Securities laws were enacted to promote public confidence in the capital markets by requiring the registration of securities and those who sell them. These laws also mandate full and fair disclosure of all "material" facts--information that investors would consider important in deciding whether or not to invest. The term "security" is defined broadly to include a wide array of investments such as stocks, bonds, notes, debentures, limited partnership interests, oil and gas interests, and investment contracts. Generally, if an investment of money is made in a business with the expectation of a profit to come through the efforts of someone other than the investor, it is considered a security.

The Texas Securities Act and Board rules provide for certain exemptions from the registration requirements. Yet it is important to remember, whether or not an exemption from registration is available, there remains an affirmative duty upon the seller of securities to disclose all material information about the offering.

Full disclosure of information to prospective investors in a securities offering is typically presented in a document called a prospectus (in the case of a public offering) or private placement memorandum or offering circular (in the case of an offering made pursuant to an exemption). This document is often the main way information about the company is communicated to prospective investors. It helps to ensure that consistent disclosure is made, creates a record of regulatory compliance, and serves to protect the company from future disputes with dissatisfied investors.

Some examples of material information include:

  • The Business of the Company This information generally includes a description of the products the company produces or the services it provides, location of the company's facilities, trends in the industry, and the company's marketing strategies.
  • Risk Factors These factors vary depending upon the company and the nature of its business. They may include cash flow difficulties, market competition, inexperience of management, dependence upon an unproven product, absence of operating history or profitable operations, potential conflicts of interest with management or affiliates, or the absence of a trading market for the company's securities.
  • Use of Proceeds The use of the funds to be received from the offering should be set forth with a high degree of specificity. Categories of expenditures may include such items as leases, rent, utilities, payroll, purchase of equipment, payment of notes, advertising costs, insurance, supplies, and payments to be made immediately to officers, directors, or promoters.
  • Key Personnel and Shareholders. Individuals who direct the company's operations or who make significant contributions to the business of the company as employees, independent contractors, consultants, or otherwise are identified and important background information such as education, age, and business experience of these persons is disclosed. Principal shareholders of the company are identified with a description of the number and percentage of shares beneficially owned.
  • Financial Statements. Financial information, such as balance sheets and statements of income and cash flows, that accurately describes the financial condition of the company is typically provided. In some circumstances these financial statements must either be audited or reviewed by a certified public accountant.

It is important to note that specific disclosures that should be made in a particular securities offering depend upon all of the relevant information available regarding the issuer and its business.