US Startups: Understanding Your Disclosure Obligations to Investors

A company and its management have an obligation to disclose all material information that a reasonable investor would want to know prior to making an investment in the company. Information is material if there is a substantial likelihood that a reasonable investor would consider it important in determining whether or not to make an investment.

US startup legal obligations to investors

Failure to disclose material information, or disclosing incorrect or inaccurate information, can result in liability for the company and management. To avoid such liability, management should take seriously its disclosure obligations to its investors by carefully vetting and disclosing material information about the company. Consider taking the following steps to meet such obligations:

Start from the beginning. Your disclosure obligations begin from your first encounter with your potential investor. Documents such as pitch decks, executive summaries, or similar documents describing your company’s products or services, value proposition, team, business model and competition must be accurate (if not complete), as well as current and not misleading.

Beware of forward-looking statements. While US federal law provides a “safe harbor” for certain forward-looking statements that are accompanied by clear disclaimers, entrepreneurs should avoid making non-factual statements about possible economic performance of the company or plans for future operations, product features or markets (which may be merely informed or positive speculation).

Do not count on your investors to fend for themselves. Do not assume that all investors are likely to engage in rigorous due diligence and use this assumption as a reason for the company to avoid disclosing material information. Even if an investor forgoes due diligence, this does not relieve you of your disclosure obligations.

Set up a virtual data room to disclose documents and information. A virtual data room can help ensure that all investors have access to the same material information. If new documents and information are uploaded to the data room after its initial set up, be sure to notify all investors of the new content.

Give investors a point person for follow-up questions. Your documents and data room may not answer all of an investor’s questions. Assign a point of contact, usually someone in senior management, to serve as a gatekeeper who can ensure timely, consistent and quality answers to information requests.

Click here to read the full Startup Advisory blogpost by Matthew W. Bower of Ally Law member Varnum LLP.