Disclaimer: This video discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this post. The views expressed herein are personal opinion.

In prior posts, we’ve discussed the role of the Board of Directors (the “Board”) and the Board’s duty to disclose information to shareholders. This post discusses the Board’s obligation to disclose information to investors and the role the Board plays in a company’s financing.

In general, the U.S. Federal Securities laws provide that a company needs to provide all material information that a reasonable investor would find relevant to an investment decision. The company can’t omit a fact that an investor acting in good faith would find substantially likely to alter their investment decision.

The concept of a “materially reasonable” investment decision is vital for the company and the Board to understand. The company must provide the investor with all material information that a reasonable person or investor would find necessary to decide whether to invest. The company can’t fail to give investors information that would change the total mix of information relevant to their investment decision. In other words, the company must include everything that would change the conclusion an investor might draw based on the information presented by the company.

For example, investors may want to see website traffic for the company. The company can’t only show a limited selection of website data. If the website data increased for 12 consecutive months and then started to decline, the company must include the declining month.

The general rule is that the company must consider anything material to the investment decision if a reasonable investor might want to know it before they decide to invest. If a fact about the company might change the investor’s mind about the deal, then that’s a material fact, and the company needs to disclose it. Different types of financings and investors require different disclosure levels. We’ll get into that in a separate post, but the key takeaway is that a company cannot withhold information from someone making an investment decision.

Similar to the duty to disclose to shareholders, companies must also be transparent and present a complete picture of the company’s metrics. In other words, the company may want to disclose information even if an investor does not ask for that information. This is especially true if the information could impact the investor’s investment decision.

In the prior example where the investor asks for website data, the company must share the website data and any materially essential factors relating to that data. For instance, if the company just lost a relationship with a critical influencer driving traffic to the website, the loss is a material factor in the website traffic.

The Board’s role in this process is to advise company executives on how the company presents information and who the company looks at as investors. The Board may review the company’s pitch deck, inspect due diligence rooms, weigh in on negotiations with investors, and much more. The Board and anyone talking to investors on behalf of the company must understand the nuance of the company’s duty to disclose information.

As always, we advise companies to talk to a lawyer if questions about the duty to disclose arise.