Special purpose acquisition companies (SPACs) are increasingly being used as an alternate vehicle to traditional initial public offerings. Companies that go public through a traditional IPO process are often subject to shareholder securities class actions. Inevitably, securities class actions will be filed against companies that become publicly traded and file public reports with the
One often-referenced advantage of the
What is a
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Financial Projections - Traditional IPO vs.
Companies typically do not include financial projections in a registration statement and related prospectus for an IPO because of the liability risks associated with such disclosures. In particular, the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act (PSLRA) that generally applies to statements made by
The ability to provide projections directly to the investors is a key feature of de-
The Litigation Risk
With the increasing popularity of de-
The recently filed securities class action related to the
Steps Companies Can Take to Mitigate the Litigation Risk Related to Projections Provided in Connection with a De-SPAC Transaction
- Projections should have a reasonable basis. If a company chooses to provide financial projections, it needs to ensure that they are based on assumptions that have a reasonable basis and represent the company's balanced view. To achieve those objectives, the company should ensure that it has followed an appropriate process for vetting the assumptions underlying the projections, which typically includes critical review of these assumptions by the board of directors, with input from financial advisors.
- Document the process used to generate projections in real-time. Securities class actions are often filed long after the challenged events or statements occurred. If a lawsuit is filed long after the events in question, it can be difficult to gather all of the facts necessary to defend against the suit. Accordingly, a company disclosing projections should ensure that it adequately documents the process used to generate and vet these projections at the same time they are created. By documenting the process in real-time, the company will ensure that it has a clear, well-documented and contemporaneous record in the event a suit challenging the projections is subsequently filed.
- Projections should be identified as forward-looking and accompanied by meaningful cautionary statements. Under the PSLRA's safe harbor provision, forward-looking statements-such as projections-are generally not actionable so long as they are: (1) identified as forward-looking; and (2) accompanied by "meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement." In order to ensure safe harbor coverage for projections, companies should ensure that they not only identify that forward-looking statements are being made, but also provide meaningful cautionary language. Although the safe harbor provides broad protection, boilerplate risk disclosures may not be sufficient. Courts may decline safe harbor protection to forward-looking statements where the cautionary language does not identify the risks that ultimately caused the prediction not to come to pass. Cautionary statements should be tailored to fit the guidance and should disclose the risks that may cause the anticipated results not to be realized. Cautionary language should also clearly attribute the source of the projections, and describe the process through which they were generated.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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