What is a Deficiency Letter?

Deficiency Letter

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Deficiency Letter

A deficiency letter is a document that’s sent by a regulatory authority, such as the U.S. Securities and Exchange Commission (SEC), to a company or individual in response to a filing that is found to be incomplete or otherwise deficient. This letter informs the company or individual of the issues identified with the filing and often requests additional information or clarification.

Deficiency letters can be issued for a variety of reasons. For example, a company that files a registration statement to issue new securities might receive a deficiency letter if the registration statement is missing required information or if the SEC has questions about the information provided.

The recipient of a deficiency letter is generally expected to address the issues raised and provide the requested information within a specified time frame. Failing to adequately respond to a deficiency letter can result in regulatory penalties or delays in the approval of filings.

It’s important to note that the specifics of the deficiency letter process, including the reasons for issuing such letters and the expected response, can vary depending on the specific regulatory authority and the nature of the filing.

Example of a Deficiency Letter

Let’s use a scenario involving a company going public:

Imagine Company XYZ is preparing for an initial public offering (IPO). To do this, it must file a registration statement, known as an S-1 form, with the Securities and Exchange Commission (SEC). This document includes vital information about the company’s business, financials, and the planned offering.

After reviewing the S-1 filing, the SEC finds that Company XYZ didn’t provide enough detail about the potential risks associated with its business model. Furthermore, the SEC finds the financial statements to be improperly formatted according to the Generally Accepted Accounting Principles (GAAP).

In response, the SEC sends a deficiency letter to Company XYZ. This letter points out the issues with the filing: the need for additional risk-related information and the correction of the format of the financial statements.

Company XYZ must then address the points in the deficiency letter. It provides a more detailed section on business risks and revises its financial statements to align with GAAP. After making these corrections, it resubmits the S-1 form to the SEC.

If the SEC is satisfied with the company’s corrections and additional information, it will declare the S-1 “effective,” and Company XYZ can proceed with its IPO. If not, the SEC may send another deficiency letter, and the process repeats until all issues are resolved.

This is a simplified example and the actual process can be complex. It’s also important to note that while this example focuses on the SEC (as it’s one of the most recognized regulatory bodies globally), other regulatory agencies can also issue deficiency letters based on their specific areas of oversight.

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