Deficiency Letter

Larkfield Corp has filed its registration statement and the offering is in the cooling-off period. During this time, a registered representative MAY:

1. A.Distribute the firm research report recommending the stock.Research and other sales literature on the issuer are restricted during the offering period. The preliminary prospectus is the permitted document.
2. B.Send interested customers a preliminary prospectus and accept non-binding indications of interest.Correct. These are the two permitted activities during the waiting period, and neither creates a binding commitment.
3. C.Accept payment from customers who want to reserve shares in the offering.No money may change hands before effectiveness. Accepting funds would be treating the offering as sold before it legally can be.
4. D.Send confirmations to customers who have agreed to buy shares.A confirmation reports a completed trade. No trades can be completed until the registration statement is effective.

Why: The cooling-off period is a waiting period, not a selling period. A representative may distribute the preliminary prospectus, often called a red herring, and may record non-binding indications of interest from customers who might want to participate. What he may not do is accept money, accept binding orders, or send anything that looks like a sales recommendation. Review the cooling-off period in the primary markets topic.

Twelve days after Larkfield Corp files its registration statement, the SEC staff sends the issuer a letter identifying incomplete and inadequate disclosure in the risk factors and use-of-proceeds sections. What is the effect of that letter on the offering timetable?

1. A.The filing is deficient, so the issuer must file an amendment and the 20-day cooling-off period generally starts running again from the amendment date; the SEC still neither approves nor disapproves the offering.Correct. A deficiency letter restarts the waiting period on amendment and carries no approval of any kind.
2. B.The registration statement is revoked and Larkfield must begin the registration process from the start.Wrong. A comment letter does not revoke a filing; the issuer amends the existing registration statement.
3. C.The offering may proceed on its original schedule so long as the issuer answers the letter before the effective date.Wrong. Amending the filing generally restarts the 20-day period, which pushes the timetable back.
4. D.The letter confirms the SEC has reviewed the offering and, once the comments are cleared, has approved it as to merit.Wrong. The SEC never approves a security or passes on the merits of an offering.

Why: A staff comment letter, traditionally called a deficiency letter, means the filing as submitted is not adequate for investors. The issuer must file an amendment addressing the staff's comments, and the 20-day statutory waiting period generally begins to run again from the date the amendment is filed, which is why registrations frequently include a delaying amendment and why effectiveness is ultimately set by an acceleration request. What the letter emphatically does not signal is any judgment about the offering: the SEC neither approves nor disapproves a security, and it never passes on the merits or the accuracy of the disclosure.