Special Circumstances and Issues

AuthorStephanie Tsacoumis
ProfessionRecognized securities law practitioner and professor at Georgetown Law Center
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.”
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
—“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
projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure, or other nancial

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