Continuing disclosure: Overview, definition, and example
What is continuing disclosure?
Continuing disclosure refers to the ongoing obligation of an entity, such as a corporation, government agency, or issuer of securities, to provide regular updates and information to stakeholders, including investors, regulators, and the public. This disclosure ensures that all relevant financial, operational, and material information about the entity is made available throughout the life of a security offering or project. The goal of continuing disclosure is to keep stakeholders informed about significant events or changes that could affect the value or performance of the securities or the entity itself.
In the context of securities, continuing disclosure is typically required by regulatory bodies such as the U.S. Securities and Exchange Commission (SEC), ensuring that investors have access to up-to-date information about the companies in which they invest. This can include financial statements, management changes, material contracts, litigation updates, and any other material developments that could impact investors' decisions.
Why is continuing disclosure important?
Continuing disclosure is important because it promotes transparency, ensures that stakeholders have the information they need to make informed decisions, and helps maintain trust between companies and their investors or the public. For businesses, providing continuing disclosure is often a legal or regulatory requirement that helps ensure compliance with securities laws and fosters investor confidence.
For investors, continuing disclosure allows them to stay informed about the financial health and performance of the companies or entities in which they hold investments. For companies, fulfilling continuing disclosure obligations can reduce the risk of legal action and ensure that all material developments are shared in a timely manner.
Understanding continuing disclosure through an example
Imagine a public company that issues bonds to raise capital. The company is required by law to provide continuing disclosure, which means it must submit regular updates, including its quarterly financial reports, any material changes in operations, and updates on pending lawsuits or regulatory matters. If the company faces a significant legal challenge or major financial change, it must disclose this information to its bondholders as part of its continuing disclosure obligations. This allows bondholders to assess the potential impact on the company's ability to repay the debt.
In another example, a government entity issues municipal bonds to fund a new infrastructure project. As part of the continuing disclosure requirements, the government must provide regular updates on the project's progress, financial performance, and any changes in revenue projections. If there are delays in the project or unforeseen costs, these changes must be disclosed to investors to help them assess the risk of their investment.
An example of a continuing disclosure clause
Here’s how a continuing disclosure clause might appear in a securities agreement:
"The Issuer agrees to provide continuing disclosure in compliance with the applicable regulations, including but not limited to quarterly financial statements, annual reports, material event disclosures, and any other information necessary for the ongoing transparency of the Issuer’s financial health. The Issuer shall file all necessary reports with the SEC and provide copies to the investors no later than 30 days following the end of each quarter."
Conclusion
Continuing disclosure is a critical component of financial transparency and regulatory compliance. It ensures that investors and stakeholders have access to up-to-date information about a company's or entity’s performance and risks. For businesses, meeting continuing disclosure obligations fosters trust, supports informed decision-making, and helps mitigate potential legal or financial risks. For investors, it provides the information necessary to assess their investments and adjust their strategies accordingly.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.