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What is Risk Disclosure?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 December 2016
  • Copyright Protected:
    2003-2016
    Conjecture Corporation
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Risk disclosure is a process that is common in many financial transactions, particularly investment situations. Essentially, risk disclosure has to do with the efforts of the seller to make sure the potential buyer understands fully the levels of risk associated with making the purchase. Many countries require some type of formal disclosure to be included in any contracts or agreements that authorize the transfer of property or other assets from one entity to another.

Depending on the rules of risk disclosure that apply in a given jurisdiction, the identification of possible risks may include instances that are classified as implied as well as expressed. That is, the risks addressed may include specific scenarios that have a real chance of impacting the value of the asset after acquisition. At the same time, the disclosure may include general examples of what could possibly happen, assuming certain circumstances come to pass. In both cases, the idea is to make sure the buyer has made an informed decision, and is aware of the potential for the investment to fail as well as the potential for the investment to appreciate in value.

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When it comes to the sale of stock, it is not unusual for risk disclosure laws to specifically warn the buyer about the relationship between past and future performance. While the way that a stock has performed in the past may serve as one indicator of how the shares will fare in the future, the terms of disclosure may specifically warn against assuming what happened in the past will happen again in the future. Investors usually understand that investments of any type contain an element of risk. However, the inclusion of verbiage of this type helps to ensure that the investors does recognize that the seller is not making any promises about the type of future performance, good or bad, that the stock will realize.

Both buyers and sellers should look closely at the details involved with the disclosures made during the negotiation of the purchase, as well as in the documents drafted as part of the sale. During the negotiation phase, the seller should make all efforts to share information about the status of the investment, even information that may seem somewhat innocuous. At the same time, the buyer should ask pointed questions that help make it easier to assess the degree of risk associated with the acquisition, thus allowing the buyer to make an informed decision. Neither party should proceed with the transaction until both are satisfied that all relevant information has been shared between the buyer and seller.

In spite of risk disclosure regulations put in place by many nations, it is still possible for disclosure fraud to take place. Fraud is usually determined to be present when it comes to light that the seller knowingly withheld important information from the buyer. If it can be determined that the seller did in fact have access to that information, laws in various countries may require the seller to cover any losses sustained by the buyer, reverse the transaction altogether, and possibly result in a formal conviction and jail time for the seller.

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