Page 31 - Initial Public Offering - An Introduction to IPO on Wall Street

3. Disclosure
The Securities and Exchange Commission (SEC) establishes and enforces disclosure
requirements for all companies in the U.S that decide to go public. This generally refers to an
IPO undertaking by a company that intends to raise additional capital by selling shares of its
stock to the public.

After a company goes public or undertakes an IPO, it will be subject to public reporting
requirements. The disclosure typically involves the timely release of a company’s information
that may impact the decision of an investor. This information can include operational details,
market data, positive and negative news—basically anything that can have an impact on the
business.

Disclosure for IPOs is not much different from how it is defined and understood in the legal
world. All those involved in an IPO have a responsibility to ensure full disclosure of facts to
act fairly and in the interest of all parties.
3.1 The Full Disclosure Principle

When discussing disclosure requirements for
an IPO, perhaps the most important thing to
reveal is the full disclosure principle.

What does the full disclosure principle state?

It states that all appropriate and essentials
details to interpret a financial statement must
be included in a compilation of financial
statements submitted to fulfill the filing
requirements for a public company.

The main purpose of this is to ensure that all
stakeholders in a company have almost the
same level of understanding about its financial health as the company’s management. This
helps to safeguard the investors while increasing a company’s prospect of selling more shares
of its stocks.

It is important to be clear that the full disclosure principle does not make it mandatory to
ensure access to all available information to the public. It would be impractical anyways.
Potential investors will have access to far more information than they need. It will confuse
them and scare them off from going ahead with the investment in a stock.

This is the reason the Securities and Exchange Commission (SEC) requires companies to
disclose only that information that can impact their financial position or financial outcomes.

The principle helps promote financial market fairness and reduces the possibilities of
fraudulent transactions. The value of the concept of full disclosure keeps rising in the light of
high-profile scandals involving the alteration of financial reports and other corrupt activities.
The most prominent cases are the 2001 Enron debacle and the Madoff Ponzi scheme exposed
in 2008.
Furthermore, the concept of full disclosure can be found in contract law. Here, all
confidential details relating to the performance of a transaction must be revealed to one

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