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An introduction to SEC filings – Part I

12 Jun An introduction to SEC filings – Part I


Until the Securitiesec-logos Act of 1933 was passed by Congress, public companies had no official obligations to their investors or to the general public.  If they wished, they could publish and distribute periodic reports containing information about themselves, but there was no oversight by the exchanges or government agencies.  In extreme cases, law enforcement could prosecute, but that didn't help investors make informed decisions.  The Securities Act, the subsequent Securities and Exchange Act of 1934, and the establishment of the Securities and Exchange Commission in 1934 imposed regulation on our previously unregulated capital markets.

Technical traders often say they don't even need to know what a company does, because they rely on charting for guidance.  There's nothing wrong with that, but they and any other short-term players should have some familiarity with the requirements of the SEC, and with the purposes of specific filings, in order to avoid unpleasant surprises.



Registration statementsicon-sec

Companies wishing to go public obviously need to get stock into the market so that trading can begin.  This can be done in one of two ways:  either by filing a registration statement, or by using an appropriate exemption, usually Regulation D.  First, while still private, the company must issue some stock, usually to family, friends, employees, or perhaps “angels.”  Nearly all private companies do have stock, but for the purposes of going public, they need to create a public float.  In many cases this stock is issued through a Reg D exemption, usually Rule 506.  A simple submission, called a Form D, is required, indicating how much stock will be sold, and what the sale price will be.

Once that's accomplished, the issuer faces choices.  If it wishes to trade as a Pink on OTCMarkets, it can simply find a sponsoring market maker willing to file a Form 211 so that the company will gain compliance with SEC Rule 15c2-11.  Once the 211 is approved by FINRA, and FINRA has assigned a ticker, the stock can begin trading.  But if the company wants to be an SEC reporter, with the higher status that confers, it must file a registration statement with the agency.

The SEC offers two principal types of initial registration statements for domestic issuers, the Form S-1, a 1933 Act form, and the Form 10, a 1934 Act form.  They provide different benefits for, and impose different obligations on, the companies that choose them for their going public transactions.


Form S-1

The S-1 is the most commonly used registration statement, promulgated under the 1933 Act.  It may by employed for initial registration or to register a subsequent offering.  As that statement implies, it registers an offering only, not a class of stock.

Usually the stock to be sold in the offering is that originally sold to what are known as the “seed shareholders” or “selling stockholders” in the Reg D private placement described above; it may also be the company's own stock.  If the private company has changed hands before the S-1 is filed, some or all of the stock offered may be owned by former officers or directors.

The form itself has many things in common with a prospectus; in fact the first part is generally referred to as “the prospectus”.  It must contain a description of the business the company is in, and the risks that may be associated with it.  Audited financials, details about earlier stock issuances, and whatever other materials the company deems appropriate must also be included.

Once the S-1 is submitted to Edgar, the SEC will review it and offer comments.  Usually the first of these arrive within a month.  The people commenting are attorneys and accountants.  Their interest is in whether the issuer has made the required disclosures properly, not in whether the company or its business plan has any merit.  When the first comment arrives, the company and its securities attorney must respond, clarifying and amending the form.  With luck this process will take two to three months; without it, it can drag on forever.  When the SEC's questions have been resolved, the agency will issue a notice of effectiveness.  Only then can the stock begin to trade, once it has applied for quotation on OTCMarkets or a listing on a national exchange.

Prospective investors can follow the comment process at Edgar.  It is often interesting to read the SEC's questions and objections, and see how the company responds.  The information sometimes points to difficulties that may develop down the road.  Short seller Carson Black, perhaps better known as “Muddy Waters,” recently said he'd identified problematic SEC comment letters issued in connection with the S-1s of a number of dicey Chinese reverse merger companies.  Unfortunately, once the SEC finishes writing the new rules it must draw up before all provisions of the JOBS Act are available to “emerging growth companies,” those letters will not be made public until after the registration process is complete, unless, of course, the issuer in question does not qualify for or invoke the provisions of the Act.

The selling stockholders whose intention to sell was announced in the S-1 may unload immediately, wait awhile, or never sell.

Once a company has completed its going public transaction, it will be subject to SEC reporting requirements, but it will not be bound by proxy rules, nor will insiders be obliged to submit beneficial ownership reports on Forms 3, 4, 5 and Schedule 13.


Form 10

Form 10, a 1934 Act form, registers a class of stock, but paradoxically does not make a company public.  To accomplish that, it must subsequently meet the requirements for listing on an exchange, or, if it plans to trade on OTCMarkets, it needs to go through the Rule 15c2-11 compliance process.  Unlike Form S-1, it is an initial registration statement only.  The Form 10 cannot be used to raise capital.  If the company subsequently wishes to register an offering of stock to investors, it must use an S-1 or an S-3 (see below) to do so.

A Form 10 contains substantially the same disclosures as an S-1, except for information about selling shareholders or entities, because there are none.  It is similar to a Form 10-K.  The SEC review process is the same as for an S-1.  However, the Form 10 automatically becomes effective after 60 days, even if issues raised by the SEC have not been satisfactorily resolved.  This can be a problem for the issuer, who may choose to withdraw the registration statement (using a Form RW) and subsequently file an S-1, which will not become effective until the problems have been addressed.

Filing a Form 10 subjects the company to SEC reporting requirement, binds it to proxy rules, and requires that its insiders file beneficial ownership reports.


Form 8-A

Form 8-A is a very brief 1934 Act form that registers a class of stock.  It cannot be used for offerings.  It is often employed by 1933 Act companies that wish to list on an exchange, and so must have a registered class (or classes) of securities.


Form S-3

Form S-3 is a simplified version of an S-1 that allows the issuer to reduce the information supplied in the prospectus, and incorporate by reference financial statements and other disclosures.  Not all companies are eligible to use it.  It cannot be used for an initial registration.


Form S-8

Form S-8 is a short-form statement used to offer stock to employees and consultants.  At one time, it was a favorite way for penny issuers to pay investor relations firms and promoters.  That is no longer allowed.  The stock must either be sold to employees as part of a benefits program, or to legitimate service providers, and it must be issued to individuals, not corporations.  If the individual is a service provider, the services in questions must have nothing to do with raising capital, arranging a reverse merger, or promoting the company's stock.  The service agreement must be memorialized in writing.

The S-8 is immediately effective, and the stock registered is immediately free trading.


Foreign issuers

The registration process is simplified for companies that qualify as foreign issuers.  (They can easily be identified by the “F” attached to their tickers.)  If the company chooses to register under the 1933 Act, it uses a Form F-1, comparable to the S-1.  For subsequent registrations, if eligible they may use an F-3, comparable to the S-3.

If they wish to register under the 1934 Act, they will use a Form 20-F, similar to a Form 10.  Annual reports must also be submitted on a 20-F; no quarterlies are required.

Canadian issuers register and submit annual reports on Form 40-F; again, no quarterlies are required.

There are a few additional SEC registration forms, but they're used in very specific circumstances that the ordinary retail trader won't often encounter.

Registering stock with the SEC is only the first step in a company's public journey.  Once its initial registration statement becomes effective, it must continue to make periodic financial reports and other disclosures to the agency.  The forms used for those disclosures will be discussed in our next installment.





  • gimmepennies
    Posted at 21:14h, 12 June Reply

    Great info, thank you!

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