Disclosure: Prescriptive v. Principles-Based Approaches
Since the S-K modernization amendments just became effective, I thought a recent Bass Berry blog provided a timely illustration of the differences in disclosure practices that might result when a principles-based rule replaces a prescriptive one.
The blog reviewed a Staff comment letter and response involving a company that disclosed its dependence on a handful of 10%+ customers. In its comment letter, the Staff requested the company to disclose the identities as required — until recently — by the prescriptive language of Item 101(c) of S-K. However, as a smaller reporting company, the company was permitted to adopt the principles-based approach sanctioned by Item 101(h). Here’s an excerpt from the company’s response to the Staff:
The Company respectfully asserts that disclosure of the names of its customers is not required by Item 101(h)(4)(vi) of Regulation S-K, nor does the Company believe the identity of its largest customers is material to an understanding of its business taken as a whole or necessary for investors to make an informed investment decision. Unlike Item 101(c)(1)(vii) of Regulation S-K, Item 101(h)(4)(vi) does not require a smaller reporting company to identify the name of any customer that accounts for 10% or more of its revenue. The Company also believes that the identities of its customers are of significantly less importance than a qualitative and quantitative description of the extent to which revenue from such customers is relied upon.
Each of the Company’s top three customers in 2019 have been customers for many years. The Company’s largest customer, representing 36.8% of revenue in 2019, has been a customer for 30 years. The second and third largest customers in 2019 have been customers for approximately 10 years and 7 years, respectively. While the Company does consider the loss of revenue from any one of its largest customers significant, warranting appropriate risk factor disclosure of the potential consequences of such loss, the Company does not believe investors will be more informed of these risks by knowing the customers’ identities.
The Company also indicated that both it and its customers regarded their identities to be highly confidential and commercially sensitive, but also agreed to provide additional disclosure about the percentage of its revenue derived from sales to those customers during the prior year. The Staff did not comment further on the company’s disclosure.
-John Jenkins, TheCorporateCounsel.net November 9, 2020
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