What Is a Safe Harbor Statement?
Before investing in a company, prospective shareholders want to know the financial condition of the company and projections for the future. While independent analysts can provide information, the real experts are those in the actual business working for the company. They continually analyze their business, and make adjustments to increase profitability. But even the best forecasts can be wrong, and these companies obtain liability protection by issuing a safe harbor statement along with the financial forecast.
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The Facts
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A safe harbor statement is a good faith, forward-looking projection that forecasts a future state of affairs. It is made after the performance of due diligence, and represents the future state with as much accuracy as possible given current knowledge. As such, the party making the safe harbor statement also assumes no liability should the future state not meet expectations due to factors unknown at the time of the forecast. It usually refers to a financial forecast.
Considerations
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Safe harbor statements also note certain risk factors that may or may not materially change the forecast and eventual outcome. Such risk factors may include changes in demand, raw material cost changes or other uncontrollable or unpredictable aspects. It also includes a declaration that should such unpredictable changes occur, the company or statement issuer will be under no obligation to issue an updated financial prediction based on new information.
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Safe Harbor Statement Example
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A swimming pool company, for example, may make a prediction for revenues and profits for a particular time period. This is based on current information and is made in good faith. However certain risk factors may affect the outcome and these factors may include: unseasonably cool weather affecting demand for swimming pools; unexpected competition in the pool industry; unexpected trends and competition from other leisure competitors; and the possible loss of key personnel. The safe harbor agreement protects the firm from liability as long as the original projection is made in good faith while referencing known risk factors.
History
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The Securities Exchange Act of 1934 exempted companies from financial liability via safe harbor statements. The company or statement issuer, however, would remain liable if any forward-looking statement was made with known inaccuracies. The act also required that safe harbor statements include risk factor cautionary information. The Private Securities Litigation Reform Act of 1995 strengthened the previous act by discouraging frivolous lawsuits, which had become common primarily due to stock price declines. The 1995 act required proof of actual fraud.
Additional Types
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Safe harbor statements refer to additional situations, but the overall premise is identical---companies assume no liability as long as business is conducted in good faith, and in some cases, within a certain framework. The European Union and the United States have developed a safe harbor framework that protects the privacy of individuals. While the European Union and the United States each have laws protecting personal data, the laws are different, and the safe harbor agreement protects companies as long as they comply with an overall framework protecting individual private data as defined in the safe harbor agreement.
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References
- Photo Credit pen showing diagram on financial report/magazine image by Anton Gvozdikov from Fotolia.com
