Letter of Comment - Explained
What is a Letter of Comment?
Written by J. Mance Gordon
Updated at April 20th, 2024
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What is a Letter Of Comment?
A letter of comment is a letter that the Securities and Exchange Commission (SEC) sends a company as a response to a request or registration statement filed by a company. Companies and individuals can also send a letter of comment as a response to SECs request for comment about a company or its proposals. Hence, a letter of comment is a response to a previous issue or an earlier letter of comment sent by a company to the SEC and vice versa.
How does a Letter Of Comment Work?
Letter of comments, otherwise called comment letters are bi-directional, meaning they can be sent by a company to the SEC and by the SEC to the company as a response to a previous issue. When individuals or companies send letters of comment to the SEC, it is often a response to a request for public comments, amendments to rules, and new concept releases made by the SEC. The SEC began releasing letters of comment to the general public in August 2004, these letters can be found on SECs website or SECs EDGAR database.
The Purpose of a Letter of Comment
Generally, the purpose of a letter of comment when sent to a company by the SEC is to enhance the clarity of the information contained in the registration statement of the company. A company's registration statement gives details about the finances, operations, history and management of the company for the regulation purpose. One a registration statement is filed, SEC gives a response n the form of a letter of comment to the information provided by the company.
This comment is to ascertain that the S-1 or registration statement is without errors or irregularities before such company issues new shares. The staff members of the SECs Divisions of Corporate Finance and Investment Management often make comment letters. In certain cases, they ask companies to provide further details to enhance an adequate understanding of the company.
Comment letters vary from company to company as there are particular issues that might arise from the registration statement of Company A which will be different from that of Company B. Letters of comment are quite informal, SEC staff do this for companies as a gesture towards them and also save them stress during the registration process. It is possible for multiple letters of comments to be exchanged between SEC staff and a company. Letters of comment are not the official statements of SEC, they are constituted by opinions of staff of the SEC about the registration filed by a company.