Definition
The term safe harbor refers to a statutory provision or regulation that eliminates liability as long as the entity did not knowingly make false statements. Safe harbor provisions are typically associated with forward-looking statements, and will explain to users the risks associated with the use of such information.
Explanation
Rules under the jurisdiction of the Securities and Exchange Commission require companies to comply with certain standards of communication. These rules were put into place to allow investors to clearly understand when a published report or statement made by a company was based on historical records or a forecast of future performance. This is referred to as a forward-looking statement.
The Private Securities Litigation Reform Act of 1995 (PSLRA) provides publicly-traded companies protection from liabilities associated with forward-looking statements through a safe harbor provision. That is to say, by clearly identifying forward-looking statements in a report, the company cannot be sued by investors if such forecasts do not materialize.
Generally, companies are protected under the PSLRA when making oral or written forward-looking statements as long as any of the below apply:
The forward-looking statements are clearly identified, and caution the user of the information that actual results could materially differ from such forecasts.
The information is immaterial to the overall performance of the business.
The information is presented as a good faith estimate.
An executive officer did not knowingly approve of a false or misleading statement.
Companies will oftentimes use the terms safe harbor and forward-looking statement interchangeably when communicating with investors. Forward-looking statements will warn users that actual results may differ materially from the forecasts appearing in the report as well as how to identify such forecasts. The safe harbor provision of the PSLRA protects the business from litigation as long as the communication meets certain requirements, including a forward-looking statement.
Related Terms
Form 10-K, Form 10-Q, Form 8-K, proxy statement, annual report, financial highlights, forward-looking statement, management's discussion and analysis, critical accounting estimates
