Safe Harbor

Safe Harbor

What is a Forward-Looking Statement?

"forward-looking statement," including those items that one might expect, i.e., projections of revenue or losses, plans and objectives for future operations, products or services and statements relating to future economic performance that would normally be included in a "Management Discussion & Analysis" section. It also includes any underlying or related assumptions that are stated.

Explanation :-

A projection of a company's financial health for a certain period of time, such as a year. A forward-looking statement makes certain assumptions; for example, management may assume that sales will increase or decrease by a certain amount based on current trends. As a result, forward-looking statements are subject to revision, as reality may not match the assumptions. A forward-looking statement is nonetheless useful for making certain decisions about a company's future, such as whether or not to expand operations.

Types a Forward-Looking Statement

A - a statement containing a projection of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items,

B - a statement of management’s plans and objectives for future operations.

C - a statement of future economic performance, including statements in the MD&A or in the results of operations;

d - any statement of the assumptions underlying or relating to any statement described above;

e - any report issued by an outside reviewer retained by an issuer which addresses a forward-looking statement made by the issuer or a statement containing a projection or estimate.

BACKGROUND

• The Securities Act in 1933 administered by the Federal Trade Commission was the first significant federal legislation regulating securities(primarily governs the initial issuance of securities) ,
• The following year Congress passed the Exchange Act. (regulates trading in securities following their initial issuance and transactions by officers, directors and principal security holders)
• As part of the Exchange Act , Congress created the SEC, which became responsible for administering both the Securities Act and the Exchange Act.
• The fundamental purpose of both Acts is to promote full disclosure of information necessary for investors to make informed investment decisions
  • Initially, the SEC prohibited the disclosure of forward looking information because it perceived the information as inherently unreliable. Such information includes a statement of economic projections, a statement of management's objective for future operations….etc,
• Passing in year 1970 adopted encourage policy for the company to issue the forward-looking information ,because the SEC believe this information is important to investor in investment decisions , and the company started to issue these information to the investors .

Safe harbor before the act rule 175:

By 1979, the SEC had adopted safe harbor rules in the form of Rule 175 respect to the Securities Act of 1933 (the "Securities Act"), and its twin, Rule 3b-6, with respect to the Securities Exchange Act of 1934 (the "Exchange Act"). . These safe harbors provided that statements of forward-looking information would not be considered fraudulent unless it was shown that the statements lacked a reasonable basis or were not made in good faith

Additionally, SEC Rule 175 does not require cautionary language to accompany the projective statements.

Rule 175 represented a significant shift in the SEC‘s policy of objecting to predictive disclosures. This policy was based on the assumption that unsophisticated investors would unduly rely on unreliable predictive information. Many commentators attacked the SEC‘s traditional position. They argued that management‘s projections could provide all investors with useful information. In response to these arguments, the SEC adopted Rule 175

these rules applied only to statements made in reports filed with the SEC or to related statements reaffirmed in subsequent filings>

PslRa

For most companies, the most important provision of the Reform Act is the "safe harbor" for forward-looking statements or projections

The safe harbor applies to actions brought under both the Securities Exchange Act of 1934 and the Securities Act of 1933, although its scope as to types of forward-looking statements covered is limited.

"Bespeaks Caution" Doctrine:

The different bet. Rule 175 and the Doctrine is The Rule 175 does not need cautionary language but the Doctrine need cautionary language

Under the PSLRA safe harbor, a defendant is not liable for a forward-looking statement if

(1) that statement is identified as forward-looking 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 or it is immaterial,

(2) the plaintiff fails to prove that the forward-looking statement . . . Was not made with actual knowledge . . . that the statement was false or misleading.

The point is to identify enough factors so that an investor should realize the risks involved in relying on the forward-looking statement.

Requirement

A. Demand for financial reports exists because users believe that the report help them in decision making . in your opinion , will forward looking statements as provided by the private securities litigation reform act aid users of financial reports in decision making ??

Management is in an ideal position to project financial results . users of financial reports will like aided in making decisions by the forward looking statements of management

B. To some extent , investors rights are limited by the curb of abusive litigation . in your opinion, is there a net benefit to investors from a safe harbor for forward looking statements ?

Yes, investors will be aided in making decisions because of the forward looking statements of management . abusive litigation is probably of little benefit to investors, since the lions share of recoveries under the litigation may go to the attorneys who brought the suit rather than to the investors.

Conclusion

Forward looking statement is faith good.

Certain risk factors no controllable or unpredictable aspects that may or may not materially change the forecast and eventual outcome .

Although the SEC and the courts made strides in balancing the needs of the investor and protecting the issuer, many believed they had not achieved a workable balance. In an attempt to strike a workable balance between these two interests , Congress passed the Private Securities Litigation Reform Act of 1995 .

The SEC adopted Rule 175 and to allow issuers to disclose forward-looking information without fear of defending strike suits However, these rules, as applied, have been ineffective in curtailing litigation. In response, the courts developed the 'bespeaks caution' doctrine .