Explaining The Material Disclosures

Today, we're talking about material disclosures. The consequences of what happens if you don't disclose everything materials and how it all works in practical applications. Just jumping in, there are certain things that you have to disclose to your investors on every deal that you do.

Those details include things about the offering, or the property itself. Like, “Oh, this place used to be a meth lab, or whatever.” Usually, I find that disclosing things about the property is not that much of an issue amongst clients, but then when we get into personal disclosures, that's when people feel very comfortable, because you do have to disclose things about yourself and your past as a sponsor. This includes bankruptcies, any criminal proceedings, any current litigation that you're in, any current, or previous enforcement actions, or investigations by the SEC, or state securities regulators, anything of that sort. It does go on for a long time. By the way, when I say just – when I say bankruptcy, this includes personal and business bankruptcy. We're covering the entire gamut here. When it comes to any of this, there's nothing in the regulation itself most of the time that says, okay, for X specific event, you must write a paragraph in the PPM that talks about this. Usually, most of this falls under what we call materiality provision, which is you have to disclose whatever is material to the offering and what is material? There's no hard and fast rule, but because there is a lot of securities litigation that goes on all the time, especially in the real estate investment space, 99% of securities attorneys are going to be more conservative than less conservative. When you ask, “Oh, is something material?” What you're really asking is okay, would the reasonable investor wish they knew this before investing in the deal. That's really what you're asking. We're not asking, do you the sponsor think it's important? We're asking what a judge or a jury person feel like they would have wanted to know this prior to investing the offering. I want to give you guys little anecdote about why this is important.

Listen to the full espisode: https://lifebridgecapital.com/2019/09/ws322-material-disclosures-with-amy-wan/

There's no specific place in the PPM where it's going to show up, but where you probably want to look, right, is when it comes to material disclosures about the sponsor themselves, it's probably going to show up wherever they talk about the sponsor. Either in the deck where they have their biographies, or the part of the PPM where it lists who are the sponsors and a little bit about their background. Then disclosures about the risks of the investment itself is there's usually a whole section around that.