The SEC sends a deficiency letter to issuers of planned public offerings of shares if deficiencies are found in the preliminary prospectus, outlining required corrections. This can delay the issuance of public securities and result in a suspension order. Deficiency letters are less frequently sent to registered mutual funds and companies that have issued securities in the past.
A deficiency letter is a document sent by the United States Securities and Exchange Commission (SEC) to issuers of planned public offerings of shares. The deficiency letter results from an examination of a preliminary prospectus for such offerings by the Office of Compliance Examinations and Inspections (OCIE), an agency of the SEC, which administers the Compliance Examination Program.
Issuers of SEC-registered securities offerings will have a preliminary prospectus of the offering reviewed by the OCIE. A response can be expected within 90 days of completion of the exam. If no deficiencies are found, a letter informing the applicant of that fact will be sent instead of a deficiency letter. Since deficiencies are found in nearly 91% of preliminary prospectuses, a more likely outcome of this examination is that a deficiency letter will be sent to the issuer listing such deficiencies and outlining any required corrections. Instead of, or in addition to, a deficiency letter, the SEC may also refer any deficiency found to a state regulatory agency or Self-Regulatory Organization (SRO). Such deficiencies include insufficient financial information and/or clarification of prospectus details.
A deficiency letter will obviously have a negative impact on the issuance of public securities, commonly known as shares, as such a letter will postpone the issuance date, thus preventing registrants from raising funds at an expected date and may also result in a suspension order will be received along with the deficiency letter. Therefore, the issuer should immediately address a deficiency letter to avoid inconvenient and costly delays in the issuance process.
Deficiency letters are sent to raise necessary questions about a preliminary prospectus and to define any necessary modifications to the prospectus to meet SEC acceptance guidelines. The preliminary prospectus examination process involves a report that includes background information and specific risks arising from the registrant, the scope of the examination, any deficiencies from previous examinations, any present deficiencies noted, and the work performed by both examiners and by the registrant.
Typically sent in response to Initial Public Offerings (IPOs) of securities, deficiency letters are sent less frequently to registered mutual funds and to companies that have issued securities in the past, these registrants are more familiar with SEC regulations governing such offerings. SEC registration strengthens 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 watchdog over investor interests.
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