On January 24, 2024, the SEC adopted final rules enhancing disclosure obligations for SPAC IPOs and subsequent de-SPAC business combination transactions. The rules are designed to more closely align the required disclosures and legal liabilities that may be incurred in de-SPAC transactions with those in traditional IPOs. The new rules spread beyond SPACs to shell companies and blank check companies in general. The compliance date for the new rules is July 1, 2025.
In the first blog in this series, I provided background on and a summary of the new rules – see HERE. The second blog began a granular discussion of the 581-page rule release starting with partial coverage of new Subpart 1600 to Regulation S-K related to disclosures in SPAC IPO’s and de-SPAC transactions – see HERE. The third blog in the series continued the summary of Subpart 1600 and in particular the new dilution disclosure requirements – see HERE. Part 4 continued a review of new Subpart 1600 to Regulation S-K including the new prospectus cover page and summary requirements and the de-SPAC background discussion – see HERE. Part 5 completed the Subpart 1600 discussion – see HERE.
Part 6 covers further rule amendments impacting de-SPAC transactions including non-financial disclosures, minimum dissemination periods, requiring a target to be a co-registrant, re-determining smaller reporting company status, the PSLRA safe harbor, and underwriter status in a de-SPAC transaction – see HERE. Part 7 delves into new Rule 145a for business combinations with any shell company, not just SPACs – see HERE. This Part 8 explores Article 15 financial statement requirements for business combinations with any shell company, not just SPACs.
Financial Statement Requirements in Business Combinations Involving Shell Companies
After a business combination involving a shell company, the financial statements of the private operating company become those of the public reporting company for financial reporting purposes. In other words, the private operating company becomes the predecessor for purposes of financial reporting, including the prior year look back periods.
Historically, the financial statement requirements were different for an S-1/F-1 that would be used in an IPO than for an S-4/F-4 that would be used for a business combination. As the SEC indicates throughout its rule release, the disclosures to the market and investors should not differ based on the method a company uses to go public. Accordingly, the new rules 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 improve the financial statement requirements in a business combination transaction.
Audit Requirements
The SEC has adopted new Rule 15-01(a) and amended rule 1-02(d) and the instructions to Forms S-4 and F-4 to align the definition of “audit” with IPO requirements. In particular, Rule 15-01 updated the term “audit” to mean “an examination of the financial statements by an independent accountant in accordance with the standards of the PCAOB for the purpose of expressing an opinion thereon.” Rule 1-02 was amended to cross-reference the new Rule 15-01. The final rule modified the proposed rule to ensure that it was clear that the new rules apply to all transactions involving shell companies, not just those involving a SPAC. The combined effect of the changes is that a predecessor to a shell company (i.e. the target company) is required to comply with the same definition of audit as if it were filing for an IPO. The instructions to Forms S-4 and F-4 were amended for consistency.
Number of Years of Financial Statements
Currently a registration statement in connection with a de-SPAC transaction on Form S4 or F-4 and a proxy or information statement must include financial statements of the target company for the same number of years as would be required by the target company in an annual report and any subsequent interim periods, which is generally three years. In contrast, in a traditional IPO under the Securities Act, a registrant that qualifies to be an emerging growth company (EGC) or a smaller reporting company (SRC) may provide only two years of these financial statements (for more on EGCs see HERE (for the definition of an SRC see HERE).
New Rule 15-01(b) provides that the financial statements required in a S-4/F-4, proxy or information statement for a business that is combining with a shell must be the same as if that business were completing an IPO. Accordingly, an EGC or smaller reporting company (SRC) may include only two years of audited financial statements in an S-4, F-4, proxy or information statements in association with a business combination involving a shell company. The new rule applies to all businesses that are combining with a shell company and not just one who would be considered a financial predecessor.
Age of Financial Statements
Although generally the current rules are consistent as to when financial statements go “stale” for purposes of a registration statement, an SEC reporting company may extend its third quarter financial statement period for an additional 45 days (90 days from year-end) if it has timely filed all SEC reports in the prior 12 months. That is, an SEC reporting company that has timely filed all its reports for the prior 12 months may use its third quarter financial statements until the due date for its annual report. Since a SPAC is a reporting company, under the current rules, an S-4 could contain financial statements that would be considered stale in an IPO.
To rectify this disparity, the SEC has adopted new Rule 15-01(c) to align the age requirements for financial statements for each business involved in a business combination with a shell company filed on Form S-4 or F-4 with those for an issuer in an IPO on Form S-1 or F-1. The new rule applies to all businesses that are combining with a shell company and not just one who would be considered a financial predecessor.
Acquisition of a Business or Real Estate Operation
The rules also add clarifying provisions related to the financial statement requirements of businesses acquired or to be acquired by the target. When an operating public company engages in an acquisition, financial statement requirements are determined using 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.
These provisions would dictate when the financial statements of a non-predecessor business that has been acquired, or is probable to be acquired, by a shell company registrant or its predecessor (the main target) should be included in the registration statements or proxy statements related to the business combination. However, this could lead to unintended consequences. The significance tests in Rule 1-02 do not address the scenario when there is both a shell company registrant and a business that is or will be its predecessor. Because a shell company has nominal activity and therefore the denominator for the tests would be minimal, the application of such tests generally result in an acquisition being significant at the maximum level, which suggests that the existing sliding scale for business acquisitions may not be effective in this context.
In order to address the ineffectiveness of the existing sliding scale in these specific transactions, the amendments to Rule 1-02(w) require the significance of the acquired business that is not the predecessor to be calculated using the predecessor’s financial information as the denominator instead of that of the shell company registrant. New Rule 15-01(d)(1) directs registrants to Rule 1-02(w)(1) in order to determine how significance is measured in certain shell company business combination transactions. New Rule 15-01(d)(2) clarifies when and how financial statements for a recently acquired or to be acquired business should be filed.
The new rules also tie in existing Rule 3-05(b)(4)(i), which provides that financial statements of a recently acquired or to be acquired business may be omitted from a registration or proxy statement when the significance of that acquisition, under the required significance tests in Rule 3-05, is measured at 50% or less. Rule 3-05 further provides that such omitted financial statements must be filed under cover of Form 8- K within 75 days after consummation of the acquisition.
That is, where the predecessor has acquired a business or real estate assets, it can rely on 3-05(b)(4)(i) to omit financial statements from the S-4 or F-4 but would need to file such financial statements in a Form 8-K within 75 days of consummation of the acquisition. To be clear the 75 days is determined as of the date of the acquisition not of the de-SPAC business combination and as such could be less than 75 days from the closing of the de-SPAC transaction. The SEC has also amended Item 2.01(f) of Form 8-K to clarify that the financial statement disclosure requirement applies to the predecessor and not the former shell company.
Financial Statements of Shell Company Registrant after the Combination with Predecessor
To add consistency, since the post business combination financial statements are that of the target company, new Rule 15-01(e) allows 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 predecessor have been filed for all required periods through the acquisition date, and (ii) the financial statements of the combined entity include the period in which the acquisition was consummated. The rule applies 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, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, 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, Linder & Cacomanolis, 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 ALC 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 the American Red Cross for Palm Beach and Martin Counties, 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.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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