Yesterday, Corp Fin posted a sample comment letter containing the types of comments that Corp Fin staff might, depending on the particular facts and circumstances, issue to companies seeking to raise capital in securities offerings amid the current market and price volatility. In that context, Corp Fin believes that “specific, tailored disclosure about market events and conditions, the company's situation and the potential impact on investors is warranted to provide investors with the information they need to make informed investment decisions and comply with the company's disclosure obligations under the federal securities laws.” Corp Fin suggests that companies preparing offering disclosure documents take these sample comments into account, particularly if the disclosure documents would not typically be subject to staff review, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements. While most of the sample comments are not altogether surprising, Corp Fin does have some notable suggested additions to the prospectus cover page.
Corp Fin notes that, when companies seek to raise capital during times of market and price volatility, risks can be “particularly acute,” especially in the context 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).”
“Risks can also be more acute,” the staff suggests, “when companies are in distress, face ‘going concern' or liquidity challenges or have smaller public floats.”
While Corp Fin disclaims any attempt at a comprehensive list of possible comments and, of course, any comments the staff did issue to a company would be tailored to the company and its disclosure, Corp Fin urges companies to consider these sample comments when drafting disclosure.
Prospectus Cover Page. The most striking comments relate to requested additions to the prospectus cover page—perhaps less the comments themselves than the suggested location of the responses. These sample comments request that the company include on the prospectus cover page a description of the company's recent stock price volatility and risks related to investing in the shares under those circumstances; disclosure of the company's market price prior to the recent price volatility (i.e., the trading price XX days earlier); and “any recent change in your financial condition or results of operations, such as your earnings, revenues or other measure of company value that is consistent with the recent change in your stock price. If no such change to your financial condition or results of operations exists, disclose that fact.” The trick will be making all the responsive disclosure fit on the cover without displacing the names of the book-running managers!
Risk Factors. Not surprisingly, a number of the comments relate to risk factors, including comments to add risks addressing “the recent extreme volatility in your stock price,” including intra-day stock price range over a time period adequate to demonstrate recent volatility, impact on investors, potential for “rapid and substantial decreases in your stock price” that may be “unrelated to your operating performance or prospects. To the extent recent increases in your stock price are significantly inconsistent with improvements in actual or expected operating performance, financial condition or other indicators of value, discuss the inconsistencies and where relevant quantify them.” Companies should also consider, Corp Fin advises, risk factors related to the effects of a potential “short squeeze” due to a sudden increase in demand for the company's stock, including a description of what often happens after a short squeeze and the effect on investors. Corp Fin also suggests a dilution risk, in light of the number of shares offered relative to the outstanding, addressing the impact of the offering on the stock price and on investors. In addition, the risk could address the potential for expected future additional offerings that could have a dilutive impact on investors that purchase shares in this offering at a significantly higher price.
Use of proceeds. Finally, Corp Fin asks that the company contemplate the possibility that it might raise less in proceeds than expected, especially where the stock price would need to significantly exceed the historical average to raise the maximum offering amount. Corp Fin asks for disclosure of that information and a discussion of the company's priorities for the proceeds if less than the maximum is raised.
Corp Fin encourages companies experiencing extreme price volatility to contact the relevant industry office with any questions about proposed disclosure.
