On February 8, 2021, staff in the SEC Division of Corporation Finance (Corp Fin) issued a letter cautioning that market and stock volatility can create risk for companies and investors, especially when companies are raising capital during these periods. In the letter, Corp Fin staff identifies several examples of comments the staff may issue to companies seeking to raise capital in securities offerings amid market and price volatility. While the staff letter only “urges” action, many companies and their advisors may hear it as a mandate that goes beyond a voluntary call to action.
The staff is quick to note that the particular facts and circumstances are important and that the sample comments are not an exhaustive list of considerations — “[a]ny comments issued would be appropriately tailored to the specific company and offering, and would take into consideration the disclosure that a company has provided in its offering documents and other [SEC] filings.” Conversely, the staff discussion that accompanies the sample comments suggests that there may be disclosures other than those responsive to the sample comments that would be material for individual companies and specific offerings.
It’s not news that there has been some unusual activity in the markets over the past few weeks. Then again, this is not the first example of extreme market turbulence since March 2020 when the pandemic took hold. Kudos to the staff for trying to find ways to dampen some of these effects, but the arrows in their quiver with which to do so are not abundant. And it’s important to keep in mind that these types of disclosure do little or nothing for secondary trading activity — that’s for the Division of Trading and Markets to address.
The sample comments provide some fairly prescriptive examples beyond addressing general risk and volatility in the market or even for a particular company’s stock. Potentially more interesting is the staff note “urging” companies to “take these sample comments into consideration as they prepare disclosure documents that may not typically be subject to review by the [staff] before their use, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements.” For shelf takedowns and other offerings that do not require Corp Fin review, it begs the question of whether companies will utilize that mechanism without first addressing the points raised in the staff guidance.
The staff letter is likely to be met with mixed reactions by companies and practitioners in this space. On the one hand, this type of guidance is welcomed because it eliminates guesswork by putting companies and their advisors on notice of the staff’s expectation on disclosures. Transparency is great, especially from a regulator, and most would say that it’s better to know up front that the staff wants, or expects to see, these details rather than finding out as follow up comments, which only adds to the time it takes to respond.
On the other hand, simply following the path set in the staff’s letter may or may not be what is required or even appropriate for a specific company. The bottom line is that companies will need to weigh relevance and materiality when considering disclosures to investors. As always, companies should continue to make thoughtful, accurate disclosures that describe their business and its risks, consistent with long-standing SEC guidance.
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