SEC Comments 101

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 registration statements of companies who go public using an initial public offering (“IPO”) as well as those conducting a direct public offering.

The 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. All issuers are eligible to register securities offerings on a Form S-1.

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. 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 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.

The S-1 SEC Comment Process

Some registration statements become effective upon filing such as on Form S-8, while others such as those on 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’s are subject to review by the SEC’s Division of Corporation Finance. Upon filing, the S-1 is typically reviewed by an SEC attorney and 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 the securities laws.

Approximately two weeks after the filing of an S-1 the SEC completes its review. It then renders comments to the issuer and/or its securities lawyer concerning the disclosures in the S-1. The issuer must file an amendment to the previously filed S-1 registration statement along with a response letter to the SEC’s comments.

The SEC will review the response letter and the amended S-1 registration statement, then render additional comments if necessary. The SEC review of the S-1 Registration Statement continues until the SEC staff is satisfied with the disclosure provided by the issuer. Once this happens the SEC will declare the S-1 registration statement 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, securities futures and options. FINRA registers firms and adopts rules to govern firms. FINRA examines firms for compliance and may discipline registered representatives and member firms that fail to comply with federal securities laws and its rules and regulations.

In the S-1 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.

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 OTC Markets which are not on a national securities exchange.

The National Securities Markets Improvement Act of 1996 (NSMIA) preempts state securities laws. As a result 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.

Securities Exchanges

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, such as an S-1 or under the Securities Exchange Act of 1934, such as a Form 10.

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 statement. Section 11(a) of the Securities Act, 15 U.S.C. Section 77k(a) makes several categories of persons and entities responsible for material misstatements or omissions in an S-1. These include a majority of the issuer’s board of directors, as well as 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 signer, is subject to potential civil liability under § 11(a) of the Securities Act for material misstatements or omissions in an S-1. In addition, any person who controls 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 Comment Process

Private companies that go public using a reverse merger with a public shell are likely to encounter SEC comments in connection with their Super 8-K filing. Additionally, notification to FINRA is now required for reverse merger transactions. 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 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 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.

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