If your company is considering a public offering of securities—whether in connection with an initial public offering, a follow-on offering, the registration of securities on a shelf for an eventual takedown, or in connection with a merger or acquisition—you may face the task of preparing a Securities Act registration statement on Forms S-1, S-3, or S-4. This article discusses the steps you can take to simplify the SEC review process for a registration statement on Form S-1. Our guidance for offerings registered on Form S-3 will be released on September 17 and our guidance for offerings registered on Form S-4 will be released on September 24.
The Division of Corporation Finance of the Securities and Exchange Commission selectively reviews filings made on Forms S-1, S-3, or S-4 to ensure compliance with disclosure requirements. The Division issues comment letters where disclosures appear to be inconsistent with SEC rules or applicable standards, or appear to be materially deficient in their rationale or in clarity.
Filing a registration statement is a complex process that can result in a long and costly review by the SEC. Some registration statements are always reviewed, such as filings on Form S-1 for an initial public offering. Other registration statements are rarely or never reviewed. For example, registration statements filed on Form S-3 are much less likely to receive a full review, and registration statements filed by well-known seasoned issuers (WKSIs) in connection with a shelf takedown are not reviewed at all.
When a company decides it wants to raise capital, time is usually of the essence. To minimize the duration of the review process and hasten its securities to market, a company should prepare the initial registration statement to minimize the potential for comments from the SEC Staff (the “Staff”).
A Form S-1 must comply with the item requirements contained in the instructions to Form S-1, as well as Regulations S-K and S-X. In addition, the Staff may also provide comments to address disclosure issues that are not obvious from a reading of these rules and regulations. The SEC publishes its comment letters on EDGAR after its review of the filing has ended, thereby providing some insight into the more nuanced comments the Staff is likely to issue and how the Staff expects registrants to address them. Before filing its registration statement, a company and its counsel should review comment letters relating to offerings within its industry, as well as comment letters relating to offerings that are similar in type and size.
Items of Particular Interest to the Staff
Our experience advising companies during the SEC review process, our attorneys’ experience while working at the SEC, and a review of SEC comment letters over the past decade reveal that certain disclosure points tend to receive greater attention from the Staff than others.
For Form S-1 registration statements, the Staff has a history of focusing on and issuing comments regarding (1) emerging growth company disclosures, (2) industry-specific disclosures about the registrant, such as developments affecting financial services regulations for banks and cyber-security developments for web-based companies, (3) business experience of management, (4) selling security holders and identification of broker-dealers as underwriters, (5) legal opinions, (6) recent sales of unregistered securities, (7) exhibits, and (8) third party statements in the prospectus.
(1) Emerging Growth Company Disclosures. If a registrant qualifies as an emerging growth company (EGC), the Staff will issue a comment to the EGC to the extent that the registrant has not identified itself as such on the prospectus cover page and indicated the exemptions from the securities laws that the registrant intends to take advantage of or waive. Accordingly, a registrant should take care to include this information in its first registration statement filed with the SEC. For an example of this comment, see the following comment letter:
(2) Industry-Specific Disclosures. The SEC’s Division of Corporation Finance generally assigns Form S-1 registration statements to be reviewed by one of twelve groups based upon the industry of the registrant (e.g., financial services, information technology, apparel, etc.). The Staff makes a point of staying apprised of developments within these industries and expects registrants to address how these developments may affect their business and, ultimately, their securities. To prevent SEC comments, registrants should carefully analyze comment letters related to their industry and address any industry-specific developments in the Business section of their Form S-1, and, if necessary, the Risk Factors section. As an example, after a recent uptick in data security breaches involving technology companies, the SEC began issuing comments requiring that these companies address in their filings steps taken to prevent these breaches in the future. To the extent that the registrant’s industry has been in the news regarding an issue that may affect the registrant’s operations, the registration statement should address that issue.
(3) Business Experience of Management. Form S-1 calls for disclosure of information about management, including the business activities of each director and executive officer over the past five years. While including this information in the registration statement may seem like an easy task, the SEC still routinely issues comments on this subject. When preparing the registration statement, registrants must account for all business activity of management. If someone was retired, unemployed, etc., during the five-year period leading up to the filing of the Form S-1, it must be disclosed regardless of whether the registrant thinks that information is immaterial or embarrassing. Failure to address gaps in business activity will all but guarantee an SEC comment.
(4) Selling Security Holders and Identification of Broker-Dealers as Underwriters. The Staff has several areas relating to selling security holders and broker-dealers on which they often comment. First, they routinely issue comments where a selling security holder is an entity but the registrant has not disclosed the natural person(s) who exercise voting or dispositive power over the securities of that entity. Second, where it appears the selling security holder may be a broker-dealer, or an affiliate of a broker-dealer, the Staff may ask that the company disclose this fact. Third, if the selling security holder is a broker-dealer, but is not identified as an underwriter, the Staff will issue a comment advising the registrant to list the broker-dealer as an underwriter. Unless the securities being registered for the broker-dealer on the Form S-1 were received as compensation for underwriting activities, the Staff will not declare the registration statement effective until the broker-dealer is identified as an underwriter.
(5) Legal Opinions. The Staff frequently issues comments regarding the legal opinions issued in connection with offerings on Form S-1. Recognizing that registrants and counsel needed additional guidance, the Staff released Staff Legal Bulletin 19 on October 14, 2011, a copy of which can be found at https://www.sec.gov/interps/legal/cfslb19.htm. The most common mistakes with regard to legal opinions include:
- making statements in the opinion letter implying that it may not be relied upon by anyone other than the registrant (purchasers of the securities are entitled to rely upon the opinion);
- stating that debt securities, guarantees, options, warrants and rights are validly issued, fully paid and non-assessable (when a registrant issues these securities, counsel must opine that they will be or are “binding obligations of the registrant”);
- stating with respect to resale registration statements that shares “will” be validly issued, fully paid and non-assessable (because the shares are already outstanding, the opinion should state that they “are” validly issued, fully paid, and non-assessable); and
- including overly broad assumptions, such as an assumption that the registrant is legally incorporated, has sufficient authorized shares, or has taken all corporate actions necessary to authorize the issuance of the securities. These are facts that go to the essence of counsel’s due diligence responsibilities in issuing its legal opinion and, therefore, may not be assumed away.
(6) Recent Sales of Unregistered Securities. Form S-1 calls for the disclosure of recent sales of unregistered securities per Item 701 of Regulation S-K. The Staff pays close attention to this Item requirement, particularly where the registration statement relates to the resale of securities issued in a private offering pursuant to Section 4(a)(2) and Rule 506. Registrants should take care to include all the information that Item 701 requires, particularly the exemption relied upon for the initial issuance. In addition, although it is not directly required by the language of Item 701, where the registrant has stated that it relied solely upon Section 4(a)(2) (as opposed to the Rule 506 safe harbor), the Staff may ask whether the purchasers were all accredited. If there were non-accredited investors, the Staff may ask what information was provided to the non-accredited investors (e.g., private offering memorandum, business plan, financial statements, etc.). Anticipating these comments, and addressing them in the initial draft of the Form S-1, will help to minimize SEC comments.
(7) Exhibits. Item 601 of Regulation S-K lists and describes the exhibits that must be filed with registration statements under the Securities Act of 1933. A common Staff comment is that the issuer has failed to include one or more material contracts required by Item 601(b)(10). When preparing the registration statement, registrants should be careful to determine whether they have made any disclosures, for example, in the Business section, MD&A or the notes to the financials, that indicate the registrant is a party to a contract that is material to its operations. If so, that material contract should be filed as an exhibit. If a contract is not material, but the description of the contract could lead a reader of the Form S-1 to question its materiality, the registrant should include disclosure in the Form S-1 explaining why the contract is not material.
(8) Third Party Statements in the Prospectus. Registrants frequently cite third party research and market data in their Form S-1, and the Staff will ask for copies of this information in connection with their review to ensure that the use of the information by the registrant is balanced and accurate. When preparing the Form S-1, registrants should make note of citations to this data and prepare a binder with the supporting documentation so that it may be delivered to the Staff. Registrants may be able to preempt a comment on third-party data by supplementally providing supporting materials to the Staff concurrently with or shortly after the filing of the Form S-1. If the third party data was commissioned by the registrant for use in the Form S-1 and the report is referenced in the Form S-1, the consent of the third party to use the report must be filed as an exhibit.
Helpful Tips in Dealing with the Staff During the Review Process
Generally speaking, the Staff will not comment on a registration statement until the registration statement has been filed through EDGAR. However, registrants may request a pre-filing conference with the Staff for unique issues that must be addressed before filing. If the Staff agrees to review pre-filing issues, it will ordinarily request a letter from the registrant or its counsel explaining the issues. When engaging in calls with the Staff, registrants should ensure that they include all necessary parties to address Staff questions. If the issues pertain to the interpretation of legal or accounting rules, then the registrant’s professional advisors can lead the call with the Staff on behalf of the registrant. If the call will require company-specific information, then the Staff will not object to participation of the appropriate company officer.
Once the registration statement has been filed, the Staff will usually try to contact the registrant or counsel within five to six business days to advise whether there will be (a) a full review of the registration statement, (b) a “monitor” (or targeted/limited review) of the registration statement, or (c) a “no review” of the registration statement. A full review of the registration statement typically means that the Staff will assign two attorneys and two accountants to review the whole document. A monitor, or targeted review, means that the Staff will only conduct a limited review of the document focused on certain specific sections.
If you haven’t heard from the Staff within the five- to six-day period, you can always call the number for the Assistant Director Office that corresponds with the registrant’s industry. Assistant Director Offices are generally composed of between four and eight staff attorneys, four and eight staff accountants, an assistant chief accountant, two accounting branch chiefs, a special counsel, a legal branch chief, a senior assistant chief accountant, and an assistant director. A list of the Assistant Director Offices and their phone numbers is available on the sec.gov website at:
Once the registration statement has been assigned for review, the Staff generally tries to provide comments within 27 calendar days of the filing date. For subsequent amendments to the registration statement, the Staff generally tries to respond within 10 business days. There may be circumstances in which the registrant disagrees with a position taken by the Staff in charge of reviewing its filing. In this situation, registrants may request to have a conference with the supervisors of that particular Assistant Director Office. The highest ranking attorneys in each Assistant Director Office are the associate director and the legal branch chief. The highest ranking accountants in each Assistant Director Office are the senior assistant chief accountant and the accounting branch chiefs. Associate directors oversee the Assistant Director Offices, which in turn report to the deputy director and director of the Division of Corporation Finance. When making a request for a higher level review of the point or points of disagreement, the registrant or its counsel should be sure to inform the Staff members who performed the initial review of the registrant’s request.