What is Full Disclosure?
Full disclosure mandates publicly traded companies and business participants to transparently share all significant and pertinent information regarding their ongoing business operations. This transparency is crucial for an informed decision-making process among investors, stakeholders, and potential partners.
In business transactions, full disclosure also signifies the obligation for both parties to present accurate and complete information about any relevant issues. A pertinent example is in real estate deals, where sellers typically sign a disclosure agreement, facing legal consequences if they conceal or misrepresent significant information.
The Operation of Full Disclosure
Historical Context and SEC Registration
Full disclosure regulations have their roots in the Securities Act of 1933 and the Securities Exchange Act of 1934, guided by the Securities and Exchange Commission (SEC). This regulatory framework sets out the rules and mandates for ensuring transparency and honesty in the securities market.
Congress and the SEC strive to balance the necessity of full disclosure with the ease of capital generation. Due to the potentially overwhelming costs for smaller enterprises, exemptions have been introduced. Over the years, smaller security issuances have seen their exemption limits increase significantly — from $100,000 in 1933 to $5 million in 1982 — exempting them from the exhaustive SEC registration requirements.
Reporting to the SEC
Publicly owned companies are required to file a Form 10-K annual report to the SEC. These due reports are meticulously structured as per federal statutes, encompassing detailed operational and financial data supplied by the company’s management and verified by public accountants through financial statements.
Annual shareholder reports, governed by SEC rules, must present certified financial statements. These typically include a two-year audited balance sheet and a three-year audited statement of income and cash flows, along with five years of pertinent financial data, covering aspects such as net sales, income or loss from continual operations, and cash dividends per common share.
Real-Life Application: Full Disclosure in Real Estate
In the realm of real estate, full disclosure manifests in the obligation of both real estate agents and sellers to disclose all material information candidly before the transaction’s completion. Failure to comply can result in severe legal consequences, including charges of perjury.
Full disclosure in real estate typically involves transparent sharing of any property defects, material business interests, or relationships with the seller by the agent or broker. Detailed disclosure includes providing potential buyers with property evaluation figures, information on how long the property has been on the market, and updates on offers or counteroffers.
Related Terms: Securities Act of 1933, Securities Exchange Act of 1934, Form 10-K, disclosure requirements
References
- U.S. Securities and Exchange Commission. “Full Disclosure System”, Page 77.
- U.S. Securities and Exchange Commission. “Full Disclosure System”, Page 80.
- U.S. Securities and Exchange Commission. “Notice of Proposed Exemptive Order Granting Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Finders”, Page 5.
- U.S. Securities and Exchange Commission. “Form 10-K”.
