Risk Factors
Section summary: Companies are required to include risk factors in registration statements, particularly in documents like the Form S-1, to provide potential investors with a comprehensive understanding of the risks associated with investing in their securities, with a focus on material factors that make the offering speculative or risky. These risk factors are a crucial component of the disclosure requirements mandated by the SEC as set forth in Item 105(a) of Regulation S-K. By outlining the risks, companies aim to inform investors about the uncertainties and challenges that could impact the company’s financial performance, business operations and overall prospects.
The inclusion of risk factors serves several purposes:
- Informed decision-making: By disclosing risk factors, companies help investors make more informed investment decisions. Understanding the potential risks allows investors to assess the likelihood and potential impact of adverse events on the company’s future performance.
- Legal compliance: The SEC requires companies to provide full and fair disclosure in registration statements to comply with securities laws. Including risk factors is a regulatory requirement designed to ensure transparency and protect investors.
- Liability mitigation: By providing comprehensive disclosure of risk factors, companies may mitigate legal liability. This helps establish that the company has fulfilled its duty to disclose material information, reducing the risk of successful lawsuits from investors who may claim they were not adequately informed.
RISK FACTORS
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in this prospectus, including our consolidated financial statements and the related notes included elsewhere in this prospectus, before making a decision to invest in our Class A common stock. Any of the following risks could have an adverse effect on our business, financial condition, operating results or prospects and could cause the trading price of our Class A common stock to decline, which would cause you to lose all or part of your investment. Our business, financial condition, operating results or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.
Risks Related to Our Business
Lazy Susan is a risk-free investment, so nothing for us to say here.
But your company will have at least 30 pages of risks to cover.
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Notes
No additional comments
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Guidelines and considerations for risk factor disclosure
The SEC has provided guidelines and considerations for risk factor disclosure in registration statements, primarily through Regulation S-K and related guidance. Some key considerations include:
- Materiality: Risk factors should focus on material risks – those that a reasonable investor would consider important in making an investment decision. Companies are encouraged to avoid boilerplate language and tailor their risk factor disclosures to the specific circumstances and risks facing their business. The US Supreme Court has held that a fact is material if there is “a substantial likelihood that the … fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” There is no bright-line test of materiality, and it is instead a mixed question of law and fact that weighs individual circumstances.
- Conciseness and clarity: Risk factor disclosure should be concise, focused and written in plain English. Companies are advised to avoid unnecessary technical jargon and to present information in a way that is easily understandable to a broad range of investors.
- Prioritization of risks: While companies may face numerous risks, they should prioritize and highlight those that are most significant and likely to have a meaningful impact on the business. This helps investors distinguish between material and less significant risks.
- Updates and changes: Companies are expected to regularly reassess and update their risk factor disclosures to reflect changes in their business environment, industry trends and other relevant factors. This is particularly important in subsequent periodic reports filed with the SEC.
- Specificity: Companies should provide specific information about the nature and potential effects of each risk. Vague or overly generic risk factor disclosures may not provide investors with meaningful insights.
Examples of specific areas of risk:
- Cybersecurity/privacy: This is an area of increased SEC focus. Ensure that the company has disclosed with particularity and specificity any breaches or incidents relating to cybersecurity, data privacy or adjacent issues. To stay up to date on cybersecurity and privacy developments, follow cyber/data/privacy insights, Cooley’s c/d/p blog.
- Artificial intelligence: As companies incorporate AI into their business operations, they are exposed to additional operational and regulatory risks. A number of existing rules or regulations may require disclosure about how a company uses artificial intelligence and the risks related to its use. SEC staff will consider how companies are describing these opportunities and risks. Learn more about Cooley’s artificial intelligence capabilities.
- Environmental, social and governance (ESG)/climate disclosures: The SEC has made clear that climate-related disclosures are a topic of interest and has specifically called out integrated climate-related risk reporting as important to public companies. You should discuss whether climate disclosures are appropriate for your company. For more on ESG and sustainability disclosures, check out Cooley’s ESG and Sustainability Advisory hub.
- Debt/loans outstanding: Consider relevant debt-related risk factors related to the negative covenants, including change of control, restriction on dividends, etc. that may negatively impact the company’s ability to operate its business in the future.
- Concentration: Consider risk concentration either among the company’s products or offerings or among customers in terms of revenue on both a comprehensive and segment-by-segment basis.
- Acquisitions: Consider whether integration of M&A may be a risk depending on the company’s strategy.
- Material weakness: Whether the company experienced a material weakness or significant deficiency in its audit that warrants disclosure of such material weakness, as well as the company’s remediation plan and any risks related to the implementation of such plan.
It’s important for companies to approach risk factor disclosure as a dynamic process that evolves with changes in the business landscape. Investors, in turn, should carefully review these risk factors as part of their due diligence process before making investment decisions.
