What Is Full Disclosure?
Let me explain full disclosure directly to you: it's the U.S. Securities and Exchange Commission's (SEC) rule that forces publicly traded companies to release and allow the free exchange of all material facts tied to their ongoing business operations.
Full disclosure also covers the basic need in any business deal for both sides to lay out the complete truth on any key issue about the transaction. Take real estate, for instance—you'll see a disclosure form that the seller signs, and if they knowingly lie or hide big facts, they could face legal penalties.
How Full Disclosure Works
These full disclosure laws kicked off with the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC pulls these together with later laws by enforcing related rules and regulations.
SEC Registration Requirements
Congress and the SEC get that full disclosure shouldn't make it harder for companies to raise money by offering stock or securities to the public. That's why registration and ongoing reporting are tougher on bigger companies than smaller ones, and they've bumped up the small-issue exemption over time—from $100,000 in 1933 to $5 million in 1982. So, if you're issuing securities up to $5 million, you skip the SEC's registration requirements.
SEC Reporting Requirements
If you're running a publicly owned company, you prepare a Form 10-K annual report for the SEC. Federal statutes strictly control its content and format, packing in detailed financial and operating info. Management gives a narrative on the company's operations, and public accountants handle the detailed financial statements.
Thanks to SEC rules, annual reports to stockholders include certified financials like a two-year audited balance sheet and a three-year audited statement of income and cash flows. They also cover five years of selected financial data, such as net sales or operating revenue, income or loss from continuing operations, total assets, long-term obligations, redeemable preferred stock, and cash dividends per common share.
Real-Life Example of Full Disclosure
You'll often see full disclosure in a real estate contract. The agent or broker and the seller have to be upfront about all material issues before closing the deal. If anyone falsifies or hides key info, they could get hit with perjury charges.
In practice, this means the agent or broker and seller disclose property defects and any other details that might make someone back out. The agent must reveal if they have any interest in the property or a personal tie to the seller, along with value estimates, how long it's been on the market, and updates on offers or counteroffers.
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