Understanding SEC Filings
Public corporations, certain company insiders, and broker-dealers must submit periodic financial statements and other disclosures to the Securities and Exchange Commission (SEC). When deciding whether to invest in a firm, financial experts and investors rely on SEC filings to guide their conclusions. At the commission's internet database, EDGAR, you can access SEC filings without charge.
The Securities Exchange Act of 1934, which President Franklin D. Roosevelt signed into law, was the vehicle through which the SEC was established. The goal of the law was to bolster investor confidence after the 1929 stock market catastrophe. The SEC is an independent government organization entrusted with fostering capital formation, preserving a fair and orderly market, and safeguarding investors.
To monitor and improve compliance, the SEC evaluates the information it receives with care. Investors review these filings to develop an understanding of a company's operations and results. Here are a few of the most typical documents that businesses must submit to the SEC. Investors can benefit from knowing how to read SEC filings as they carry out their due diligence. We'll go into more depth about these files in this piece.
Registration Statements
A company's financial situation and the securities it is offering are both disclosed in registration statements. A business that intends to sell securities to the general public must submit a Form S-1 registration statement to the SEC. The sentence is divided into two parts:
Prospectus
Anyone who is offered to purchase the company's stocks must receive a copy of this required document. The prospectus is required to include specifics regarding the management of the company, business operations, financial situation, operational outcomes, risk factors, and other relevant information. According to the Securities Act of 1933, all businesses looking to raise money for newly released items in the United States are required to submit a prospectus to the Securities and Exchange Commission. The company's income statement and other financial statements must be audited by a separate certified public accountant (CPA).
Additional information
Any relevant supplementary information, such as recent sales of unregistered securities, may be provided by the company.
Why are registration statements important?
Investors and analysts can better comprehend the characteristics of freshly issued shares and bonds by reading registration statements. These filings contain the names and biographies of the main management of the firm, a description of the business and assets of the issuer, a description of the security being sold, and an independently certified copy of the issuer's most recent financial statements.
Investors pay special attention to the prospectus since it offers all the data a prospective investor would need to quantitatively assess the prospects of new securities. It will frequently also include crucial qualitative data that investors may interpret as possible red flags. Since the prospectus is a legal declaration and must adhere to transparency rules, the majority of businesses offer specific information to guarantee that investors are not in any way misleading, however, they may use careful or creative wording to cover up obvious warning signs. There can be no assurance that the company will be successful in addressing its risks; failure to do so could have a material adverse effect on the company's business, prospects, financial condition, and results of operations, for example. If the company faces significant risks, its prospectus might state that "risks for the company include, but are not limited to, an evolving and unpredictable business model and the management of growth."
It's common to encounter flowery legalese and protracted warning remarks when reading an issuer's registration statements, which serve more to protect the company than the investor. However, the legal structure of these agreements also gives investors frank information about the dangers, opportunities, and market environment of a potential investment. When reading a prospectus, pay close attention to any material that is unique or special to the company in question as opposed to generalizations or statements that could apply to any publicly traded company.
Form 10-K
An annual report called a Form 10-K offers a thorough evaluation of the company's financial situation. Although there is information in both the Form 10-K and the company's annual report, they are not the same. Within 60 to 90 days following the end of their fiscal year, businesses are required to file this extensive annual report.
There are various components to the Form 10-K. These consist of:
- Business Summary: This sums up how the corporation does business. It would contain details regarding, among other things, company divisions, goods and services, subsidiaries, markets, legal concerns, R&D, rivalry, and staff.
- Management Discussion and Analysis: The company might describe its operations and financial outcomes for the previous year in this area.
- Financial Statements: The balance sheet, income statement, and cash flow statement for the company would be included in the financial statements.
- Additional Sections: Sections that may be included may talk about the company's management team and legal actions.
Why are Form 10-K’s important?
To keep investors informed of a company's financial situation and to give them sufficient information before they buy or sell securities issued by that company, the SEC requires all public corporations to submit regular 10-K reports. At first sight, the 10-K may seem unnecessarily complicated, packed with tables containing a wealth of information. This report is crucial for investors to understand a company's financial situation and prospects, though, because it is so thorough.
A business will submit a 10-K report and an annual report to the SEC. The annual report is a condensed version that frequently includes glossy pages, graphics, a letter from the chair or CEO, and an executive summary of the financials. All of the company's financial statements will be included in the 10-K, a longer, more detailed technical document that can be used for fundamental analysis. By calculating ratios and other metrics using data from the balance sheet, income statement, and statement of cash flows, fundamental analysis is a popular method for assessing a company. In order to assess a company's underlying value and potential for future growth, fundamental analysis for equities considers its revenues, profits, future growth, return on equity (ROE), profit margins, and equity multiples. Liquidity, leverage, and solvency ratios are appropriate for corporate bonds.
Readers of a 10-K should also pay attention to "Item 1," which describes what the firm does, who its customers are, and the principal industry in which it works, in addition to the quantitative method of fundamental analysis.
Then, keep an eye out for risk signals like legal actions or statements hinting at upcoming charges or volatility.
Observe any footnotes that are included in the report as well. You can learn from these notes the accounting system a company employs and how it stacks up against industry norms and the generally accepted accounting principle. This data may indicate questionable accounting procedures. The footnotes also provide information about past accounting irregularities, pending legal matters in which the company is involved, and any synthetic leases. Investors with a stake in the business should pay close attention to these disclosures in the footnotes.
Investors should pay close attention to any footnotes in Form 10-K as they may help you identify any dubious accounting techniques used by the company you are investigating.
Form 10-Q
Form 10-Q, which is filed quarterly, is a condensed form of Form 10-K. The form gives a yearly overview of the company's ongoing financial situation. For the first three quarters of the company's fiscal year, the Form 10-Q must be submitted. The submission deadline is 40 days after the end of the quarter. The financial statements on Form 10-Q are not audited, and there is less information necessary than in Form 10-K.
Why are Form 10-Q’s important?
The 10-Q is significant since it is updated four times a year as opposed to the 10-K's annual filing. As a result, there is less of a lag when investors update their valuation measurements and financial ratios. Even before the company submits its annual report, investors can utilize the 10-Q to monitor any changes that might be occurring within the company.
Changes to working capital and/or accounts receivable, elements affecting a firm's inventory, share buybacks, and even any legal threats that a company confronts are some areas of interest to investors that are frequently seen in the 10-Q. You can compare the firm you're thinking about to a close competitor's 10-Q to evaluate how it's doing relative to the comparative company. This will provide you with a more comprehensive understanding of your investment's strengths and shortcomings as well as areas where it could use improvement.
Form 8-K
A corporation uses the Form 8-K to disclose significant events that take place in between the submission of the Form 10-K or Form 10-Q. Bankruptcies or receiverships, material impairments, the conclusion of the acquisition or disposal of assets, or executive departures or appointments are a few significant company events that would need the submission of a Form 8-K.
Why are Form 8-K’s important?
Investors are promptly informed of significant developments at a firm via Form 8-K. Many of these developments are specifically defined by the SEC (such as a merger or acquisition, for example), while others are just things that businesses believe to be significant enough for their shareholders (such as a new product release or upgrade). In either case, the 8-K gives companies an opportunity to speak with investors directly without having their messages filtered or changed by sell-side analysts or the media.
Additionally, Form 8-K offers a useful record for financial investigation and analysis. For instance, a stock analyst would be curious about the impact particular corporate events have on stock prices. Researchers will require trustworthy data in order to quantify the effects of these occurrences using statistical methods like regressions. 8-K disclosures offer a comprehensive record and prevent sample selection bias because they are legally required to be honest and accurate and are legally standardized.
Proxy Statement
Investors can read a company's management's pay as well as any other benefits they may be entitled to in the proxy statement. Before asking shareholders to vote on the election of directors and the approval of other business actions, the proxy statement must be submitted to the SEC and made available prior to the shareholder meeting.
Why are proxy statements important?
Shareholders of publicly traded firms gather at annual meetings to vote on a range of corporate decisions or to elect new directors. You have a vote if you own common stock in a corporation (generally one vote per share), however, it is usually not practical to attend the annual meeting. The proxy statement enables you to use a selected individual to cast your votes on your behalf by combining their votes. This individual, referred to as a proxy, will vote on behalf of the shareholder in accordance with the instructions provided on their proxy card. Before the deadline, proxy votes may be cast via mail, phone, or online. This deadline is typically 24 hours prior to the start of the shareholder meeting. The standard voting options are "For," "Against," "Abstain," and "Not Voted."
As a result, the issues up for vote will be listed in the proxy statement, which also gives you the option to send a form to the company telling your proxy how to vote on your behalf.
Forms 3, 4, and 5
Forms 3, 4, and 5 must be filed by business insiders. "A company's executives 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," according to the SEC, are considered corporate insiders. These documents are designed to provide greater details regarding the securities that business insiders own.
- Form 3 is the initial filing and discloses ownership amounts.
- Form 4 notes ownership transitions.
- Form 5 is an annual summary of Form 4 and includes any information that should have been reported.
Why are Forms 3,4, and 5 important?
Knowing what the company's owners and largest shareholders (i.e., insiders) are doing is advantageous if you're an investor. It is simpler to gauge a stock's future by observing the trading activity of company insiders and major institutional investors. Even though insider or institutional ownership isn't a buy or sell indication on its own, it might be a useful initial filter when looking for a promising investment. Forms 3, 4, and 5 are helpful disclosures because insider ownership and trading can affect share prices.
Smart investors can reasonably assume that insiders know a lot more about their firm's future than the rest of us outsiders by closely observing what they do with their company shares. Therefore, if insiders are purchasing stock in their own company, they may be privy to information that non-insider investors are not. The insider may purchase because they believe their stock is undervalued, see significant potential, or anticipate a future merger or acquisition.
According to Peter Lynch, one of the greatest investors of all time, "insiders might sell their shares for a variety of reasons, but they purchase them for just one reason: they anticipate the price will grow." Insiders frequently buy stocks when they believe the company will do well over the long term because they are typically restricted from purchasing and selling their company stock within six months of a corporate event or new problem.
You can have too many insiders owning too much. When insiders take over a company, managers might not feel beholden to the interests of the shareholders and instead focus on enriching themselves.
Schedule 13D
When any owner purchases 5% or more of the voting shares of a firm, Schedule 13D, also known as the "beneficial ownership report," is necessary. Within 10 days of the 5% criterion being reached, the report must be submitted. It offers the following details:
- Name, address, and any background information of the Acquirer
- What kind of connection this owner has with the business
- Whether the individual has received a criminal conviction during the last five years
- An explanation of the rationale behind the deal
- The security's class and type
- The origin of funds used for purchases
Why are Schedule 13D’s important?
The Williams Act of 1968, a revision to the Securities Exchange Act of 1934, included the addition of Section 13D. This change was made in response to the growing prevalence of tender offers in business acquisitions. The purpose of Schedule 13D was to alert individual investors to potential changes in corporate control that would have an influence on the company's future as a result of the concentration of voting power by corporate raiders.
Investors utilize Schedule 13D to look for warning signs of insider ownership concentration that could be detrimental to certain shareholders as well as potential signs of a firm being acquired or bought out, which could be advantageous to shareholders.
Form 144
When corporate insiders seek to sell company stock, a Form 144 is necessary. Typically purchased by insiders or affiliates in a deal without a public offering, Form 144 is a notice of the intent to sell restricted stock. The stock is limited because it needs to fulfill specific requirements in order to become transferrable. Within 90 days of filing, the transaction, or at least a portion of it, is completed. When more than 5,000 shares or $50,000 are sold during a three-month period, Form 144 is necessary.
Why are Form 144’s important?
Form 144 is helpful for determining how many prospective shares will be offered for sale on the open market once the lock-up period for a new issue, such as an IPO, expires. Investors can look to Forms 3, 4, and 5 for changes in the insider ownership. Form 144 can show how much a stock price might drop if there is a sudden influx of new sale orders when the lock-up expires.
In order to promote some level of stability in the stock price during the first few months of trading, underwriters and regulators require that a company's executives, managers, employees, and early investors (such as venture capitalists) sign lock-up agreements surrounding a company's initial public offering (IPO). Insiders and company underwriters enter into a legally enforceable contract known as a "lock-up agreement" that forbids insiders from selling any shares of stock for a predetermined amount of time. Lock-up times are normally 180 days long, however, can range from 120 to 365 days.
Foreign Investment Disclosures
The SEC modified its disclosure guidelines in 2008 for overseas corporations selling securities on the American market. The regulations did away with the need for overseas businesses without SEC-registered securities to send paper disclosures to the SEC in favor of enabling them to publish disclosures in English online. In addition, from six months to four months, overseas enterprises now have less time to file their annual reports.
Why are Foreign Investment Disclosures important?
Today, many investors look to geographically diversify their portfolios by purchasing securities issued by non-U.S. corporations. These may include shares or bonds issued to emerging market economies by established businesses. American Depositary Receipts, or ADRs, are a form of stock that can be purchased on U.S. exchanges. ADRs give American investors a chance to buy stock in foreign corporations that would otherwise not be possible. Foreign businesses profit as well since ADRs allow them to draw in American money and investors without the difficulty and cost of going public on American stock exchanges.
To provide investors with accurate and recent information, foreign issuers are required to submit paperwork to the SEC in a manner comparable to domestic businesses. For example, Form F-4 permits the registration of securities involving foreign private issuers in connection with exchange offerings and business combinations, whereas Form F-6 is a regulatory document that all investment companies must register with the SEC if they desire to market ADRs.
Form 13F
The 13F requirement was established by Congress in 1975. Its goal was to give the American public access to the largest institutional investors in the country's assets. 2 The country's financial markets would be more credible in the eyes of investors, according to lawmakers. Mutual funds, hedge funds, trust companies, pension funds, insurance companies, and registered investment advisors are just a few of the businesses that fall under the category of institutional investment managers.
Many smaller investors have tried to use the 13F filings as a roadmap for their own investment strategy because they give investors a glance at the holdings of Wall Street's top stock pickers. Their argument is that not only are the nation's largest institutional investors likely to be the smartest but also that their size provides them the ability to influence markets. Therefore, it makes sense as a strategy to invest in the same stocks or to sell the same stocks.
What to keep in mind
When looking for investment ideas, observers should be aware of what is lacking from 13F filings and the type of investment strategy a hedge fund employs due to the fact that they only provide a fraction of the investment story. A 13F will display changes in the core positions of numerous net long funds but will not identify the short positions (used for hedging). An observer can frequently tell where and when these funds were successful because they may rely heavily on these core long positions for their returns. On the other hand, some funds are net short, which means that the situation is reversed and a portfolio consists mostly of short holdings with long positions serving as hedges. In this situation, focusing just on long holdings does not provide a whole picture of a fund's investment approach. Therefore, it is essential to understand a fund's investing strategy before reading its 13F filings.
Domestic Exchanges Only
The fact that the 13F report solely monitors activity on domestic exchanges is another crucial aspect of the report. Except for ADRs, 13Fs do not display a fund's holdings obtained through foreign exchanges. The 13F will therefore only display a portion of the investment portfolio for a fund that divides its investments between domestic and foreign ones nearly equally. Due to this, those who study 13Fs frequently concentrate on funds that primarily prioritize domestic investments.
Looking behind
Due to the fact that 13F reports are filed up to 45 days after the end of a quarter, they occasionally include investment choices that were taken more than four months earlier. The best course of action for those considering making investment decisions based on 13F results is to keep in mind that these findings are only a window into prior trends and tactics. When the 13F is submitted, these might no longer be applicable.
Why SEC Filings are important
SEC filings offer transparency and the essential information to regulators, analysts, researchers, and institutional and individual investors. In the end, the SEC wants the general public to be aware of the information so they can decide intelligently whether to buy, sell, or hold a company's stocks. Getting the information provided and correctly analyzing it can offer any investor helpful direction when making investing decisions.
Reading between the lines is necessary to comprehend the data that businesses provide in their SEC filings. When reading SEC paperwork, especially financial forms, combine multiple of them to gain a better understanding of the big picture. The short- and long-term financial health of a corporation is frequently determined using financial ratios. Footnotes in a company's documents frequently raise warning signs. One or more extremely perplexing sections in a 10-K or 10-Q, unexpected one-time or special charges, or a significant amount of insider selling are all warning signs.
FAQ
What are SEC Filings?
Companies and securities issuers are required to file SEC Filings, which are regulatory documents, to the Securities and Exchange Commission (SEC) on a regular basis. Investors, analysts, and regulators are to be given transparency and information.
Where can you find SEC Filings?
SEC forms are submitted using the EDGAR system (Electronic Data Gathering, Analysis, and Retrieval system). EDGAR automates the process of gathering, verifying, indexing, accepting, and transmitting submissions from businesses and other parties required by law to submit documents with the SEC. On the SEC website, you may find information on EDGAR and search through forms. You can also use the website's EDGAR training to get acquainted with the system.
SEC filings may also be accessible through your online brokerage account or a financial website like Google Finance.
How do you print SEC Filings?
You can print EDGAR-retrieved documents right from your web browser.
Are SEC Filings available to the public?
Yes, SEC filings are accessible to the general public for free online through the EDGAR system. Additionally, businesses may maintain their own copy on their corporate websites, which are accessible through their investor relations division.
Be aware that under some conditions, a firm may ask that specific details be withheld from otherwise public filings. In line with a company's SEC Forms 8-K, 10-Q, or 10-K report, a confidential treatment application (CTA) or confidential treatment request (CTR) is a form to be filled out. If releasing such information could result in serious or financial harm to the corporation or a business partner, it permits information in the SEC filing to be kept confidential or redacted on public records.