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How Much Information Must I Provide to an Investor?

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This post is based on a question that I answered on Quora. Q. Which tax documents is a startup obligated to disclose to its investors? Our angel investor is asking to see the full tax return (Form 1120S plus all Forms 1099). What are his rights versus the corporation?

A. I’ll give a multi-part answer.:

1. I doubt that there is any law that says you must give certain information to an investor.

2. However, I think that there probably is a business, rather than legal, answer to your Q: If the investor wants the information, and you want to keep the investor, you probably should provide the information. At best, your refusal to do so may cause the investor to suspect that you are hiding something; at worst, he will refuse to invest.

3. Reinforcing #2, a properly-written stock purchase agreement will require a variety of investor representations, typically including some along the line of the following:

Investor represents that: (i) he has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its prospective investment in the Shares; (ii) he believes that he has received all the information that he has requested from the Company and considers necessary or appropriate for deciding whether to obtain the Shares; (iii) he has had the opportunity to discuss the Company’s business, management, and financial affairs with the Company’s management; (iv) he has the ability to bear the economic risks of its prospective investment; and (v) he is able, without materially impairing his financial condition, to hold the Shares for an indefinite period of time and to suffer a complete loss on his investment.

If you refuse to provide requested information, it would be difficult for the investor to make some of those representations.

Dana H. Shultz, Attorney at Law  +1 510-547-0545  dana [at] danashultz [dot] com
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