So, how much information do you need to make an informed decision?
Unfortunately, Tesla’s Motors problems with autopilot cars provide a great discussion about required disclosure to investors. This CNBC video with a former SEC Chairmen discusses whether or not Telsa had a duty to disclose a car accident that occurred with an autopilot vehicle sooner to investors. Could the lack of timely disclosure impact an investor’s decision about Telsa as an investment?
A May 7th, 2016 crash of a Telsa car using autopilot killed a person in the vehicle. Telsa sold stock through a registration statement, which is a disclosure statement filed with the SEC that required Telsa to disclose all material facts about their company to investors. Telsa notified the National Highway Traffic Safety Administration (NTHSA) of the accident on May 16th, and the firm issued a secondary offering of common stock on May 18th. A secondary offering is an additional issuance of stock after a firm’s initial public offering. The NTHSA announced a probe of the accident on June 30th.
The case for disclosure
Harvey Pitt, the former SEC Chairman, makes the point that Telsa’s stock fell sharply once the accident was disclosed, which indicates that the information was considered material to investors. Materiality, in this context, is defined as information that affects an investor’s decision, and the stock price decline, according to Pitt’s argument, makes the case that the accident was material information to investors.
If the SEC investigates and finds Telsa at fault, Pitt explains that Telsa may be required to return the sales proceeds from the secondary offering to investors. The CBNC anchor reads from Telsa’s most recent Form 10-Q filing, which is a required quarterly filing to the SEC (Here is the March 31, 2016 report). Part 2, Item 1A discusses Risk Factors, which include this statement:
“We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend or insure against such claims.”
Now, that statement does not specifically mention liability that may arise due to an accident- it’s only a broad statement that Telsa may face product liability claims. Pitt also mentions that the SEC does not like companies relying on broad, generic “boiler plate” statements as investor disclosure. Sure, all firms face potential liabilities- but the statement above is too vague to offer anything meaningful to an investor.
Pay attention, ask questions
If you pay attention and read the information disclosed by the companies you own, you can make informed decisions. Rather than plow through SEC disclosures, head over to Google Finance or some other site that collects data on disclosures and reports it. Finally, if you work with a financial advisor, ask them about the companies you own when you see reports in the media.
As always, these posts are for informational purposes only. Consult a financial or tax advisor as needed.
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(website and blog) http://www.accountingaccidentally.com/
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Maciej Lewandowski, Vintage Cars, (CC By SA-2.0)