On February 8, 2021, the Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance (“Division”) released a Sample Letter to Companies Regarding Securities Offerings During Times of Extreme Price Volatility (“Letter”). Although the guidance carries no legal force, companies seeking to raise capital in registered offerings during a period of substantial trading price volatility should carefully consider how to address the sample comments included in the Letter.
The Letter follows several weeks of extreme volatility in the price of so-called “meme stocks,” including GameStop Corp. and AMC Entertainment Holdings, Inc. That price volatility has been fueled by posts on websites like Reddit and Twitter, short squeezes, and other events unrelated to the business prospects of the companies involved.
The Letter addresses recommended disclosures by companies seeking to raise capital under three circumstances that the Division believes may pose acute risks to companies and investors:
- recent stock run-ups or recent divergences in valuation ratios relative to those seen during traditional markets;
- high interest in shorting the stock or reported short squeezes; and
- reports of strong and atypical retail investor interest (whether on social media or otherwise).
When companies seek to raise capital under these circumstances, the Division recommends that the company provide additional disclosures to potential investors, and the Letter provides a non-exhaustive list of the types of disclosures that may be appropriate.
For the prospectus cover page, the Division encourages companies to consider including:
- A description of recent stock price volatility and any known risks of investing in the company’s stock under these circumstances.
- The market price of the company’s common stock before the recent price volatility.
- A description of any recent change in the company’s financial condition or measure of company value that is consistent with the recent change in the stock price.If no such change exists, that fact should be disclosed.
The Division also encourages companies to consider whether to include risk factors addressing the following:
- Recent extreme volatility in the stock price, including intra-day stock price range information that covers a period sufficient to demonstrate the recent volatility and the impact of that volatility on investors. Such disclosure should also address the potential for rapid and substantial decreases in the stock price, including decreases unrelated to operating performance or prospects.To the extent recent increases in the stock price are significantly inconsistent with indicators of the company’s value, discuss the inconsistencies and, where relevant, quantify them.If the company lacks information to do so, the company would be expected to explain why.
- Effects of a potential short squeeze due to a sudden increase in demand for the company’s stock.Among other things, such disclosure should describe what typically happens following a short squeeze and address the impact on investors that purchase shares during this time.
- If offering a high number of shares relative to the number of shares currently outstanding, the impact that the offering could have on the stock price and on investors.
- If the company expects to conduct additional offerings in the future, the dilutive impact of those offerings on investors that purchase shares in the current offering at a significantly higher price.
Finally, in the event that the company’s offering seeks to raise an amount that would be achievable only if the sales price of the stock significantly exceeds its historical average price per share, the Division encourages companies to consider disclosing that information. To the extent applicable, such disclosure should also include a discussion of the company’s priorities for the proceeds received in the offering if those proceeds are less than the maximum aggregate offering amount.
The Division urges companies to take the sample comments in the Letter into consideration when preparing disclosure documents, particularly those disclosure documents that are not typically 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 also encourages companies experiencing extreme price volatility to contact the industry office responsible for reviewing the company’s filings with any questions regarding the company’s proposed disclosure. Doing so may reduce the risk of the Division reviewing the company’s registration statement while an offering is pending, as occurred when Hertz Global Holdings, Inc. initiated an at-the-market equity offering program following a sharp rise in its trading price while it was in bankruptcy.
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