What Is a Letter of Comment?
A letter of comment—or a comment letter—is a document from the Securities and Exchange Commission (SEC) that is sent to a company in response to filing its registration statement, known formally as its Form S-1.
- A letter of comment is a response to a company's SEC Form S-1 registration for new securities by an issuer.
- The comment letter is used to edit or amend the S-1 registration to ensure that all information provided to potential investors is clear, accurate, and up-to-date.
- Comments are provided by the SEC’s Divisions of Corporate Finance and Investment Management and only reference material is provided in the initial registration.
Understanding a Letter of Comment
The main purpose of the comment letter is to assist the issuing company in making the information in their registration statement, also called an S-1 form, clear, transparent, and free from irregularity before the issuance of new shares or other securities. These letters are stored in the SEC’s EDGAR database. The SEC began releasing these communications to the public in 2005 for filings made after Aug. 1, 2004.
A comment letter may also refer to the letters that entities and individuals send to the SEC in response to its requests for public comment on proposed rules, amendments to rules, or concept releases.
The items covered in a company's registration statement include the company's financial details, operations, management history, and any other important facts. Comments from staff members at the SEC’s Divisions of Corporate Finance and Investment Management will be made based on the information disclosed by the company in its initial filing. The letter will typically be informal, and it is done as a courtesy; it is intended to save both the company and the SEC time down the road in the event of any errors or inconsistencies. It is also intended to protect investors from any misleading or inaccurate information. Letters of comment are based on SEC staff’s understanding of the company’s circumstances and are a matter of public record.
Letters of comment are based primarily on a company’s disclosure and other public information, such as information on the company’s website, in press releases, or discussed on analyst calls. Nonpublic information, such as whistleblower tips and PCAOB inspection reports can also be a source of comments. Comments reflect the SEC staff’s understanding of the applicable facts and circumstances. In comments, the SEC staff may request that a company provide additional supplemental information so that they can better understand the company’s disclosure, or may ask that the company provide additional or different disclosure in a future filing or change the accounting and/or revise the disclosure by filing an amendment.
SEC staff might use the letter of comment to ask the company to provide further supplemental information so that they can come to a stronger understanding of the company’s disclosure and its implications. The letter of comment may ask the company to revise its disclosure, provide additional disclosures, or file a different disclosure in a future SEC filing. Staff may exchange multiple rounds of letters of comment with the company in order to identify issues in the filing and resolve them.
Publicly-traded companies can greatly cut down on the time needed to come to market with new issues if they can anticipate what comments might come from the SEC. They are well-advised to address them before the registration statement is first completed. The registration statement will become effective when all facts have been signed off by the SEC. Letters of comment do not constitute official statements regarding the views of the SEC. They simply elucidate staff opinions, and are limited to the facts of the specific filing in question; they cannot be applied to other filings.