Startup Disclosure Requirements

Cite this article as:"Startup Disclosure Requirements," in The Business Professor, updated December 4, 2014, last accessed August 3, 2020,


Disclosure Requirements

The perfection of an exemption does not completely relieve the disclosure requirements. As previously discussed, the exemption may require an entrepreneur to provide the Private Placement Memorandum (PPM) to potential investors at the time of offer or prior to the entrepreneur accepting any offer of investment.

Any such offering memorandum requirement will also include ancillary documents that provide additional information about the offer, such as a term sheet, subscription agreement or instructions, investor questionnaires, etc. These documents serve the purpose of providing the investor all of the information necessary to evaluate the business proposition.


General Startup Disclosure Provisions

The relevant disclosure provision governing issuances by startup ventures is Rule 502(b)(2). It requires that Issuers provide both financial and non-financial information. A startup entrepreneur will be required to provide the equivalent information as is required under SEC Form 1-A. It is important to note that the information disclosure or delivery requirements set forth in Rule 502(b) are only applicable to offerings under certain exemptions. For example, offerings under Rules 505 and 506 have to provide extensive information to non-accredited investors, while offerings under Rule 504 do not. These exemptions are discussed further in other lessons. In any event, you will need to look closely to the specific disclosure requirements under a specific registration exemption.

In any case, the Issuer must provide the investor with sufficient information to make certain the transaction is not misleading. The Issuer must always comply with state and federal anti-fraud laws, such as section 11(a), 12(a) and (b), and 10(b) under the ’33 Act. Information that is factually untrue or misleading in any form runs the risk of violating one of these provisions.

Generally, if the Issuer is not a company that routinely provides reports to the SEC under Sections 13 or 15(d) of the Securities Exchange Act of 1934, it must furnish the following information to the purchaser of the securities.


Non-Financial Information

Non-financial information required by Rule 502(b) includes: the management team; the industry; the type and characteristics of the securities offered; any third-party facilitators in the offering process; and the risks involved in the type of security being offered. More precisely, the required information is listed in part 1 of the registration statement that the business would be required to use, absent the applicable exemption. This information is deemed necessary to allow the investor to make an informed decision about whether to undertake the investment.

There is some flexibility in this disclosure requirement, as the introductory language in Rule 502(b)(2)(i) requires the Issuer to furnish the specified information “to the extent material to an understanding of the Issuer, its business, and the securities being offered.


Financial Information 

Financial information about the business must be disclosed via the financial statements of the business. The extent of disclosure, which can be extremely detailed, depends on the size of the offering. The greater the dollar value the more extensive the disclosure requirements. The amount of required financial information varies between issuances below $2 million, between $2 million and $7.5 million, and above $7.5 million. The information requirement serves to provide the investor with information that may not be available because the business is not required to register the information with the SEC.


Type of Purchaser of Securities

The law further breaks down the disclosure requirements based upon the type of investor or purchaser of the securities. For example, in sales to non-accredited investors (defined below) the Issuer must provide the above-described information prior to sale. Offerings to accredited investors, on the other hand, do not require furnishing information. The reasoning behind this division is that some investors have greater knowledge or access to information and do not need the protection of the additional disclosure requirements.

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