More on Chairman Issa and Projections

As mentioned below, House Oversight Committee Chair Darrell Issa sent a letter recently to SEC Chairman Mary Schapiro requesting information about IPOs. One of his concerns was the rules about disclosing forward-looking information, including projections about future financial performance.

In the Facebook offering, underwriters told institutional clients that their projections were going lower, but did not tell the public they were selling to. In addition, the two "safe harbors" for forward looking information in the Securities Act, Issa points out, do not apply to IPOs, causing underwriters to have fear in disclosing their projections to the public at large. And one of them requires a reasonable basis for the information and preparation in good faith. Issa suggests looking at getting rid of that.

My thoughts: The reality is that even where the safe harbor applies, most of my public clients still choose not to reveal forward looking information. Why? Because they can still be challenged down the road if someone alleges there was not a reasonable basis for the projection or it was not disclosed in good faith. Forget that there may be no evidence of this, it can still mire a company in litigation and significant cost that most likely ends in an expensive settlement rather than be in court for years.

Solution? Allow the safe harbor for all SEC filings, including the IPO, and subject them to the same standard as other disclosures, namely the requirement that fraud must be proven in order to properly bring a case. This would be much more likely to have the effect the SEC was hoping for when it passed the safe harbors, namely that companies would indeed be encouraged and protected in revealing this information. But they would also be subject to damage claims where they intentionally mislead the public about their future expectations.

But that's just me.

For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog  by David N. Feldman, Esq., Partner of Richardson & Patel LLP.

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