SEC Disclosure Laws and Regulations

Registration of New Securities

Private companies that wish to become publicly owned must comply with the registration requirements of the SEC. In addition, companies floating new securities must follow similar disclosure requirements. The required disclosures are made in a two-part registration statement that consists of a prospectus as one part and a second section containing additional information. The prospectus contains all of the information that is to be presented to potential investors. It should be noted that SEC rules and regulations governing registration statements are subject to change.

In order to meet the disclosure requirements of new issue registration, companies prepare a basic information package similar to that used by publicly owned companies for their annual reporting. The prospectus, which contains all information to be presented to potential investors, must include such items as audited financial statements, a summary of selected financial data, and management's description of the company's business and financial condition. The statement should also include a summary of the company's material business contracts and list all forms of cash and noncash compensation given to the chief executive officer (CEO) and the top five officers. Compensation paid to all officers and directors as a group must also be disclosed. In essence, a company seeking to go public must disclose its entire business plan.

Securities Industry Regulations

Additional disclosure laws apply to the securities industry and to the ownership of securities. Officers, directors, and principal stockholders (defined as holding 10 percent or more of the company's stock) of publicly owned companies must submit two reports to the SEC. These are Form 3 and Form 4. Form 3 is a personal statement of beneficial ownership of securities of their company. Form 4 records changes in such ownership. These reporting requirements also apply to the immediate families of the company's officers, directors, and principal stockholders. Individuals who acquire 5 percent or more of the voting stock of a SEC-registered company, meanwhile, must also submit notification of that fact to the SEC.

Securities broker-dealers must provide their customers with a confirmation form as soon as possible after the execution of an order. These forms provide customers with minimum basic information required for every trade. Broker-dealers are also responsible for presenting the prospectus to each customer for new securities issues. Finally, members of the securities industry are subject to reporting requirements of their own self-regulating organizations. These organizations include the New York Stock Exchange (for listed securities transactions) and the National Association of Securities Dealers (for over-the-counter traded securities).

DISCLOSURE RULES OF THE ACCOUNTING PROFESSION

Generally accepted accounting principles (GAAP) and specific rules of the accounting profession require that certain types of information be disclosed in a business's audited financial statements. As noted above, these rules and principles do not have the same force of law as SEC rules and regulations. Once adopted, however, they are widely accepted and followed by the accounting profession. Indeed, in some instances, disclosures required by the rules and regulations of the accounting profession may exceed those required by the SEC.

It is a generally accepted accounting principle that financial statements must disclose all significant information that would be of interest to a concerned investor, creditor, or buyer. Among the types of information that must be disclosed are financial records, accounting policies employed, litigation in progress, lease information, and details of pension plan funding. Generally, full disclosure is required when alternative accounting policies are available, as with inventory valuation, depreciation, and long-term contract accounting. In addition, accounting practices applicable to a particular industry and other unusual applications of accounting principles are usually disclosed.

Certified financial statements contain a statement of opinion from an auditor, in which the auditor states that it is his or her opinion that the financial statements were prepared in accordance with GAAP and that no material information was left undisclosed. If the auditor has any doubts, then a qualified or adverse opinion statement is written.

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