Gibson Dunn is out with its annual update sharing observations and trends from Form 10-K disclosures so far based on annual reports they’ve reviewed for clients and other filings. It’s full of helpful discussions of trending risk factor and MD&A disclosures, common topics for comment letters, enforcement focus areas and other reminders. One suggestion that I found interesting and practical (plus universally applicable) is to tweak your typical risk factors intro. Here’s why and how (links added):

Recent securities litigation has highlighted the importance of properly characterizing the purpose of risk factor disclosures and clearly communicating the limitations of those disclosures to investors. Securities lawsuits increasingly include claims that risk factors are misleading when they describe potential risks as hypothetical when such risks have already materialized. Last year, the Supreme Court’s decision to dismiss the appeal in Facebook Inc. v. Amalgamated Bank left unanswered how securities fraud claims challenging risk factor disclosures should be analyzed, and, as a result, companies face even greater uncertainty in drafting risk factors.

To address this risk, we recommend companies update the introductory paragraph to the Risk Factors section to clarify that the risk factor disclosures reflect management’s beliefs and opinions about potential future risks and do not contain factual assertions about past events [. . .] The following is an example of language that could be included in the introductory paragraph of the Risk Factors section:

“These disclosures reflect the Company’s beliefs and opinions as to factors that could materially and adversely affect the Company and its securities in the future. References to past events are provided by way of example only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in the past or their likelihood of occurring in the future.”

Including such clarification communicates that Item 105 disclosures are inherently speculative and exclusively forward-looking. We encourage companies preparing their 2025 Form 10-Ks to incorporate similar language to strengthen their litigation protection while maintaining clarity.

Even the Newtyn Partners case that I shared in the prior blog included a claim that a risk factor that the loss of any of the company’s top ten clients would have a significant impact on revenue was misleading because it failed to add that some clients were considering terminating. The Sixth Circuit’s decision was consistent with the suggested language above — that risk disclosures are inherently prospective and should not “cause a reasonable investor to infer anything about the present.”

I fully support including this language and agree with John that alleged “hypothetical risk factors” aren’t likely to be a high priority for the SEC in the current environment. But it still behooves companies to be careful about hypothetical risk factor language since it’ll continue to be a popular topic for private securities litigation and may preclude companies from relying on the PSLRA safe harbor for forward-looking statements. (And, after Saturday, that may now mean updating risk factors concerning geopolitical risks and conflict in the Middle East to address surging oil prices and other business impacts of war against Iran.)

– Meredith Ervine