The SEC’s Division of Corporation Finance (CorpFin) on Feb. 8, 2021, published an illustrative staff comment letter so that public companies will provide better disclosures about extreme swings of their stock prices as well as disclosures during turbulent times.
CorpFin’s sample letter starts out saying, “We have reviewed your filing and have the following comments. Please revise or update your disclosure in response to our comments.”
The letter is divided into three sections: prospectus cover page, risk factors, and use of proceeds. The sample letter provides eight total disclosure suggestions for the three sections.
The division, which reviews regulatory filings by companies, is providing this sample letter amid recent stock price turmoil at companies such as GameStop Corp. Hedge Funds have shorted the company’s stocks, but retail investors using social media have gone on a buying spree that artificially drove up the stock prices, leading to big losses for hedge fund managers. The letter also comes as the stock market in general has experienced volatility with challenges related to the COVID-19 pandemic.
“The Division of Corporation Finance recognizes the importance of capital formation, including during times of market volatility and when an issuer’s own securities are experiencing extreme price volatility,” CorpFin said. “The Division also cautions that such market and stock volatility can create risks for both companies and investors.”
The SEC said that these risks can be acute when companies are trying to raise capital during periods with:
The staff said risks can be especially acute when companies are in distress, face going concern or liquidity challenges, or have smaller public floats.
Under such circumstances, CorpFin said companies should provide specific, tailored information about market events and conditions, the company’s situation, and the potential impact on investors. This is so that investors can make informed decisions. Also, companies would be complying with their disclosure obligations under the federal securities laws.
The illustrative letter contains sample comments that the division may issue to companies trying to raise capital amid market and price volatility.
“The sample comments do not constitute an exhaustive list of the issues that companies should consider,” the division explained. “Any comments issued would be appropriately tailored to the specific company and offering, and would take into consideration the disclosure that a company has provided in its offering documents and other Commission filings.”
The staff urged companies to look at the sample comment when they draft disclosure documents that may not typically be subject to review by CorpFin before their use, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements.
The division also encourage companies that are experience extreme price swings to contact CorpFin’s industry office responsible for the company’s filings with any questions about its proposed disclosure.
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