Plain English, risk factors, and disclosure documents

What does the plain English rule actually require?

Clarity in named places. Rule 421 requires that the front and back cover pages, the summary, and the risk factors section of a prospectus be written in plain English.¹ It then lists the techniques: short sentences, definite and concrete everyday words, the active voice, and tabular presentation of complex information. It also rules out legal jargon, highly technical business terms, and multiple negatives.¹

The Commission's own handbook restates that as a set of writing decisions rather than a checklist. It names the active voice with strong verbs, personal pronouns, concrete language in place of abstractions, cutting unnecessary words, positive rather than negative phrasing, and short sentences.²

Its diagnosis of what goes wrong is a sentence about sentences. "Lengthy, information-packed sentences choke many prospectuses today."²

Which parts of a filing does the standard reach?

The rule names its territory, and the rest of a document is not exempt from being readable. Rule 421 also carries a general requirement that the information in a prospectus be presented in a clear, concise, and understandable manner.¹

Risk factors have a rule of their own about length. Item 105 of Regulation S-K requires a discussion of "the material factors that make an investment in the registrant or offering speculative or risky."³ It has to be presented in plain English, immediately after the summary or the cover page.³

Where that discussion runs past fifteen pages, a summary becomes mandatory. The registrant adds "a series of concise, bulleted or numbered statements that is no more than two pages summarizing the principal factors" in the forepart of the document.³ A length rule of that kind is unusual, and it is a rule about editing as much as about disclosure.

Does the risk factor section have a content standard too?

It has a discouragement, which is nearly as useful. Item 105 states that presenting risks "that could apply generically to any registrant or any offering is discouraged."³ Where generic risks appear anyway, they go at the end under the caption "General Risk Factors."³

An editor cannot decide which of your risks is generic and which is specific to your business. What an editor can do is mark every risk factor that names nothing about your company, your industry, or your offering, and hand that list to the people who can decide.

The same pass finds the duplicates. Long risk sections accumulate factors that were added in different years and now say the same thing in different words. A section grown by accretion over six annual reports usually contains several pairs.

Headings are the other place editing helps. A risk factor headed with a sentence stating the risk is findable in a way that one headed "Regulatory matters" is not.

Does plain English mean simplifying the substance?

Simplifying the substance is a different act, and the handbook is careful about the difference. The technique it recommends is surrounding a complex idea with short, common words rather than removing the idea.²

Technical terms that carry a precise meaning belong in the document. A defined term used consistently is clearer than a plain synonym used loosely, and substituting an everyday word for a term of art can change what a sentence says.

What the rule targets is different. A sentence that runs forty words before reaching its verb, a double negative, a passive construction that hides who acts, and jargon with no meaning outside a drafting committee are all faults of expression. Removing them leaves the substance untouched.

That distinction is worth holding onto during review, because "we cannot simplify this" is sometimes true of the idea and almost never true of the sentence carrying it.

What does an editor do to a document lawyers have already approved?

Less than people fear, and the useful work is mostly consistency and queries. Counsel owns the wording of anything that carries legal weight, and an editor who changes such wording creates a re-review rather than saving one.

The pass that adds value is the one nobody else has time for. A figure stated one way in the summary and another way in the notes is findable. So is a defined term used before it is defined, a cross-reference to a renumbered section, a subsidiary named three ways, and a date given in two formats. None of those five are judgment calls.

Where a sentence is genuinely unclear rather than merely legal, a query is the right response. Counsel decides whether the wording changes.

How are the numbers checked?

By comparison within the document, not against the underlying records. Editing can establish that a figure in the summary matches the same figure in the discussion and in the tables. It can establish that percentages in a sentence add to the total stated, and that a period called the fiscal year is described consistently throughout.

Verifying that a figure is correct is an accounting question, and it belongs to the people who prepared and audited the statements. An editor who flags a disagreement between two numbers is reporting an inconsistency rather than identifying which one is wrong.

That boundary is worth stating before the work starts. A client expecting arithmetic to be checked against source documents is expecting something an editor does not supply.

Who has final approval, and what does the schedule look like?

Approval belongs inside your own disclosure process rather than to us, and it usually involves counsel, the finance function, and an executive signatory. An editor's file enters that process at whatever point you specify, and knowing that point in advance changes how the file is prepared.

Two versions are often useful. A marked file goes to the reviewers who need to see what changed, and a clean one goes to whoever is assembling the filing.

The practical constraint is that editing is worth most before the document is circulated for approval, and worth least after. Changes made after review restart the review for the pages they touch, which is why a late copyedit often costs more in reviewer time than it saves in reader time.

Every document a client sends us is treated in confidence, and that applies with particular force to a draft that has not been filed. Material nonpublic information stays with the people entitled to it.

What can an editor not do here?

We do not advise on what has to be disclosed, whether a risk is material, or whether a document satisfies a Commission rule. Those are questions for securities counsel, and a service that answers them while calling itself an editor is doing something else. Reporting what a published rule says, as this page does, is a different act from applying it to your facts.

What we work on is the text: sentence length, the active voice, terminology used the same way throughout, headings that describe their sections, and figures that agree with each other across a long document. The Commission published a book arguing that this work matters to investors, which is a stronger case for it than any editor could make.