What is a Deficiency Letter?

Eric Tallberg
Eric Tallberg
Businessman with a briefcase
Businessman with a briefcase

A deficiency letter is a document sent by the Securities and Exchange Commission (SEC) of the United States to the issuers of intended public stock offerings. The deficiency letter results from an examination of a preliminary prospectus of such offerings by the Office of Compliance Inspections and Examinations (OCIE), an agency of the SEC, which administrates the Compliance Examination Program.

Issuers of securities offerings registered with the SEC will have a preliminary prospectus of the offering examined by the OCIE. A response can be expected within 90 days of completion of the examination. If no deficiencies are found, a letter informing the registrant of that fact will be sent instead of a deficiency letter. Since deficiencies are found in nearly 91% of preliminary prospectuses, a more likely result of this examination is that a deficiency letter will be sent to the issuer enumerating such deficiencies and delineating required corrections. In lieu of, or in addition to a deficiency letter, the SEC may also refer any deficiencies found to a state regulatory agency or to a Self Regulatory Organization (SRO). Such deficiencies include insufficient financial information and/or clarification of the details of the prospectus.

A deficiency letter will obviously have a negative impact on the issuance of public securities, commonly known as stocks, since such a document will postpone the date of issuance, thus preventing registrants from garnering funds on an expected date and also may result in a stop order being received along with the deficiency letter. Thus, a deficiency letter should be addressed immediately by the issuant to prevent inconvenient and costly delay in the issuing process.

Deficiency letters are sent to pose necessary questions about a preliminary prospectus and to define any needed modifications to the prospectus for compliance with SEC acceptance guidelines. The examination process of a preliminary prospectus involves a report including background information and specific risks consequent to the registrant, the scope of the examination, any deficiencies from previous examinations, present deficiencies noted and work performed by both the examiners and registrant.

Usually sent in response to Initial Public Offerings (IPO) of securities, deficiency letters are sent less often to registered mutual funds and companies that have issued securities in the past, these registrants being more familiar with the SEC regulations governing such offerings. Registration with the SEC buttresses a company's financial transparency and boosts the confidence of potential investors in that company's honesty and integrity. Formed in 1934, the SEC is a vital watchdog over the interests of investors.

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Discussion Comments


@David09 - They may not be good from an investing standpoint, but from the company’s perspective, they are meant to help, not harm.

Especially in cases where there is an initial public offering, you want everything to be above board so that people can buy the stock and help build the company’s valuation.

A deficiency letter is like a letter from the IRS. It’s not exactly Christmas cheer, but it could keep you from more serious troubles down the road.


Deficiency letters are not a good thing from an investing standpoint, I’ll tell you that.

When I worked in telecommunications our company didn’t do too well, and its stock began taking a nose dive. When it traded less than a dollar, the company received a deficiency letter from the SEC.

Actually this didn’t happen right away. I think we had 30 days or something like that to get the stock price up above $1, otherwise we would be forced to trade it as a penny stock, taking it off the Nasdaq stock exchange.

We could never get it above $1, but the letter made things worse. As a public company we had to make public that we had received the letter and indicate what it said.

Do you think investors were interested in buying up more of our stock after that? No, it was just the opposite.

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