Avoid Boilerplate and Complacent Forward-looking Statements | Practical Law

Avoid Boilerplate and Complacent Forward-looking Statements | Practical Law

A reminder to avoid overlooking the importance of forward-looking statements legends by keeping them current, relevant and focused on an issuer's true risks.  

Avoid Boilerplate and Complacent Forward-looking Statements

Practical Law Legal Update 5-559-5205 (Approx. 4 pages)

Avoid Boilerplate and Complacent Forward-looking Statements

by Practical Law Corporate & Securities
Published on 30 Apr 2015 • USA (National/Federal)
A reminder to avoid overlooking the importance of forward-looking statements legends by keeping them current, relevant and focused on an issuer's true risks.
Issuers, underwriters and counsel spend countless hours and great effort to draft and refine public company disclosure. One of the major factors stoking this process is the desire to avoid or mitigate liability under the securities laws, often referred to as draconian.
A powerful protective tool in the hands of the disclosure drafters and reviewers is the treatment under federal securities laws for forward-looking statements. Forward-looking statements in the context of corporate disclosure generally include soft information such as estimates, projections, plans and objectives that are unverifiable.
What makes the protections for forward-looking statements so useful is that they can be attained with relatively little effort compared to the time that goes into the drafting process for disclosure documents as a whole. And when done properly, forward-looking statements disclosure can act as a shield that is difficult to penetrate. Despite this fact, forward-looking statements legends can be overlooked and copied from document to document with little or no changes.
Practical Law's suite of resources can help disclosure drafters and reviewers understand forward-looking statements and how to best obtain the protection the safe harbor offers. A little work now can go a long way to avoid serious headaches and costly litigation later.
As discussed in our resources, the key is to avoid boilerplate, vague or static cautionary statements and risk factors that are part of forward-looking statements disclosure without tailoring them to the issuer's business and constantly evolving market conditions and pressures. For example, two hot areas where issuers are encouraged to consider updates to their forward-looking statements cautionary language include risks related to cybersecurity breaches and conflict minerals disclosure and supply chain issues.

The Safe Harbor and Bespeaks Caution Doctrine

The Private Securities Litigation Reform Act of 1995 created a multi-pronged safe harbor that shields a covered person from liability for written or oral forward-looking statements under certain conditions. The safe harbor can be secured using any one of the three prongs that focus on:
  • Identification and use of meaningful cautionary statements.
  • Knowledge of the falsity or misleading nature of the statement.
  • Materiality.
Practical Law's Practice Note, Forward-looking Statements: Securing the Safe Harbor guides issuers, executives, underwriters and practitioners in understanding the protections afforded to forward-looking statements. It also examines the steps that should be taken when preparing securities offering documents, Exchange Act reports and other corporate disclosure (such as disclosure issued in the ordinary course of business or in the context of an offering) to take advantage of these significant protections.
This Note covers the bespeaks caution doctrine where the safe harbor is inapplicable and what to do when forward-looking statements end up being inaccurate after they are made. It also covers navigating forward-looking statements made orally (for example, on earnings calls) and some tricky points to keep in mind, especially when transcribing oral forward-looking statements.

Checklist of Dos and Don'ts

Practical Law's Forward Looking Statements Checklist summarizes the dos and don'ts for forward-looking statements and their related forward-looking statements legends. At least quarterly, issuers and their counsel should review the forward-looking statements legend they are including in their disclosure and the corresponding factors that can prevent projections from materializing.

Sample Forward-looking Statements Legends

Practical Law has several forms of forward-looking statement legends to aid in creating a first draft or to review with fresh eyes previously drafted legends. Each standard document includes lists that identify common forward-looking language and common meaningful factors that can be tailored for an issuer's specific risk factors at any given time.

Standard Legend

Practical Law's Standard Document, Forward-looking Statements: Standard Safe Harbor Legend can be used as part of a variety of public company disclosure documents, Exchange Act reports, press releases or other documents. It may be used for disclosures issued in connection with a securities offering (other than an IPO) or for disclosures issued in the ordinary course of business.

IPO Prospectus Legend

Practical Law's Standard Document, Forward-looking Statements: IPO Prospectus Legend can be used and tailored for prospectuses forming part of IPO registration statements. The statutory safe harbor for forward-looking statements does not apply to IPO registration statements so issuers and their representatives can look to the bespeaks caution doctrine for liability protection.
For this reason and because IPO prospectuses are inherently more speculative than those of established public issuers, the forward-looking statements legends used for IPOs differ from the safe harbor legends used for issuers and documents that are covered by the statutory safe harbor.

Earnings Release Legend

Practical Law's Standard Document, Forward-looking Statements: Earnings Releases can be used for earnings releases. The placement of the legend is not of primary importance and it can vary.
However, the most typical placement of the legend for earnings releases is the end of the text of the release, but it should be placed before the earnings conference call information and before the condensed financial statements. Issuers that include earnings information in the body of the Form 8-K filing itself should also include the legend in the body. Those issuers that simply incorporate the earnings release by reference into the Form 8-K only include the legend in the release and not in the body of the Form 8-K.