What is a Letter of Comment?

A letter of comment is a notice from the Securities and Exchange Commission (SEC) advising a company planning a new offering that it may want to make certain changes to its registration statement. Registration statements are legal filings provided to the SEC to give it information about a company, including how it is organized and how many shares are being made available in the new offering. The letter of comment is not an indicator of wrongdoing, but is merely a request for additional clarity to avoid potential confusions and conflicts.

In the letter of comment, the SEC will outline its concerns about the registration statement and make recommended changes. The company can respond by filing those changes, thus resolving the matter before the public offering is made. If the company does not agree with the SEC's recommendations, it can discuss the issue with representatives and work out a mutually agreeable solution.

While receiving a letter of comment may seem ominous, as it suggests there is a problem with the registration statement, that problem may not be serious in nature. Sending such letters is not an indicator that the SEC thinks a company is engaging in fraud or any other wrongdoing, and the letter is not a formal warning. The purpose of the letter of comment is to make sure the registration statement is scrupulously accurate in the interests of protecting investors and the public.

Inaccuracies in a registration statement can include a variety of things, and they are often innocent in nature. The SEC, as the regulatory agency overseeing offerings of securities, wants to make sure that information associated with such offerings is transparent, correct, and sufficiently detailed. If information appears unclear or inaccurate, as might happen for example if an old address was left in by mistake, the letter of comment identifies it and provides an opportunity to correct it.

The SEC is responsible for carefully combing through all legal filings it collects to identify anything of concern. Companies can run into trouble if they fail to follow filing directions exactly or if they accidentally skip steps or elide information. When a letter of comment is received, the company is expected to review it, acknowledge the contents, and work on addressing the issue that drew the attention of an SEC analyst. If the letter appears to be erroneous in nature, identifying a problem that doesn't exist, company representatives can provide supporting documentation to resolve the situation.