Letter of Comment
What Is a Letter of Comment?
A letter of comment — or a comment letter — is a document from the Securities and Exchange Commission (SEC) that is sent to a company in response to filing its registration statement, referred to formally as its Form S-1.
Understanding a Letter of Comment
The principal purpose of the comment letter is to assist the issuing company in making the information in their registration statement, also called a S-1 form, clear, transparent, and free from abnormality before the issuance of new shares or different securities. These letters are stored in the SEC's EDGAR database. The SEC started releasing these communications to the public in 2005 for filings made after Aug. 1, 2004.
A comment letter may also allude to the letters that entities and individuals send to the SEC in response to its requests for public comment on proposed rules, amendments to rules, or concept releases.
The items covered in a company's registration statement incorporate the company's financial details, operations, management history, and some other important facts. Comments from staff members at the SEC's Divisions of Corporate Finance and Investment Management will be made based on the information disclosed by the company in its initial filing. The letter will commonly be informal, and it is finished as a courtesy; saving both the company and the SEC time down the road in the event of any errors or inconsistencies is planned. Shielding investors from any misleading or inaccurate information is also planned. Letters of comment are based on SEC staff's understanding of the company's circumstances and are an issue of public record.
Letters of comment are based basically on a company's disclosure and other public information, such as information on the company's website, in press releases, or discussed on analyst calls. Nonpublic information, such as whistleblower tips and PCAOB inspection reports can also be a source of comments. Comments mirror the SEC staff's understanding of the applicable facts and circumstances. In comments, the SEC staff might request that a company give extra supplemental information so that they can better understand the company's disclosure, or may ask that the company give extra or different disclosure in a future filing or change the accounting as well as revise the disclosure by filing an amendment.
Special Considerations
SEC staff could use the letter of comment to ask the company to give further supplemental information so that they can come to a stronger understanding of the company's disclosure and its implications. The letter of comment might ask the company to revise its disclosure, give extra disclosures, or file an alternate disclosure in a future SEC filing. Staff might exchange various rounds of letters of comment with the company to distinguish issues in the filing and resolve them.
Publicly-exchanged companies can significantly cut down on the opportunity expected to arrive to market with new issues in the event that they can guess what comments could emerge out of the SEC. They are very much advised to address them before the registration statement is first completed. The registration statement will become effective when all facts have been signed off by the SEC. Letters of comment don't constitute official statements with respect to the views of the SEC. They simply explain staff opinions, and are limited to the facts of the specific filing in question; they can't be applied to different filings.
Highlights
- Comments are given by the SEC's Divisions of Corporate Finance and Investment Management and just reference material is given in the initial registration.
- The comment letter is used to alter or revise the S-1 registration to ensure that all information gave to potential investors is clear, accurate, and modern.
- A letter of comment is a response to a company's SEC Form S-1 registration for new securities by an issuer.
