Risk Factors

Generally, risk factors are conditions that increase the risk an investor will not receive a return on their investment. The Security and Exchange Commission (SEC) requires disclosure of risks in registered securities offerings and private placements. There are five generic risk factors typically disclosed in an offering document for a startup company: a lack of operating history, a lack of recent profitable financial periods, the company’s overall financial position, and lack of a market for the securities being offered. Most risk factor disclosures are designed to communicate financial information about the company that investors should be aware of before making an investment. Some risk factors, such as the lack of a market to resell securities, are meant to educate investors about practical considerations when making an investment. Companies can disclose idiosyncratic risks as well such as successful completion of prototype testing or securing a specific location for the company’s operations. Threats to the company in the form of major litigation or potential enforcement action by regulatory agencies can also be important factors to disclose. While disclosure of risks is a statutory requirement, companies can benefit from making risk factor disclosures by educating investors and creating a written record of potential reasons for a lack of return on investment.