SEC Trends & Developments - Winter 2011 - Latest Comments from the Commission

"Latest Comments from the Commission" intends to highlight some of the more frequently appearing quotes from recent SEC comment letters. For a complete listing of SEC comment letters and registrants' responses, please visit the commission's website at 

Materiality and Other Considerations

“…. We also note your disclosure that the adjustments were immaterial to previous and current year consolidated results. Please provide us with a quantitative and qualitative analysis describing management’s determination that the effects of these errors were not material to the respective prior annual and interim financial statements and current results. Refer to ASC 250-10-S99-1. Additionally, please provide us with your analysis regarding the effects of the adjustments under both the rollover and iron curtain approaches pursuant to ASC 250-10-S99-2.”

“Please tell us how you considered if your original disclosures in your management’s report on internal control over financial reporting . . . continue to be appropriate in light of this error. If you conclude that your original assessment of ICFR was incorrect, you should consider if it is necessary to revise your report on internal control over financial reporting. You should also re-evaluate the appropriateness of your prior disclosures regarding the effectiveness of your disclosure controls and procedures and make any necessary revisions.”

Shared-Based Payments

“Please tell us what valuation models you used to determine fair values and provide the assumptions used in those models. To the extent you use the Black-Scholes option pricing model please explain to us why you use that model, instead of a binomial or lattice pricing model to value your warrants. In this regard the Black-Scholes model does not take into account the warrants’ down-round protection. It appears to us that the price adjustment feature would add value to the warrant for which the binomial or lattice models are better suited.”

“Please disclose for the most recent year for which an income statement is provided the number and weighted-average grant date fair value for each of the following groups of restricted shares: (a) those nonvested at the beginning of the year, (b) those nonvested at the end of the year, and those (c) granted, (d) vested, or (e) forfeited during the year. Refer to FASB ASC 718-10-50-2.c. For each year for which an income statement is provided, please disclose the weighted average grant-date fair value of restricted stock granted during the year and the total fair value of restricted shares vested during the year.”

“We note your disclosure that you used the simplified method to estimate the expected term as you do not have sufficient historical exercise data due to the limited period of time the equity shares have been publicly traded. In light of the fact that you became a publicly traded company [more than five years ago], please explain to us why you believe it is appropriate to use the simplified method for stock option grants in 2011.”

“We note from your disclosure . . . that during 2010 you granted . . . options to employees to purchase common stock. For these and all other stock options or equity awards granted during the periods presented in your consolidated statements of operations . . . , please tell us whether, at the date of grant, you obtained a contemporaneous or retrospective valuation of your underlying common stock and whether it was performed by an unrelated valuation specialist as defined by the AICPA Practice Aid “Valuation of Privately-Held-Company Equity Securities Issued as Compensation” (the “Practice Aid”). In addition, please revise to disclose the following information related to issuances of equity instruments:

  • Discuss the significant factors considered, assumptions, and methodologies used in determining the fair value of the underlying common stock at each date on which equity instruments were granted. These additional disclosures should include quantitative information regarding your assumptions and the weighting of the valuation methods. You should also address why you believe that the methods and assumptions used were appropriate under the circumstances. In addition, discuss the consideration given to any alternative factors, methodologies and assumptions; and 
  • Discuss each significant factor contributing to the difference between the estimated IPO price and the fair value determined . . . either contemporaneously or retrospectively, as of the date of each grant and equity-related issuance. This reconciliation should describe significant intervening events within the company and changes in assumptions as well as weighting and selection of valuation methodologies employed that explain the changes in the fair value of your ordinary shares up to the filing of the registration statement. “

SEC Trends & Developments - Winter 2011 Issue  

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