Form S-1 Risk Factor Disclosures – Securities Lawyer 101

The Securities Act of 1933 is often called the “truth in securities” law.  It has two basic objectives: to require that investors receive financial and other important information about securities being offered for sale, and to prohibit deceit, misrepresentation, and other fraud in the sale of securities.

When an issuer files a Form S-1 registration statement, it must provide specific Form S-1 risk factor disclosures about its business plan, its operating history and financial condition.  Risk factors are a primary part of Form S-1 registration statement disclosures.  Item 503 of Regulation S-K sets forth the requirements for risk factor disclosures.

The SEC has stated that issuers should not present risks that could apply to any issuer or any offering and effective risk factor disclosure should be unique to the particular issuer.  Risk factor disclosures are not only a matter of compliance with Regulation S-K line item requirements.

Issuer should provide concise identification of each risk factor under a subheading and limit each subheading to one risk.  Risk factors should be easy for an investor to understand.

To simplify risk factor disclosures, separate categories should be used.  Some examples of common risk factor categories include:

Risk Related to Financial Condition

• Company operating history
• Liquidity and ability to borrow
• Indebtedness
• Whether the issuer has resources to stay in business for next 12 months
• Whether the issuer’s resources are sufficient to implement or complete its business plan
• Whether an auditor has expressed doubt about the company continuing its operations

Risks Related to Management

• Whether the loss of certain officers & directors would harm the issuer
• Whether management has experience in overseeing the operations of a public company
• Whether management has knowledge and internal control over financial reporting
• Whether independent directors have been appointed
• Whether management holds or controls the issuer’s voting securities

Risks Related to the Issuer’s Securities

• Liquidity of the Issuer’s Securities
• Whether the issuer’s securities are a penny stock (less than $5.00 per share) and related restrictions
• Convertible securities and other shares eligible for resale in the future that could dilute investors

Risks Related to the Issuers Products and Services

• Internal and external factors causing decreased demand for the issuer’s services and/or products.
• Whether the issuer has few or many customers
• Availability of suppliers and manufactures for the issuer’s products
• Intellectual property protection
• Risks related to the issuer’s competitive position
• Whether the demand for the issuer’s products is cyclical or seasonal

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Hamilton & Associates Law Group, P.A provides ongoing corporate and securities counsel to private companies and public companies listed and publicly traded on the NASDAQ Stock Market, the NYSE MKT or over-the-counter market, such as the OTC Pink, OTCQB and OTCQX. For two decades the Firm has served private and public companies and other market participants in corporate law matters, securities law and going public matters. The firm’s practice areas include, but are not limited to, forensic law and investigations, SEC investigations and SEC defense, corporate law matters, compliance with the Securities Act of 1933 securities offer and sale and registration statement requirements, including Regulation A/ Regulation A+ , private placement offerings under Regulation D including Rule 504 and Rule 506 and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, Form F-1,  Form S-8 and Form S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including Form 8-A and Form 10 registration statements, reporting on Forms 10-Q, Form 10-K and Form 8-K, Form 6-K and SEC Schedule 14CInformation and SEC Schedule 14A Proxy Statements; Regulation A / Regulation A+ offerings; all forms of going public transactions; mergers and acquisitions; applications to and compliance with the corporate governance requirements of national securities exchanges including NASDAQ and NYSE MKT and foreign listings; crowdfunding; corporate; and general contract and business transactions. The firm provides preparation of corporate documents and other transaction documents such as share purchase and exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The firm prepares the necessary documentation and assists in completing the requirements of federal and state securities laws such as FINRA and DTC for Rule 15c2-11 / Form 211 trading applications, corporate name changes, reverse and forward splits, changes of domicile and other transactions. The firm represents clients in London, Dubai, India, Germany, India and throughout the U.S.