Public companies are not required by the SEC (or stock exchange rules) to provide guidance or projections on future operating results, but many nonetheless choose to do so. Today, we take a look at some guidance-related questions. Just by way of background, see our Client Alert “Giving Good Guidance – What Every Public Company Should Know“ for a more extended discussion on topics such as liability, Regulation FD considerations and best practices related to giving guidance.
Blue Star Airlines, Inc. has recently announced a public offering of securities, and Bud Fox, the company’s CFO, wants to discuss the public offering during the company’s upcoming earnings call. Bud will also be discussing guidance and other forward-looking information during the call.
Should he?Probably not. Bud’s desire to discuss a recently announced public offering during an earnings call is understandable -- after all, his investors are likely to care about the topic. The rub is the Securities Act’s broad (and broadly interpreted) definition of “offer” in Section 2(a)(3). Rule 168 provides public companies with a safe harbor from Section 2(a)(3) for regularly released factual information and forward-looking information, and Rule 169 provides a more limited exception for non-reporting companies. But Rule 168(c) carves out from that exception communications containing information about registered offerings or communications released or disseminated in connection with the offering activities. (See also Rule 168’s adopting release at 67, which stresses that distributing an earnings release as part of the marketing activities to potential investors in an offering is outside the scope of protections of Rule 168’s safe harbor.)
So, without the safe harbor, you are left wondering whether or not the earnings call is an “offer.” And it’s an important question. Let’s assume that, for Regulation FD reasons, the call is recorded and posted on Blue Star’s website for future viewing. Well, in that case, the call seems like a “graphic communication” and therefore a “written communication,” as each is defined in Rule 405. If it’s an offer, it’s a written offer (and, in the case of a private offering, potentially a general solicitation). Also remember that you cannot make a written offer prior to effectiveness of your registration statement, with various exceptions (such as for “free writing prospectuses” under certain circumstances). In other words, mentioning the offering on the earnings call has all sorts of unintended consequences. As a result, most companies announce pending offerings in a separate press release (using Rule 135c in the case of private offerings).
We all know that Bud used to be a bit of a gambler back in the 1980s,1 but the right advice here is apt to be “bad idea, sport.” You may want to have a look at his script and to suggest that if he gets any questions about the offering, he answer with words to the effect that there is a separate announcement about that matter and he can’t discuss it on the call.
What about the timing of a guidance announcement? Can Blue Star update guidance without having to worry about the offering timeline?It depends. If guidance is updated as part of a regularly scheduled quarterly earnings call that is consistent with the company’s past practice, then it should be covered under Rule 168(d)’s requirement that the factual business information be “regularly released” in the ordinary course and that the timing, manner and form of the release is consistent with prior similar releases. If not, it’s a tougher call – but remember that the regularly released requirement may not be quite as limiting as it may seem at first glance. For example, the adopting release at 64 acknowledges that a single prior release may be enough to establish a track record.
OK – so generally the CFO shouldn’t talk about the offering on the earnings call. What about the flip side of that situation – can Bud talk about the guidance during the roadshow for the offering?
Market practice is typically not to include projections in prospectuses or road show slides. Issuers and underwriters worry about the liability implications of doing so. Bottom line: if Blue Star is inclined to say anything, let’s talk.
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1 You may remember when he announced that “Blue Horseshoe loves Anacott Steel” — and even if you missed that, there is a sequel .