Full Disclosure Definition: Everything You Need to Know
Full disclosure definition is when a company or individual is required to reveal the complete truth regarding a matter necessary for another party to know before entering into a sale or contract.3 min read
Full disclosure definition is when a company or individual is required to reveal the complete truth regarding a matter necessary for another party to know before entering into a sale or contract. Full disclosure can apply to many different matters in the world of business.
What Is Full Disclosure?
Most companies will come across a full disclosure requirement at some point as they're doing business. Some common fields that use full disclosure include:
- Accounting — full disclosure is treated as a principle that requires any material facts to be revealed in a financial statement
- Patenting — patents are only granted under the agreement of full disclosure in the application for the patent, and if the applicant does not provide full disclosure, their patent could become null and void
- Real estate — most states require home sellers to fill out and sign a form for full disclosure and agree to be charged with perjury if they intentionally concealed or falsified any information in the selling of the property.
The United States Securities and Exchange Commission (SEC) requires all companies that are publicly traded to release their information regarding the continual operations of their business to the public under the principle of full disclosure.
Generally speaking, full disclosure is also understood as the necessity for honesty from both sides of any business contract regarding any of the transaction's material issues. Real estate contracts are formed under a full disclosure requirement when both parties sign a form, so if the selling party intentionally hides the fact that the property has a termite infestation, they could be sued.
In 1933 and 1934 the Securities Act and Securities Exchange Act brought the concept of full disclosure into the world of business.
As the full disclosure principle is understood, companies are technically required to share all of their financial information including statements and any material that could help someone better understand that information. This leaves a bit up to interpretation because, technically, this could cover a massive amount of material that is probably unwanted by the reader.
Usually, companies are given the right to only disclose financial information and related material that actually could have an effect on the financial state of the company.
Depending on the type of contract, a business may be required to disclose information about issues that aren't yet fully resolved, like ongoing lawsuits or tax disputes with the IRS (Internal Revenue Service).
Under the principle of full disclosure, businesses are also required to report their accounting policies in practice and anytime those policies change.
The SEC and the U.S. Congress do not wish to impede the ability of companies to raise their capital through their stock offerings by requiring full disclosure, but they hope to keep the market honest and fair.
To help smaller companies stay in the game, the SEC has allowed for small-issue exemptions throughout the past several years and continue to raise the limit on such exemptions. Large companies don't usually have as much difficulty keeping up with the registration and reporting requirements that come with full disclosure laws, but these can be quite a burden to the little guys.
Examples of Full Disclosure
An example of full disclosure in the business world includes the federal requirement for companies owned publicly to submit an annual report to the SEC as a 10-K Form detailing important information regarding business operations and finances. The detailed financial reports are prepared by public accountants while the company's higher management handles a public narrative for the business operations such as major mergers and acquisitions, profits and losses, and any other relevant information.
Stockholders receive annual reports thanks to the SEC's full disclosure regulations. These reports include:
- Financial statements
- Balance sheets from a two-year audit
- Statements of cash flow from a three-year audit
- Other financial data like net sales, operating revenues, total asset amounts, etc.
Other examples of information required to be shared with investors in a company under the full disclosure principle include:
- Changes in accounting principles
- Material losses resulting from lower costs or changes in the market
- Number of and value of encumbered assets
Another example of full disclosure is found in real estate transactions. There are specific things that individuals selling a property are required by law to disclose to their buyers.
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