Handling IPO comment letters from the SEC

13 April, 2017

Wayne Carnall
Consultant, PwC; Retired Partner, PwC US

In a recent blog post, I provided information about how to work with the SEC for a successful IPO. Now I’d like to share some tips for handling comment letters on your registration statement.

(Incidentally, I will be speaking on these, and other considerations on how to work with the SEC during an IPO, at our upcoming “IPO and Dual Path Considerations – Preparing for the Big Event” conference in New York on April 24. I invite you to join us if you’re interested in learning more about paths to liquidity.)

After you file an S-1, the SEC staff of lawyers and accountants do a cover-to-cover review of the document with a particular emphasis on your company’s financial statements. During this review, the SEC staff looks for compliance with GAAP as well compliance with the Commission’s regulatory requirements – for example, the need for financial statements of an acquired business. The SEC staff will look for consistency within the document itself and with other public information – for example, is the segment presentation consistent with how the company describes its business in the document as well as on its website?

In comments, the SEC staff may request that a company provide supplemental information, modify its disclosure or perhaps restate the financial statements for a correction of an error. Each comment letter is unique to the particular filing. However, a large number of comments tend to fall under a handful of recurring themes, including stock compensation, MD&A (management discussion and analysis), tax issues, and acquisitions.

A company’s explanation will often resolve a comment, but the SEC staff may issue additional comments following its review of the company’s response. This comment and response process continues until the comments are resolved.

The vast majority of S-1 registration statements for IPOs receive comments. Responding to the comments can be handled effectively by adhering to the following guidance:

Keep calm and don’t rush

There is usually time pressure associated with the IPO process. Accordingly, companies want to respond to the comment letters as quickly as possible. The quality of the response is critical. If the response is not complete and accurate, the SEC staff will repeat and perhaps expand the questions. Some companies can be delayed for months in a back and forth process that could have been avoided if they took a few more days to improve the quality of their first response. The fastest way to get through the review process is to take your time in responding.

Ask for clarity, don’t guess

You should understand the objective of the question and draft the response accordingly. If you don’t understand a comment, contact the SEC staff and get clarification. There is a mutuality of interest in the efficiency of the comment and response process. You do not want to waste time responding to a question the SEC staff is not asking and the SEC staff does not want to waste time reading and reviewing such a response. This will only result in more comments and more responses.

Do your own work

Comment letters and responses are public information. Various organizations collect and analyze all of the comments and responses. You will be able to find comments (with responses) that are similar to the question your company received. While this information can be a helpful aid, do not cut and paste from another company’s response letters. Along with the issue of plagiarism, the fact that another company resolved what would appear to be similar question does not mean the same response will work for you. You do not know why the SEC staff accepted a particular answer – there could be many differences between the other company’s fact pattern and yours. View the comment letter process as a personal communication between the SEC staff and you, and respond based on your particular facts and circumstances.

It’s all public

Remember, the comment letters and responses are public information shortly after the registration statement is declared effective. Even comment letters related to EGCs (Emerging Growth Companies), which have the ability to submit an IPO confidentially, are made public. These letters and responses are part of your public communications and should be viewed the same as disclosures included in the S-1. The financial press writes stories about issues raised in the comment letter process. You do not want your company to be the subject of an unflattering story based on a poorly drafted response letter.

I invite you to join us at one of our upcoming events to learn more about going public, and being a public company.