Full Disclosure

What Is Full Disclosure?

Full disclosure is the U.S. Securities and Exchange Commission's (SEC) requirement that publicly traded companies release and provide for the free exchange of all material facts that are relevant to their ongoing business operations. Full disclosure also refers to the general need in business transactions for both parties to tell the whole truth about any material issue pertaining to the transaction. For example, in real estate transactions, there is typically a disclosure form signed by the seller that may result in legal penalties if it is later discovered that the seller knowingly lied about or concealed significant facts.

How Full Disclosure Works

Full disclosure laws began with the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC combines these acts and subsequent legislation by implementing related rules and regulations.

SEC Registration Requirements

Congress and the SEC realize full disclosure laws should not increase the challenge of companies raising capital through offering stock and other securities to the public. Because registration requirements and ongoing reporting requirements are more burdensome for smaller companies and stock issues than for larger ones, Congress has raised the limit on the small-issue exemption over the years. In 1933, the exemption was $100,000, whereas, in 1982, it became $5 million. Therefore, securities issued up to $5 million are not subject to the SEC’s registration requirements.

SEC Reporting Requirements

Publicly owned companies prepare a Form 10-K annual report for the SEC. The report’s content and form are strictly governed by federal statutes and contain detailed financial and operating information. Management typically provides a narrative response to questions about the company’s operations. Public accountants prepare detailed financial statements.

Due to SEC regulations, annual reports to stockholders contain certified financial statements, including a two-year audited balance sheet and a three-year audited statement of income and cash flows. Annual reports also contain five years of selected financial data, including net sales or operating revenue, income or loss from continuing operations, total assets, long-term obligations, redeemable preferred stock and cash dividends declared per common share.

Real-Life Example of Full Disclosure

A real estate contract often contains a full disclosure requirement. The real estate agent or broker and the seller must be truthful and forthcoming about all material issues before completing the transaction. If one or both parties falsifies or fails to disclose important information, that party may be charged with perjury.

Full disclosure typically means the real estate agent or broker and the seller disclose any property defects and other information that may cause a party to not enter into the deal. The agent or broker must disclose whether the seller is willing to accept a lower offer; facts or data describing the seller’s urgency level of completing the sale; and whether the agent or broker has any interest in the property being sold or any personal relationship with the seller. Figures and estimates of the property value; how long the property has been on the market; and updates on offers or counteroffers placed on the property are typically disclosed as well.