On March 30, 2022, the SEC issued proposed rules, which, if finalized, would include specific disclosure requirements in initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and private operating companies.
Among other provisions, the proposed rules also would amend a number of financial statement requirements applicable to transactions involving shell companies and would update the SEC’s guidance regarding the use of projections in SEC filings. The proposal is briefly summarized below, and is available for comment until the later of May 31, 2022 or 30 days after it is published in The Federal Register.
Proposed new Regulation S-K Subpart 1600
If finalized, proposed new Regulation S-K Subpart 1600 would set forth specialized disclosure requirements in connection with IPOs by SPACs and in connection with de-SPAC transactions, including the following among others:
- Additional disclosures about:
- The sponsor of the SPAC (e.g., experience, roles, controlling persons, terms of any lock-up agreements, compensation)
- Actual or potential material conflicts of interest between the sponsor and public investors
- The potential for dilution
- Additional disclosures on de-SPAC transactions, including a requirement that the SPAC state (a) whether it reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to unaffiliated investors, and (b) whether it has received any outside report, opinion or appraisal relating to the fairness of the transaction
- Certain disclosures in plain English on the prospectus cover page and in the prospectus summary of registration statements filed in connection with SPAC IPOs and de-SPAC transactions
Aligning de-SPAC transactions with traditional IPOs
The proposal would align the disclosures provided, as well as the legal obligations of companies, in de-SPAC transactions more closely with those in traditional IPOs, such as by:
- Amending the registration statement forms and schedules filed in connection with deSPAC transactions to require additional disclosures about the private operating company, including, but not limited to disclosures regarding:
- A description of the business
- A description of property
- Legal proceedings
- Changes in and disagreements with accountants on accounting and financial disclosures
- Security ownership of certain beneficial owners and management
- Recent sales of unregistered securities
- Requiring a minimum dissemination period for disclosure documents in de-SPAC transactions
- Deeming a private operating company in a de-SPAC transaction to be a co-registrant of a registration statement on Form S-4 when a SPAC files such a registration statement for a de-SPAC transaction, such that the private operating company and its signing persons would be subject to liability under Section 11 of the Securities Act
- Requiring a re-determination of smaller reporting company status following the consummation of a de-SPAC transaction
- Amending the definition of “blank check company” such that the safe harbor for forward-looking information would not apply to projections in filings by SPACs, including with respect to projections of target companies, and certain other blank check companies that are not penny stock issuers
- Providing that underwriters in a SPAC IPO are deemed to be underwriters in a subsequent de-SPAC transaction under certain circumstances
Business combinations involving shell companies
If finalized, the proposed rules would deem any business combination of a reporting shell company, involving another entity that is not a shell company, to involve a sale of securities to the reporting shell company’s shareholders.
Also, the proposed rules include new Article 15 of Regulation S-X, as well as related amendments, which 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. Such new requirements would address matters such as:
- The number of years and the age of financial statements presented
- The performance of the audit of the predecessor in accordance with the standards of the Public Company Accounting Oversight Board
- The presentation of financial statements for businesses acquired by a shell company registrant or its predecessor that are not or will not be the predecessor. For example, assume shell Company A and target private operating Company B are part of a business combination, and a Form S-4 registration statement is filed. Company B acquired Company C before the Form S-4 was filed. In this example, the proposed amendments would require:
- The application of Regulation S-X Rule 3-05, 8-04 or 3-14, as applicable, aligning the financial reporting for acquired Company C in the Form S-4 and proxy or information statement with what would be required to be included for an IPO
- That, if significant and if omitted from the previously-filed registration, proxy or information statement, acquired Company C’s financial statements must be filed in an Item 2.01(f) Form 8-K filed with Form 10 information
- That the significance of acquired Company C be calculated under amended Regulation S-X Rule 1-02(w) using target private operation Company B’s financial information as the denominator instead of that of shell Company A
- The presentation of financial statements of a shell company registrant after the combination with the predecessor
Updated projections disclosure
Among other things, the proposed amendments would address the presentation of projections by companies with no history of operations and provide that the guidance also applies to projections of future economic performance of persons other than the registrant, such as the target company in a business combination. These proposed amendments would clarify that:
- Any projected measures that are not based on historical financial results or operational history should be clearly distinguished from projected measures that are based on historical financial results or operational history
- It generally would be misleading to present projections that are based on historical financial results or operational history without presenting such historical measure or operational history with equal or greater prominence
- The presentation of projections that include a non-GAAP financial measure should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it is most closely related, and an explanation of why the non-GAAP financial measure was used instead of a GAAP measure.
The proposed rules also would require additional disclosures regarding financial projections in de-SPAC transaction filings, including:
- Why the projections were prepared and by whom
- All material bases of the disclosed projections, all material assumptions underlying the projections, and any factors that may materially impact such assumptions
- Whether the disclosed projections still reflect the view of the board or management of the SPAC or target company, as applicable, as of the date of the filing; and if not, then discussion of the purpose of disclosing the projections and the reasons for any continued reliance on the projections by management or the board
Proposed safe harbor under the Investment Company Act
The proposed rule would provide a safe harbor from the definition of “investment company” under the Investment Company Act for SPACs that satisfy certain conditions that limit a SPAC’s duration, asset composition, business purpose and activities.
