Materiality - SEC Disclosure Standard

Materiality is the U.S. federal securities law standard that governs what public companies must disclose. A fact is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. The standard was established by the U.S. Supreme Court in TSC Industries v. Northway (1976) and refined in Basic v. Levinson (1988), and it is the trigger for SEC Form 8-K Item 1.05 cybersecurity incident disclosure.

The Reasonable Investor Standard

Materiality is qualitative and contextual, not numeric. There is no dollar threshold that automatically triggers disclosure. The test asks whether, considering all the facts and circumstances, a reasonable investor would consider the information important when deciding whether to buy, sell, or hold the security. Both quantitative and qualitative factors are relevant.

Quantitative and Qualitative Factors

SEC Staff Accounting Bulletin No. 99 (SAB 99) identifies qualitative factors that may make a quantitatively small misstatement or event material:

• Effect on regulatory compliance
• Effect on loan covenants or contractual requirements
• Effect on management compensation
• Effect on segments or significant business operations
• Whether the event involves illegal acts
• Whether the event affects trend analysis or earnings consensus
• Effect on reasonable investor expectations

Cyber Incident Materiality

The SEC adopting release for Item 1.05 emphasized that cyber incident materiality is a qualitative, contextual judgment. Factors specific to cyber incidents include the nature and scope of the affected systems and data, operational disruption, financial impact, reputational harm, regulatory and litigation exposure, and competitive consequences. Companies must document the determination process so it can be evaluated later.