The Division of Corporation Finance recognizes the importance of capital formation, including during times of market volatility and when an issuer’s own securities are experiencing extreme price volatility. The Division also cautions that such market and stock volatility can create risks for both companies and investors. These risks can be particularly acute when companies seek to raise capital during periods with:
- 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 when companies are in distress, face “going concern” or liquidity challenges or have smaller public floats.
The Division believes that when a company seeks to raise capital under these types of circumstances, 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.
The following illustrative letter contains sample comments that, depending on the particular facts and circumstances, the Division may issue to companies seeking to raise capital in securities offerings amid market and price volatility. The sample comments do not constitute an exhaustive list of the issues that companies should consider. Any 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 Commission filings. The Division urges companies to take these sample comments into consideration as they prepare disclosure documents that may not typically be subject to review by the Division before their use, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements. The Division encourages companies experiencing extreme price volatility to contact the industry office responsible for the company’s filings with any questions regarding the company’s proposed disclosure.
We have reviewed your filing and have the following comments. Please revise or update your disclosure in response to our comments.
Prospectus Cover Page
- Describe the recent price volatility in your stock and briefly disclose any known risks of investing in your stock under these circumstances.
- Add, for comparison purposes, disclosure of the market price of your common stock prior to the recent price volatility in your stock. For example, disclose the price at which your stock was trading XX days prior to your filing.
- Describe 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.
- Include a risk factor addressing the recent extreme volatility in your stock price. Your disclosure should include intra-day stock price range information and should cover a period of time sufficient to demonstrate the recent price volatility and should address the impact on investors. Your disclosure should also address the potential for rapid and substantial decreases in your stock price, including decreases 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. If you lack information to do so, explain why.
- Include a risk factor addressing the effects of a potential “short squeeze” due to a sudden increase in demand for your stock. Among other things, your disclosure should describe what typically happens following a short squeeze and address the impact on investors that purchase shares during this time.
- We note the significant number of shares you are offering relative to the number currently outstanding. Include a risk factor that addresses the impact that the offering could have on your stock price and on investors.
- To the extent you expect to conduct additional offerings in the future to fund your operations or provide liquidity, include a risk factor that addresses the dilutive impact of those offerings on investors that purchase shares in this offering at a significantly higher price.
Use of Proceeds
- We note that you are seeking to raise up to $XX in this offering but the number of shares you may sell is limited to XX shares. We also note that unless your sales price exceeds $XX per share (which significantly exceeds your historical average price per share) you will not be able to raise the maximum offering amount. Disclose that information and, to the extent applicable, include a discussion of your priorities for the proceeds received in this offering in the event you raise less than the maximum aggregate offering amount.
We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.
Division of Corporation Finance
 The statements in this guidance represent the views of the staff of the Division of Corporation Finance. This guidance is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”). The Commission has neither approved nor disapproved its content. This guidance, like all staff guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.