Full Disclosure: What it is, How it Works, Example

What Is Full Disclosure?

Full disclosure is the requirement of the U.S. Securities and Exchange Commission (SEC) for publicly traded companies to release all relevant material facts pertaining to their ongoing business operations.

Full disclosure also applies to business transactions, requiring both parties to provide complete and truthful information about any material issue related to the transaction. For instance, in real estate transactions, sellers are required to sign a disclosure form, and if they knowingly lie or conceal important facts, they may face legal consequences.

How Full Disclosure Works

Full disclosure laws originated from the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC enforces these acts and subsequent legislation by implementing related rules and regulations.

SEC Registration Requirements

Congress and the SEC recognize that full disclosure laws should not impede companies’ ability to raise capital through stock offerings and other securities. Over the years, the exemption limit for smaller companies and stock issues has been raised to reduce the burden. In 1933, the exemption was $100,000, which increased to $5 million in 1982. Consequently, securities issued up to $5 million are not subject to the SEC’s registration requirements.

SEC Reporting Requirements

Publicly owned companies prepare an annual Form 10-K report for the SEC. This report’s content and format are strictly regulated by federal statutes and include detailed financial and operational information. Management provides a narrative response to inquiries about the company’s operations, while public accountants prepare comprehensive financial statements.

Due to SEC regulations, annual reports to stockholders include certified financial statements, such as a two-year audited balance sheet and a three-year audited statement of income and cash flows. These reports also present 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 includes a full disclosure requirement. Both the real estate agent or broker and the seller must provide truthful and complete information about all material issues before finalizing the transaction. Falsifying or failing to disclose important information may result in perjury charges.

Full disclosure in real estate involves disclosing any property defects and other information that may deter the parties from proceeding with the deal. The agent or broker must disclose any personal interest in the property, any relationship with the seller, figures and estimates of the property’s value, the duration it has been on the market, and updates on offers and counteroffers.