What are SEC Comments? Going Public Attorneys

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.

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.

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 avoid unnecessary comments.  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 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.

Securities Exchanges & SEC Registration Requirements

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.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com