Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC issued two pieces of guidance on special purpose acquisition companies, or SPACs.  One piece, styled as a statement by Paul Munter, Acting Chief Accountant, speaks to financial reporting and auditing considerations of companies merging with SPACs.  The other statement, issued by the Division of Corporation Finance, is labeled “Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies.”

As to financial reporting and auditing matters the SEC notes, among other things:

  • Companies acquired by SPACs need to be prepared to transition from being a private company to a public company very quickly. Do not underestimate the challenges.
  • The combined public company should have finance and accounting professionals with sufficient knowledge of the relevant reporting requirements, including the applicable accounting requirements, and the appropriate staffing to meet deadlines for required current and periodic reports. In particular, there are matters that require significant judgement in accounting for the merger with the SPAC.
  • It is important for target companies to understand internal control over financial reporting and disclosure controls and procedures and have a plan in place for the combined public company to comply with those requirements on a timely basis.
  • Clear and candid communications between the audit committee, auditor, and management are important for setting expectations and proactively engaging as reporting, control, or audit issues arise during and after the merger process.
  • It is also important for the auditor to consider whether the appropriate acceptance and continuance procedures have taken place when a formerly private audit client prepares to go public through a SPAC merger. While this process also occurs in a traditional IPO, the compressed timing and complexity in a de-SPAC transaction may require thoughtful consideration and analysis pertaining to the client continuance assessment and may require the audit firm to quickly make adjustments to its engagement team to ensure the team has the appropriate level of expertise and experience with SEC and PCAOB requirements.

The statement by the Division of Corporation Finance focuses on accounting, financial reporting and governance issues that should be carefully considered before a private operating company undertakes a business combination with a SPAC. Among other things:

  • Financial statements for the acquired business must be filed within four business days of the completion of the business combination pursuant to Item 9.01(c) of Form 8-K. The registrant is not entitled to the 71-day extension of that Item;
  • The combined company will not be eligible to incorporate Exchange Act reports, or proxy or information statements filed pursuant to Section 14 of the Exchange Act, by reference on Form S-1 until three years after the completion of the business combination;
  • The combined company will not be eligible to use Form S-8 for the registration of compensatory securities offerings until at least 60 calendar days after the combined company has filed current Form 10 information;
  • The combined company will be an “ineligible issuer” under Securities Act Rule 405 for three years following the completion of the business combination;
  • If the combined company is NYSE or Nasdaq listed, the company also must meet qualitative standards regarding corporate governance, such as requirements regarding a majority independent board of directors, an independent audit committee consisting of directors with specialized experience, independent director oversight of executive compensation and the director nomination process, and a code of conduct applicable to all directors, officers, and employees. There is a risk that a private operating company that has not prepared for an initial public offering and is quickly acquired by a SPAC may not have these elements in place in order to meet the listing standards at the time required.  Advance planning may be necessary to identify, elect, and on-board a newly-constituted independent board and audit committee, and for them to adequately oversee the preparation and audit of the company’s financial statements, books and records, and internal controls.

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