This practice note examines some of the issues most commonly raised in Securities and Exchange Commission (SEC) staff comment letters on registration statements filed for initial public offerings. It is intended to guide you, as counsel to an IPO company, in assisting your client in efficiently navigating the SEC comment and review process.
This practice note discusses comments that apply to IPO prospectuses generally, including comments on plain English principles and expert consent requirements, and comments on specific sections of a prospectus, including the risk factors, management's discussion and analysis of financial condition and results of operations, and others. It provides excerpts from, and links to, representative SEC comment letters, and offers drafting and other tips to help issuers avoid receiving these types of comments or, failing that, anticipate and respond effectively to the SEC's concerns.
This practice note does not provide a comprehensive list of the types of comments that the staff of the SEC's Division of Corporation Finance (SEC staff or staff) can issue, and does not address SEC staff comments on executive compensation disclosure, which has become less relevant since the Jumpstart Our Business Startups Act of 2012 (JOBS Act) enabled emerging growth companies (EGCs) to provide less detailed executive compensation disclosures in their registration statements, which most EGCs undertaking IPOs have done. It also does not discuss financial statement and related accounting issues, which are typically addressed by the issuer's chief financial officer and its independent auditor. SEC staff comments can vary widely from offering to offering and depend on the issuer's industry sector, the stage of the issuer's business, and the issuer's financial condition. Accordingly, each issuer must draft its IPO prospectus disclosures to accurately reflect its own unique facts and circumstances.
For information about preparing the registration statement and prospectus for an IPO, see Registration Statement and Preliminary Prospectus Preparations for an IPO, Top 10 Practice Tips: Drafting a Registration Statement, and Form S-1 Registration Statements. For information about the IPO process, see Initial Public Offering Process.
SEC Review Process
After a company files a registration statement on Form S-1 (or Form F-1 for a foreign private issuer), the SEC staff will perform a cover-to-cover review of the document to monitor and enhance compliance with the applicable disclosure and accounting requirements under the Securities Act of 1933, as amended (Securities Act). The SEC staff does not evaluate the merits of an investment in an IPO but rather focuses on whether the disclosures provided in the registration statement provide investors with enough information to make an informed investment decision.
The SEC Staff's Comment Letter
Virtually all IPO registration statements receive comments. The SEC staff will generally issue a comment letter within 30 days from the date the registration statement is received (whether submitted confidentially or publicly filed on the SEC's Electronic Data Gathering, Analysis, and Retrieval system (EDGAR)).
The SEC staff's comments will include a description of any deficiencies identified in their review and may also include requests for supplemental information from the company if, for instance, the staff believes the disclosures do not comply with SEC disclosure requirements or omit information that may be material to investors. Each comment letter is unique to the filing and may include comments that require substantial revisions to the registration statement. The number of comments in the SEC staff's initial comment letter can range from just a few to 70 or more. There will likely be several rounds of letters from the SEC staff and responses from the company until the issues identified in the staff's review are resolved.
Responding to SEC Staff Comment Letters
You should work with your client, underwriters' counsel, the company's auditor, and the other members of the IPO working group to carefully address each SEC staff comment in the company's response letter and in any amended registration statement filed with it.
When responding to the SEC, it is important to be aware that your responses will eventually be made publicly available. If you do not fully understand a specific comment, you should contact the SEC staff reviewer for clarification so you can provide an appropriate response. Thoughtful, well-written response letters are crucial to resolve SEC staff comments efficiently. Responses should focus on the SEC staff's specific questions and cite the SEC's rules, guidance, and other authoritative sources (especially for accounting comments) wherever possible. Although it is helpful to review other companies' response letters, a company's response letter should address its unique facts and circumstances. Additionally, be aware that prior filing reviews do not constitute precedential authority and therefore your response may not receive the same treatment as the same response given by another company. If an amendment to the registration statement is being filed with the response letter, the response letter should indicate specifically where the revisions have been made to address the SEC staff's comments.
You should not assume that receiving a comment means that the SEC staff reviewer disagrees with the company's approach or disclosure. Often comments seek additional information and clarification to enable the staff tobetter understand the company's position. You should not respond to a comment by adding disclosures to the registration statement that you believe to be immaterial. Instead, if you believe that a comment concerns an immaterial matter, you should communicate that to the SEC staff reviewer (legal or accounting) responsible for the comment as early as possible in the review process to avoid causing any delays in resolving the comment. The response letter should thoroughly explain the judgments the company applied in drafting such disclosure to assist the SEC staff in understanding why additional disclosure is not material to investors or necessary to comply with the disclosure requirements.
Generally, SEC comment letters request responses within 10 business days. However, if you believe more time is needed to respond to the comments, you should discuss this with the appropriate SEC staff reviewer.Once all the SEC staff's comments on the registration statement have been resolved, the company can request that the SEC declare the registration statement effective, which allows the company to proceed with the IPO. The SEC staff will upload its comment letters and the company's responses to EDGAR within 20 business days of declaring the registration statement effective.
Once all the SEC staff's comments on the registration statement have been resolved, the company can request that the SEC declare the registration statement effective, which allows the company to proceed with the IPO. The SEC staff will upload its comment letters and the company's responses to EDGAR within 20 business days of declaring the registration statement effective.
For information generally on responding to SEC comment letters and the SEC staff review process, see SEC Comment Letter Responses and SEC Review Process.
To minimize the number of SEC staff comments on your client's registration statement, you should review staff comment letters and company response letters from recently completed IPOs in the same industry to identify industry-specific issues that the SEC staff may raise, as well as IPOs for companies that have adopted similar accounting principles to identify any accounting-specific issues that the SEC staff may focus on in the filing review. Foreign private issuers should also review SEC comment letters and company response letters from recently completed IPOs for issuers with the same country of domicile. However, many comments tend to fall under the recurring themes discussed below.
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Originally published by LexisNexis.
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