Forward-looking statements disclaimers appear in almost all things SEC and public company related from registration statements to reports filed in accordance with the Securities Exchange Act to press releases. Like many disclaimers, they are usually looked past by readers, including at times by the attorneys reviewing or preparing the documents. On many occasions we will have a new client come to the firm that has been using the same forward-looking statements disclaimer for years that has perpetually been cut and pasted into every document, and which would fail to provide the intended protections if ever tested.
The Private Securities Litigation Reform Act of 1995
Many companies start a forward-looking statements disclaimer paragraph with the sentence “[I]nformation contained herein contains ‘forward looking statements’ within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended.” Sections 27A and 21E, both created by the Private Securities Litigation Reform Act of 1995 (PSLRA), provide certain statutory protections for qualifying companies in qualifying materials, for forward-looking statements.
The key word being “qualifying.” The protections afforded by the PSLRA are not available to a company that: (i) has been convicted of a felony or misdemeanor related to securities fraud within the last three years; (ii) has been, within the past three years, subject to a judicial or administrative decree or order prohibiting future violations of the antifraud provisions of the securities laws; (iii) has been, within the past three years, subject to a judicial or administrative decree or order requiring the company to cease and desist from violating the antifraud provisions of the securities laws; (iv) has been, within the past three years, subject to a judicial or administrative decree or order determining the company has violated the antifraud provisions of the securities laws; (v) makes the forward-looking statement in connection with an offering of securities of a blank check company (such as a SPAC); (vi) is a penny stock company; or (vii) is an investment company.
In addition, the forward-looking statements protections of the PSLRA are not available for forward-looking statements that are: (i) included in financial statements that are prepared in accordance with GAAP; (ii) made in connection with a roll-up transaction; (iii) made in connection with a going private transaction; (iv) made in connection with a tender offer; (v) made in connection with an IPO; (vi) made in connection with an offering by, or relating to the operations of a partnership, limited liability company, or a direct participation program; or (vii) made in a disclosure of beneficial ownership under Section 13 of the Exchange Act (Schedule 13D and 13G).
The forward-looking statements protection afforded by the PSLRA extends to (i) a company that is subject to the reporting requirements of the Exchange Act (i.e., not just a voluntary filer); (ii) a person acting on behalf of such a company (officer, director, or employee); (iii) an outside reviewer retained by the company and making a statement on behalf of a company; and (iv) an underwriter, with respect to information provided by the company or information that is derived from information provided by the company (“Covered Persons”).
Oral statements are also covered by the PSLRA as long as the statement is accompanied by a forward-looking statement disclaimer.
Importance of Properly Drafted Disclaimers under the PSLRA
It is very important that a forward-looking statements disclaimer avoid boilerplate language and be drafted addressing facts and circumstances specific to the particular company. When the PSLRA can be relied upon, its protections are broad. That is, in any private litigation claiming fraud or misrepresentations, a covered person cannot be held liable for forward-looking statements, whether written or oral, if the forward-looking statement is properly labeled and identified as a forward-looking statement and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.
In addition to requiring that a forward-looking statements disclaimer provide pertinent facts related to a particular company which could cause results to differ from the statements made, courts have found that a cautionary statement cannot be meaningful if the disclaimer itself is misleading. A disclaimer can be deemed misleading if it does not include known historical facts that could impact the forward-looking statements. For example, statements about potential future sales or product development could be denied protection under the PSLRA if known historical facts or trends are not specifically addressed in the disclaimer.
In the case of In re: Harman International Industries, Inc. Securities Litigation, the D.C. Circuit Court of Appeals found that the safe harbor requirement for “meaningful” cautionary statements calls for “substantive company-specific warnings based on a realistic description of the risks applicable to the particular circumstances.” Thus, “cautionary statements must be substantive and tailored to the specific future projections, estimates or opinions in the [forward looking statements]…” The court also noted that boilerplate does not meet “the statutory standard because by its nature it is general and ubiquitous, not tailored to the specific circumstances of a business operation, and not of useful quality.”
The cautionary language of the disclaimer should be reviewed and updated regularly. It should warn of specific, important risks, include a discussion of actual developments that are relevant to the risks and avoid boilerplate or general risks that are true for any company.
The PSLRA also provides protection from liability if the forward-looking statements are immaterial or if the plaintiff fails to prove that the statements were made with actual knowledge that the statement was false or misleading.
Bespeaks Caution Doctrine
When the safe harbor provisions of the PSLRA are not available, such as for a penny stock company or in an IPO registration statement, the judicially created “bespeaks caution doctrine” provides an alternative protection. The “bespeaks caution” doctrine refers to a line of judicial case law holding that statements of future forecasts, projections and expectations in an offering or other disclosure document are not misleading as long as they contain adequate cautionary language disclosing specific risks. Like the PSLRA, the bespeaks caution doctrine requires a meaningful, specific, forward-looking statements disclaimer. Importantly, a reference to the PSLRA would not apply and should not be included.
The PSLRA was actually modeled after the bespeaks caution doctrine and most courts interpret the protections under both substantially the same. Cautionary language must meet similar requirements regarding content and placement. The language must be precise and fact-specific, directly addressing the substance of each forward-looking statement. General or boilerplate statements of risk do not suffice.
Like the PSLRA a court is likely to find that cautionary language is not meaningful if the forward looking statements are knowingly false at the time made. In other words, you can’t just slap a disclaimer on a false statement and receive ironclad protection.
Practical Suggestions
Keep in mind the following suggestions when drafting a forward-looking statements disclaimer:
- Identify the forward-looking statements as such. If the company is not covered by the PSLRA, make sure that the disclaimer does not reference the statute;
- Ensure predictions and other forward-looking statements have a reasonable basis in fact and are made in good faith;
- Accompany predictions and forward-looking statements with accurate facts regarding present and/or historical performance and describe any assumptions in detail;
- Include cautionary language in the same document that includes the forward-looking statement it qualifies. For oral statements, provide listeners with a reference to appropriate written cautionary language;
- Tailor cautionary language to the specific risks and uncertainties of the forward-looking information provided. Avoid boilerplate cautionary language; and
- Review cautionary language often and keep it updated.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
LAnthony@AnthonyPLLC.com
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including sitting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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