The Securities and Exchange Commission (SEC) requires public companies, certain company insiders and broker-dealers to file periodic financial statements and other disclosures. Finance professionals and investors rely on SEC filings to make informed decisions when evaluating whether to invest in a company. SEC filings can be accessed for free at EDGAR, the commission's online database.

The SEC was created through the Securities Exchange Act of 1934, which was signed into law by President Franklin D. Roosevelt. The act was intended to help restore investor confidence following the stock market crash of 1929. The SEC is an independent government agency tasked with protecting investors, maintaining a fair and orderly market, and facilitating capital formation.

The SEC selectively reviews the information it receives to monitor and enhance compliance. Investors study these filings to form a view of a company's performance and activities. Here are some of the most common forms that companies are required to submit to the SEC.

Key Takeaways

  • Investors can review SEC filings by visiting the commission's online database, EDGAR.
  • Registration statements are required when a company initially sells shares to the public.
  • The annual 10-K report provides a comprehensive summary of a company's financial performance.
  • Proxy statements are presented prior to a shareholder meeting and before voting on the election of directors and other corporate actions.

Registration Statements

Registration statements help investors understand the securities being offered by a company as well as its financial condition. A company preparing to offer securities to the public will file an Form S-1 registration statement with the SEC. The statement consists of two parts:

  • Prospectus: This legal document must be given to any person who is offered to buy the company's securities. The prospectus must provide details about the company's management, business operations, financial health, operational results, risk factors and other pertinent information. Financial statements such as the company's income statement must be audited by an independent certified public accountant (CPA).
  • Additional information: The company may provide any relevant additional information, for example, recent sales of unregistered securities.

Form 10-K

Form 10-K is an annual report that provides a comprehensive analysis of the company's financial condition. Though the Form 10-K contains information that overlaps with the company's annual report, the two documents are not the same. Companies must submit this lengthy annual filing within 60 to 90 days of the close of their fiscal year.

The Form 10-K is comprised of several parts. These include:

  • Business summary: This describes the company's operations. It would include information about business segments, products and services, subsidiaries, markets, regulatory issues, research and development, competition and employees, among other details.
  • Management Discussion and Analysis: This section allows the company to explain it operations and financial results for the past year.
  • Financial statements: The financial statements would include the company's balance sheet, income statement and cash flow statement.
  • Additional sections: Additional sections may discuss the company's management team and legal proceedings.

Form 10-Q

Form 10-Q is a truncated version of Form 10-K that is filed quarterly. The form provides a view of the company's ongoing financial condition throughout the year. The Form 10-Q must be filed for the first three quarters of the company's fiscal year. The deadline to file is within 40 days from the end of the quarter. Unlike Form 10-K, the financial statements in Form 10-Q are unaudited, and the information required is less detailed.

Form 8-K

The Form 8-K is what a company uses to disclose major developments that occur between filings of the Form 10-K or Form 10-Q. Major company events that would necessitate the filing of a Form 8-K include bankruptcies or receiverships, material impairments, completion of acquisition or disposition of assets, or departures or appointments of executives.

Proxy Statement

In the proxy statement, investors can view the salaries of the management of a company and any other perks that a company's management is eligible for. The proxy statement is presented prior to the shareholder meeting and must be filed with the SEC before soliciting a shareholder vote on the election of directors and approval of other corporate actions.

Forms 3, 4 and 5

Corporate insiders must file Forms 3, 4 and 5. The SEC defines a corporate insider as "a company's officers and directors, and any beneficial owners of more than ten percent of a class of the company's equity securities registered under Section 12 of the Securities Exchange Act of 1934." These forms are meant to reveal more information about the securities that company insiders own.

  • Form 3 is the initial filing and discloses ownership amounts.
  • Form 4 identifies changes in ownership.
  • Form 5 is an annual summary of Form 4 and includes any information that should have been reported.

Schedule 13D

The Schedule 13D is also known as the "beneficial ownership report" and is required when any owner acquires 5% or more of the voting shares in a company. The report must be filed within 10 days of reaching the 5% threshold. It provides the following information:

  • The acquirer's name, address and other background information
  • Type of relationship this owner has with the company
  • Whether the person has been convicted of a crime in the past five years
  • An explanation of why the transaction is taking place
  • The type and class of the security
  • The origin of funds used for purchases

Form 144

Form 144 is required when corporate insiders want to dispose of company stock. The Form 144 is a notice of the intent to sell restricted stock, typically acquired by insiders or affiliates in a transaction not involving a public offering. The stock is restricted because it must meet certain conditions before becoming transferable. The transaction, or at least part of it, is made within 90 days of filing. Form 144 is required when the amount sold during any three-month period exceeds 5,000 shares or $50,000.

Foreign Investments

In 2008, the SEC updated disclosure requirements for foreign companies offering securities in the U.S. market. For foreign companies without SEC-registered securities, the rules eliminated the requirement that they submit paper disclosures to the SEC, in favor of allowing them to post disclosures in English on the internet. In addition, the deadline for foreign companies to submit annual reports was shortened from six months to four months.

Reading the SEC Forms

Understanding the information submitted by companies involves reading between the lines. Review SEC documents together to better understand the overall picture, especially with financial forms. Financial ratios are often used to identify a company's short- and long-term financial strength.

Red flags are often revealed in a company's footnotes. Red flags include:

  • Very confusing sections in a 10-K or 10-Q
  • Sudden one-time or special charges
  • Reports from short sellers that discredit the company's filings

The Bottom Line

Ultimately, the SEC wants investors to know the facts so they can make informed decisions about when to buy, sell or hold a company's securities. Obtaining the available material and interpreting it correctly can provide any investor with valuable guidance when making investment decisions.