Readers may recall from previous articles that offerings of securities by entrepreneurs and emerging businesses must either be registered with the appropriate regulatory authorities or be exempt from registration. Regardless of whether an offering of securities is exempt or registered, antifraud provisions apply. What is meant by the statement that "antifraud provisions" apply?
There are various provisions in federal and state securities statutes which make it illegal to make a misstatement or omission of a material fact in connection with an offering of securities. Both the company, and its officers and directors, can become subject to civil and, in severe cases, criminal liability for violations of these antifraud provisions.
These provisions are enforced by the regulatory agencies with broad authority as well as by private investors seeking compensatory relief. The detailed (or "line-item") disclosure requirements of the securities laws provide important guidance to companies, officers and directors as to the requisite level of disclosures which must be made to avoid antifraud liability. These detailed requirements typically have an implied or express "catchall provision" mandating disclosure of any other material information necessary to make the disclosed information not misleading.
One of the more difficult tasks a company's officials will encounter when formulating an offering document is the determination of which facts constitute "material" facts. As a general proposition, a fact will be deemed "material" if there is a substantial likelihood that a reasonable investor would consider the fact to be important in deciding whether to invest in the company. Thus, in making a determination of materiality, company officials must place themselves in the shoes of a hypothetical reasonable investor and ask themselves, "What matters would I want brought to my attention to assist me in making an informed investment decision"?
Not surprisingly, there is no precise yardstick which can be constructed to apply to every securities offering. Indeed, materiality is a mixed question of law and fact which is determined on the basis of individual circumstances surrounding the company, its offering, and other relevant matters.
To assist companies in successfully navigating their way through a "materiality" determination, the following is a sampling of material misstatements or omissions claimed by plaintiffs in actual lawsuits:
The determination of what constitutes "material" (and therefore disclosable) facts will ultimately determine a company's or its officers' and directors' antifraud liability exposure. As is the case with numerous matters under the federal and state securities laws, the author urges entrepreneurs to seek the assistance of experienced counsel to help them make this determination.