SEC Regulations Committee June 23, 2021 — Joint Meeting with SEC Staff
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The Center for Audit Quality (CAQ) SEC Regulations Committee meets periodically with
the staff of the SEC to discuss emerging financial reporting issues relating to SEC
rules and regulations. The purpose of the following highlights is to summarize the
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I. ATTENDANCE
SEC Regulations Committee
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Securities and Exchange Commission
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Observers and Guests
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Jonathan Guthart, Chair
John May, Vice-Chair
Kendra Decker
Fred Frank
Marie Gallagher
Paula Hamric
Steven Jacobs
Lisa Mitrovich
Dan Morrill
Steve Neiheisel
Mark Shannon
Mary Stone
Scott Wilgenbusch
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Staff from the
Division of Corporation Finance (Division) and
Office of the Chief Accountant
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Erin McCloskey, KPMG
Annette Schumacher Barr, CAQ
Observer
Carolyn Hall, CAQ Observer
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II. ORGANIZATIONAL, PERSONNEL AND PROJECT UPDATES
A. Staff Update
The staff provided the following updates on personnel developments in the
Division:
- Renee Jones has been named as the new Division Director. John Coates, who previously served as the Acting Division Director, is now the Commission’s General Counsel.
- Sarah Lowe will soon join the Division as a Deputy Chief Accountant.
- Patrick Gilmore has left the SEC, creating an open position for a Deputy Chief Accountant. This position will be filled on an acting/temporary basis by current staff members until a public and internal posting for the permanent replacement is done.
- Angela Kim will join CF-OCA through December to assist with rulemaking and updates to the Financial Reporting Manual (FRM).
B. FRM Update
The staff is continuing its work on updates to the FRM, focusing on revisions
to reflect recently released rules and deleting references to outdated rules
and requirements.
III. CURRENT FINANCIAL REPORTING MATTERS
A. Pre-merger SPAC financial statements after the de-SPAC merger has been completed
The Committee members and staff considered an illustrative scenario in which
a calendar year-end SEC registrant SPAC merged with a calendar year-end
private operating company in Q1 2021 in a transaction that was accounted for
as a reverse recapitalization. The post-merger registrant intends to file a
new registration statement on Form S-1 (e.g., to register the shares of
common stock which may be issued upon exercise of warrants to purchase the
registrant’s common stock).
The Committee members asked whether the staff would object to a registrant
not including the pre-merger historical financial statements of the SPAC in
connection with the Form S-1 if it includes financial statements of the
registrant for a post-merger interim period and also includes the historical
financial statements of the previously private operating company
retrospectively revised, as appropriate, for the impact of the share
exchange.
In this scenario, the staff indicated it would not object if the
registrant omits the pre-merger historical financial statements of the SPAC
from the Form S-1. The staff indicated, however, that this position would
not necessarily apply in situations other than reverse recapitalizations.
The staff indicated that it would object if the Form S-1 omits the
pre-merger historical financial statements of the SPAC in situations where
the registration statement does not include financial statements of the
registrant for a post-merger period and the historical financial statements
of the previously private operating company retrospectively revised, as
appropriate, for the impact of the share exchange.
B. Change in accountants disclosure relating to a non-reporting target in a SPAC transaction
The Committee members asked whether a non-reporting target in a SPAC
transaction that has had a change in accountants during the two most recent
fiscal years or any subsequent interim period would be required to provide
disclosures required by Item 304(a) of Regulation S-K in a proxy statement
on Schedule 14A or a combined proxy and registration statement on Form S-4.
The staff stated that disclosure under Item 304(a) is not required for a
non-reporting target in a proxy statement or in a combined proxy and
registration statement, but the disclosure could be provided if the
information was believed to be material. That said, the disclosures set
forth in Item 304(b) of Regulation S-K would be required in both the proxy
statement on Schedule 14A or a combined proxy and registration statement on
Form S-4.
This response is specific only to a proxy statement or combined proxy and
registration statement. FRM 12230.3 contains the following guidance with
respect to the Form 8-K filed to report the loss of shell company status
shortly after the completion of the de-SPAC merger:
12230.3 In a reverse recapitalization with a shell
company, any change in accountants during the two most recent
fiscal years and interim period for the accounting acquirer must
be reported in the Form 8-K, as itisrequired by Item 14 of Form
10. Any change must be reported even if a successor accountant
reaudits all of the periods of the financial statements
contained in the Form 8-K.
C. Loss of Emerging Growth Company (EGC) status due to exceeding the rolling three-year $1 billion non-convertible debt issuance threshold
The staff discussed reporting requirements that apply when a registrant loses
its EGC status because it exceeded the rolling three-year $1 billion
non-convertible debt issuance threshold after fiscal period end (annual or
quarterly) but before the periodic report associated with that period end
(either Form 10-K or Form 10-Q) is filed. For example, a calendar year-end
registrant loses EGC status in January 2021 because it exceeded the rolling
three-year $1 billion non-convertible debt issuance threshold and will not
file its 2020 Form 10-K until February 2021. Given this scenario, the staff
addressed the question of whether non-EGC reporting requirements would be
applicable in the 2020 Form 10-K.
The staff indicated that the JOBS Act stipulates that EGC status is lost on
the date non-convertible debt issuances exceed $1 billion over a rolling
three-year period; from that point on, the entity must comply with non-EGC
reporting requirements. In addition, the staff noted that form eligibility
is assessed on the date the form is filed. In the above scenario, the
registrant would be required to comply with the reporting requirements
applicable to a non-EGC in its 2020 Form 10- K since the registrant is no
longer an EGC as of the date the Form 10-K is filed. For example, the
registrant would not be permitted to avail itself of the exemption afforded
to EGCs relating to the auditor attestation requirements relating to
internal control over financial reporting set forth in Item 308(b) of
Regulation S-K in connection with the 2020 Form 10-K. The registrant also
would not be permitted to use the extended transition period exemption for
new or revised accounting standards for EGCs and would need reflect in its
2020 Form 10-K the adoption of such accounting standards that had previously
been deferred.
The staff also indicated that the same conclusion would apply in the context
of a reverse merger in which the accounting acquiror had issued more than $1
billion in non-convertible debt during a relevant 3-year period.