July 6, 2018

Comment Letters: How to End Up in Corp Fin Purgatory

I’m sure most of us have experienced situations where the Corp Fin review process seemed to drag on for what seemed to be forever. For most companies, even an extensive review process usually ends after 3 or 4 rounds of comments & responses – but for a select few, the comment letter process really does turn into “Purgatory.”

This “Audit Analytics” blog takes a look at those companies.  Audit Analytics looked at 27 listed companies that had Corp Fin reviews involving at least 10(!) back & forth letters during the period from 2016 – April 2018, and tried to determine why they ended up in this predicament.  The answers were interesting:

In many cases, long SEC reviews appear to be correlated with other significant failures including SEC enforcement actions. For example, in 2017, MDC Partners Inc appeared on our radar after the company was charged in an SEC Enforcement action. One of the legal charges was related to using misleading custom metrics – the same metrics that were questioned by the SEC in some of the MDC’s comment letters.

Zynga had a conversation that spanned eleven letters and 150 days. Some of the comments were centered on presentation of individually tailored non-GAAP metrics, a presentation that is explicitly prohibited by the SEC rules.

A major red flag for comment letters is noted when the SEC asserts that a company partially or completely failed to address the comments. Arguably, a company’s failure to respond should be taken in the context of the overall controls environment of the company. Since 2016, three companies failed to respond to SEC comments, including Axon Enterprise, Inc and Dana Inc. In such a case, the SEC will typically issue a separate letter warning that if the comments are not resolved the agency will terminate the review and release the comments to the public.

A slightly more common scenario is the failure to incorporate previously agreed upon disclosure text from SEC review into the subsequent filings. Audit Analytics identified six instances where the SEC noted inconsistencies between the disclosure and previous responses to SEC comments.

Under the circumstances, I don’t think it’s too surprising that any of the companies cited found the Corp Fin review process to be a very long & winding road.

By the way, if you’re wondering how long a company’s stay in SEC purgatory can be, the blog notes that Iconix Brands spent a total of 723 days in the review process. During that time, the company & the SEC exchanged a staggering 29 rounds of correspondence. Two other companies, MDC Partners (540 days/18 letters) & Acacia Research (427 days/26 letters) spent more than a year under review.

Revenue Recognition: Trends in Staff Comments

While we’re on the subject of Corp Fin comments, here’s a FEI memo that reviews comments issued on the new revenue recognition standard and identifies some trends.  FEI says that Staff comments have focused on the following areas of ASC 606:

– Disaggregation of revenue
– Disclosure of performance obligations; consideration of significant payment terms
– Disclosure of performance obligations; determination of whether promised goods/ services are distinct
– Timing of satisfaction of performance obligations
– Principal versus agent considerations
– Transaction price determination and allocation to specific performance obligations
– Costs to obtain and fulfill a contract

The memo reviews & provides links to individual Staff comment letters and company responses.

“Hey, Why is the SEC Advertising ICOs in its Emails?”

Several members have mentioned to us that they’re confused as to why the SEC is including a link to an advertisement for an ICO in all of its email announcements.  If you share this confusion, go ahead and click on the ad – it sends you to the SEC’s “” mock ICO site.

I’m sure the SEC is usually quite concerned if a communication from the agency leaves members of the public scratching their heads – but if people are intrigued enough to click on the ad, I’ll bet they’re pleased that this one does.

John Jenkins