The SEC sends a letter of irregularity to issuers of intended public stock offerings if deficiencies are found in the preliminary prospectus. This can delay the issuance process and result in a stop order. Deficiency letters are sent to ask necessary questions and discuss necessary changes to comply with SEC guidelines. Registration with the SEC enhances a company’s financial transparency and increases investor confidence.
A letter of irregularity is a document sent by the United States Securities and Exchange Commission (SEC) to issuers of intended public stock offerings. The whistleblower letter resulted from a review of a preliminary prospectus of those offerings by the Office of Compliance Inspections and Examinations (OCIE), an agency of the SEC, which administers the Compliance Examination Program.
Issuers of SEC-registered offerings of securities will have a preliminary offering prospectus reviewed by OCIE. An answer can be expected within 90 days of completing the exam. If no irregularities are found, a letter informing the declarant of this fact will be sent instead of a irregularity letter. Since deficiencies are found in nearly 91% of the preliminary prospectuses, a more likely outcome of this review is that a deficiency letter will be sent to the issuer enumerating these deficiencies and outlining the necessary corrections. In lieu of or in addition to a letter of irregularities, the SEC may also report any deficiencies it finds to a state regulatory agency or self-regulatory organization (SRO). Such deficiencies include insufficient financial information and/or clarification of prospectus details.
A letter of irregularity will obviously have a negative impact on the issuance of government securities, commonly known as shares, as such a document will postpone the issue date, thus preventing the registrants from raising funds on a scheduled date and could also result in a stop order being received together with the irregularity letter. Therefore, an irregularity letter should be addressed immediately by the issuer to avoid inconvenient and costly delays in the issuance process.
Deficit letters are sent to ask necessary questions about a preliminary prospectus and to discuss any necessary changes to the prospectus to comply with SEC acceptance guidelines. The process of examining a preliminary prospectus involves a report including background information and specific consequential risks to the registrant, the scope of the examination, any deficiencies arising from previous examinations, present deficiencies found and work done by both the examiners and the registrant.
Typically sent in response to initial public offerings (IPOs) of securities, deficiency letters are less often sent to registered mutual funds and companies that have issued securities in the past, these registrants being more familiar with the SEC regulations governing such offerings . Registration with the SEC enhances a company’s financial transparency and increases potential investors’ confidence in that company’s honesty and integrity. Formed in 1934, the SEC is a vital check on investors’ interests.
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