If you work with us, you will hear it many times that we strongly advise against financial projections … as they can get you in trouble. However, companies always seem to want to include projections that start from zero, and grow exponentially. This type of financial projection that is untethered to reality is a primary driver of what will cause investors to sue for being misled because investors expect companies to believe that those projected results are attainable.
One such commonly used financial projection is the hockey stick graph, as in the example below:
CrowdCheck Law’s projected legal revenues. (FYI, the size of the entire global legal market is anticipated for
This example is pure bunk, because this is not the type of service that can grow exponentially. Maybe you believe that your company can achieve these types of results, and we appreciate that potential competitors may have used these types of projections when presenting to the institutional investor market. However, when done correctly, those numbers are reviewed by industry insiders who understand all the assumptions and trends that underlie these charts, along with the factors that will make these projections speculative.
Another common area where companies’ enthusiasm can run afoul of anti-fraud rules is potential market share. While we appreciate your enthusiasm, if you are a guy or a gal in a garage, you probably do not have a rational basis for assuming you will compete with multinational companies and have a 25% market share in the next couple years (or really at all).
A third of the many ways to be sued is absolute statements about future revenues that have conditions over which the company has no control. For instance, in the Elizabeth Holmes trial (Theranos), one of the two “smoking guns” was financial projections of $40 million a year. Maybe Theranos could have reached those future revenues, but only if the science worked and the FDA cleared the product. Without qualifying statements of future potential revenue with what needs to happen to get there, the company, and Elizabeth Holmes, was found liable.
This is only a small sample of what can get a company sued. The universe of possibilities is only limited by the fury of disgruntled investors.