U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Staff Observations in the Review of Smaller Reporting Company IPOs

Division of Corporation Finance

In an effort to provide smaller reporting companies with information to aid them in preparing their registration statements, the Division of Corporation Finance compiled this summary of common comments cited in the staff's first comment letters sent to smaller reporting companies in connection with the reviews of initial registration statements under the Securities Act of 1933. Smaller reporting companies may want to consider these comments when preparing their registration statement disclosure. It is important to note that these comments may or may not relate to a smaller reporting company's own particular facts and circumstances and that these comments may not address all material disclosure items that a company should present in its registration statement. Each company should consider its own facts and circumstances when preparing its registration statement and related disclosure. These observations summarize and explain certain rules adopted by the Securities and Exchange Commission but are not a substitute for the rules. Only the rules themselves can provide complete and definitive information regarding the requirements.

Prospectus Cover Page

Items 501 and 502 of Regulation S-K specify the content requirements for a registration statement cover page and the front and back prospectus cover pages. The information on the front and back prospectus cover pages must be in plain English. The disclosure on each page must be limited to the information the disclosure items require and should not extend beyond one page. We frequently reminded companies to present prospectus cover page disclosure in plain English and limit that disclosure to what is required by the disclosure items. In this regard, Rule 421 of Regulation C and the Plain English Handbook are helpful resources.

Prospectus Summary

If a company's prospectus is lengthy or complex, Item 503 of Regulation S-K requires that it provide a plain English summary of the key aspects of the offering. Where companies merely restated information from elsewhere in their prospectuses, we reminded them to present summarized or abbreviated information in their prospectus summaries. We also frequently reminded companies to present balanced summaries of the positive and negative aspects of their businesses and offerings.

Risk Factors

Item 503 of Regulation S-K requires a company to discuss the most significant facts that make its offering speculative or risky. A company should limit each risk factor to one or two short paragraphs in which it identifies the risk and explains, in plain English, why it applies to the company.

We issued a substantial volume of comments on risk factors. In our comments, we made the following suggestions:

  • Clearly and concisely identify a risk in each risk factor subheading;

  • Limit each risk subheading to one risk. Instead of discussing multiple risks under one caption, break the discussion into separate, appropriately captioned, risk factors;

  • Generic risk factor discussions that do not describe how a specific risk applies to the company or to an investment in the offering are not helpful to an understanding of the risk; and,

  • Set out the extent of each risk plainly and directly. It is rarely helpful to state that there is or can be no assurance of a particular outcome. Further, generally avoid mitigating language in risk factor discussions, such as clauses that begin with "while," "although" or "however."

We frequently reminded companies whose auditor expressed substantial doubt as to their ability to continue as a going concern to highlight that fact in the risk factor section.

Use of Proceeds

Item 504 of Regulation S-K sets forth the requirements for companies to disclose the principal purposes for which the net proceeds of the offering will be used and the approximate amount intended to be used for each purpose. Where a company will make its offering on a best efforts basis, its intended use of proceeds may change depending on the volume sold. We frequently suggested that a company pick benchmarks for the amount of securities that it may sell, for example, 25%, 50%, 75% and 100%, and indicate how it will allocate the proceeds at each benchmark.

Description of Business

Item 101 of Regulation S-K requires a company to describe its business development during the last three years. It also requires the company to provide a brief description of the material aspects of its business. Where it was not clear what a company did to generate revenue or what its future growth strategy was, we asked it to provide a discussion of its current or intended material sources of revenue.

Management's Discussion and Analysis

Pursuant to the requirements of Item 303 of Regulation S-K, companies must present Management's Discussion and Analysis of Financial Condition and Results of Operations. In its MD&A, a company must address known trends, demands, commitments, events, or uncertainties that will have, or are reasonably likely to have, a material impact on the company's financial condition, operating performance, revenues, and/or income, or results in its liquidity decreasing or increasing in any material way. A company also must provide additional information about the quality and variability of earnings and cash flows so that readers can evaluate whether past performance is likely to be indicative of future performance. A company also should discuss whether it expects its financial position to remain at its current level or to increase or decrease.

We recommend that companies carefully read Item 303 of Regulation S-K and SEC Release Nos. 33-6835 and 33-8350 before they write and file their MD&A. We set out below several of our more common comments to help companies know where to focus.

Introduction or Overview

We frequently suggested to companies that they could improve their MD&A presentation with an introduction or overview in which they provide a balanced executive-level discussion of the most important matters management is concerned with in evaluating the company's financial condition and operating results. A good introduction or overview should:

  • Include economic or industry-wide factors relevant to the company;

  • Inform the reader about how the company earns revenues and income and generates cash;

  • Discuss the company's line of business, location of operations and principal products and services; and

  • Provide insight into material opportunities, challenges and risks on which the company's management are most focused for both the short term and long term, as well as the actions they are taking to address these opportunities, challenges and risks.

Financial Condition, Changes in Financial Condition and Results of Operations and Other Key Variables

In a number of instances, we suggested that companies enhance their discussion of their financial condition, changes in financial condition and results of operations, as well as other key variables and other factors necessary to an understanding and evaluation of the company. We often suggested that companies disclose:

  • Any known material trends, demands, commitments, events, or uncertainties that will have, or are reasonable likely to have, a material impact on the company's financial condition and short-term or long-term liquidity;

  • Any known material trends, demands, commitments, events, or uncertainties that will have, or are reasonable likely to have, a material impact on the company's revenues or income from continuing operations;

  • Internal and external sources of liquidity;

  • An evaluation of the amounts and certainty of cash flows;

  • Any material commitments for capital expenditures and the expected sources of funds for such expenditures;

  • The past and future financial condition and results of operations of the company, with particular emphasis on the prospects of the future;

  • Any significant elements of income or loss that do not arise from the company's continuing operations;

  • The causes for any material changes from period to period in one or more line items of the company's financial statements;

  • Any seasonal aspects that had a material effect on the financial condition or results of operations; and,

  • Any additional information about the quality and potential variability of the company's earnings and cash flows so that readers can ascertain the likelihood that past performance is indicative of future performance.

Results of Operations

Where we found that management did not provide a detailed discussion of the company's results of operations and did not explain the reasons for period-to-period changes, we asked the company to:

  • Identify the causes for period to period changes in results of operations for each material line item in the financial statements;

  • Disclose the reasons underlying these causes for the period to period changes; and,

  • Identify changes in items which are caused by more than one factor and then quantify the effect of each factor on the change.

Directors, Officers, Promoters and Control Persons

Item 401 of Regulation S-K requires disclosure in registration statements of information relating to the identity and experience of those entrusted with the management of the company. Specifically, a company must list the names and ages of directors, officers and certain significant employees. In addition, it must describe the terms of office of these persons, the periods during which they have served and their ties with other business concerns, including directorships in other companies. The company must describe the business experience of each director or officer in reasonable detail. Because Item 401 requires a historical statement of experience for the last five years, a company must account for the entire five-year period including any gaps in employment or education. Where a company did not provide a brief and accurate description of the business experience and educational background of its officers and directors, we asked it to do so. Where a company's executives did not serve the company full time, we asked the company to describe the other business activities in which the executives were concurrently engaged.

Transactions with Related Persons, Promoters and Certain Control Persons

Item 404 of Regulation S-K requires a company to describe transactions with officers, directors, promoters, control persons, and certain relatives where the amount involved exceeds the lesser of $120,000 or one percent of the average of the smaller reporting company's total assets at year end for the last two completed fiscal years and in which any of those persons have a direct or indirect material interest. Item 404 allows companies whose business involves financial services to indicate that loans to related persons were made in the ordinary course of business on the same terms available to outsiders. In light of that provision, we asked some companies either to confirm with us or disclose whether their loans to insiders were on comparable terms with outsiders and whether they were made in the ordinary course of business.

Plan of Distribution

Item 508 of Regulation S-K requires a company to describe how it will offer its securities to the public. Where a company indicated its officers or directors, or any person other than an underwriter, would sell its securities, we asked it to name those persons and describe the process through which those persons intended to offer the securities.

Where companies stated that their securities were, or would be "listed" on the Financial Industry Regulatory Authority's Over the Counter Bulletin Board, we reminded them that that those securities are not "listed;" rather, they are "quoted" on the Bulletin Board. The OTCBB is not a national securities exchange under the federal securities laws and the reference to "listing" may be confusing to potential investors.

Selling Security Holders

Where a company's registration statement includes securities to be sold by existing security holders for their own account, Item 507 of Regulation S-K requires that the company:

  • Name each selling security holder;

  • Identify any special relationships the selling security holders have had with the company within the last three years;

  • Disclose the amount of the selling security holders' holdings (including the percentage of the overall outstanding shares of the class being sold);

  • Disclose the amount of securities the selling security holder seeks to sell; and,

  • Disclose the percentage of ownership of the class after the sale (if over 1%).

Where a selling security holder was an institution, we frequently asked the company to identify the natural persons with voting and dispositive authority over the securities the institution holds.

Financial Statements

Age of Financial Statements

As a routine matter, we asked companies to update their financial statements in accordance with Article 8-08 of Regulation S-X (Age of financial statements). That provision states that:

  • At the date of filing, the financial statements included in filings other than Exchange Act annual or quarterly reports must not be less current than the financial statements that would be required in those reports if those reports were required to be filed; and,

  • If required financial statements are as of a date 135 days or more before the date a registration statement becomes effective, the financial statements must be updated to include financial statements for an interim period ending within 135 days of the effective date.

Statement of Cash Flows

We frequently reminded companies of the requirement to provide a statement of cash flows that complies with Statement of Financial Accounting Standard 95, Statement of Cash Flows. In the statement of cash flows, the company classifies cash used by, or provided by, operating, investing and financing activities.

In our comments, we reminded companies that:

  • They should include only items that resulted in the receipt or payment of cash in the investing and financing activities sections of the statement of cash flows and that this includes, but is not limited to, the proceeds and repayments of debt or equity transactions; and,

  • They should report information about all investing and financing activities that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in related disclosures (non-cash investing and financing activities) and that these disclosures may be narrative or summarized in a schedule.

We frequently reminded companies to review paragraph 32 of SFAS 95 for non-cash transactions.

Revenue Recognition

We frequently cited comments with regard to revenue recognition. We found that many companies failed to provide an accounting policy for revenue recognition. In addition, often when a company did disclose its revenue recognition policy, it failed to fully describe the nature of its earned revenues. We asked companies to:

  • Apply the specific authoritative revenue recognition guidance for transactions within the scope the appropriate accounting literature;

  • Describe the nature and types of earned revenue; and,

  • Disclose a separate revenue recognition policy for each type of earned revenue.

Accountants' Report

Where the report of a company's independent public accountant did not satisfy the technical requirements of Article 2-02 of Regulation S-X (Accountants' reports and attestation reports), we reminded the company that the accountant's report must:

  • Be signed and dated by the independent accountants;

  • Indicate the city and state where issued;

  • Identify the financial statements the report covers; and,

  • Ensure that the periods described in the audit opinion correspond precisely with periods covered by the audited financial statements.

We also reminded development stage companies that their independent accountant's reports should indicate that the companies are in the development stage and referred them to SFAS 7, Accounting and Reporting by Development Stage Enterprises. As long as the company is in the development stage, the accountant must include the cumulative period since inception in its report.


Companies are required to include in their registration statements certain undertakings to provide additional information, to update information, or to address other matters. Depending upon the nature of the offering, a company may be required to provide a number of the undertakings specified in Item 512 of Regulation S-K. We frequently asked companies to add additional required undertakings in their registration statements.

Recent Sales of Unregistered Securities

Item 701 of Regulation S-K requires a company to discuss all of its sales of securities within the past three years which were not registered under the Securities Act. We frequently asked companies to expand their disclosure about their past history of issuing securities in private placements. Where a company did not include dates of sale, the amounts and the titles of the securities sold, and the consideration it received from the sales, we asked it to do so. Where a company did not identify any underwriters associated with those transactions and any persons or classes of persons to whom the securities were sold, we asked it to do so.

In addition, Item 701 requires a company to disclose the exemption from registration that it relied upon when it sold the securities and include a brief statement of the facts that support the application of the exemption in each case. We frequently asked companies to address the sophistication level of the investors and their access to information of the type generally conveyed to purchasers in registered offerings.


We frequently reminded companies of the need to include the signatures of their principal executive officer or officers, their principal financial officer, their controller or principal accounting officer, and at least a majority of the board of directors or persons performing similar functions. Where a person occupied more than one of those positions, we asked companies to identify which positions are represented by the signature.

General Comments

Rule 419 applies to any registered offering of securities of a blank check company where the securities fall within the definition of a penny stock under the Securities Exchange Act of 1934. We frequently reviewed registration statements of recently established development stage companies with a history of losses and an expectation of continuing losses and limited operations. These companies often stated that they may expand current operations through acquisitions of other businesses without specifying what kind of business or what kind of company. In other cases, the stage of a company's development, when considered in relation to the surrounding facts and circumstances, may raise questions regarding the company's disclosed business plan. We generally asked companies like these to review Rule 419 of Regulation C. We asked these companies either to revise their disclosure throughout the registration statement to comply with the disclosure and procedural requirements of Rule 419 or to provide us with an explanation of why Rule 419 did not apply.

We often questioned a company's form eligibility when it filed a Form S-3 to register securities on behalf of selling security holders and those selling security holders were affiliated with the company.

Item 16 of Schedule A of the Securities Act requires that registration statements include either a set price for the securities to be offered or at least disclose a method by which the price will be computed. Some companies that did not have a trading market for their securities when they filed their registration statements indicated that the securities would be sold at the prevailing market price once such a market developed. In those cases, we questioned the pricing of the offering and asked the companies to amend their registration statements to set a fixed price for the securities until they were listed on an exchange or quoted on the OTCBB.

Where a company's registration statement appeared incomplete when filed, we often deferred our review of it until the company filed an amendment so that the filing was complete. When the information in a company's registration statement was out of date, we often deferred our review of it until the company filed an amendment so that the filing was current.

We often reminded companies to carefully review their registration statements to resolve any inconsistencies in disclosure from section to section.

We often asked companies to provide written support for promotional statements or statistics they provided in their filings. In some instances, we asked companies to review Rule 436 of Regulation C and consider whether they should provide the consent of the source of promotional information in their filings.

We often found that companies used materials such as photographs, charts or maps in their prospectuses. When the companies submitted those documents for staff review, we often had comments. We reminded companies that when they intend to include materials in their prospectuses that they do not include in their EDGAR filings, they may submit those materials for staff review prior to using them.



Modified: 03/04/2009