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Why is disclosure important when small businesses raise capital?

Remember that the reason for disclosures is to enable investors to make decisions based on all the relevant information needed to assess risk and reward. All publicly owned companies must make detailed periodic disclosures on business operations and financial health to shareholders and the SEC. Private small businesses typically need not make detailed disclosures because the law assumes an investor knows enough about the private small business such that no additional protections are necessary. When a small business goes public, then it will be subject to the same disclosure rules as large publicly owned businesses. It’s a fact that disclosures are tougher for small businesses to handle, so the SEC provides ways to balance the public’s need for transparency against small businesses facing hardship in capital formation. For example, small issue exemptions, private placement exemptions, and less stringent filing parameters are some of the ways the SEC eases the burden of disclosure on qualifying small businesses.

To be on the safe side, small businesses should keep meticulous records and err on the side of accurate disclosure. Hashing out in court whether or not you needed to disclose more can be a headache. If a court finds your disclosures insufficient, you may be subject to rescission and other penalties. Not only that, but disclosing relevant financial information, even when the SEC does not absolutely require it, sows seeds of trust with your investors—that’s priceless. Giving proper disclosures, as expected by both SEC and best business practices, is a murky area for entrepreneurs, but the attorneys of Bjornson Jones Mungas provide experienced, tailored advice for each unique client.

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