Financial Information – What is a “comfort letter?” – (41)

market value analysis conducted by the SEC in hindsight based on a known IPO price range. There is some industry confusion as to the acceptable method for calculating the fair market value of non-publicly traded shares and how much deviation from this value is permitted by the SEC. A company will often address this “cheap stock” concern by retaining an independent appraiser to value its stock options. However, it now appears that most companies are using one of the safe- harbor methods for valuing shares prescribed in the Section 409A regulations.
What is a “comfort letter?”
During the waiting period, underwriters’ counsel and the company’s independent auditor will negotiate the auditor’s “comfort letter.” In the “comfort letter,” the auditor affirms (1) its independence from the issuer, and
(2) the compliance of the financial statements with applicable accounting requirements and SEC regulations. The auditor will also note period-to-period changes in certain financial items. These statements follow prescribed forms and are usually not the subject of significant negotiation. The underwriters will also usually require that the auditor undertake certain
“agreed-upon” procedures in which the auditor compares financial information in the prospectus
(outside of the financial statements) to the issuer’s accounting records to confirm its accuracy. These procedures can be the subject of significant negotiation as certain information for which the underwriters seek comparison may not be in the issuer’s accounting records. These are called “comfort letters” as they offer cold comfort because of the number of caveats and exceptions taken by the auditors, including use of negative assurance language (for example, “nothing has come to our attention that the relevant information is

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