Special Circumstances and Issues

• Author: Stephanie Tsacoumis
• Profession: Recognized securities law practitioner and professor at Georgetown Law Center
• Pages: 237-286

237

Chapter5

Special Circumstances

and Issues

Forward- Looking Statements and Projections

“Forward- looking information occupies a vital role in the United

States securities markets. Investors typically consider management’s

forward- looking information important and useful in evaluating

a company’s economic prospects and consequently in making their

investment decisions. Analysts and other market participants report

that they view consideration of management’s own performance

projections, i.e., earnings and revenues, to be critical to their own

forecasts of a company’s future performance. As such, forward- looking

information is often considered a critical component of investment

recommendations made by broker- dealers, investment advisers and

other securities professionals.”

—SEC

238 What Must Public Companies Disclose?

Forward-Looking Statements: SEC’s Shifting View

“It has been the Commission’s long- standing policy not to permit pro-

jections and predictions in prospectuses and reports led with the

Commission. Such documents are designed to elicit material facts....

A real danger exists. . . that projections .. . would be accorded a

greater measure of validity by the unsophisticated than they would

deserve.”

—“The Wheat Report” (1969)

“[Public companies should] avoid making projections, forecasts or pre-

dictions in prospectus disclosure.”

—SEC (1971)

“Availability of forward- looking and analytical information is important

to an investor’s assessment... and may be material to informed invest-

ment decision- making.”

—SEC (1978)

Forward- looking statements typically take the form of projections,

forecasts, plans, objectives, or estimates of future economic per-

formance, and fall within the category of disclosure traditionally

referred to as “soft information.” In contrast to “hard information,”

which consists of historical and objectively veriable information,

soft information involves conjecture and unreliability. Historically,

the SEC disfavored disclosure of soft information in SEC lings based

on a concern that unsophisticated investors would rely too heavily

on predictive and speculative statements in making investment deci-

sions. Indeed, until 1973, the SEC did not permit public companies

to include nancial projections in their SEC disclosure documents.

The SEC later reconsidered this position, concluding that pro-

jections could be benecial to investors. Thus, in 1973, the SEC per-

mitted projections of earnings, revenues, and other nancial items

concerning future performance, pointing out that the Commission

was “neither encouraging nor discouraging” them. As forward-

looking information became more important to market participants,

the SEC’s perspective continued to evolve.

Current SEC policy “encourages” the use of management’s pro-

jections of future economic performance that have a “reasonable

Chapter5 ■ Special Circumstances and Issues 239

basis” and that are “presented in an appropriate format.” Projec-

tions must have a “reasonable basis,” and the disclosures accompa-

nying projections should “facilitate” investor understanding of the

basis for, and limitations of, the projections. Disclosure of the most

signicant assumptions underlying the projections is encouraged.

Additionally, the SEC has expressed its belief that “investors would

be aided by a statement indicating management’s intention regard-

ing the furnishing of updated projections.” The SEC also has noted

that because of the obligation to make “full and prompt disclosure

of material facts, both favorable and unfavorable,” regarding nan-

cial condition, a disclosure obligation may exist where management

knows or has reason to know that previously disclosed projections no

longer have a reasonable basis.

Liability for Forward- Looking Statements

Although the SEC reversed its prohibition of forward- looking state-

ments, many public companies continued to avoid such disclosures

because of continued litigation challenging forward- looking disclo-

sures as misrepresentations. Any forward- looking statement that did

not come to fruition was the potential subject of a lawsuit and judi-

cial second- guessing.

Regulatory Safe Harbor Protection

To help address the liability concerns relating to projections and sim-

ilar statements, in 1979 the SEC adopted a rule that created a safe

harbor for specic categories of forward- looking statements. Under

the rule, specied forward- looking statements will not be fraudulent

“unless it is shown that such statement was made or reafrmed with-

out a reasonable basis or was disclosed other than in good faith.” The

rule addressed specied statements contained in quarterly reports

on Form 10-Q and annual reports to stockholders. Several categories

of forward- looking statements were covered by the regulatory safe

harbor:

• projections of revenues, income, earnings per share, capital

expenditures, dividends, capital structure, or other nancial

items;