THE BASES OF SECURITIES INFORMATION DISCLOSURE 
Olayiwola O. Olatlele* 
I. I~TRODlC-:-IO!'\ 
The study of the protection of investors through information disclosure 
regulation is not new. I In fact. it is almost as old as many major securities market 
and indeed older than many emerging markets. including Nigeria. However, over 
the years. scholars have not only disagreed on the importance of information 
disclosure to investor protection. there also has been an ongoing debate on whether 
the disclosure should be voluntary or mandatory. The volur.tary disclosure school 
argues that the securities market and securities issuers. reputation consciousness 
provide adequate incentives for issuers to voluntari Iy provide socially efficient 
level of intormarion.' Conversely. the mandatory disclosure school is generally of 
the opinion that without direct and explicit governmental regulation .requiring 
disclosure, securities issuers would be selective and evasive in disclosure. Thus, 
disclosure would equalise access to information ... thereby starting everyone at the 
same place in the competition to find the best investment. Disclosure would. at the 
same time. hinder fraud and improve the morals of the market place.":' 
2. THE PllRPOSES OF SJ<:Cl'RITIES \I.·\RKETS 
Existing works have established that securities markets serve certain important 
purposes. The market is an instrument of economic growth that performs the 
functions of capital formation. provision of liquidity and risk management. In the 
process of capital formation. the market brings together "capital laden investors and 
capital needy businesses" for equity (common stock and preferred stock) or debt 
securities (debentures, notes. bonds. commercial paper) transactions.' The capital 
raiser issues the securities that the investors subscribe for with their money. The 
market provides liquidity. that is. ready marketability of investment instruments. by 
bringing in COli tact those who wish to sell and those who wish to buy those 
instruments. It also offers investors the means to minimize their investment risk 
through diversification and hedging." The Nigerian securities market performs all 
of these important functions. 
11.I The Purposes of the Nigerian securities market 
•	LL.\1.. I'h. D. Senior Lecturer. Department 01" Business Law. Obafcmi Awolowo University. lIe-II"<:. 
Nigeria. 
I.	See. as examples. Harold Marsh. "New Approaches to Disclosure in Registered Securities Offerings" 2g Bus. 
Law 50S (ln3): Frank. Easterbrook and Daniel Fischel. "Mandatory Disclosure and the Protection of 
Investors' 70 l'a. L. Rev. 66'1 (1984); Gellis. Ann "Mandatory Disclosure lor Municipal Securities: A 
Revaluation" 36 Buff L. Rev 21 (1987): James Cox. "Insider Trading Regulation and the Production ot 
mformarion: Theory and Evidence" 64 /J'ush l.'. L.Q. 474: Dennis S. Karjala "Federalism. Full Disclosure. 
and the National Markets 111 the Interpretation of Federal S "urilles Law" 8U .\'11'. L Rev. 1508 (1986): 
1 See Joseph A. Franco. "Why Antifraud Prohibiuons are not Enough: The Significance of Opportunism. 
Candor and Signalling III the Case for Mandatory Secunucs De-closure" cWU2) Colum. Bus. L. ReI' 223.230. 
Advisory Comrnutcc to the Secunties and Exchange Conuruxxron t Unued States). <)5 Cong.. I;T SlOSS. 
Repon on Corporate Disctosure. 308 (Corum. Print 1<)77) 
4.	A.R. Palmiter. SeClIn/IL'S Regnlauon Examples and £X"IOlloIIIOIIS 3 (New York. 19981. See also AT 
Popoola. The Structure and Context of Ihe laluauon 0)/ \'('11 Ordinary Shares /II the \'lgenol1 Prtmarv 
STOle/, vtarket", 38-43. unpublished Ph.D thesl' Ohafenu Awolowo UnIVCrSIl). He-Ile IWI. () () 
Oladele, "The Nigerian Capital Market Regulauons". 15( 1 ) .: csotho Law Journal. 141. at 142-144 (2005) 
n.n Oladcle. "The Nigerian Capital Market Regulations". 141. at 142-144. Hcdgmg is-a mean, ut 
offsetting investment risk. The manager (,I' a large pool of funds such as a pension fund may hedge' his or 
her exposure 10 interest rate or currency risk b~ baying or selling denvauves (futures or options contracts) 

50 

OLA YIIJ'OLA O. OUDELE 

The reasons for the establishment of the Nigerian securities market are 
largely similar to those for establishing such markets elsewhere in the world; the 
only addition being the taking into account of our peculiar domestic needs at the 
time the market was established. In its memorandum to The Panel on the Review of 
the Nigerian Capital Market" the SEe. the apex regulatory agency for the Nigerian 
securities market stated the objectives inter alia as to 
mobilisc savings from the surplus economic units for on-lending 
to deficit units to ensure efficient and effective allocation of 
scarce financial resources: 
create an avenue for the populace to participate in the economy: 
reduce over-reliance on the money market for industrial 
financing: 
provide seed money for venture capital development; 
promote solvency. efficiency and a competitive financial sector: 
encourage corporate financial discipline and accountability: 
provide long-term financial sector requirements without 
increasing the tax burden on the citizens (of Nigeria); and 
promote stock market culture. 
Added to the above was the need to provide government an avenue to raise 
long-term capital. 7 
In 1961, at the inception of the Lagos Stock Exchange (now Nigerian Stock 
Exchange), a foundation member of its Council and the managing director of the 
Nigeria I ndustrial Development Bank Limited (NIDB), one of the promoters of the 
. Exchange. stated the objectives of the Nigerian capital market as follows: 
(a) the mobilization of savings for economic growth; 
(h) diversion of capital from less productive sectors such as real estate 
to more productive sectors such as industries: 
\ c) augmentation of the banking system and reduction of dependence 
uf government on taxation for economic development:- 
(d) 'I:lecentralisation of the ownership of assets and creation of a 
healthy private sector; 
(e) avoidance of excessive concentration of economic power in the 
hands of government: 
(f) avoidance of excessive concentration of economic power 10 the 
hands of a small private group; 
(g) encouragement of more even distribution of wealth: and 
(h) facilitation of co-operation between indigenes and aliens in 
fostering economic development." 
The Panel on the Review of the Nigerian Capital Market affirmed the 
validity of these objectives. and reported that most of the problems the market set 
out to solve still remain unsolved. Financial resources are still not fully mobilised 
11 Odilc l'ancl. 1<)911 
7 lhc tirst i cdcral Government of'" igeria Loan Sind: lias floated In London long before the Lag", SI"d 
lxchangc IIUS established. 
~ See D. Odilc. "Stockbroking in NIgeria: Prohlems and Prospcct-" I SL'CUrillL'S Market Journal (.\lgell<lj 2, 
\ 1(83). 

THE BASES OF SECURITIES INFORMA TlON DISCLOSURE 

51 

for industrialisation: economic power is yet largely in the hands of Government; 
the economy still over-depend on the banking sector; the private sector is yet 
unhealthy: there are still not enough foreign investors and the problems of 
distribution and concentration of wealth persist." 
When the Lagos Stock Exchange was incorporated. its memorandum of 
association stated the objectives of the securities market as to inter alia: 
(a) provide facilities to the public. in Nigeria for the purchase and sale of 
funds. stocks and shares of any kind and for the investment of money; 
(e) correlate the stock-broking activities of its members and facilitate the 
exchange of information for their mutual advantage and for the benefit of 
their clients and to offer facilities whereby the public can be informed of 
securities dealt in by member; 
(f) co-operate with the association of siockbrokers and Stock Exchanges in 
other countries and to obtain and make available to members information 
and facilities likely to be of advantage to them or their clients .... 
The securities market could achieve its stated purposes if it has in place at all times 
the mechanisms for protecting those who approach it for investment. These 
mechanisms are what securities regulation seeks to ensure. 
III. TilE OBJECTIVES OF SECURITIES REGliLHIO:\ 
Investment and trade in securities are regulated by statutes, regulations, 
government and self-regulatory institutions on which much work has been done 
globally. 10 However, not much has been done in Nigeria. and most of the little that has 
been done concentrate on securities market institutions. Scholars have diverse but 
complementary opinions on the purpose of securities regulation. Olawoyin's The 
Nigerian Capital Market I I is a general appraisal of the structure and operations of the 
Nigerian capital market against the legal ai.d regulatory tools employed to monitor the 
market from 1961 till the early ) 980s. While acknowledging the importance of the 
market to national economic development, he observed importantly that - 
Tho: econonust or financial analyst IS primarily concerned with the analysis of securities 
and general price trends in a capital market. but the focal point for consideration by a 
lawyer relates to the controls introduced either by statute or by self-regulasory bodies with 
	a view to ensuring an orderly development of the i..arket. 12 	. 
He identified the objectives of securities regulation as including: 
(a) the creation and maintenance of an orderly market in which securities can be 
issued and traded; 
(b) the full. prompt and honest disclosure to shareholders and creditors of all 
relevant matters and in particular of information necessary to a decision 
to buy. hold or sell securities or to the establishment of a fair price: 
9 See the Report of the Panel on the Review of the Niger/all C apital Market (1996). 
10 The literature on securities regulation in general is too vast to be captured III a footnote. but see a" 
examples F. Easterbrook. and D. Fischel. "Mandatory Disclosure and the Protection of Investors" 70 
Virginia Law Review. 669 (1984); L. Loss. Fundamentals of Secunues Reguluuon 280-281 2nd ed .. tNew 
York: Little. Brown and Company, 19?8): J.D. Cox, et al. Securities Regulation, SIlo ed .. (New York. 
Aspen Publishers. 2006); H.S. Scott and P.A Wellons. Ill/emotional Securities Regulation. (New York: 
	Foundation Press. 2002): 	. 
10 For a study with a global locus. see U. Geiger 'The Case lor the Harmonization of Securities Disclosure 
Rules in the Global Market" (1997) Columbia Law Review 241. 
II G.A. Olawoyin The Nigerian Capital Market. University of Ife Nigeria Inaugural Lecture Series 46. (Ilc- 
Ife University of lfe Press. 1982) 
12!d.at5 

52 

OLA YIWOLA O. OUDELE 

(c) the protection of investors from misleading information and from abuse 
of privueged information. 13 
Olawoyin acknowledged that the law requires every public company offering 
its securities to the public to publish a prospectus. He added that the prospectus 
must contain sufficient information to enable investors to make informed 
investment decisions. The work is a succinct brilliant appraisal of the framework 
and functions of the Nigerian securities market. It however did not focus the 
content and impact of securities information disclosure. More importantly, the law 
on securities has changed remarkably since Olawoyin wrote his lecture. This work 
has updated knowledge of securities regulation in Nigeria by filling the gap created 
by new developments and legislation. 
As far back as 1967, Morton and Booker" posited that the purpose of securities 
regulation is to facilitate the working of securities markets in financing businesses. 
However, Professor Anderson" submitted that securities regulation has two 
purposes, namely the protection of investors against the fraud and other abuses in 
the securities markets as well as that of providing useful information to assist 
investors in making buy. sell, and hold decisions in securities. Concerning these 
purposes, the belief is that" ... a disclosure law would provide the best protection 
for investors. In other words. if the investor had available to him all the material 
facts concerning a security. he would then be able to make an informed judgment 
whether or not to buy.t' '" With due respect. Anderson's work assumed that 
disclosure automatically leads to informed investment decision. To that extent. it 
left out the important issue of the target of the disclosure and their ability to make 
sense out of the disclosed information. 
Louis Loss, 17 who introduced the term "securities regulation" when he adopted 
it as the title of the first edition of his treatise on the subject," considered the 
protection of investors as an important objective of securities regulation. This is 
because a system of "private capital" is unimaginable without the instrumentality of 
securities whose "very nature makes them a ready device for preying on the 
unsophisticated and the gullible. This creates the general problems of fraud. share- 
pushing (to use a British term), and market manipulation.t'" From these, there arise 
the problems of-keeping numerous shareholders informed, giving them a "corporate 
franchise that is as effective as their political franchise" and protecting them 
..... against the selfish use of inside information by their corporate representatives or 
by persons in control of their cornpanies.v'" 
Securities statutes seek to achieve its objective of investor protection through 
the philosoph,ies of regulation and disclosure." The philosophy of regulation is a 
13 Ibid .. quoung with approval the United Kingdom Stock Exchange. The Role and Functioning of Tire STock 
Exchange. I (London: Her Majesty Stationery office, 1978). 
14 Morton and Booker. --The Paradoxical Nature of Federal Securities Regulations" 44 Den. 1..1. 479 (1967) 
'15 A.I. Anderson. "The Disclosure Process in Federal Securities Regulation: A Brief Review' 25 Hastings 
L.J 311 (1973) 
16 SEC Securities Act Release No. 5.223 (Jan. II. 1972). Xotice of Adoption of Rille 1-1-1. reprinted in [1971· 
i972] Fed. Sec. L Rep. (CCH) 78,487. 
17 L. Loss Trends in Corporate Governance and Investor Protection. The J.l.C Taylor Memorial Lectures for 
1980.33 (Lagos: Faculty of Law. University of Lagos. 1981) 
18 L. Loss Securities Regulation, I Sf ed .. (New York Boston. Little. Brown and Co .. 1951 \. 
19 Up. cit. supra f.n. 17. 
201d. at 34 
21 Id at:16 

THE BASES OF SECURITIES INFORMATION DISCLOSURE 

53 

"statutory formulation of substantive standards that must be satisfied before 
securities may be offered for sale." These standards, among other things, not only 
seek to prevent illegality and fraud, but they also seek to ensure that the privilege 
of offering securities to the public is based upon the regulator's finding that the 
proposed business plan is 'fair, just and equitable' .,,22 The philosophy of disclosure 
had its origin in the prospectus provisions of the English Companies Act of 1844. 
True to federalism, the United States has a dual system of federal and state 
securities regulation. The federal government chose the disclosure philosophy when 
it enacted Securities Act of 1933, while it preserved the states' statutes with their 
'regulatory or merit' philosophy. Loss has been of the opinion that "Congress ... did 
not take away from the citizen 'his inalienable right to make a fool of himself.' It 
simply attempted to prevent others from making a fool of him."}' Curiously, the 
Securities Act of 1933 borrowed the anti-fraud provisions of the blue sky law of 
New York and combined them with the prospectus provisions of the United 
Kingdom's Companies Act of 1929.24 Loss' work offers an excellent tool for the 
understanding of the investor protection philosophies of the Investments and 
Securities Act (ISA) of Nigeria. 
Gower. a renowned professor of company law. who spearheaded the review of 
investor protection in England. agreed with loss. He submitted that financial 
services include securities transactions through means of instruments that many do 
not adequately understand. Therefore, it is important to protect investors forrrrrhose 
who could take advantage of their ignorance. The need therefore arises for adequate 
investor protection "to prevent people being made full of.,,}5 
Odife, the chairman of the defunct Presidential Panel on the Review of the 
Nigerian Capital Market, 1996 whose report resulted in the enactment of the 
Investments and Securities Acr" shed some light on the philosophy of the emerging 
Nigerian capital market. According to him, it is to facilitate "broad-based economic 
development" for the sustenance of democracy through the adoption of "transparent 
procedures.t" Commenting on the role of the financial system and the purpose of 
capital market regulation, he submitted: 
It is essential to the above stated philosophy that the markets contribute in the most 
effective way to the functioning and the growth of tilt: economy and to the creation of 
wealth. The emerging capital market rccognises the need for all the various components of 
the financial system. the money and the capital markets inclusive. to work in tandem 
rather than at cross purposes to deliver superior economic performance. The philosophy of 
capital market regulation thus recommended is to maintain an appropriate level of 
regulation sufficient to sustain the highest staru.ards of market integrity and investor 
22 Ibid. This is what Loss describes as "the home-grown regulatory or merit philosophy of most of the blue 
sky laws of the tittv states in the United States as well a, the District of Columbia and Puerto Rico. The 
blue sk' laws are directed at promoters who "would sell building lots 111 the blue sky 111 tee sunplc" - 
Mulvey. "Blue Skv Law" 36 Can. L. T J 7 ( 1<) 161. These laws have anu-traud provisions and. among othcr 
things. condition offering of securities 011 a finding by the bureaucracy that the issuer's proposed business 
plan IS "fair. Just and equitable 
is t»,« 
241d at 37. 
25 L.c. B. Gower. Review of Investor Protection Report. Pari I. 6 (London: Her Majesty's Stationery ollicc. 
1985) 
26 No. 45 of 19<)9. now re-enacted as Cap. 124. Laws of the Federation ofNigena 20(j~ 
'27 D.O. Odife. "Philosophy and thrust ofNigerias emerging capital market". 4 a paper presented at the 19<N 
SEC Seminar on Democracy and Nigeria's Emerging Capital Market held at Sheraton Hotel from 
November 23-25. 1999. 

OLA YIWOLA O. OLADELE 
protection. without hindering die freedom and flexibility of the market to grow and 10 
rntroduce mnovanons .. 
The .. capital market also Imbues the lead regulator with rule-making power. The idea is 
that the scope of the law can be expanded to ke"~ pace with the demands of economic 
dcveloprnent.. ,. 
In addition to the above. the lead regulator, the SEC, has a duty to licence 
capital market trade associations as self-regulatory organisations (SROs) so that 
they could assist in democratically monitoring the capital market according to 
approved rules of association and conduct." 
This study has evaluated the capacity and effectiveness of the existing 
regulatory system to sustain market integrity and investor protection in Nigeria 
through information disclosure and compliance enforcement. 
I\'. SEC'l'RITIES INFORMATION DISCLOSlJRE AND INVESTOR PROTECTION 
Investors in the securities industry need to be protected because of a number of 
important reasons. Companies with public market for their shares are organisations 
in which ownership is diversified and divorced from control." In these companies. 
shareholders and investors occupy an important position because of their role in 
wealth generation, employment provision and economic development. This fact 
gives impurtance to investor protection. In accomplishing this task, our company 
law grapples with interrelated matters which company law scholars. including Kiser 
Barnes. identify as including the relationship between the shareholders and the 
company. the protection of the minority shareholders from unfairly prejudicial 
conduct;' the protection of the company and majority shareholders from frivolous, 
oppressive and time-wasting suits of the minority shareholders;" the right of the 
minority shareholder to institute a corporate derivative action'"; the establishment 
of equality of voting power of shares and the abolition of weighted shares;" the 
rules on maintenance of capital and payment of dividends;" the ultra vires rule and 
abolition of the constructive notice of registered documents rule." and, most 
importantly, the statutory rules on dealing In company securities and the protection 
of investors. including the prohibition of insider dealings." 
Importantly, unlike tangible assets like automobile, buildings and the like, 
securities are not inherently valuable. The value that the holders obtain from them 
is in their entitlement to claim from the assets and earnings of the issuer and the 
voting power that could attend such claims. Thus the nature of securities and the 
intricacies of trading in them justify the protection of the investors who are prone 
to the manipulative devices of the unscrupulous securities issuers and professionals. 
28 Id. at 8-9. 
29 Ibid. 
30 L. Loss op. cit. supra f.n. 19 at .34. 
31 Companies and Allied Matters Act. 2004. sec. 310-313. 
32 Companies and Allied Matters Act. 2004 and under the rule in Fo~s v. Harbottle (I ~43) 2 Hare 46 I. 
33 Companies and Allied Matters Act. 2004 sec. 30), 	. 
34 Companies and Allied Matters Act. 2004 sec. 116. 
35 Trevor v Whitworth (1887) 12 A.C 409 as well as Companies and Allied Matters Act. 2004 sec. 386. 
36 Companies and Allied Matters Act. 2004 sees .. 38-40 and 68. 
37 See I>:.D. Barnes. "Xigerian Corpora/ion Law and Shareholder and Investor Protection" (unpublished 
paper). 

THE BASES OF SECURITIES INFORMA TlON DISCLOSliRE 
Bernard Black38 is of the opinion that the law must protect investors because 
they pay much money to strangers for intangible rights. He adds that the issuers of 
securities have an incentive to puff or lie about the quality of their securities, and 
this problem is compounded by the fact that the investor is unable to directly verify 
the accuracy of the information that the issuers provide. This problem acquires 
more prominence with small issuers. "The smaller the issuer, the less the investor 
can rely on the issuer's prior reputation as a signal of the quality of the information 
that it provides.":" 
Black adds that the activities of small securities issuers could create for the 
investors the problem of 'adverse selection' of securities. This adverse selection 
combines with information asymmetry to drive issuers of high quality securities out 
of the market. It also drives securities prices down because the investors will 
discount the prices they are willing to offer for securities.'? Black summed up the 
impact on the market in the following words: 
In modern lingo, securities markets are a particular vivid example of a market for lemons. 
Investors don't know which issuers are truthful and which aren't. su the} discount the 
price they will offer for all securities. That makes honest I~~l,,:rs less interested III offering 
securities. but doesn't discourage the dishonest ones. Secunties that aren't worth the paper 
tl~ey're printed on are. after all. quite easy to produce. Paper. like talk is cheap." 
Paddy is of the opinion that capital market regulation must have four basis 
elements. The first is certainty of contract and property right, the second is 
disclosure by publicly quoted companies of material information that affects the 
value of their securities. The third is the protection of investors from unfair practice 
by corporate insiders and securities market professionals. The fourth is systemic 
protection against financial failure of market professionals and institutions." 
In another scholarly contribution, Bernard Black submitted that the value of the 
securities that investors hold is predicated on the quality of the information that 
they receive on the issuer's candor." One important means that legal systems ~dopt 
in protecting investors is mandatory disclosure of information by securities issuers. 
The United Kingdom's Companies Consolidation Act of I &45 was the first to 
establish the system of mandatory disclosure of information which the United 
States adopted when it enacted its Securities Act of 1933. The former Act had two 
principal objectives namely, "(I) to obviate the evils of fraudulent and fictitious 
companies and (2) to protect the public from companies which ... were faulty in 
their nature because unsound calculations and inadequate management.v'" 
The United States Congress adopted mandatory disclosure of securities 
information when it enacted the Securities Act of 1933 in response to its securities 
market crash of 1929. Senate hearings on the crash showed remarkable evidence of 
unethical and fraudulent conduct by investment bankers and corporate promoters 
38 B. S. Black. "lnformation Asymmetry. the Internet and Securities Offering' 2 Journal of Emerging and 
Small Business Law 93-94 (Summer. 1998). 
391d at 92. 
40 Ibid 
41 Ibid 
42 Paddy Roberts "Institutional Reforms in Emerging Securities Markets". a World Bank Policv Research 
Working Paper, May 1992, at p.4. 
43 Bernard Black. "The Legal and Institutional Preconditions for Strong Securities Markets" (2001) 48 
UCLA LOll" Review 781 at 782. 
44 See R.L. Knauess. "A Re-appraisal of the Role of Disclosure". 62 Michigan Law Review. 607. 611 (1%4). 

S6 

OLA YJlVOL4 O. OLWELE 

that comprised conflicts of interest, manipulation of stock prices through devices 
like market rigging and corporate insider dealings. In the period that preceded the 
crash, improved standard of living caused corresponding increase in demand for 
securities. Confronted by this phenomenon. investment bankers who were 
underwriters abandoned ethical standard of banking and encouraged corporations to 
offer highly spurious, speculative and fraudulent securities to uninformed 
investors." 
The need for a federal regulation that would rid the secunues market of the 
abuses that precipitated the crash of 1929, restore investors' confidence in the 
market and protect the investors became central to the American presidential 
election campaign of 1932. Once President Franklin D. Roosevelt emerged the 
winner of the election and was sworn in, he made a speech to Congress on March 
29, 1933 which summarised the philosophical basis of the United States securities 
regulation as follows: 
There is an .. obligation upon us to insist Ihat every issue of new securities to be sold in 
Interstate commerce shall be accompanied by full puhlicity and information. and that 110 
essenually important clement attending the issue shall he concealed form the buving 
puhlic." 
The philosophical thrust of the mandatory disclosure initiative could be 
appreciated in the light of the opinion of scholars such as Adolf A. Berle and 
Gardner C. Means." Scholars of this persuasion argued persuasively that neither 
the members of the financial sector nor the directors of public companies were 
subject to liability, concerning the investing public, for breach of their fiduciary 
duties. This was significant because at the time the United States Congress passed 
the 1933 Act. American securities markets were self-regulatory, and under that 
system, the investing public had no legal remedy against corporate managers for 
breach of their fiduciary duties. 
Nigeria has not experienced 'a market crash with such a damaging impact on 
investors as occurred in the' United States. The Federal Government of Nigeria, as a 
matter of deliberate policy choice, decided to have an officially regulated securities 
market. Just as the United States, it responds to the need for investor protection 
through poTicies and regulations. It has statutes and regulations as well as an 
intricate set of public and private institutions, discussed above, meant to reasonably 
assure investors tha the issued securities are authentic and worth investing in. Our 
securities statute and the regulations made pursuant thereto require extensive 
disclosure with severe sanctions for misleading and false information. They are 
enforced through securities regulators with professionally competent staff. and 
adequate budget to fight securities fraud. This effort is supplemented by accounting 
rules that seeks to reduce the propensity of securities issuers to fudge their financial 
reports. It also is complemented by the input of 'reputational intermediaries' such 
as investment bankers and securities lawyers. The investment bankers investigate 
the issuers of the securities that they underwrite. This is because their reputation 
45 See 1.M. Landis. 'Tile Legislative History of the Securities Act of 1933"". 28 George Washington Law 
Review 29 (1959): and A.G. Anderson. "Disclosure Process in Federal Securities Regulation: A Brief 
Review", 25 Hastings L.J. 311. 316 (1973). 
46 H.R. Rep. No. 73-85. at 1-2 (1933). See also .I.M. Landis. Ibid. 
-t7 A.A. Berle. and G.c. Means. The Modern Corporation and Private Property. Harcourt. Brace & World 
rev. cd. (Ncwyork. Harcout. Brace and World. 1968). Se; also L.D. Brandeis. Cther People's vtonev and 
how Bankers Use II. (1914). 

THE BASES OF SECURITIES INFORMATION DISCLOSURE 

57 

depends on not selling fraudulent or overpriced securities to investors. Solicitors to 
securities issues have the duty to ensure that the issuers' offering documents 
comply with the statutory disclosure requirements and to counsel their clients 
against making overly optimistic statements that could be false and misleading. The 
purpose is to maintain the integrity and transparency of the securities market and 
reduce the problem of adverse selection of securities by attracting honest issuers 
and driving out, or at least reducing the dishonest ones." 
The most recent and comprehensive treatise and on securities regulation in 
Nigeria is Abugu's Company Securities: Law and Praclice.49 The work dealt with 
the legal and institutional framework for the regulation of securities transactions in 
Nigeria. issue. sale and tr .nsfer of shares including private placement and public 
offer of securities. It also discussed some of the arguments for and against the 
Efficient Capital Market Theory (ECMT). It argued for disclosure as a means of 
protecting investors. but because it traversed gener.. ". transactional and regulatory 
issues pertaining to the Nigerian securities market. it did not plum the depth of 
securities information disclosure as the present has. In its commendable attempt to 
present an overview of the Nigerian securities regulation, it has neither provided an 
in-depth theoretical framework for securities information disclosure nor a 
contextual evaluation of the Nigerian system. 
Speaking to the theme of this work, Abugu submitted that the existence of a 
vibrant securities market depends on regulation. "This provides an incentive for 
countries to gravitate towards securities laws that appear most inclined to attract 
investment. .. In this context, the capital and financial markets stand on a tripod of 
regulations. The first is the corporate legal framework where the law focuses on 
companies and their securities .. .',50 He added that securities markets invariably 
follow similar pattern which result in similar regulatory systems. The regulatory 
systems "typically have mandatory disclosure requirements on the distribution of 
securities to the public. ,They typically have ongoing mandatory disclosure 
requirements to provide information in support of the post-issue trading of 
securities. Insider trading and market manipulation techniques are usually 
prohibited in some manner."?' They also cover the market and duties for corporate 
control, record keeping by market professionals and their standard of competence. 
duties to clients and minimum capital for operational purposes." 
While Abugu's work has highlighted the legal and institutional frameworks for 
information disclosure in securities transactions in Nigeria, it has left their 
appraisal, in the light of the known theoretical underpinnings, for further scholarly 
inquiry. It is that inquiry that this study has undertaken so as to enhance the 
understanding of this area of the law. 
v. i\lANDATORY DISCLOSllRE THROUGH ItEGISTRATIOl'\ Al'\D Al)TIIORISATIO~ 
PROCEDURES 
The ISA and the SEe Rules and Regulations have extensive provisions on 
registration with and authorization by the SEC as means of regulating securities 
market institutions, market operators and the issue of securities. These form the 
481d. at 93. 
49 E.O. Joseph Abugu. Company Securities: Law and Pracuce i Lagus: University of Lagos Press. 2005). 
501d. at 55-56. 
51 Id. at 62. 
521d. 

58 

OLA YIWOLA O. OLADELE 

basis of subjecting secunues issuers and intermediaries acting for them on the 
market to disclosure and reporting obligations for the protection of investors. To 
the extent that would guide this scholarly inquiry, some attention has been paid to 
the to SEC registration of the market institutions including the Securities and 
Commodities Exchanges, the Central Securities Clearing System and the National 
Association of Securities Dealers. Attention is, at this juncture, turned to the 
registration and authorization of the market operators and securities. 
V. I. Registration and disclosure obligations of securities market operators 
Registration is the means that the SEC adopts to authorize the securities market 
operators to participate in the market. Through this process. the SEC is able to 
regulate the securities market for the protection of investors from fraudulent 
dealings and ensure fair. transparent and equitable market in securities. At the point 
of registration. the SEe has the power to limit operations on the market to credible 
operators and sponsored persons. All sponsored individuals are required to undergo 
police clearance in a manner specified by the SEe. They shall also appear before 
the SEe committee on registration of capital market operators and institutions for 
interview" These requirements are not static, but they may be reviewed by the SEC 
from time to time. 
Corporate operators must, among other things, attach their latest audited 
accounts or statements of the affairs of the company (if it has been in operation for 
less than one year) to their registration applications. In addition, they must post and 
maintain fidelity bonds representing 20 per cent of their paid lip capital against 
possible fraud by their staff members. They must also undertake by oath to keep 
proper books and accounts. Their records must contain all their affairs and the 
transactions they have done." The SEC prescribes and reviews the nature, form and 
contents of the records that they must keep. In addition, the market operators must 
file quarterly returns with the SEe.55 To ensure objectivity in their record keeping 
and reporting, the SEC has designed various forms that require statement and 
disclosure of diverse line items. These forms are in Schedule III of the SEe Rules 
and Regulations. 
V.2 Registration and disclosure obligations in securities issuance 
The Investments and Securities Act (ISA) of Nigeria obtains mandatory 
disclosure from securities issuers by the same method that the Securities Act. 1933 
of the United States adopts. They both require an issuer to file with the SEe a 
registration statement that consists of two parts. Registration of offers and sales of 
securities is a primary means of achieving two important objectives of securities 
regulation. The first is that of providing investors and the public with material 
information concerning publicly offered securities. This is to enable investors to 
appraise the soundness of the securities, and exercise an informed investment 
decision. The second is to prevent fraudulent practices such as misrepresentation 
and deceit in sale of securities." 
53 SEC Rules and Regulations. nile 15(3) and (4). 
54 SEe Rules and Regulation. rule 168 ibid This Rule prescribes a fine of N I 000 for every day during which 
market operator has contravened the Rule. 
55 See generally SEC Rules and Regulations Rules 3/-38 ibid 
56 Securities and Exchange Commission. The work of the SEe 7-10 (1997). 

THE BASES OF SECURITIES INFORMATION DISCLOSURE 

59 

The registration statement, which is in two parts. is filed with the SEe for 
scrutiny and record purposes. The first part is a prospectus which ultimately is sent 
in an abridged form to prospective investors. The second part consists of detailed 
information about the securities being offered for subscription and exhibits which 
are not sent to the investors but are available in the SEe files for inspection by the 
public. 
Although the registration process requires that the facts presented in the 
prospectus and registration documents be accurate. it does not guarantee such 
accuracy. However, the ISA and other securities statutes prohibit the making of 
false and misleading statements in securities disclosures under the pain of 
imprisonment. fine or both. Investors who are able to prove that they have been 
induced to buy or sell securities inchoate or inaccurate disclosure of material 
statements in the registration statement or prospectus have remedies under the law. 
Important as the registration requirement is. it also does not vouch that the 
issuer is profitable. well managed and not risky. The issuer may not represent that 
the SEe has approved the issue on its merit. Summing up the import of securities 
registration some learned scholars in corporation law and securities regulation 
submitted: 
The onlv standard which must be met when registcrmg securities IS adequate and accurate 
disclosure of required material facts concerning the company and the sccuriues it proposes 
1\1 s~1I The fairness of the terms. the issuing companys prospects for successful 
opCra1JOIL ~1J1d other factors affecting the merits of investing in the securities (whether 
price. promoters or underwriters' profits, or otherwise) have no bearing on the question of 
whether or not securities may be registered 57 
VI. T!-IEORIES ON T!-IE PURPOSE, TARGET AJ\f) EFFECT Of SECURITIES 
INfORMATION OISCLOSl!RE 
Scholars have expressed some theories on the purpose. target and effect of 
information disclosure as a means of protecting investors. Barnes" is of the opinion 
that disclosure is a price that companies must pay for the privilege of incorporation. 
In his well considered opinion. 
lhc ohligation on a company to disclose material information that will protect 
shareholders/investors and others dealing with the corporation is seen as a justifiable 
consideration for the privilege of incorporation. Disclosure requirements not only 
lughlight the role of government In the administrauon of company law 111 a manner that 
protects the investing public. it also illustrates that the system of tiling and searching has 
become fundamental to the practical operation of company law and to the theory on which 
it is based. For the disclosure rules are intended III protect all investors. notwithstanding 
their C(\)n0111IC strength or whether thcv arc majority or minority shareholders." 
While Barnes instructively gave a theoretical pedestal for information 
disclosure in securities offering. he did not appraise the statutory provisions and 
subsidiary legislation thereon. More importantly, the law on the subject has 
changed substantially after he wrote his essay. 
VI.I Forms. purpose and effect of disclosure 
Proponents of disclosure are of two schools namely, the mandatory disclosure 
and voluntary disclosure groups. Mandatory disclosure rules compel securities 
57 L.D. Solomon . .l.D. Bauman, et a/ .. Corporations Law and Policv Materials and Problems. 4'" ed .. 21 (St 
Paul. rvtlNN. 1(98) 
58 o». cit. supra f.n. 37 
59 lbid. 

60 

OLA YIWOL-t O. OLAD£L£ 

Issuers to continually disclose specific information for a meaningful evaluation of 
their securities before they are issued and when they are traded in the market. The 
justification offered for this mode is that without compulsion, some securities 
issuers would misrepresent information or refuse to make disclosure. The major 
proponents of mandatory disclosure include Louis Loss and Joel Seligrnan.?" 
Franco." as well as Abugu61 

Franco submits that theoretically, disclosure regulation alms at 
securities issuers disclose "socially efficient levels of 
information." That important purpose arises from the problem of 
asymmetry that he describes as follows: 

ensuring that 
firm-specific 
informational 

AOS-:IKC regulation. issuers control nOI onl} access to. bUI the accuracy of information and 
timing or: firm-specific disclosure. Investor, seldom will be able to ascertain 
coruemporaneousty whether issuer-disscrnmatcd mformation is accurate. complete. or 
current. Even if Investors could Independently venfy inforrnauon In some cases. lhc~ 
would have no guarantee of continuing access to firm-specific information or conunuing 
capabrlity to verify 11. and such a process might he. costly. ThIS. 10 a nutshell. I' the 
problem of mformanonal asymmetry r,' 
He classifies such disclosures into two. The first category consists of 'antifraud 
prohibitions' the purpose of which is to eliminate deceptive disclosure. This 
category "[enhances] the integrity of disclosure by prohibiting materially false and 
misleading representations. [It does] nOI impose affirmative content-based 
disclosure obligations. but rather mandate accuracy.T" The second category 
comprises 'mandatory disclosure requirements' meant to increase the quantum of 
information available to investors and 10 enhance the truthfulness of the 
information." They arise when a company offers its securities to the public. and 
could also be of periodically continuing nature when the securities are traded on a 
securities exchange or are widely held. The provisions of statutes that mandate 
these disclosures " ... compel disclosure of information that would not necessarily 
be voluntarily [made] by an issuer. Such information-forcing requirements promote 
greater candor by establishing a content floor for an issuer's disclosure.t''" 
Franco examined mandatory disclosure of securities information from the 
perspective of eeonornic efficiency. His central thesis is that a number of factors 
concerning "the production and distribution of firm-specific information cause the 
private profit-maximizing calculus of issuers to diverge from firm-specific 
disclosure policies that would be socially optimizing."?' He evaluated three core 
economic arguments in favour of mandatory disclosure namely. informational 
asymmetry between securities issuers' and investors, positive. informational 
60 .J.Seligman. "The Historical Need for a Mandatory Disclosure Svstcrn" (1<J83) 1. Clip. L.. I: 1.. Loss. and 
.I. Seligman. Securities Regulation. (Boston & Toronto' Little. Brown & Co.) 198'1. See also 1. Bauman. 
"Loss ant! Seligman on Securities Regulation: An Essav lor Don Schw artz" 78 Georgetown 1. . .1, 1753 
11990). 
/> I .I .. \. Franco, "Why Antifraud Prohibitions arc not lnough: The Significance of Opportunism. Candor and 
Sranallinu in the Economic Case for Mandatorv Sccuriucs Disclosure ... (2002) Columbia Business Law 
	Re~'lelr 2~3 at23/> -237. 	. 	• 
62.1. Abugu.lompal1)' Securities: Law and Practice. (Lagos: IlnivcrsilY of l.agos Press. 2(0) 
63 ld. at 244-245. 
64 Mat 232. 
65 Id at n 1-232. 
06 ld. (//233 
67 lei. at 237-238. 

THE BASES OF SECURITIES INFORMA TJON DISCLOSURE 

61 

externalities arising from the issuer's disclosure and the ability of investors to 
gather information excessively thereby incurring excessive costs. Of these 
arguments. he submitted that the informational asymmetry justification is the most 
compelling and superior to the extent that it assists policymakers in designing 
disclosure paradigm and achieving its purpose.i" "The principal advantage of the 
informational asymmetry justification is that it strengthens the link between the 
theoretical justification for mandatory disclosure and its implications in designing 
	mandatory disclosure requirements."?" 	- 
Franco argued. and persuasively too. that rather than through antifraud 
provisions alone. an efficacious investor protection is better achieved through a 
combination of antifraud provisions and mandatory disclosure requirements as 
follows: 
The mandatory disclosure theory] addresses a broader range of candor Issues that stem 
from asymmetric relationship between issuers and investors than antifraud prohibitions. 
Whereas antifraud prohibitions arc designed tl' prevent affirmatively false disclosure. 
mandatory disclosure combats evasiveness and problem of selectivity by issuers in 
disclosure. Why aren't antifraud prohibitions enough? Only through the combination of 
antifraud prohibitions and mandatory' disclosure requirements can candid issuers 
efficiently and effectively signal candor. as \\cll as accuracy to securities markets." 
Abugu argued that a company's past performance and future prospe.ct should 
determine the value of its securities. He added that there. however, is the problem 
of getting the information to the investors to enable them make well thought 
through investment and to decide on their existing investment." He added that 
ready availability of the information that affects the value of securities makes a 
securities market efficient. "The ultimate aim of regulation therefore. is to prevent 
or minimize abuses. which miuht distort information and therefore the value of 
securities and thereby mar inves~or's confidence and the market integrity.',7c 
From the preceding and following literature. disclosure has come to be a 
central philosophy of securities regulation. A Nigerian company law scholar. 
Akanki, submitted that publicity is an antidote to fraud." and "its philosophy 
transcends the entire gamut of Nigerian statutory law on companies.t'{' However. 
there is an ongoing debate on whether disclosure ought to be mandatory or 
voluntary. 
A very significant challenge to the system of mandatory disclosure is the 
economists' "Efficient Capital Market Theory (ECMT)"' that gained prominence 
from the theoretical formulations of Eugene Fama in the I 960s. 74 Though the 
literature on this theory is vast, the core of-the ECMT is that all active securities 
markets are "efficient.,,7; That is. all publicly available inforrnation is swiftly 
681d. 
69 lei. a1.242. 
70ld al355 
71 .I. Abugu, up. cit. supraY.t: 59-60. 
721d at 60. 
73 r.o. Akanki, "The History of Company Law (1977- 7S) II .\·igel III Journal oj ContemporaryLaw 105 
74 See generally E. Fama. "The Behaviour of Stock Market Prices" (1965) J!; J Bus. 34: L Fama, & Blume. 
"Filter Rules and Stock Market Trading" (1966) 39 J. /JIIS. 226: Mandclbroi. B. "Forecasts of Future 
Pnces, t Inbiascd Markets. and 'Martingdale Models" 1l},,6) 39 J. Bus. 242. 
75 Failla describes an efficient market as a "market where there are large number "I' rational pro lit 
maxunizcrs acuvcly compenng with each other trying to predict future market \ alucs of mdividual 
secunues. and here important current information IS almost fred) available to all parncrpants. .. In that 

62 

OLA I'IWOLA O. OLAD£L£ 

"impounded" in the prices of securities. Thus. the best position for most investors 
is that the market prices of securities reflect all available information. The market 
is fair. and the best evidence of securities' value is the market price. Therefore. it is 
useless to attempt to make more than normal profit in securities transactions or to 
trade to beat the market. 76 
Arising from the ECMT. the proponents added that to reduce the risks of 
particular securities investors have to diversify their portfolio;" Kripke summed lip 
the effect of the ECMT and the diversification theory on mandatory disclosure in 
the following words: 
On their face. these theories leave little or no room for the present disclosure system. 
Admiuedly. not all theorists or participants in the investment world accept them. but 
certain conclusions seem inescapable Drversificauon leaves the small investor with so 
lillie investment in an) particular company tha: It is scarcely worth his while to wade 
through the enormously complicated disclosures. financial and otherwise. in the annual 
report and prospectus disclosure system. or III the proxy system." 
There is a substantial opposition to the ECMT in the available studies." A 
group of financial economists. known as the noise theorists. are of the conviction 
that 
Narve speculative traders. activated by fads. fashions. or irrational psychological 
predispositions toward things like chasing trends. add cumulative noise to share prices so 
that for significant periods of time shan: prices end up deviating from their fundamental 
value - the efficient market price that would prevail if the market consisted enurcly of 
rational investors who possessed all available intormauon." 
Considerable work provides support for the noise theorists' posmon. Robert 
Schiller, in his pioneering study, examined stock prices and dividends over a period 
of 100 years and found that volatility of price "appear]s] to be far too high ... to be 
attributed to new information about future real dividends if uncertainty about future 
dividends is measured by the sample standard deviations of real dividends around 
their long-run exponential growth path." 
F ox is of the opin ion that noise theory predicts a worse consequence than the 
ECMT does for the uninformed and speculative investors. They tend to buy when 
stock prices are too-high and sell when prices are too low. thereby providing profits 
market competiuon among the many intelligent participants lead to a situation where. at an) point in tune. 
the actual prices of individual securities already reflect the effects of information based both on the events 
that have already occurred and on events. which. as of now. the market expects to take place in the future. 
In other words. in an etTtcient market. at any point in time. the actual price of a security will be a good 
estimate of its intrinsic value" - E. Fama, "Random Walks in Stock Prices" (1965) 9-10 Fill. Analyst J. 22. 
For an evaluation of the ECMT. see generally J. Abugu. op. cit. supra I n. 69 at 213-231. 
76 H. Kripkc, "Fitly Years of Securities Regulation in Search of a Purpose" (198~-1985) Corp Prac CU//1//1 
5~5 at 563. For an introduction to the EMeT. see Kripke. H. "A Search for a Meaningful Disclosure 
Pol icv' 31 Bus. Law 293 ( 1973) 
77 Kripke. Id at 56~ 
7R Ibid. 
79.1. Abugu. Id. at 221-231 give" a summary of some of the critique. 
XO J.B. Fox. "Securities Disclosure in a Globalizing Market: Who Should Regulate Whom" 95 slich. L. ReI'. 
2498 at 2536 (1997) 
X I J. R. Shiller. "Do Stock Prices Move too much to be Justified by Subsequent Changes in Dividends?' 71 
.'1111. Econ. Rev. 421. 433-34 (1981 ). See also F. Black. "Noise" 41 J. Fill. 529 (1986): Bradford De Long. 
ct :.11 .. "YOISo! Trader Risk in Financial Markets". 98 J. Pol. Eco. 703 (1990): and Donald C. l.angevoort. 
"Theories. Assumptions. and Securities Regulation" 140 C. Pa. l.. R",' 851 (1992) for an analysis of 
legal implications of the noise theory. 

THE 8.4SES OFSEClIRITlES INFORMATION DISCLOSURE 

63 

for the informed investors. He concluded that it is "questionable whether the 
concept of fairness should be expanded to condemn this wealth transfer ... given the 
availability to uninformed investors of a strategy - a randomly chosen diversified 
portfolio - that permits participation in the benefits of equity investing without 
risking such losses.··H2 
The quest for voluntary disclosure has been gaining momentum in recent years. 
The proponents of voluntary disclosure have challenged the need and value of 
requiring mandatory disclosure from issuers of securities. They argued that 
securities markets provide adequate incentives for issuers of securities to 
voluntarily disclose "socially optimal levels firm specific" information." The 
issuer's management, they argued, has motivations to establish a reputation with 
securities markets of truthfulness and integrity. They added that mandatory 
disclosure is expensive and burdensome as it offers little useful information to 
investors that economic self-interest of the issuers would not have persuaded them 
to disclose." Scholars of this persuasion include Easterbrook. Fischel,8s Stigler." 
Bension. x- Ro~s~x and Mahoney 8') 
In a 2005 research, Mahoney?" studied mandatory disclosure in documents filed 
in the United States. These filings were III response to the Securities Act of 1933 
which mandates disclosure in public offering of securities. and the Securities 
Exchange Act of 1934 which requires periodic disclosures by all companies whose 
securities are listed on a stock exchange. Based on the threshold that market 
makers'" increase their bid-ask spread in apprehension of loss when they trade with 
82 Mcrrit B. Fox. "Securities Disclosure in a Globalizmg Market: Who should Regulate Whom" 95 .I/Jch. L. 
Rev 2-1% at 2537. The Challengers of the Noise Theory lncludc F.E. Fama. "Efficient Capital Market: II" 
.t6.1. Fill. 1575 (1991): T.A. Marsh. & R.C. Merton. "Dividend Viabiliiv and Variance Bounds Tests for 
the Rationality of Stock Market Prices" 76.'/11I. Econ. Rev. -183 (1986). 
83 J.A. Franco. op. cit. supra f. {l. 61 at 230 
X-1 A.R. Palmiter. op. CII. supra rn. 4 at 25. 
85 F.H. Easterbrook. and D.R. Fischel. "Mandatorv disclosure and the protecnon of investors". op. cit. supra 
f.n 10 at 682-68.:1 where the learned authors submitted that the principle of voluntarv disclosure is a 
soluuon to property right minformation applied III the primary and secondaly markets. This is because 
uivcstors want to sell their stock in the trading market ut the highest price possible. and this depends "on a 
Ilow of believable intormat'en.' Otherwise potential buyers reduce the: bid prices. assuming the worst). 
The firm is best able to distribute its own information, and a firm that wants the highest price attainable 
for its stock must contmually disclose information without compulsion. 
86 G.J. Stigler. "Pllblic Regulation of Securities Markets" 37.1. Bus. 117. 1:!2-24 (1964). Stigler studied two 
group, ofnew share Issues. one from I 923-:!& (before mandatory disclosure) and the second from 19-19-55 
(utter the passage of the U.S. Securities Act rnandaung disclosure). H.: found that the latter did not do 
better than the former group. l lc suggested that mandatory disclosure has not made availahle any new 
informution that eliminated any unfairness. 
87 G. lI.;nstnn. "The Value of ~C s Accounting Disclosure Requirements' -14 .·/Cel. 1<<,>". 515-532 ( 19691. 
88 Paul (j Mahoncv. "Mandatpry disclosure a, a solution to agency problem," 6:! U. Chi. L. R':I 1047 
i I <)I}5). Thi-, article argued that mandatory disclosure requirements lien: purposed to addrc- 1110r.: 
narrow Iy defined agency problems associated II nh offering of securuics and not to promote 1I11<')£InaIIOnal 
clficicncy "I' securuics markets. 
89 Paul G. Maiioncy, "Mandatory Disclosure as a Solution to Agency Problems" 6:! C'. Chi. L. ReI'. lO·n 
(1995) This article argued that mandatory disclosure requirements were purposed to address more 
narrowly defined agency problems associated with offering of securities and not to promote informational 
efficiency of securities markets. 
90 Paul Ci. Mahoney. "Mandatory versus Contractual Disclosure in Securities Markers: Evidence from the: 
I 930s" hup . .'I\\"\\"w.law.virginia.edu/homdOO:!/pdti\lorkshops:0506/mahnnc} vrsued on 1111/06 
91 A sccuruics market dealer makes a market when he maintams "firm hid and 011l:r prices III a given security 
h~ stamling ready to buy or scll lround lots) at puIJlicly quoted prices. The dealer is called a market maker 
in the over-the-counter market and a SPECIALIST on the exchanges. ;\ dealer who makes a market over a 

.' 

OLA. YIWOLA O. OLADELE 
informed insiders. Mahoney found out that the securities investigated did not show 
marked reduction in the bid-ask spread after the mandatory disclosure regime. He 
therefore concluded that the additional mandatory disc losure in the tiled documents 
did not constitute informat ion to investors that reduced ibformallonal asymmetry. 
This i~ because changes in bid-ask spread and liquidity should occur and conunue 
for some time after an event that reduces informational asymmetry." 
Bensron'" submitted that mandator} disclosure gains little value for investors 
He investigated whether or not com pan ies stock prices improved after they wert' 
required to make mandatory disclosure of sales data. He compared the annual stock 
price returns of companies that voluntarily disclosed information with the returns of 
companies that disclosed the information after they were compelled to do so. He 
found that the latter did not perform better than the formet." However. Daines and 
Jones'" opined that Benstons study has many limitations, "It is not clear that the 
best measure 01' the l Securities Exchange] Act" s effect i~ its net impact on share 
price. Moreover. Bcnston examined only New York Stock Exchange firms. large 
firms about which there was already substantial available, information, while it i'; 
possible that the Act had different effects on smaller firrns.'ltl They added that the 
Securities Exchange Act might have produced new mandated information the cost 
of which offset the benefit with no net increase in stock price." Summing up their 
criticism of Bcnstons findings. Daines and Jones submitted that 
Stuc], price return and volatility arc .. incomplete measures of thc+Acis effect and mISs a 
prlll1;1r, goal "f the lcgrsluuon The ACI', primarv goal was not 1(1 produce new 
Inlilrlllalion.· b,lI rather III force firms 10 publiclv share information previously held oill, b~ 
insidcr s. and share price effects arc not the best measure of intormauon dispersal. If 
informed managers. customers or suppliers traded (In mtormauon prior to the Act. the 
uiturmution would alrcadv he impounded in the linn', -tock pnce even if IHII w idclv 
known. Suhscqucn! revelation otthis informutiou under mand.uorv disclosure rules would 
have little effect on a linn' s '111ck puce \ olaulitv. "\"~II if Iho: rulc-, made public 
uuorm.uion ihar \\as prc\"ll\lI·d~ pnvaic." 
Daines and Jones studied the effect ofmandaiory disclosure and the supporting 
anti-fraud provisions of the United States Securities Exchange Act on informational 
asymmetry. They argued from the premise that prior to the Act. disclosure was purely 
voluntary. but from the enactment of the Act. all the firms whose securities are publicly 
traded on any stock exchange are required to make rnandatorypdisclosures. They sought 
to answer two questions: (I) have the Act's mandatory disclosures given investors 
meaningful information? (2) could there he found any information externalities that 
would warrant mandatory disclosure? 
To answer the questions above. they examined changes in bid-ask spread over a 
period after the effective date or the Act. "Bid-ask spread arc common proxy for 
long pcnod is saul to mauuam a marker _ .• 1. Downes. and .11: (jn,\lilllall. I~J,.) Barron S Dtcnonorv "I 
Finance and Investment, 341 (Hauppauge. NY' Harron s 1·:Jll""lillnal Series. lnc.). 
()2 Mahoncv, "I'. CII. supra t.n. ()Ii al 236. 
'>3 Of'. cu. supra t.n. 87 S<:~ abll Iknsl','" liellr~~ .I. "Rcquucd Di,.lll,urc and the Stock Market: .III 
l.valuution ofthe Scc.iriuc E~dwng~ .vct of 1<.13-1"". h.l.II"'t'rh<l1l Fe"IiOI/IIC Review 132-13:' (1'1731 
(It tbut. 
ll.' R. i):Ullc', "lIrJ C VI. Jones. "Mandatory Disclosure .. \S,ulIllclri, Inlor.nation and Liquidity the lrnpact ,\1" 
thl' 1').;'\'- hIlIY"\\'\\ w.l:lw.nonhw':slcnu:du/colloqulumila\\,':c(l!1(lllllcs. dames visited Oil ~2: 12,-05. 
'Il, 1.1 ;11 ., 
971hid 
9~ lru]. 

THE BASES OF SECURITIES INFORMATION DISCLOSURE 

65 

information asymmetries because they reflect the risk that market makers will lose 
money when trading against informed parties. Idea is that because informed parties 
only buy (sell) when the stock IS undertoverj-priced. specialists face an adverse 
selection problem."?" Market makers have to widen their spread as informational 
asymmetries increase against losses to the informed parties so as to recoup their losses 
by wide profit margin as they trade with uninformed parties. Daines and Jones expected 
the bid-ask spreads to reduce if the 1934 Act reduced informational asymmetries. They 
found little evidence that the Act produced new information or improved liquidity. II\(, 
They found that issuers who voluntarily disclosed information started out with wider 
spreads than those who compulsorily disclosed information. However. the spreads of 
the former narrowed down remarkably to nearly match those of the latter. This 
contradicted what they should have found if increased disclosure reduced information 
asymmetry.'?' They however did not rule out the possibility that the mandatory 
disclosure requirements coupled with antifraud and civil liability provisions "improved 
the information environment for all firms .. ·101 
V 1.2. Targets of disclosure 
Over the years, there has been much debate on whom the intended audiences of 
securities disclosure are - the layman or institutional investors'} Of equal 
importance is what an investor needs to understand to make an informed investment 
decision. The need therefore arises tor the prospectus and annual reports of 
companies to be written in intelligible language. In the United States the SEe 
maintains that disclosure must address all categories of investors from the layman 
to the professional investment analyst. The most pragmatic step taken in that 
direction was its adoption of Plain English disclosure rilles on January 22. 1998. JO.' 
While the SEC has since the 1970's been insisting on brevity and simplicity of 
the prospectus so that it could benefit laypersons.Y'schotars insist that laymen do 
not directly benefit from securities disclosures because their complexity make them 
understandable by professionals only. 11I5 Homer Kripke. an emeritus professor or 
law. studied the response of the American public to securities disclosures in [he 
period between 1933 and 1970. He came to the conclusion that thl; public did not 
make securities decisions based on the SEC prospectus disclosure requiremenrs.''" 
He challenged the informational function of the United States securities regulation 
as creating "the myth of the informed layman."!" Employing' fi ltration theory'. he 
submitted that the layperson is able to benefit from mandated disclosure "after a 
process of filtration through professionals. directly in the form of investment advice 
'1'1 td. at 3. 
100Id at 3-4 
101 IJ. atd2. 
102 It!. al 21. 
103 See generally Plain i.nghsh disclosure. Securities ,\cl Release No. 33-7-1<)7. 63 Fed Reg (J37() (I<NNI 
Plain [:nglish arose from an Anglo-American legal tradition that legal writing and dratling be made simple 
and easier 10 understand. It also emphasises "accuracy. brevity and Simplicity" freed of "tautologies. 
redundancies and circumlocutions ... unintelligible to those whom it concerns 1110S1 - T. W .. Tay lor. "Plain 
english lor Arm)" l.awycrs" 118 .lIil. L. Rev. 117. 2n (quoting Thomas Jefferson). 
10-1 Levenson. "Appropriate Disclosure" Rev. SEe. Reg. 961 (March -I. 1971). 1 he: author was then the 
Director orthe American SEes Division of Corpora lion linancc. 
105 See generallv Advisory Comrmucc to the Sccunues and Exchange Comnussion. 95 ru CON(j .. I'; 
'iESS. Report 01/ corporate disclosure. chs II to VI (Co'11m Print 1(77): W. Douglas &. B.III:s. 'The 
Federal Securities Act of 1<)33" -13 Yale LJ. 171 (19~3). Kripke. Homer. 'Th" SEe. the Accountants. 
~;nmc M~ th-, and Some Realities' 45 Y U·. I .. Ir'L 1151. al II (,-1 " 1175 ( 1(70) 
106 Horner Kripke tbul. 
107 Homer Knpkc "The II •. lyth of the Informed Layman" 2~ Bus. Lawver 631 (Iv73). 

66 

OLA YIWOLA O. OLAD£L£ 

or management, and indirectly through their effect on the market."!" This line of 
thought established that the value of widely traded securities is best estimated as 
the market price determined through the interplay of sellers and buyers.'?" 
Firtel"O argued that the general public has difficulty understanding the law 
(disclosures) because they have no understanding of legal concepts. "Simple 
language does not mean simple concepts ... , the average investor. as foreshadowed 
by the 'myth of the informed layman, still will not be able to understand 
disclosure." Therefore, he added that the best the issuer could do is to write 
disclosure documents in plain English for the professional market analyst to assist 
the investor to make an informed investment decision.'!' 
The "myth" that an average investor could understand and effectively use 
disclosures to make "an intelligent investment decision 111 has been refuted on three 
grounds. First, the average investor lacks the ability to understand complex 
financial information supplied by a typical issuer of securities. Only professionals 
could make an effective use of it. A typical prospectus "does not make light 
reading.": L1 Second, the complexity of securities transactions renders impossible 
the telling of the "whole truth" to an average investor in an intelligible way. II~ A 
simplification of disclosure for the benefit of the layman often leaves out the 
information that is valuable to securities professionals. The prospectus then 
becomes "a routine; meaningless document which does not serve its purpose."!" 
	• 	VII. CONCLlISIOl\ 
Much of the theories so far reviewed rightly submitted that mandatory information 
disclosure is germane to the protection of investors. The actualization of the theories 
has been a matter for each securities market and the legal system that has established it. 
This article agrees that disclosure is better mandatory than permissive. The positioning 
of emerging securities markets in the global scheme of securities transactions depends 
importantly on how much the regulators of such markets take cognizance of the 
theoretical foundation of securities regulation and information disclosure in enacting 
and updating the applicable statutes. The ultimate purpose must be not only for 
mobilisation of capital and maintenance of a fair and orderly market. but for investor 
protection and to give value for the money invested. 
Nigeria, a prominent emerging market in Africa, adopts a system of mandatory 
information disclosure in securities transactions. In so doing, it acknowledges the 
importance of protecting investors who cannot protect themselves from information 
concealment and market manipulative devices of securities issuers and market 
professionals who act as intermediaries. The protective system is reinforced by an 
institutional framework of regulators that must be proactive in monitoring 
information disclosure. The SEe leads the way that self-regulators of the market 
must follow. 
108 Homer Krinke "Fifty Years of Securities Regulation in Search of a Purpose" 1984 -1985 Corp Prac 
COI1lI11 547 at 561 . 
109 SEC Securities Act Release No. 6176 (January 15. 1980) reprinted ill [1979-1980 Transfer Binder] Fed. 
Sec. L Rep. (CCH). 
110 K.B. Firtcl. "Plain English: a Reappraisal of the Intended Audience of Disclosure under the Securities 
.-\~I nf 1933"" 73 'I. Cal. Law Re\·. 851 (January/March 19<)9) 
III lbid. 
112 Homer. Kripke "The SEe. the Accountants. Some Myths and Some Realities" 46.\". U·. l.. ReI'. 1151 at 
116-1. 
I U Ibul. 
11-1 Douglas & Bales. op. cit. supra f.n 105 above at p 171. 
115 Kripkc. op. cit. supra t.n. 107 at 631 and 633.