Through the year various public companies around the world are accused of failing to properly disclose to investors the risks to a company's revenue and profit of a variety of incidences. Authorities investigate and often class actions follow. It is worth raising the broader subject in hand of risk disclosure in relation to investing in both public and private companies, and the importance of the related business case, funding documents and subscription agreements.

Every business case must include a statement of all risks that would be expected to have 'reasonably' been known to or identified by management at the time the document was constructed.

When it's time to raise funds from the market for the accepted business case, the funding proposal documents e.g. IM, PPM will contain an extract of the business case; and most importantly must contain from the business case the full set of risks known by management and the board at the time of going to market for the funds. These will now expand to include funding round related risks, specific risks relating to for example the structure of the business, key person risks, potential conflicts of interest, technology risks, project risks, environmental risks, currency risks, country risks. All of these risks can in turn impact for example the revenue that the project or business ends up achieving. Lawyers overseeing the documents for the funding round(s) will also advise other risk categories appropriate for the business and jurisdiction of operation. The aim of this section is to ensure that investors will be fully briefed on the downsides of investing in the business opportunity.

The temptation is for those issuing funding offering documentation to seek to minimise the risk factors in order not to discourage investors. This can backfire when incoming shareholders can later fairly claim they were not made aware of the risks associated with investing.

Within the subscription agreement documents the investors are asked to make very sure they understand what they're buying into. The investor, in signing the subscription documents, is therefore confirming that he/she has read the 'warnings' and the offering documents and is therefore fully aware of the potential loss or reduction of their initial invested sums.

Now, some investors are so in love with a prospective investment that they rush through reading the funding offer and subscription agreement and simply sign on the line. If subscribers choose not to read the funding proposal or subscription agreement carefully before signing, and these documents did in fact contain extensive statements of risk, then the investors right of re-dress when matters don't turn out as expected is limited. Boards in this event can argue that they did ensure that all risks were disclosed and therefore it is not the directors' fault if people did not read the documents and ended up with some loss of their investment, or experienced lower returns than projected.
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As an example, the following are extracts from a subscription agreement we worked on for a large capital infrastructure project in the United States:

"The undersigned understands that investment in the Shares involves a high degree of risk and is suitable only for sophisticated investors. The undersigned further understands that the Shares are being offered in reliance upon an exemption from registration provided by the federal Securities Act of 1933, as amended (the "1933 Act") and Regulation D of the Securities and Exchange Commission thereunder ("Regulation D"), and all applicable state securities laws or regulations. Accordingly, the undersigned hereby represents and warrants to you, and intends that you and the Company rely upon these representations and warranties for the purpose of establishing the acceptability of this subscription offer, as follows:

The undersigned acknowledges that the Company has made available to him, her or it the opportunity to ask questions and receive answers concerning (a) the Company; (b) the Shares; (c) the Investment Offer; (d) the Company's Amended and Restated Certificate of Incorporation as amended, and (e) any other information provided by the Company to the undersigned.

The undersigned has made his, her or its own inquiry and analysis (on his, her or its own or with the assistance of others) with respect to (a) the Company; (b) the Shares; (c) the Investment Offer; (d) the Company's Amended and Restated Certificate of Incorporation, as amended; (e) the Subscription Agreement, and (f) other material factors affecting the Shares. Based on such information and analysis, the undersigned has been able to make an informed decision to subscribe for the Shares.

The undersigned has such knowledge and experience in financial and business matters that he, she or it is, either alone or with his, her or its advisors or representatives, capable of evaluating the merits and risks of investment in the Shares'.

The point is that the subscriber / the investor to the funding requirement is reminded several times over that when they sign on then they certify that they understand the risks.