, with /A added to the Form Type to set it apart from the original, which remains in the system. If more than one amendment is submitted, as with IPO-related filings, all amendments bear the same designation, like this: S-1/A. NT [Form Type] (i.e., NT 10-Q) when a company is unable to submit a filing by the SEC deadline, it must file a notice to that effect, including an explanation for the delay. [Form Type]12B or [Form Type]12G (i.e., 20FR12B or 15-12G) The 12B and 12G designations refer to filings submitted pursuant the requirements of Sections 12(b) and 12(g) of the Securities Exchange Act of 1934 ( 34 Act). 7 Major Corporate Forms Every public company is required to file certain forms with the SEC some are submitted once a year or every quarter, while others (like the 8-K) are filed on an as-needed basis. 10-Q quarterly report that includes unaudited financial statements and provides a continuing view of the company s financial position at a specific point in time. The report must be filed within 35 days of the end of the first three quarters of the company s fiscal year. 10-K annual report that provides a comprehensive review of the company s business and financial condition, along with audited financial statements. It also includes the management s discussion and analysis, risk factors, properties, legal proceedings, executive compensation information, and much more. The 10-K is due days after the end of the company s fiscal year, depending on company size. Although similarly named, the annual report on Form 10-K is distinct from the Annual Report to Shareholders (ARS), which a company must send to its shareholders when it holds the annual meeting to elect directors. The SEC does not require companies to file the ARS, although some do so voluntarily.

3 Morningstar Document Research 3 8 Additional 10-K filing types: 10-KT Transitional Annual Report filed by a company that is changing its fiscal year. 10-KSB Annual Report for Small Businesses, an abbreviated version of the 10-K filed by most large public companies. The 10-KSB and 10-QSB were phased out in K the current report companies must file with the SEC to alert shareholders to major events, such as preliminary earnings announcements, merger activity, bankruptcy filings, change of executive or director, new material agreements or direct financial obligations, change in certifying accountant, and other activity that could affect the value of a company s stock. Schedule 14A the proxy statement must disclose all important facts about issues on which shareholders will vote, often in connection with the annual shareholder meeting, such as election of directors and executive compensation ( say on pay ). The Proxy s value lies in the concise, understandable overview of a company s health, relationships, risks, and future plans. Selected Schedule 14A filing types: PRE 14A preliminary proxy statement filed prior to shareholder votes on issues not related to contested matters or merger activity. DEF 14A definitive proxy statement, most commonly filed in conjunction with the annual shareholder meeting. Additional proxy materials may be filed in a DEFA14A. PREC14A & DEFC14A proxy statements filed in connection with shareholder votes on a contested proxy solicitation, also known as a hostile takeover. PREM14A & DEFM14A proxy statements related to shareholder votes on issues related to a merger or acquisition. Registration Statements The registration statement describes a class of filings used when a company offers shares for sale to the public. It provides essential facts and detailed descriptions 9 of the company s business, including information about the company s management and financial statements certified by independent accountants. S-1 Initial Public Offering (IPO), used when a private company first goes public. Comprised mainly of the prospectus, which contains important information about the company. A new public company typically has no prior reporting history, so the information that can inform a decision to invest often can only be found in the prospectus. Companies normally file several amendments (S-1/A) prior to going public. S-3 simplified registration statement for subsequent (secondary) share offerings; can be used by companies with at least a 12-month history of timely filing under the 34 Act. S-4 used to register securities in connection with business combinations (i.e., mergers) and exchange offers. S-6 registration statement for unit investment trusts registered on Form N-8B-2. S-8 used to register securities to be offered to company employees via incentive plans. S-11 for the registration of securities issued by certain real estate companies, including real estate investment trusts (REITs). Ownership Filings Certain investors have a special obligation to disclose their relationship with publicly-traded companies, particularly the number and value of shares held, and information about their stock transactions. Three investor groups are subject to special reporting requirements: Company Insiders, Beneficial Owners, and Institutional Investors. Insider Trading when corporate insiders (officers, directors, and owners) buy and sell stock in their companies, or exercise stock options, they are required to report those transactions. Insiders are barred from trading on material, nonpublic data, such as unreleased earnings reports or new business relationships. Once the information has been released to investors, the insider

4 Morningstar Document Research 4 10 no longer has an unfair advantage over others and can legally trade on the information. Form 3 initial insider filing; reports ownership amounts and is due within 10 days of a person becoming an Insider. Form 4 reports any change in ownership such as stock purchases & sales and the exercise of stock options; should be filed within 2 business days of transaction(s). Form 5 annual summary of Form 4 transactions; also includes any other information that should have been reported previously. Beneficial Ownership when an individual, group, or other entity acquires at least 5% of a company s shares, that event triggers certain reporting requirements. Schedule 13D identifies all parties with voting or selling authority; must be filed within 10 days of any transaction. Note: even passive investors must file the 13D when their investment exceeds 20% of the company s stock. Schedule 13G filed by passive investors with an ownership stake between 5% and 20% and no intention to control the company; provides less information than the 13G. Institutional Ownership large investment entities with at least $100 million in assets under management (AUM) are required to file the quarterly Form 13F-HR, which discloses information about management and investment holdings. Institutional investors include banks, investment advisers, broker-dealers, pension funds, and insurance companies. Foreign Filings As discussed previously, a foreign issuer is a foreign country, foreign national, or entity incorporated or organized under the laws of a foreign company that lists equity shares on a U.S. stock exchange. As such, they are subject to the SEC s reporting requirements. Any issuer that is not a foreign government or does not qualify as a foreign private issuer is subject to the standard filing requirements of the SEC, including the submission of major forms like the 10-K, 8-K, and S-1. Foreign Government the government of any foreign country or political subdivision of a foreign country. The filing requirements differ from those for U.S. or foreign companies. 18-K annual report for foreign governments that provides a comprehensive overview of the country s political and economic landscape; filed within 6 months of fiscal year end. S-B registration statement for foreign governments registering securities; includes descriptions of the country & government, offering terms, and planned use of proceeds B & 18-12G used for the initial registration of foreign government securities pursuant to specific sections of the 34 Act. Foreign Private Issuer a foreign company is classified as a foreign private issuer if less than 50% of its shares are held by U.S. citizens and NONE of the following conditions are met: Most of its officers or directors are U.S. citizens, or Most of its assets are located in the U.S., or Most of its business is administered in the U.S. If a company qualifies as a foreign private issuer, then it may submit these filings to the SEC: 20-F integrated reporting form (similar to the 10-K) for foreign private issuers; can be used as a registration statement (rarely) or annual report (more common). 40-F integrated reporting form for Canadian foreign private issuers; used both as an annual report and as a registration statement. The 40-F serves as a wraparound for the company s public reports. 6-K current report (similar to the 8-K) regarding material events such as changes in control, acquisitions, bankruptcy, default, shareholder votes, or stock option grants. Because foreign private issuers do not file quarterly reports, the 6-K is also used to report quarterly financial results.

5 Morningstar Document Research 5 Foreign Registration Statements used by foreign private issuers to register equities for sale in the U.S. F-1 basic registration form authorized for certain foreign private issuers when other, more specialized, forms are not required. F-3 simplified registration statement for secondary share offerings; can be used by foreign issuers with a 12-month filing history and a public market float above $75 million. F-4 used to register securities in connection with business combinations (i.e., mergers) and exchange offers involving foreign private issuers. F-6 registration statement for shares represented by American Depositary Receipts (ADRs) issued against the deposit of a foreign issuer s securities. F-7 used by certain eligible publicly-traded Canadian foreign private issuers to register rights offers extended to their U.S. shareholders. Form F-7 acts as a wraparound for the relevant Canadian offering documents. F-8 & F-80 these forms may be used by Canadian foreign private issuers to register securities offered in business combinations and exchange offers. The forms act as a wraparound for the relevant Canadian offering or disclosure documents. F-9 & F-10 these forms may be used by Canadian foreign private issuers to register certain securities. The forms act as a wraparound for the relevant Canadian offering or disclosure documents.