On February 8, the staff of the SEC’s Division of Corporation Finance (the Staff) published a sample comment letter that the Staff might send to companies that conduct securities offerings during periods of extreme stock price volatility. In its statements accompanying the sample comment letter, the Staff acknowledged the necessity of capital formation, even when the financial markets and stock prices are volatile, while also cautioning that unpredictability in the market can prove hazardous to investors and companies alike. The Staff noted the risks are “particularly acute” when companies attempt to raise capital during times of “recent stock run-ups or recent divergences in valuation ratios relative to those seen during traditional markets,” “high short interest or reported short squeezes,” and “reports of strong and atypical retail investor interest (whether on social media or otherwise).” The Staff indicated that those risks may be exacerbated “when companies are in distress, face ‘going concern,’ or liquidity challenges or have smaller public floats.”
In light of those heightened risks, the Staff encouraged companies seeking to raise capital during heightened market volatility to disclose relevant information about the market generally and the company’s circumstances specifically, including any possible effects that market volatility might have on existing and potential investors. The Staff’s illustrative comment letter includes sample comments that the Staff may issue to such companies and is intended to help companies as they prepare their disclosure documents, particularly those that may not typically be subject to review by the SEC (e.g., automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements). The sample comments are not intended to be an exhaustive list of issues, and any comments issued by the SEC would be based on the specific offering, as well as the company involved.
The Comment Letter
The Staff’s sample comment letter is presented in three categories: (1) the Prospectus Cover Page, (2) Risk Factors and (3) Use of Proceeds.
Prospectus Cover Page
The Staff’s comments request that the company that is the subject of the comment letter:
- disclose on its prospectus cover page the recent price volatility of its stock, as well as a brief description of any known risks of investing in its stock during periods of market and price volatility;
- indicate, for comparison purposes, the market price of its common stock before the recent price volatility; and
- describe recent changes to the company’s financial condition or results of operations consistent with the recent change in the company’s stock price and, if no such changes have occurred, a statement to that effect.
The Staff’s comments focus on the company’s risk factor disclosure and request that the subject company include risk factors that:
- address the recent extreme volatility of its stock price, including to disclose its intra-day stock price range, how such price volatility affects investors and the possibility for sudden increases or decreases in stock price (including decreases unrelated to the company’s operating performance and prospects). To the extent such price fluctuation is significantly inconsistent with the company’s actual or expected operating performance and other metrics, the company should discuss such inconsistencies and, where relevant, quantify them. Such information should be presented for a time period that can sufficiently describe the recent price volatility, and, to the extent the company lacks the information to make such disclosure, it should explain the reason for such deficiency.
- describe the impact on the company and its investors of a possible “short squeeze” as a result of a rapid increase in demand for the company’s stock;
- disclose, if relevant, that the number of shares being offered by the company is significant relative to the number of shares currently outstanding, along with a description of the effect that the offering could have on investors and the company’s stock price; and
- address the possible impact of any additional offerings the company plans to conduct to fund its operations or provide liquidity, including the dilutive effect of any such future offerings on investors acquiring stock in the current offering at a significantly higher price.
Use of Proceeds
In the sample comment letter, the Staff notes that, in the circumstance where the subject company is seeking to raise a specified dollar amount in its proposed offering, but the number of shares to be sold is limited, the company would not be able raise the maximum offering amount stated in the prospectus unless the sales price exceeds the historical average price per share. The sample comment letter requests that the subject company disclose that information and, to the extent applicable, discuss its priorities for the intended use of proceeds in the event the company raises less than the maximum offering amount.
The Staff also encouraged companies experiencing extreme stock price volatility to contact the industry office within the SEC that is responsible for the company’s filings to discuss any questions regarding the company’s proposed disclosure.