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. This Part 7 delves into new Rule 145a for business combinations with any shell company, not just SPACs.
Business Combinations Involving Shell Companies
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 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.
Rule 145a
New Rule 145a deems 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 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.
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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