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SEC Proposes New Rules For SPACs – Part 5

On March 30, 2022, the SEC proposed rules related to SPAC and de-SPAC transactions including significantly enhanced disclosure obligations, expanding the scope of deemed public offerings in these transactions, making a target company a co-registrant when a SPAC files an S-4 or F-4 registration statement associated with a business combination, and aligning de-SPAC transactions with initial public offering rules.  In addition, the SEC has also proposed rules that would deem any business combination transaction involving a reporting shell company, including but not limited to a SPAC, to involve a sale of securities to the reporting shell company’s shareholders.  The new rules would amend a number of financial statement requirements applicable to transactions involving shell companies.

In addition to proposing new rules for SPAC and de-SPAC transactions, the SEC is proposing new Securities Act Rule 145a that would deem all business combinations with an Exchange Act reporting shell to involve the sale of securities to the reporting shell company’s shareholders.  This rule would not only in practice require an S-4 or F-4 in every single de-SPAC transaction, but would likewise require a registration statement in every shell company reverse merger including the dozens of such transactions completed with OTC Markets shell companies each year.  The SEC is also proposing new Article 15 of Regulation S-X to more closely align the required financial statements of private operating companies in connection with shell company reverse mergers, with those required in registration statements on Form S-1 or F-1 for an initial public offering

In the first blog in this series, I provided background on and a summary of the proposed new rules (see HERE).  The second blog began a granular discussion of the 372-page rule release drilling down on new disclosure requirements associated with SPAC IPOs (see HERE).  The third week continued summarizing new disclosure requirements focusing on de-SPAC transactions (see HERE).  The fourth blog in the series dissected several rule changes intended to align a de-SPAC transaction with an old-fashioned IPO (see HERE.)  This week’s blog delves into new proposed Rule 145a and Article 15 for business combinations with any shell company, not just SPACs.


A “reverse merger” is a process whereby a private operating company goes public by acquiring a controlling interest in, and merging with, a public operating or public shell company.   The SEC created many rules that impose limitations on public companies that are or ever were a shell company and that effect reverse mergers with public shell companies.

In particular:

  • Financial statements and Form 10 information for the acquired business must be filed within four business days of the completion of the business combination in a Super 8-K (financial statements for an acquired business by a non-shell are not due until 71 days following the filing of the initial closing 8-K).
  • A shell company and post business combination company will be an ineligible issuer for three years following completing a business combination and, as such, (i) is not entitled to use a free writing prospectus in its IPO or subsequent offerings; (ii) cannot qualify as a well-known seasoned issuer (WKSI); (iii) may not use a term sheet free writing prospectus available to other ineligible issuers; (iv) may not conduct a road show that constitutes a free writing prospectus, including an electronic road show (see HERE for more on road shows and eligibility considerations); and (v) may not rely on the safe harbor of Rule 163A from Securities Act Section 5(c) for pre-filing communications made more than 30 days prior to the filing of the registration statement (see HERE for more on gun jumping).
  • A shell company and post business combination company does qualify to use incorporation by reference in Exchange Act reports, proxy or information statements, or Form S-1 (including forward incorporation by reference) until three years after completing a business combination (see HERE for more on incorporation by reference).
  • After completing the IPO and until it completes a business combination, a shell company, including a SPAC, must identify its shell company status on the cover of its Exchange Act periodic reports.
  • A shell company and post business combination company cannot use a Form S­8 to register any management equity plans until 60 days after completing a business combination and filing Form 10 information.
  • A shell company and post business combination company may not file an S-3 in reliance on Instruction 1.B.6 (the baby shelf rule) until 12 months after it ceases to be a shell and has filed “Form 10” information (i.e., the information that would be required if the company were filing a Form 10 registration statement) with the SEC reflecting its status as an entity that is no longer a shell company.  See here on S-3 eligibility HERE.  More recently, the SEC issued a C&DI extending the 12 months post-shell status eligibility requirements to Instruction 1.B.1 (the full shelf rule) and as such, a SPAC may not use S-3 for a shelf registration until 12 months following its business combination.
  • Holders of shell company securities may not rely on Rule 144 for resales of their securities until one year after the company completes a business combination and has filed current “Form 10” information with the SEC reflecting its status as an entity that is no longer a shell company; and so long as such company remains current in its SEC reporting obligations.
  • Under the new 15c2-11 rules, broker-dealers are able to rely on the “piggyback” exception to publish quotations for shell companies for only 18 months following the initial priced quotation on OTC Markets.  For an in-depth discussion of the 15c2-11 rules, see HERE and HERE).

However, none of these rules really address the SEC’s new focus on the fact that a reverse merger is a going public transaction, usually without a registration statement.  As such, the SEC’s new rules are designed to require registration statement disclosures prior to the closing of a reverse merger with a shell company.

The SEC found a novel way to get there – by deeming all business combinations with an Exchange Act reporting shell to involve the sale of securities to the reporting shell company’s shareholders even though the shell company shareholders would not in fact purchase or receive shares in the transaction.  The SEC’s theory is that the shell company shareholders have effectively exchanged their shares for new shares representing an interest in the combined operating company.  However, that would then be true every time an operating company makes an acquisition, pivots, spins-off a division, or ceases operations becoming a shell.  Regardless of the inconsistency, I suspect the new rules will be adopted substantially as proposed.

Proposed Rule 145a

As I’ve written about hundreds of times, every offer or sale of securities must either be registered or be exempt from registration.  To expand the definition of a sale, new Rule 145a would deem any business combination of a reporting shell company involving another entity that is not a shell company to entail a sale of securities to the reporting shell company’s shareholders.  Nothing in proposed Rule 145a would prevent or prohibit the use of a valid exemption, if available, for the deemed sale of securities; however, I know of no such available exemption and the SEC rule release not only does not suggest one but specifically clarifies that Section 3(a)(9) would not be available.

Backing up, offering exemptions are found in Sections 3 and 4 of the Securities Act.  Section 3 exempts certain classes of securities (for example, government-backed securities or short-term notes) and certain transactions (for example, Section 3(a)(9) exchanges of one security for another).  Section 3(b) allows the SEC to exempt certain smaller offerings and is the statutory basis for Rule 504 and Regulation A.  Section 4 contains all transactional exemptions including Section 3(a)(9) , which is the statutory basis for Regulation D and its Rules 506(b) and 506(c).  The requirements to rely on exemptions vary from the type of company making the offering (private or public, U.S. or not, investment companies…), the offering amount, manner of offering (solicitation allowable or not), bad actor rules, type of investor (accredited) and amount and type of disclosure required.  In general, the greater the ability to sell to non-accredited investors, the more offering requirements are imposed.

There are very few offering exemptions that allow for sales to both accredited and non-accredited investors, none of which would be available for a publicly traded company with shares in the DTC system comprised of both accredited and non-accredited investors, the identities of which are unknown.  A NOBO (non-objecting beneficial owners) list would not solve the identification issue as there may also be many OBOs (objecting beneficial owners).  Section 3(a)(9) would seem to be the only likely choice, but the SEC explains why it will not work.

Section 3(a)(9) exempts any securities exchange by an issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.  Although it would seem that the deemed exchange of securities by the public company shareholders would fall within the parameters of Section 3(a)(9), the “offering” would integrate with the offering that is the exchange of the private company’s securities for their interests in the combined company.  As a result, because the exchange would not be exclusively with the reporting shell company’s existing security holders, Section 3(a)(9) would not be available.

Accordingly, every reverse merger with a publicly reporting (and trading) shell company, including SPACs will require the filing of a registration statement on Form S-4 or F-4.  Not only would result in enhanced liabilities for signatories to any registration statement and potential underwriter liability, but under Securities Act Section 11(a)(4) would impose liability on experts, including every accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him, who has, with consent, been named as having prepared or certified any part of the registration statement or prepared or certified any report or valuation which is used in connection with the registration statement.

Excluded Transactions

There are several exemptions to Rule 145a including: (i) business combinations between two bona fide non-shell entities; (ii) business combination related shell companies (i.e., shell companies formed for the sole purpose of effectuating a change in domicile or triangular merger); and (iii) a business combination between two or more shell companies.

Article 15 of Regulation S-X

After a business combination involving a shell company, the financial statements of the private operating company become those of the registrant for financial reporting purposes. In other words, the private operating company becomes the predecessor.  The proposed amendments more closely align the financial statement reporting requirements in business combinations involving a shell company and a private operating company with those in traditional IPOs.  For the most part, the amendments would improve the financial statement requirements in a business combination transaction.

A registration statement on Form S-4 and F-4 and a proxy or information statement require financial statements of the target company for the same number of years of financial statements as would be required by the target in an annual report and any subsequent interim periods.  Generally, three years of financial statements are required unless the company is (i) a smaller reporting company; (ii) an emerging growth company (EGC) if it were conducting an IPO of common equity and the registrant is an EGC that has not yet filed or been required to file its first annual report, even if the target would not be a smaller reporting company; or (iii) the transaction is registered on Form F-4 and either (a) the target is a first time adopter of IFRS; or (b) the F-4 is the initial registration of the target and provides U.S. GAAP financial statements.

The SEC proposed amendments provide that the financial statements required in a S-4/F-4 or proxy for the target company would be the same as if that target company were completing an IPO.  Accordingly, the proposed rules would require that audited financial statements be prepared in U.S. GAAP by an independent PCAOB qualified auditor.  Similarly, the rules would allow an EGC to file two years of financial statements regardless of whether or not the registrant had filed or been required to file its first annual report.  Moreover, where the target company would be an EGC if it were to conduct an IPO, it could provide the reduced financial disclosure available to an EGC (i.e., two years of financial statements and related scaled back disclosures – see HERE).

The proposed rules also add clarifying provisions related to the financial statement requirements of businesses acquired or to be acquired by the target.  Again, the rules would align the financial statement requirements with an IPO including the need to conduct significance and probability tests applying Rule 3-05 or Rule 8-04 for a smaller reporting company.  For a summary of these rules, see HERE.

To add consistency, since the post business combination financial statements are that of the target company, the new rules would add Rule 15-01 to allow a company to exclude the financial statements of a shell company, including a SPAC, for periods prior to the acquisition once the following conditions have been met: (i) the financial statements of the shell company have been filed for all required periods through the acquisition date, and (ii) the financial statements of the registrant include the period in which the acquisition was consummated.  The proposed rule would apply regardless of whether the de-SPAC transaction is accounted for as a forward acquisition of the target private operating company by the SPAC or a reverse recapitalization of the target private operating company.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service.  The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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