SEC and its forms

The US Securities Exchange Commission (SEC) has a variety of functions that are of fundamental importance to investors. It not only ensures that stock market transactions of all kinds are carried out properly, but also ensures that insider trading, for example, is severely punished. In contrast to other countries (including Switzerland), insider trading can result in draconian fines and prison sentences that are much harsher than elsewhere.

In addition, the SEC also ensures that listed companies adhere to a wide range of rules and regulations, such as proper and, above all, correct accounting. Here, too, there are repeated investigations, even against large companies. This can lead to the invalidity and subsequent revision of earlier quarterly or annual financial statements. Such “investigations” repeatedly cause unrest and share price falls, as it is often not disclosed exactly what went wrong with the business figures. Sometimes these are details without major consequences, but sometimes they can result in write-downs or other corrections amounting to billions.

However, we want to deal with another important feature of the SEC here, and that is the so-called SEC Forms, which contain extremely interesting information and data for the investor. Some are short, some can be dozens of pages long. Again, some are packed with valuable details for the curious and serious investor, others are as dry as a Swedish crispbread. We want to illustrate the most important forms here with real examples. The website for searching is located at https://www.sec.gov/edgar/searchedgar/currentevents.htm

The general page for the SEC forms (EDGAR database) is: https://www.sec.gov/edgar/searchedgar/companysearch.html

So here we go!

Formulare 10-K and 10-Q

Here is the header of a real and current Form 10-Q. 10-Qs are a company’s quarterly reports, while the 10-K is the annual report. Both are similar, though annual reports are naturally more detailed.

As you can see, they simply show some basic information such as ticker symbol, company name, address, etc. This structure is identical for all forms. This structure is identical for all forms.

The next image shows an excerpt from the balance sheet, although the items can of course differ from company to company, depending on the accounting system used and the sector.

In the following sections of a 10-K or 10-Q, the entire accounting such as income statement, cash flows, profits, etc. are listed in tabular form. Of particular interest here are of course not only the figures and the comparison with the previous year/quarter, but also extraordinary events such as unusual depreciation and amortization, provisions, the issue of bonds (i.e. new debt) or shares, management compensation, goodwill (always a popular trick to make the company appear more valuable than it actually is).

Margins such as operating margin or gross margin are also interesting. Comparisons can be used to determine whether margins are improving or eroding. Of course, comparisons can also be made with other companies in the same sector. This is another point that analysts look at very closely. Continuously falling margins are a loud alarm signal, which could, for example, stem from increasing competition or other cost pressures. One cause of this would be an oversupply of a product or raw material and a resulting price collapse.

If you want a detailed description of a company and its activities, you can find this information in the 10-K annual report. Here is an example excerpt from Altimmune, a relatively small biotech company.

The following sections are even more interesting. Here, the individual products and drugs currently being researched by this biotech company are listed. Here too is a small excerpt.

There is no question that such reports, some of which are dozens of pages long, are not exactly everyone’s cup of tea. But all analysts and major investors go through these reports immediately and very thoroughly after they are published, which often results in upgrades/downgrades by analysts (and the associated price swings).

Sections entitled “Legal Proceedings”, for example, are also very interesting. This describes possible legal cases, for example pending lawsuits or other legal disputes. A few sentences can conceal serious consequences for the company. So here too, the small print often contains the real truth!

And last but not least (although there are of course many more interesting details), you should look for the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the form. This is where management gives an outlook and comments on the current financial quarter//year. Here too, positive and negative comments or announcements (e.g. of increasing cost pressure) can provide an outlook on how the company will develop in the near future.

Form 8-K

This form is published for important, business-relevant information and, unlike the above annual reports, is published on an ad hoc basis, i.e. without prior notice. Such forms can therefore be published at any time, whereas the publication of annual reports is scheduled in advance. As an example, here is the important text of a Form 8-K from Nike:

On March 27, 2020, NIKE, Inc. (the “Company”) completed an underwritten public offering of $1,000,000,000 aggregate principal amount of 2.400% Notes due 2025, $1,000,000,000 aggregate principal amount of 2. 750% Notes due 2027, $1,500,000,000,000 aggregate principal amount of 2.850% Notes due 2030, $1,000,000,000,000 aggregate principal amount of 3.250% Notes due 2040 and $1,500,000,000,000 aggregate principal amount of 3.375% Notes due 2050 (collectively, the “Notes”). The Notes were offered and sold under a prospectus supplement and related prospectus filed with the United States Securities and Exchange Commission pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-232770).

In this example, the issuance of new debt is described, including all relevant information such as maturity, interest, amount, etc.

Other information in such forms can include acquisitions, mergers, personnel changes in management or important disposals of business assets, as well as extraordinary write-downs (impairments).

Forms 8-K can sometimes be very brief, as the example of the fashion retailer Guess Inc. shows, which you can find at the following link: https://www.sec.gov/ix?doc=/Archives/edgar/data/912463/000091246320000011/form8-kx032720.htm

This only refers to a press release that had to close various stores due to the Covid-19 pandemic.

Proxy Statement (Form 14xxx)

The proxy statement deals with the annual general meeting of a company. It is very detailed and describes, among other things

Key points of the annual general meeting
Compensation of the management
Composition of the Executive Board and possible elections
Corporate governance (what we do and what we don’t do, i.e. the business principles and guidelines)
Highlights of the financial year
Key business figures, events and management decisions
As an example, you are welcome to take a look at the Kraft Heinz Foods sample, which provides a good overview and can be found here: https://www.sec.gov/Archives/edgar/data/1637459/000163745920000046/kraft-heinzproxy2020.htm

Form 4

This form is used to disclose purchases/sales of company shares, so-called insider transactions. Insiders are, among others

• Companies or persons who own more than 10% of the shares (10% owners)
• Management, management
• Senior management
• Legal representatives of the company who have internal knowledge of the company
  

They must publicly disclose trades in the company’s shares within a few days of the execution of the trade, such as the purchase/sale/purchase of options. This is so important because they have special knowledge that outsiders do not have and thus create at least partial justice. If a CEO of a biotech company knows about the failure of one of his company’s drugs, he can sell shares. He must therefore make this public, which will certainly lead to speculation that “something is up”. Even if he follows the rules, however, he could face prosecution, as many lawyers in the USA specialize in such matters.

Here is an example from the company Allegiant Travel about the sale of shares:

Failure to publish this information can lead to severe sanctions (up to many years in prison).

Form 5 is very similar, it contains a summary of all Form 4 transactions in a year and thus provides an excellent overview of all insider transactions.

Form S-1

This is used to publicize the issue of new shares. The company is presented in detail, the current business situation is described, what the money will be used for, risks are explained, whether dividends will be paid, etc.

An example for studying the company Principio Inc. can be viewed here: https://www.sec.gov/Archives/edgar/data/1043961/000110465920039620/tm2013969d1_s1.htm

Form 13

This form is published when a person/company acquires a stake of more than 5% of the total shares, e.g. for a later acquisition. You can read an example in text form here: https://www.sec.gov/Archives/edgar/data/78003/000007800319000086/a13g_contrafect.htm

The background to this transaction can be found here: https://www.barrons.com/articles/pfizer-bought-penny-biotech-stock-contrafect-just-before-it-doubled-51578141004

Form 13 in particular contains extremely important information and can have a considerable influence on the price of a share, both positive and negative. It often happens that large investors or investment companies such as Buffett’s Berkshire Hathaway acquire huge blocks of shares, often over a long period of time. If it then becomes known through this form that a major “player” is investing a lot of money in a company, this can immediately cause the share price to skyrocket.

Conclusion

There are other forms such as the S-3 form, the so-called shelf registration, on which bonds or shares are listed for later use and subscription.

What use are these forms to you as a trader/investor/interested party? Well, annual reports are very detailed, are pre-announced and therefore you can build a strategy on them. You could buy/sell on certain price movements, on a predetermined date, giving you tactical opportunities to exploit. The 10-K/10-Q forms are therefore particularly interesting in this respect.

The situation is somewhat different with most other forms that appear ad hoc. These appear unannounced, but often have a massive impact on a company. So if a share price suddenly rises or falls sharply, you are sure to find a corresponding explanation in one of these published forms. However, they are difficult or even impossible to implement as a strategy because they appear out of the blue and often come as a complete surprise. Don’t forget that large banks continuously monitor all these publications and respond to them within minutes.

You do not have this luxury and this possibility. You can stay informed, but usually you can only react once the big investors have already acted. The simple fact is that thousands and thousands of such forms are published every day, and it would be impossible for you to sift through this flood manually. What you can do, however, is at least regularly check the companies in your portfolio, which is an effort that can still be managed to some extent.