Certain issues arise when a company wishes to file a registration statement and undertake an offering during the first quarter of the year (i.e., after December 31st for companies with a fiscal year-end of December 31st) but before the company's year-end financial statements are complete. In particular, a company should focus on the financial statements that are required to be included (or incorporated by reference) in its registration statement and the comfort that the company's accountants may be willing to provide on the financial information contained in the registration statement, as well as comfort with respect to the period of time after the date of that financial information.1
Financial Statements
When a company prepares a registration statement after its fiscal year-end, which is often December 31, it is important to understand when the company's financial statements go "stale" so that the proper financial information can be included in the registration statement. A company will need to time the offering so that the company's registration statement is declared effective prior to the date on which the relevant financial statements become stale.2 In addition, the company's accountants will not consent to, and the Securities and Exchange Commission ("SEC") will likely not begin its review of, a filing, unless the financial statements included in the registration statement are in compliance with the staleness rules under Regulation S-X as of the filing date.
Financial statements in a registration statement are tested for staleness by the number of days between the date of the financial statements in the filing and the effectiveness date of the registration statement.3 Generally, financial statements go stale (other than third quarter financials as described below) under applicable SEC rules 135 days (or 130 days in the case of large accelerated filers and accelerated filers) after the date of the most recent balance sheet presented in the registration statement.4 It is important to note that a filing may be made on the next business day if the last day before financial statements go stale is on a weekend or U.S. federal holiday. It is also important to note that the staleness rules under Regulation S-X vary for different types of companies (e.g., large accelerated filers5, accelerated filers6, initial filers7, delinquent filers8, and companies without current net income9).
Below is a chart listing when third quarter and year-end financial statements go stale for companies with a December 31 fiscal year-end.10 The financial statements referenced go stale at the close of business on the following dates (or the next business day, if the date falls on a weekend or holiday).
| Date | Which Financial Statements Go Stale? | |
| 1. | February 14 | Third quarter financial statements for initial filers, delinquent filers and companies without current net income. (Updated annual audited financial statements must be included when the number of days between the effectiveness date of the registration statement and the fiscal year-end exceeds 45 days.) |
| 2. | March 1 (+) | Third quarter financial statements for large accelerated filers that are not delinquent filers or companies without current net income. (Updated annual audited financial statements must be included when the number of days between the effectiveness date of the registration statement and the fiscal year-end exceeds 60 days.)11 |
| 3. | March 16 (+) | Third quarter financial statements for accelerated filers that are not delinquent filers or companies without current net income. (Updated annual audited financial statements must be included when the number of days between the effectiveness date of the registration statement and the fiscal year-end exceeds 75 days.)11 |
| 4. | March 31 (+) | Third quarter financial statements for all other filers. (Updated annual audited financial statements must be included when the number of days between the effectiveness date of the registration statement and the fiscal year-end exceeds 90 days.)11 |
| 5. | May 9 (+) | Year-end financial statements for large accelerated filers and accelerated filers. (First quarter financial statements must be included when the number of days between the effectiveness date of the registration statement and the date of the year-end financial statements in the filing exceeds 129 days.) |
| 6. | May 14 (+) | Year-end financial statements for all other filers. (First quarter financial statements must be included when the number of days between the effectiveness date of the registration statement and the date of the year-end financial statements in the filing exceeds 134 days.) |
Comfort Letters
Even when a company has the proper financial statements available to be included in the registration statement, it still may face problems when attempting to commence an offering post-year-end. When a company prepares a registration statement after its December 31 fiscal year-end, but before formally issuing its year-end financial statements, as the company's audited financial statements are not yet available, they cannot be included in the registration statement. However, underwriters want to be sure that the registration statement does not contain material misstatements and therefore will want to conduct due diligence to confirm that there are no surprises in the fourth quarter (or after year-end). In addition, underwriters often want to include "flash" fourth quarter or year-end numbers because the marketing of the transaction will require a "recent developments" section. Accordingly, the underwriters may request that the registration statement contain up-to-date financial information – and will want to receive comfort from the company's accountants that such information is accurate. Furthermore, issues often arise related to the willingness of the company's accountants to perform comfort procedures on any information relating to periods after the conclusion of the third quarter not included in the registration statement or on any "capsule financial information" (i.e., financial information for the recently ended fourth quarter and fiscal year) included in the registration statement.12
The underwriters will request "bring-down" comfort from the company's accountants that certain key line items (e.g., revenue, net income) did not decline in the period since the last financial statements as compared to the comparable period in the prior year. Often the accountants will not provide bring-down comfort for periods after 134 days following the end of the third quarter, which can make it difficult to price an offering after that date (i.e., after February 11th for companies with a fiscal year-end of December 31st) if the company's year-end audited financial statements are not yet issued. The AICPA's Codification of Statements on Auditing Standards AU-C Section 920 (codifying Statement on Auditing Standards No. 72, "Letters for Underwriters and Certain Other Requesting Parties") ("SAS 72") only allows accountants to provide negative assurance for a period no more than 134 days following the end of the most recently audited or reviewed period (though it may be possible for them to provide other types of comfort after this date). Given these issues, which are described in more detail in a white paper issued in 2005 by the AICPA,13 it is important for companies wishing to engage in a transaction after December 31 to carefully consider the financial information included or incorporated by reference in the offering document and to discuss with the company's accountants the types of comfort that they expect to be able to provide on that information before making a decision regarding the timing of a proposed offering. In our experience, each accounting firm has its own internal policies on these issues, and, according to the white paper, the comfort provided in each case remains subject to the professional judgment of the company's accountants. Therefore, it is critical to discuss these points with the company and its accountants up front. The underwriters will need to determine whether the level of comfort to be provided is acceptable and within market norms, and determine any additional diligence procedures they will need to undertake. A company's CFO may need to provide an officer's certificate for periods not covered by the comfort letter.
Below is a chart listing the types of comfort procedures that are often requested on the capsule financial information, with a discussion of the comfort accountants typically may provide (which is based on the AICPA white paper):
| Comfort Requested | Discussion | |
| 1. | AU-C Section 722 (codifying Statement on Auditing Standards No. 100, "Interim Financial Information") ("SAS 100") negative assurance on the full-year capsule information. | Not permitted pursuant to SAS 100, which only applies to interim financial information. |
| 2. | SAS 100 negative assurance on the fourth quarter capsule information. | When the accountants have conducted a SAS 100 review, they may give negative assurance on the underlying interim financial information, provided that they state that the information has not been audited and that they cannot express an opinion thereon, and provided that fourth quarter financial statements are attached to the comfort letter. In addition, accountants typically may only provide negative assurance on such information when audit fieldwork is "substantially complete" and the year-end financial statements are in "substantially final form" (as determined using the accountants' professional judgment). However, the company should note that the fourth quarter information is subject to change, and the company may not state that the information is final. |
| 3. | Reading the fourth quarter information and reporting changes in certain specified financial elements. | Pursuant to SAS 72, accountants may provide negative assurance that they have read the fourth quarter information and that they are aware of certain changes in amounts. Accountants typically provide this comfort on the fourth quarter only when audit fieldwork is substantially complete (though the financial statements do not yet need to be in substantially final form). Comfort may be provided on a shorter period within the fourth quarter (e.g., one or two months), even if the audit fieldwork is not substantially complete. |
| 4. | Inquiring of company officials regarding changes in certain specified financial elements. | SAS 72 permits accountants to provide negative assurance that they have inquired of company officials and that they are unaware of certain changes in financial statement line items no more than 134 days following the end of the most recent period for which an audit or review has been performed. When the cut-off date is year-end, accountants typically may only provide such negative assurance after audit fieldwork is substantially complete; however, when the cut-off date is not year-end, accountants may provide comfort, even if work is not substantially complete. |
| 5. | Agreeing fourth quarter or full-year capsule financial information to the company's accounting records (i.e., providing "tickmark" comfort). | Accountants may agree unaudited information to the company's accounting records if an audit of the company's financial statements for a period including or immediately prior to the unaudited period has been performed, or if the accountants otherwise have knowledge of the company's internal controls. This type of comfort will typically be given only after audit fieldwork is substantially complete (though the financial statements need not be in substantially final form). |
| 6. | Positive assurance that the year-end capsule financial information has been audited. | Accountants may not comment on the completeness of the audit prior to the issuance of the company's financial statements14 because both the accountants and the company are responsible for evaluating subsequent events up to the issuance date. |
It is critical to consider the issues discussed above when planning a post-year-end transaction, because considerations related to the availability of the company's financial statements and the comfort its accountants will provide can significantly affect the timing of a proposed offering. Furthermore, the ability to do an offering may depend on where the company's accountants are in their auditing procedures with respect to the year-end audit.
Footnotes
1 Note that this memo addresses timing issues related to U.S. reporting companies and does not cover foreign private issuers.
2 Note that, in a non-shelf context, an offering may be priced within 15 days of the registration statement being declared effective, although underwriters typically will not price more than one day after effectiveness.
3 In the case of a Rule 144A offering, this period is typically analogized to equal the number of days between the date of the latest balance sheet presented and the pricing date.
4 To the extent a company is contemplating doing a shelf take-down, it will already have an effective registration statement. Since periodic report deadlines will for most periods be up to a few days after the staleness deadline, for shelf take-downs, it may be possible to do an offering off an already effective shelf registration statement even though a registration statement could not go effective and periodic reports may not yet be filed. In these situations, conversations should be had with transaction participants and accountants well in advance.
5 A "large accelerated filer" is a company that (i) has an aggregate market value held by non-affiliates of $700 million or more, as of the last business day of the company's most recently completed second fiscal quarter, (ii) has been subject to SEC reporting under the Securities Exchange Act of 1934, as amended (the "Exchange Act") for at least 12 months, (iii) has filed at least one annual report under the Exchange Act and (iv) is not eligible to use the requirements for smaller reporting companies in Regulation S-K.
6 An "accelerated filer" is a company that meets the other conditions specified in footnote 5 above for a large accelerated filer, but has an aggregate market value held by non-affiliates of $75 million or more, but less than $700 million, as of the last business day of the company's most recently completed second fiscal quarter.
7 An "initial filer" is a company that was not previously subject to SEC reporting requirements, and would include IPO issuers and voluntary filers.
8 A "delinquent filer" is a company that is subject to the SEC's reporting requirements, but has failed to file all of the reports pursuant to Section 13 or 15(d) of the Exchange Act that are due in a timely fashion.
9 A "company without current net income" is a company that does not expect to report positive income after taxes but before extraordinary items and the cumulative effect of a change in accounting principle for both (i) the most recently completed fiscal year and (ii) at least one of the two previous fiscal years.
10 For filers whose fiscal year-end is a date other than December 31, the dates will need to be adjusted accordingly.
(+) In leap years, these deadlines are one day earlier (e.g., February 29 instead of March 1, and so on).
11 When the expected effective date of the registration statement falls within the number of days described from the fiscal year-end, the filing must include financial statements through the third quarter, unless the audited financial statements for the fiscal year are available or unless the expected effective date falls after 45 days from the fiscal year-end and the issuer is a company without current net income. See footnote 9.
12 Similar issues may arise in 144A offerings. Accountants will not provide comfort on ranges for fourth quarter or year-end financial information.
13 See "Comfort Letter Procedures Relating to Capsule Information Presented in a Registration Statement Prior to the Issuance of the Year-End Financial Statements," American Institute of Certified Public Accountants, Inc., 2005.
14 The AICPA white paper, quoting the SEC staff in EITF Topic No. D-86, notes that the "[i]ssuance of financial statements...would generally be the earlier of when the annual or quarterly financial statements are widely distributed to all shareholders and other financial statement users or filed with the Commission.‟ Financial statements would not be considered issued as of the date of either an earnings release or posting of financial statements to the registrant's web site."
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