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SEC Provides Guidance to Operating Companies Merging with SPACs

The SEC Division of Corporation Finance staff ("Staff") issued guidance on accounting, financial reporting and governance issues that operating companies should consider prior to undertaking a "business combination" with a special purpose acquisition company ("SPAC").

Staff recommended that private companies engaging in business combinations with SPACs consider that:

  • pursuant to Form 8-K Item 9.01(c), financial statements are required to be filed for the acquired business within four business days of the completed business combination;
  • the combined company will not be allowed to incorporate by reference on Form S-1 any Exchange Act reports or proxy or information statements until three years following the completed business combination;
  • the combined company will not be allowed to use Form S-8 for compensatory securities offerings registration until a minimum of 60 days have passed since the combined company has filed updated Form 10 information; and
  • the combined company will be considered an "ineligible issuer" pursuant to Rule 405 for a three-year period after the completion of the business combination, during which time the combined company (i) will be unable to qualify as a well-known seasoned issuer, (ii) will not be able to use a free writing prospectus, (iii) will not be able to use a term sheet free writing prospectus that is available to other ineligible issuers, (iv) cannot conduct a roadshow constituting a free writing prospectus and (v) cannot rely on the Rule 163A ("Exemption from section 5(c) of the Act for certain communications made by or on behalf of issuers more than 30 days before a registration statement is filed") safe harbor for pre-filing communications.

Staff stated it is important for a SPAC and the private operating company to consider that books and records and internal control requirements applying to SPACs prior to a business combination will generally apply to the combined company post-merger. These requirements include, among others, (i) annual or interim reporting requirements, (ii) SEC rules and disclosure requirements and (iii) new accounting standards in the financial statements required in the business combination or the subsequent Form 8-K that are not yet effective for private companies. In the statement, Staff explained that SPACs that are listed on a national securities exchange must fulfill quantitative and qualitative initial listing standards following a business combination.

Further, Staff noted that private companies considering a merger with a SPAC must plan for how they will comply with the SEC and securities exchange requirements.

In a related statement, Acting SEC Chief Accountant Paul Munter highlighted some of the key considerations related to the unique risks and challenges of a private company entering the public markets through a merger with a SPAC. These include:

  • Market and timing. Mr. Munter emphasized that target companies of a SPAC merger must implement a comprehensive plan that addresses the demands associated with becoming a public company on an accelerated timeline. He stated that target companies should also assess the status of various functions, including people, processes and technology, necessary to meet SEC filing, audit, tax, governance and investor relations obligations following the merger.
  • Financial reporting. Mr. Munter stated that the combined public company should have personnel and processes in place to produce high-quality financial reporting in compliance with SEC rules and regulations. While the merger process with a SPAC often raises several challenges, one area in which target companies face complex issues is in the accounting for and reporting of its merger with the SPAC, including (i) determination of whether financial statements should be prepared in accordance with Generally Accepted Accounting Principles or, alternatively, International Financial Reporting Standards, (ii) public company disclosures, including issues related to the identification of the predecessor entity, (iii) identification of the entity that will be treated as the "acquirer" for accounting purposes, (iv) accounting for earn-out or compensation arrangements and complex financial instruments and (v) assessing the effective dates of recent accounting standards.
  • Internal control. Mr. Munter emphasized the importance of target companies understanding internal control over financial reporting and disclosure procedures, and having a related plan in place for the combined public company to comply with those requirements on a timely basis. In particular, Mr. Munter stated that management must understand the timing required for financial reporting under Section 404(a) of the Sarbanes-Oxley Act.
  • Corporate governance and audit committee. Mr. Munter highlighted the importance of boards having a clear understanding of board members' roles, responsibilities and fiduciary duties. He also emphasized that board composition is critical, both to comply with independence requirements and for the right level of experience for key committee assignments, including on the audit committee. Mr. Munter described the vital role an effective audit committee plays in providing reliable financial information to investors.
  • Auditor. Mr. Munter noted the importance of the timing of the requirement that the target company's financial statements be audited in accordance with Public Company Accounting Oversight Board ("PCAOB") standards given the compressed timing and complexity of a SPAC merger. Mr. Munter recommended that auditor independence, auditor registration with the PCAOB and related requirements be evaluated early in the merger transaction.


Regulated Entities: 
SEC-Registered Issuers, SPAC
Body of Law: 
SEC Chief Accountant, SEC Corp. Fin.