Can SEC Comment Letters of Regulation A Offerings Serve as Quality Signals for Investors and Firms? Preliminary Results are Encouraging

Abstract

This study investigates the potential of Securities and Exchange Commission (SEC) comment letters to serve as quality signals for investors and firms in the context of Regulation A (Reg A) offerings. In particular, the research examines the sentiment of Reg A filings and corresponding SEC comment letters during the first two years following the implementation of the Jumpstart Our Business Startups (JOBS) Act. By analyzing text-based communications, this study determines that the sentiment within comment letters can help predict the SEC’s qualification decision of a proposed offering. The findings demonstrate a statistically significant and positive relationship between the sentiment of comment letters and issue qualification. Additionally, the study contributes to signaling theory in the framework of Reg A offerings, with the novel use of sentiment analysis to identify themes and patterns within SEC comment letters and the attitudes and opinions of the SEC staff regarding Reg A filings. Overall, while only covering thirty months, this study presents significant implications for investors, issuers, and policymakers in the context of Reg A offerings. It provides a valuable contribution to the use of textual analysis of SEC communications and the role it plays in signaling the quality of offerings.