Legal Definitions - deficiency letter

A deficiency letter is an official written communication from a regulatory agency to an individual or organization. This letter identifies specific issues, errors, or omissions in a submitted document, such as a tax return, a financial filing, or an application. It details how the submission fails to meet legal requirements, regulations, or disclosure standards, and typically requests corrections, additional information, or a formal response.

• Example 1 (Tax Compliance): Imagine a small business owner, Sarah, who files her annual income tax return. A few months later, she receives a letter from the Internal Revenue Service (IRS). This letter points out that certain business expenses she claimed appear to be unusually high compared to her reported revenue, and that income from a particular freelance project seems to have been omitted. The letter requests clarification, supporting documentation for the expenses, and an amended return to include the missing income. This IRS communication is a deficiency letter because it formally identifies specific discrepancies and potential errors in her tax filing, indicating non-compliance with tax laws, and requires her to address these issues.

• Example 2 (Securities Disclosure): Consider a growing biotechnology company, "BioFuture Corp.," that plans to raise capital by selling shares to the public for the first time (an Initial Public Offering or IPO). They submit a comprehensive registration statement to the U.S. Securities and Exchange Commission (SEC). After reviewing the extensive document, the SEC sends BioFuture Corp. a letter. This letter highlights that the company's disclosure of potential risks related to its experimental drugs is too vague, that the financial projections lack sufficient detail, and that the executive compensation structure is not clearly explained to potential investors. The SEC requests revisions to these sections to ensure full transparency and compliance with federal securities laws. This communication from the SEC is a deficiency letter because it pinpoints specific shortcomings in the company's registration statement, indicating that the filing does not yet meet the required disclosure standards for public offerings, and mandates corrections before the offering can proceed.