Risk Factor Drafting for a Registration Statement
This practice note discusses risk factors in a registration statement, including the basic requirements under securities laws, identifying relevant risks, common risk factors in initial public offerings (IPOs) and for emerging growth companies (EGCs), and general drafting tips for risk factors. While risk factors are one of the most important parts of any registration statement, they are particularly critical to a registration statement on Form S-1 filed in connection with an IPO. Risk factors inform the investor of the potential risks of making an investment in a newly-public company and potentially help protect a company from liability. Risk factors are commonly referred to as free insurance for the company. Not surprisingly, the risk factors section of the registration statement receives thorough examination by the U.S. Securities and Exchange Commission (SEC) in the review process. As such, they should be drafted with care and precision.