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`NITS, GRITS, AND SOFT INFORMATION
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`IN SEC FILINGS
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`CaRL W. SCHNEIDERT
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`The corporate image created by a prospectus, proxy statement, or
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`other Securities and Exchange Commission (SEC) filing may be likened
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`to a shadow—it tells something about the subject’s gross outline but
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`in a flat, lifeless, and sometimes distorted form. Many commentators,
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`including SEC Chairman William J. Casey,’ have suggested that SEC
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`disclosure filings should be more lifelike representations, devoting
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`greater attention to economic realities and the nitty-gritty of
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`business, and including certain types of forward-looking information,
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`rather than boilerplate phrases and standard disclaimers which could
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`fit almost any filing.
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`Historically, certain types of information, highly relevant to in-
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`vestment decisions—referred to herein as “soft” information—have
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`been largely excluded from SEC filings, primarily because of the Com-
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`mission’s policy. Recently, however, the SEC, analysts and other mar-
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`ket professionals, the courts, and investors have shown interest in
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`the expanded use of such information in these documents. Conse-
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`quently its greater use seems to be inevitable.
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`This Article will consider several categories of soft information
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`traditionally excluded from filings and will examine someof the policy
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`implications of this practice. Since its basic theme is to suggest a
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`shift in attitude to allow, and possibly even require, more soft in-
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`formation in SEC filings, the policies that should control the use of
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`such information will also be explored.
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`I.
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`IDENTIFICATION OF SoFT INFORMATION
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`‘The content of SEC filings has traditionally been confined to
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`what may be called “hard” information, meaning statements concern-
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`ing objectively verifiable historical events or situations—commonly
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`TAB. 1953, Cornell University; LLB. 1956, University of Pennsylvania, Member,
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`Pennsylvania Bar.
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`An abbreviated version of this Article was presented as an address to the 1972
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`Annual Meeting of the American Bar Association in San Francisco on August 15, 1972.
`A transcript will appear in the January, 1973, issue of Business Lawyer.
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`1 See, e.g., Addresses by SEC Chairman Casey: New York Financial Writers Associa-
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`tion, June 7, 1971, in 105 BNA Sec. Rec. & L. Rep, F-1 (June 9, 1971); American
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`Bankers Association, Mar. 17, 1972, reported in 144 BNA Src. Rec, & L. Rep. A-7
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`(Mar. 22, 1972); Conference on Financial Reporting, May 19, 1972, reported in 153
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`BNA Sec, Rec. & L. Rep. A-5 (May 24, 1972).
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`254
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`CELLTRION - EXHIBIT 1078
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`CELLTRION - EXHIBIT 1078
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`SOFT INFORMATION IN SEC FILINGS
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`called “facts’” in SEC parlance—as distinguished from opinions, pre-
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`dictions, or subjective evaluations. Although a comprehensive defini-
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`tion of soft information is not readily apparent, several non-exclusive
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`and non-exhaustive categories can be identified:
`(1) forward-looking
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`statements concerning the future, such as projections, forecasts, pre-
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`dictions, and statements concerning plans and expectations; (2) state-
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`ments concerning past or present situations when the maker of the
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`statement lacks the data necessary io prove its accuracy—for ex-
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`ample, information on a company’s historical share of the market,
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`when it does not have access to precise statistics concerning its com-
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`petitors; (3) information based primarily on subjective evaluations—
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`for example, representations concerning the competence or integrity
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`of management, the relative efficiency of a manufacturing operation,
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`or the appraised value of assets;
`(4) statements of motive, purpose,
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`or intention, since it is frequently easier to verify objectively what
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`was done than to determine why it was done—for example, explana-
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`tion of the reasons for which an auditor has been discharged;* (5)
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`statements involving qualifying words, such as “excellent,” “inge-
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`nious,”“efficient” and “imaginative,” for whichthere are no generally
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`accepted objective standards of measurement in most contexts.*
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`2The SEC has given particular stress to the difference between “fact” and other
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`types of information in setting forth guidelines for public disclosure of an issuer “in
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`registration.” See SEC Securities Act Release Nos. 5180 (Aug. 16, 1971), 5009 (Oct. 7,
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`1969), 3844 (Oct. 8, 1957); SEC, Disctosure zo Investors: A REAPPRAISAL OF FEDERAL
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`Aparmistrative Poricres UNDERTHE °33 AND °34 Acts 95-96 (1969)
`[hereinafter cited
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`as WaeaT Report].
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`8 See Schneider, Developments in 1934 Act Reporting, PLI 3p Inst. on Sec. Res.
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`110-11 (1972). In certain instances, motive must be disclosed. Cochran v. Channing Corp.,
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`211 F. Supp. 239 (S.D.N.Y. 1962)
`(anti-fraud rules could be violated by failure to
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`disclose motive for cut in company’s dividend rate). But see Lester v. Preco Indus.,
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`Inc., 282 F. Supp. 459 (S.D.N-Y. 1965)
`(allegation that at time of registration officers
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`intended to mismanage corporate funds not sufficient to bring action under anti-fraud
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`rules).
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`For an example of an attempt to examine motive, see Wall St. J., Nov. 24, 1972,
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`at 4, col. 3: “Asked to explain the resignation [of Lybrand, Ross Bros. & Montgomery
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`as auditors for International Controls Corp.], an officer replied ‘There isn’t any one
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`specific reason. In general, it related to our feeling that the auditor-client relationship
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`we desire to maintain can’t be so any longer.’ Pressed for specifics,
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`them... .”
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`Compensating balance arrangements also fall within this category of soft informa-
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`tion, “Lack of disclosure [of compensating balance arrangements] has been justified
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`on the grounds that such arrangements were generally unwritten,
`informal and not
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`subject
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`to support a
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`policy of nondisclosure of a phenomenon which is recognized to be real and significant,”
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`Draft guidelines circulated by the SEC, discussed at 180 BNA Sec. Rec. & L. Rep.
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`A-10 (Dec. 6, 1972), and reprinted in id. J-1.
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`4In preparing a prospectus for a manufacturer of office copying machines, manage-
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`ment blithely described the copies produced as “permanent” in discussing the product
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`with the underwriters. This was in an era when many such devices made copies which
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`faded on exposure to sunlight. But what does the word “permanent” mean in relation
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`to a piece of paper, when even Dead Sea scrolls turn brittle around the edges after a
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`few thousand years? Although the businessmen seemed to know what a “permanent”
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`copy was, the lawyers were not certain, The prospectus adopted the circumlocution that
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`the copies would resist deterioration and fading as well as any normal printed matter,
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`256
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`UNIVERSITY OF PENNSYLVANIA LAW REVIEW [WVol. 121:254
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`“Ward” and “soft” must be recognized as highly relative concepts
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`suggesting no sharp dividing line. Many apparently hard statements
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`have soft cores and vice versa. Audited historical financial statements
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`are normally considered to be a classic type of hard information. Ac-
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`counting is not an exact science, however, and many subjective evalua-
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`tions and other types of soft information must be considered in order to
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`prepare audited financials.® On the other hand, many types of soft in-
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`formation contain an element of “fact.” Thus, statements about a man’s
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`excellent reputation for integrity and creativity are normally considered
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`to be too soft for inclusion in a prospectus, although existence of a repu-
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`tation has been considered a “fact” which can be proven in court under
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`traditional rules of evidence.® Similarly, the existence of a plan for the
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`future may be treated for various purposes as a “fact,” even though the
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`plan may be very indefinite and subject to many contingencies which
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`often cannotbe controlled.
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`The dividing line between hard and soft information is sometimes
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`bridged by casting statements in terms of beliefs, opinions, or expecta-
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`tions.” Thus, the statement that a company believes itself to be the
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`whatever that may mean. See Prospectus, Magnefax Corp., SEC Reg. File No. 2-17,943
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`the establishment of
`5Soft information in financials relates to such matters as:
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`reserves for bad debts,litigation, and tax audits;
`judgments concerning the degree of
`profitability and extent of completion of open contracts when using percentage of com-
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`pletion accounting;
`judgments concerning useful
`lives of assets (based on factors of
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`wear and also obsolescence)
`in calculating depreciation; and valuing intangible assets,
`such as patents or good will of an acquired business. Litton Industries has been questioned
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`for preparing earning statements improperly based upon estimates of a recovery on a
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`$450 million claim against the government. See 162 BNA Sec. Rec. & L. Rep. A-10
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`(July 26, 1972). Chairman Casey has recently commented on this area:
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`it seems vital to me that [accountants] correct the impression that accounting is
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`something which produces exact measuremenis—that it is a scale on which a
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`business can be weighed to getan exact and precise answer as to its performance
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`and the degree of its progress in any particular period and its value. It seems to
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`me that there is a need for greater public understanding that the accounting
`process relies on and produces estimates.
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`Accountants have encouraged the public to think of accounting as an exact
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`science by producing a single number result and limiting accountants’ respon-
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`sibility to a single, segregated section of reports to shareholders, when the essence
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`of the accrual system of accounting is estimation and prediction of future events.
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`Address by SEC Chairman Casey, American Institute of Certified Public Accountants,
`Oct. 2, 1972, at 6-7 (emphasis added).
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`8C,. McCormick, Evmmence § 44 (2d ed. W. Cleary 1972). Traditional rules of
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`evidence sometimes distinguished between reputation and character. A man’s character
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`is said to be too subjective or elusive an attribute to be a proper subject of evidence,
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`although his reputation is an objective, provable fact.
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`Reputation, of course, differs somewhat from an opinion held by a particular indi-
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`vidual. Id. Thus, a particular individual may hold another person in low regard, although
`the holder of the opinion may recognize that the subject of the opinion has an excellent
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`reputation.
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`7 Chairman Casey made a similar point in a recent speech regarding the Commission’s
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`Then, there is the question of whether we can really justify the prohibition of
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`forecasts which are carefully prepared, relied on for budgeting and planning
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`purposes, based on comprehensive data and reasonable assumptions and well
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`articulated and regularly supplemented to reflect supervening developments and
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`1972]
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`SOFT INFORMATION IN SEC FILINGS
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`237
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`largest producer of a product purports to be a statement of a “fact”—
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`that is, the fact about the belief held—even though the subject of the
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`belief may be soft information, if the company does not have precise
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`information aboutits competitors.
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`The Commission has been particularly ingenious in turning soft
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`representations into hard ones (one might call them pseudo-hard) by
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`using the “implied representation” technique. This approach is em-
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`ployed extensively by the SEC in broker-dealer administrative pro-
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`ceedings, typically when a salesman has madea very optimistic forecast
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`expressed in terms of his opinion or belief. The Commission holds that
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`every expression of opinion contains an implied representation of “‘fact”’
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`—namely, the fact that the opinion has an adequate basis. If the Com-
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`mission discerns no adequate basis for the opinion, it finds a misrepre-
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`sentation in this implied factual representation.®
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`The dividing line may be especially blurred when dealing with the
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`future, depending on whether the statement is an affirmative representa-
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`tion about what will occur or a statement about a present plan or expec-
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`tation for the future. The relative hardness of a statement should turn
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`less on its form (for example, a statement concerning what will happen
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`as opposed to a statement of present expectation) and more on the un-
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`derlying substance. If a company has a firm agreement to buy a prop-
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`erty, with closing scheduled ten days after the effective date of its
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`prospectus,andall closing preconditions have beensatisfied, a statement
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`that the company “will” (or presently proposes to) purchase the prop-
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`erty may be considered reasonably hard, and, therefore, acceptable for
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`prospectus inclusion under current practice. But a statement that the
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`company will (or even the softer statement that it presently expects or
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`proposes to) open one hundred additional branches over the next five
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`years, when no further locations have been selected, would be too soft
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`for inclusion in a prospectus underprevailing standards.
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`PREVAILING PRACTICES OF EXCLUSIONS
`TI.
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`There has been somethingof a “conspiracy ofsilence” in excluding
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`soft information from SEC filings. The Commission andprivate parties
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`preparing SECfilings, each for their own reasons, have generally (with
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`revisions in estimates. If we do prohibit forecasts which a company makes and
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`circulates, are we subjecting the company to statutory liability for failure to
`disclose a material fact? The forecast is an estimate but its existence and the
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`articulated judgment it represents is a fact.
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`Address by SEC Chairman Casey, Financial Executives Institute, Oct. 18, 1972, at 16-17
`(emphasis added).
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`8 Cohen & Rabin, Broker-Dealer Selling Practice Standards, 29 Law & ConTEME.
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`Pros. 691, 704-05 (1964). The Commission has gone so far as to establish conclusively
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`that certain types of opinions may never be adequately based in fact, such as opinions
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`that there will be a very sharp rise in the market price of a speculative security.
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`258
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`UNIVERSITY OF PENNSYLVANIA LAW REVIEW [Wol. 121:254
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`some exceptions) excluded soft information from such filings. Although
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`the prevailing attitude on soft information has emerged primarily in
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`contexts concerning registration statements filed under the 1933 Act,?
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`the same approach is normally applied (with some exceptions) on a
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`fairly uniform basis to other types of filings—proxy statements and
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`periodic reports for example.
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`A. The Traditional SEC Position
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`The Commission has been motivated by a desire to protect in-
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`vestors against questionable selling literature, as well as to aid in the
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`enforcement of statutory liabilities.1° SEC filings, especially 1933 Act
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`prospectuses, traditionally have been considered to be among the most
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`accurate and reliable (although not necessarily the most useful) sources
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`of information available to investors. The Commission tries to confine
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`these documents to hard information to assure a continued high degree
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`of reliability. Moreover, since it is generally more difficult to prove an
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`inaccuracy in soft information, the limitation of filings to hard informa-
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`tion makes it easier to establish accountability for inadequate dis-
`closures.
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`Furthermore, according to the traditional SEC view, the inclusion
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`of soft information in filings would clothe such information with an
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`unduly high aura of credibility. Investors assume, with a great deal of
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`justification, that information appearing in SEC filings has been pre-
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`pared with considerable care, tending to assure its accuracy.“ There-
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`fore, under the SEC’s approach, if soft information appeared in a
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`prospectus, the public would incorrectly assume an unwarranted degree
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`of reliability—that a prediction or projection would almost certainly be
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`fulfilled, or that any statement made is subject to verification by ob-
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`jective evidence.
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`The bootstrap element in this logic is apparent. If the public as-
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`sumes that filed information is completely verifiable by objective data,
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`[hereinafter cited as 1933
`A 1. Securities Act of 1933, 15 U.S.C. §§ 77a et seq. (1970)
`ct].
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`10 For two excellent and rather critical expositions of the traditional SEC position,
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`see Kripke, The SEC, the Accountants, Some Myths and Some Realities, 45 NVUL.
`Rev. 1151 (1970) [hereinafter cited as Myths]; Mann, Prospectuses: Unreadable or Just
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`Unread?—A Proposal
`to Reexamine Policies Against Permitting Projections, 40 Gro.
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`Wasu. L. Rev. 222 (1971) [hereinafter cited as Prospectuses]. A more sympathetic anal-
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`ysis of the SEC position appears in Heller, Disclosure Requirements Under Federal
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`Securities Regulations, 16 Bus. Law. 300 (1961). For a judicial exposition of the tradi-
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`tional SEC view, see Union Pac. R.R. v. Chicago & N.W. Ry., 226 F. Supp. 400, 408-09
`(ND. Dl. 1964).
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`11 Investors may also assume, with some though by no means total justification,
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`that the SEC itself has verified the statements in a prospectus, notwithstanding the
`boldface warning on the cover to the contrary, The Staff certainly does make comments
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`or requests for supplemental information designed to verify the accuracy and adequacy
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`of some disclosures, especially those which have elements of softness.
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`1972]
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`SOFT INFORMATION IN SEC FILINGS
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`259
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`it does so precisely because filings have been confined in the past to
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`hard information. This cause and effect cycle could be broken easily,
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`however, if a new policy were adopted to permit greater use of soft in-
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`formation in filings. Indeed, the Commission’s view does not deny either
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`the relevance of soft information in making investment decisions, or
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`the fact that soft information is used extensively (and quite appropri-
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`ately) by investors. Rather, the traditional Staff attitude may be sum-
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`marized to the effect that soft information is all right in its place, but
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`an SECfiling is not its place.
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`The SEC’s hostility to soft information is particularly evident in
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`its comment letter practice. With insights sometimes suggestive of
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`paranoia, the Staff has shown particular zeal for detecting, and request-
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`ing the deletion of, implied predictions in seemingly inoffensive Jan-
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`guage. Also Staff requests for supplemental information (for its own
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`use but not for inclusion in filings), apply with disproportionate fre-
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`quency, and occasionally with chilling effect, to statements suspected
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`of being soft, such as representations about a company’s competitive
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`position, or about the management’s beliefs in that regard.”
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`B. Acquiescence by Private Parties
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`Issuers, underwriters, and their counsel generally have acquiesced
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`as a matter of self-protection in the traditional exclusionary policy of
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`the SEC regarding soft information. They are not anxious to assume
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`needless exposure to potential liability by making soft representations
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`which maybe difficult to substantiate, especially if a reasonably based
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`soft statement (such as a prediction or subjective evaluation) made in
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`good faith proves to be incorrect.
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`Since securities are sold primarily through oral sales efforts, with
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`supplemental information often being supplied to dealers through under-
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`writers’ memoranda which are not filed with the SEC,” there has been
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`relatively little pressure by issuers and underwriters to allow (or re-
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`12 In one situation in the author’s experience, the initial filing set forth management’s
`broadly stated beliefs about
`the company’s industry position. This belief was based
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`primarily on the accumulated feel for the industry acquired by the executives over
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`many years of personal contracts. Management’s more specific beliefs, expressed privately
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`to the underwriters in preparing the registration statement, could have been erroneous
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`by a wide margin, and still the much more general statement in the prospectus would
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`have been completely accurate. Despite the absence of objective data, counsel and
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`underwriters were completely satisfied with the statement made in the initial filing.
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`On review, however, the Staff raised so many questions about the basis for management’s
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`belief, that the statement was finally modified rather than risk further delay by prolonged
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`discussions, Cf, Chris-Craft Indus., Inc. v. Bangor Punta Corp., 426 F.2d 569 (2d Cir.
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`(disclosure of “fact” of anticipated price per share considered improper), dis-
`1970)
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`cussed in SEC, Consequences of Corporate Acoursitions 172-77 (C, Schneider, J.
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`Bauman & H. Wander eds. 1971).
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`18 Such documents may be supplied supplementally to the SEC (SEC Securities Act
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`Release No. 4936, {| 42 (Dec. 9, 1968)), but they are not “filed” or subject
`to the
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`liabilities which attach to deficient filings as such.
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`260
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`UNIVERSITY OF PENNSYLVANIA LAW REVIEW [Vol. 121:254
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`quire) more soft information in prospectuses. A prospectus is a some-
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`what schizophrenic document, which might serve either a selling or
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`liability-prevention function. Faced with the enormous potential li-
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`abilities for a deficient filing, most private parties have opted to stress
`the preventive function, treating the prospectus as an insurancepolicy."
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`They can take comfort in the knowledge that the prospectus contains
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`only statements that are demonstrably provable by objective evidence
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`already at hand.
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`Additionally, preparation of a filing in accordance with the tradi-
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`tional formula can reduce the delay and trauma inherent in the pro-
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`cessing procedure. A pragmatic adjustment to these realities by those
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`who preparefilings has ingrained habits very deeply, and consequently
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`the traditional approach has become a generally accepted pattern. One
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`actively engaged in the securities business can easily forget how stylized
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`andstilted this genre of literature appears to the uninitiated.
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`C. Excepiions to the Practice of Exclusion
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`Exceptions exist to the general policy of excluding soft information.
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`One may detect a wide variety of relatively soft statements in many
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`filings. For example, the application of proceeds section of prospectuses
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`and certain data in Form 8-11 (the form for various types of real estate
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`offerings) 7° expressly require forward-looking information. The intro-
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`ductory statement in a prospectus, which describes so-called risk factors
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`and speculative aspects, tends to develop some soft areas.*® Further-
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`more, there has apparently been a slight shift in the Commission’s atti-
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`tude recently, resulting in more toleration of soft information in filings
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`when it is particularly material and useful to investors.*” For instance,
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`14 See text accompanying notes 30-31 infra.
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`15 See SEC Form §-11, Item 6(b), calling for future estimates of cash flow and
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`taxable incomein certain cases,
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`16 SEC Securities Act Release No. 4936, Guide No. 6 (Dec. 9, 1968), as amended,
`SEC Securities Act Release No. 5278, Guide No. 6 (July 26, 1972).
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`17 The Commission’s
`recent suggestions
`regarding prospectuses of broker-dealers
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`which offer their own securities publicly may well reflect this trend. See SEC Securities
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`Act Release No. 5222 (Jan. 3, 1972). These suggestions expressly call for various types
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`of soft information. The guidelines as a whole convey the impression that more soft
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`information than has been typical would not only be tolerated, but would be required
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`in prospectuses of broker-dealers.
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`For example, the Commission suggests discussion concerning the competitive impact
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`on the issuer—which might well be favorable—of developments such as access of financial
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`institutions and broker-dealers to various market places, the impact of NASDAQ and
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`other automated quotation systems, revision of commission rate structures, trends toward
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`public ownership, antitrust
`implications of present
`industry practices, and pending
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`proposals for industry change. Id. {| 5. These topics represent highly sensitive and unclear
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`in a state of flux with numerous unknowns. The Commission historically has
`areas,
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`neither expected nor required discussions of comparable imponderables which face issuers
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`in other industries. The Commission’s intimate familiarity with the brokerage business
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`no doubt gives it confidence that it can exercise some independent judgment in processing
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`broker-dealer filings, a factor which probably increases its willingness to deal with soft
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`information concerning this particular industry.
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`1972]
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`SOFT INFORMATION IN SEC FILINGS
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`261
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`the Staff is reconsidering its traditional prohibition of financial projec-
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`tions in filings.?® Such a shift in attitude is clearly consistent with Chair-
`man Casey’s call for more economic reality.”
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`As a matter of practice, the Commission has been moretolerant of
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`soft information in filings concerned with acquisitions (mergers, ex-
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`change offers, and so forth), tender offers, and proxy contests.”° In these
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`situations an investor most clearly needs “fair,” as contrasted with
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`“conservative,” disclosure. When an investment decision involves a
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`choice between two securities (or two managements), the alternate
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`choice may seem to be relatively better than it really is, if an overly
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`conservative presentation makes one security (or management) appear
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`worse than it in fact is. Furthermore, in an adversary situation, such
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`as a proxy contest or disputed tender, each contestant can raise ap-
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`propriate challenges to the soft information offered by the other, thus
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`tending to assure that investors will not be misled.
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`Furthermore, the SEC has adopted a double standard, depending
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`on whether soft information is favorable or adverse. It has considered
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`18 See SEC Exchange Act Release No. 9844 (Nov. 1, 1972). A recent proposal for
`more disclosures regarding substantial write-offs and charges against income would also
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`call for a great deal of predictive information. SEC Securities Act Release No. 5313
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`(Oct. 2, 1972).
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`19 Chairman Casey drew particular attention to the economic realities relating to
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`compensating balance arrangements for bank loans. Address by SEC Chairman Casey,
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`American Bankers Association, Mar. 17, 1972, reported in 144 BNA Sec. Rec. & L. Rep.
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`A-7 (Mar. 22, 1972). He stated that disclosure could not be avoided merely because there
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`Was no