The SEC also reviews registration statements filed under the Securities Act such as those filed on Form S-1 as well as those registration statements filed under the Exchange Act as on Form 10.
The Sarbanes-Oxley Act of 2002, requires the SEC to review an issuer’s Exchange Act filings at least once every three years. The SEC may also selectively review an issuer’s filings, including proxy materials and registration statements under the Securities Act.
When an issuer’s filings having been selected for review, the SEC conducts a non-public preliminary review and, on the basis of its findings, determines whether a further examination is warranted. The SEC undertakes three types of reviews..
♦ a full review of the entire filing;
♦ a financial statement review in which the financial statements and related disclosures, such as Management’s Discussion and Analysis of Financial Condition and Results of Operations are reviewed; and
♦ a targeted issue review involving one or more specific items in the disclosures.
Once finished, the SEC may prepare and issue a comment letter to the company requiring a response.
Public Availability of Comment and Response Letters
If an issuer desires to keep certain information confidential, it may do so in limited circumstances by filing a request for confidential treatment. A confidential treatment request may be made pursuant to:
♦ Rule 406 of the Securities Act or Rule 24b-2 of the Exchange Act, with respect to information required to be reported to the SEC such as a material agreement filed as an exhibit to a registration statement or periodic report; or
♦ Rule 83 of the SEC’s Rules of Practice, with respect to information not required to be filed with the SEC such as supplemental information provided in the context of the comment and review process.
Securities Act Rule 406 or Exchange Act Rule 24b-2
A request for confidential treatment made pursuant to Rule 406 of the Securities Act or Rule 24b-2 of the Exchange Act must:
♦ be sufficiently narrow so as only to include information eligible for exemption under the Freedom of Information Act (“FOIA”);
♦ specify the basis for the exemption (there are nine FOIA exemptions available, with “trade secrets and commercial or financial information obtained from a person and privileged or confidential” being the most often invoked);
♦ contain legal and factual analyses substantiating the exemption;
♦ contain an affirmative representation as to the confidentiality of the information; and
♦ indicate the duration for which the exemption is being sought.
The SEC will not generally grant a request for confidential treatment with respect to information that is specifically required to be disclosed under applicable securities laws or information that is otherwise material to investors.
Rule 83 of the SEC’s Rules of Practice
As with a request for confidential treatment made pursuant to Rule 406 of the Securities Act or Rule 24b-2 of the Exchange Act, a request made pursuant to Rule 83 of the SEC’s Rules of Practice must be sufficiently narrow so as only to include information eligible for exemption under the FOIA. However, it is not necessary to substantiate a Rule 83 request for confidential treatment until such time as a disclosure request is made under the FOIA. Any request for confidential treatment that is granted under Rule 83 will expire after 10 years unless renewed prior to its expiration.
Requests for Supplemental Information to be Returned to the Issuer
Issuers may request that the SEC return its supplemental materials that are furnished during the comment and review processes, thus rendering them unavailable for production in an FOIA request. Such a request should be made pursuant to Rule 418(b) of the Securities Act or 12b-4 of the Exchange Act. The SEC will generally honor the request if:
♦ the request is made at the time the supplemental material is furnished to the SEC; return of the supplemental material is consistent with the protection of investors and provisions of the FOIA; and
♦ the supplemental material was submitted to the SEC in paper form.
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Securities offerings are regulated by the Securities Act of 1933, as amended, (the “Securities Act”). Section 5 of the Securities Act requires that securities offerings be registered with the Securities and Exchange Commission (the “SEC”) or be exempt from the SEC’s registration requirements. Private companies seeking to go public are often unaware of the SEC comment process. The SEC comment process applies to registration statements filed by companies who go public using an initial public offering (“IPO”) as well as to companies conducting a direct public offering.
Form S-1 Registration Statement Process
In order to register securities with the SEC, issuers must file a registration statement with the SEC. Typically private companies seeking to go public register securities on a Form S-1 registration statement (“Form S-1 Registration Statement”). All issuers are eligible to register securities offerings on Form S-1.
Form S-1 Parts
A Form S-1 Registration Statement consists of two parts:
♦ A prospectus which is provided to potential investors; and
♦ Supplemental information not provided to investors but which is publicly available.
A prospectus contains financial statements and narrative disclosures about the issuer and the securities offering being registered on the Form S-1 Registration Statement. The prospectus is intended to provide disclosure of all relevant material information necessary for an investor to make an investment decision. The form and content of the S-1 Registration Statement is similar for an IPO and Direct Public Offering. The primary difference is the disclosure of items related to the underwriter in securities offerings or IPO’s, which do not apply to direct public offerings.
Form S-1 Disclosures
The prospectus contains financial statements and narrative disclosures about the issuer and the securities offering being registered on the Form S-1. It is intended to provide disclosure of all relevant material information necessary for an investor to make an investment decision. The form and content of the document are similar for an IPO and direct public offering. The primary difference is the disclosure of items related to the underwriter in securities offerings or IPOs, which do not apply to direct public offerings.
The S-1 SEC Comment Process
Some registration statements, such as Form 8, become effective upon filing, while others, such as Form S-1, do not. Regardless of whether an issuer goes public using an IPO or a direct public offering, the SEC review process is the same. S-1 registration statements are subject to review by the SEC’s Division of Corporation Finance. Upon filing, the statement is typically reviewed by an SEC attorney and an SEC staff accountant to ensure that all required disclosures have been made by the issuer. The SEC does not determine the merits of the issuer’s business, management, prospects or of the securities offering being registered. The role of the SEC is to determine whether the disclosures comply with securities laws.
Form S-1 SEC Comment Period
Approximately two weeks after the filing of an S-1 Registration Statement the SEC completes its review. It then sends comments to the issuer and/or its securities attorney concerning the disclosures made. The issuer must file an amendment to the previously filed S-1 registration statement along with a response letter to the SEC’s comments. SEC comments may be lengthy and complex; it’s important that the issuer and its securities attorney compile the original submission with care, in order to avoidRegardless of whether an issuer goes public using an IPO or a direct public offering, the SEC review process is the same. S-1 registration statements are subject to review by the SEC’s Division of Corporation Finance. Upon filing, the statement is typically reviewed by an SEC attorney and an SEC staff accountant to ensure that all required disclosures have been made by the issuer. The SEC does not determine the merits of the issuer’s business, management, prospects or of the securities offering being registered. The role of the SEC is to determine whether repeated exchanges with the SEC.
The SEC will review the response letter and the amended S-1 registration statement, and will then send additional comments, if necessary. The review of the S-1 Registration continues until the SEC staff is satisfied with the disclosure provided by the issuer. Once that happens the SEC will declare the S-1 effective.
The S-1 must be declared effective before the issuer or any selling shareholder can sell securities registered in the securities offering.
FINRA’s Role in the S-1 Registration Statement
The Financial Industry Regulatory Authority (“FINRA”) is an industry organization that regulates broker-dealers, trading in equities, corporate bonds, futures and options. FINRA registers member firms and adopts rules to govern them. FINRA examines broker-dealers for compliance and may discipline registered representatives (“brokers”) or member firms that fail to comply with federal securities laws and FINRA’s rules and regulations.
In the S-1 Registration Statement process FINRA also reviews underwriting arrangements and agreements in securities offerings that are registered with the SEC. FINRA’s review determines if an underwriters’ compensation in connection with the securities offering is fair and reasonable. FINRA must approve the compensation for an underwritten registered offering to be declared effective by FINRA. FINRA does not review direct public offerings that are registered on Form S-1 which do not relate to an IPO or underwritten offering.
Form S-1 Registration & State Blue Sky Laws
State blue sky administrators cannot require registration of securities offerings under blue sky laws of certain “covered securities,” which include nationally traded securities, securities listed or authorized for listing on the AMEX, NYSE or NASDAQ; or securities offerings under Rule 506 of the Securities Act. States can regulate companies listed on the OTCMarkets that are not on a national securities exchange.
The National Securities Markets Improvement Act of 1996 (NSMIA) preempts state securities laws. As a result of the adoption of NSMIA, many types of securities offerings are exempt from registration under state securities laws. Despite NSMIA, states are allowed to require an issuer to pay a fee and undertake a filing for securities offerings in their state.
Some private companies that go public initially list on the principal stock exchanges in the U.S., which are the AMEX, NYSE and NASDAQ. The quantitative and qualitative standards for listing vary for the exchanges but all require that an existing public company or private company seeking to go public using an IPO or direct public offering file a registration statement with the SEC either under the Securities Act of 1933, such as an S-1, or under the Securities Exchange Act of 1934, such as a Form 10 registration statement.
Should an issuer choose to use a Form S-1 to go public on one of the exchanges listed above, once the S-1 is declared effective, the issuer will also have to file a form 8-A. The 8-A is a simple document that merely registers securities under Section 12(g) or Section 12(b), and is immediately effective.
Liability for Registration Statement Disclosures
The Securities Act holds individuals who help prepare a registration statement on behalf of an issuer responsible for any misrepresentations and omissions in the registration statement. Section 11(a) of the Securities Act, 15 U.S.C. Section 77k(a) holds several categories of persons and entities liable for material misstatements or omissions in an S-1 registration statement. These persons include a majority of the issuer’s board of directors, its principal executive officer or officers, principal financial officer, and its controller or principal accounting officer, all of whom must sign the S-1.
The issuer, as well as each signatory, is subject to potential civil liability under §11(a) of the Securities Act for material misstatements or omissions. In addition, any control person of the issuer or any other responsible party is subject to liability.
In addition to the issuer and its officers and directors, attorneys, accountants and underwriters are liable under Section 11(a) of the Securities Act.
Reverse Mergers and the SEC Comment Process
Private companies that go public through a reverse merger with a public shell are likely to receive SEC comments in connection with their Super 8-K filing. Additionally, notification to FINRA is now required for reverse merger transactions under FINRA Rule 6490. Like the SEC, FINRA may now comment and/or require supporting documentation for reverse merger transactions. SEC and FINRA review of reverse mergers can literally take months to complete. As such, using a Form S-1 Registration Statement may be a less expensive and faster method of going public than a reverse merger.
Issuers who offer and sell securities or file an S-1 Registration Statement for selling shareholders in connection with a going public transaction will need the assistance of an experienced securities lawyer for the registration process to ensure all required SEC disclosures are provided.