When preparing annual reports on Form 10-K or Form 20-F, companies should always revisit their risk factor disclosure to ensure that their disclosure is up to date and includes a discussion of the most significant risk factors that could affect the company’s business, operations, industry, financial position or future financial performance. In light of the current financial crisis, public companies should take a careful look at their existing risk factor disclosure to determine whether updates are needed in order to adequately describe the risks that companies expect to face.

A public company’s risk factor disclosure should be specific to its individual situation, and should not merely contain risks that could apply to every issuer. As such, public companies need to examine how the current financial crisis is affecting them, so that they may determine whether and what type of updated risk factor disclosure is necessary. Risk factor disclosure regarding the current financial crisis may include, among other things, the effect that the current financial crisis is having on a company generally, the impact the financial crisis may have on a company’s previously stated growth plans, a company’s inability to access the capital markets and the impact that may have on the balance sheet, the ability of a company’s customers to pay for goods and services or the ability of a company’s suppliers to service the company in a timely manner.

Public companies who file annual reports on Form 10-K should also be aware that the Securities and Exchange Commission requires such companies to disclose, in their quarterly reports on Form 10-Q, any material changes from the risk factors previously disclosed in their annual reports on Form 10-K. Companies must therefore, at a minimum, review risk factor disclosure on a quarterly basis in order to determine whether and what type of updated risk factor disclosure needs to be included in a quarterly report on Form 10-Q.

Up to date risk factor disclosure may also provide a company the basis to take advantage of the safe-harbors for forward-looking statements provided in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as well as the “bespeaks caution” defense that has been developed through case law. The safe-harbors and the “bespeaks caution” defense provide that, if certain requirements are met, forward-looking statements may not be used as the basis for private securities fraud claims.[1] Forward-looking statements are statements made by a company that relate to its current expectations regarding its financial condition, results of operations, plans, objectives, future performance or business.

One of the requirements that a public company must meet in order to take advantage of the safe-harbors and the “bespeaks caution” defense is that the forward-looking statements must be accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those contained in the forward-looking statements.[2] Such cautionary statements must be specifically related to the company and the forward-looking statements that it is making; cautionary statements regarding risks that could apply to every issuer will not be sufficient to receive the protection of the safe-harbors and the “bespeaks caution” defense.[3] Accordingly, when preparing annual reports on Form 10-K or Form 20-F and quarterly reports on Form 10-Q, public companies should review their risk factor disclosures (especially in light of the current financial crisis) to ensure that such disclosures are up to date and specifically identify potential risks facing the company.In addition, although smaller reporting companies are not specifically required to include risk factor disclosure in their annual reports on Form 10-K or their quarterly reports on Form 10-Q, such issuers may nevertheless wish to include risk factor disclosure in order to take advantage of some of the protections provided by such disclosure. A smaller reporting company including risk factor disclosure in its annual report on Form 10-K or its quarterly report on Form 10-Q should also consider the issues discussed above.