SEC Regulations Committee September 30, 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
|
Securities and Exchange Commission
|
Observers and Guests
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---|---|---|
Jonathan Guthart, Chair
John May, Vice-Chair
Muneera Carr
Kendra Decker
Sam Eldessouky
Fred Frank
Marie Gallagher
Paula Hamric
Steven Jacobs
Lisa Mitrovich
Dan Morrill
Steve Neiheisel
Mark Shannon
Scott Wilgenbusch
|
Staff from the Division of Corporation Finance
(Division) and Office of the Chief
Accountant
|
Erin McCloskey, KPMG
Annette Schumacher Barr, CAQ Observer
Carolyn Hall, CAQ Observer
|
II. ORGANIZATIONAL, PERSONNEL AND PROJECT UPDATES
A. Staff Update
The staff noted that Sarah Lowe and Melissa Rocha have been named Deputy
Chief Accountants in the Division of Corporation Finance.
B. Operational Update
In an effort to facilitate the efficiency of the review process, the staff
shared the following observations and suggestions:
- With respect to S-X Rule 3-13 Waiver Requests, registrants should include all pertinent information in their initial waiver request (including what the rules require absent a waiver, why the related information is not necessary for investors, consideration of materiality factors, etc.) so as to alleviate the staff’s need to follow up numerous times for information supporting the waivers.
- With respect to SPAC transactions, all parties are encouraged to “put their best foot forward” in initial responses to reduce the need for follow-on comments. The staff added that registrants should consider the guidance regarding governance and other matters in the Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies.
- As emphasized by the staff in the March 24, 2021 Joint Meeting, draft or initial registration statements must be complete when they are submitted/filed except for the specified items in the FAST Act or Division’s confidential submission policy. The staff also indicated that frequent calls from registrants (or their advisors) to check on the status will not expedite the filing process.
C. Division Efforts on Climate Change Disclosures
The staff observed that its recent Sample Letter to Companies Regarding Climate Change
Disclosures, was intended to share comments issued on
the topic broadly. They also emphasized that the Sample Letter is separate
from the Commission’s current ESG rulemaking initiatives (posted in the
SEC
Annual Regulatory Agenda). As such, some of what is
ultimately included in forthcoming proposed rules may or may not be
consistent with what is contained in the Sample Letter. Regarding timing of
any proposed rules, Committee members observed that an adequate
implementation runway would be necessary, given current reporting deadlines.
The Commission encourages the public to weigh-in on proposed rules,
including the transition provisions and the economic analysis related to the
costs and benefits of the proposed rules.
III. CURRENT FINANCIAL REPORTING MATTERS
A. Pre-merger SPAC financial statements after a de-SPAC transaction accounted for as a forward acquisition
At the June 2021 meeting, Committee members and staff considered an
illustrative scenario in which a calendar year-end public SPAC merged with a
calendar year-end private operating company in a transaction that was
accounted for as a reverse recapitalization. In a circumstance where
the post-merger registrant intends to file a new registration statement on
Form S-1, the staff noted that it would not object to a registrant omitting
the pre-merger historical financial statements of the SPAC in the Form S-1
if it includes (1) financial statements of the registrant for a post-merger
period and (2) historical financial statements of the previously private
operating company retrospectively revised, as appropriate, for the impact of
the share exchange in a reverse recapitalization.
Committee members and staff discussed the following illustrative scenario
which is similar to the scenario discussed in June, except the merger
between the SPAC and the operating company was accounted for as a forward
acquisition (i.e., the SPAC was determined to be the accounting
acquiror): A calendar year-end public SPAC merges with a calendar year-end
private operating company on June 5, 2021 in a transaction that is accounted
for as a forward acquisition. In September 2021, the 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).
Question 1: Regarding Form 10-Q, the Committee asked whether the staff
would object if the registrant were to omit the pre-merger historical
financial statements of the SPAC from its June 30, 2021 Form 10-Q if it
includes (1) historical financial statements of the private operating
company through the transaction date (i.e., January 1, 2021 through June 4,
2021 and April 1 through June 4, 2021) and (2) the registrant’s financial
statements that includes the post-merger period (i.e., June 5, 2021 through
June 30, 2021). Such presentation would include a black line to indicate
that any periods presented prior to and including June 4, 2021 (often
referred to as the predecessor) are presented on a different basis of
accounting than the periods presented on or after June 5, 2021 (often
referred to as the successor).
The staff noted that it would not object to registrants applying the
following guidance in Financial Reporting Manual (FRM) 1170.2(b) to forward
acquisitions as it relates to the post-merger Form 10-Ks and 10-Qs:
After the acquisition of a business by a
special-purpose acquisition company registrant (“SPAC”), the financial
statements of the registrant for periods prior to the acquisition may
not be required to be included in Forms 10-K and 10-Q once the financial
statements include the period in which the acquisition or
recapitalization was consummated. Generally, these financial
statements would not be required in cases in which the registrant had
only nominal statement of comprehensive income activity. (Last updated:
10/20/2014)
Question 2: Regarding Form S-1, the Committee asked whether the staff
would object if the registrant were to omit the pre-merger historical
financial statements of the SPAC from a Form S\u00021 filed in September
2021 if it includes (1) audited historical financial statements of the
private operating company for the two or three years ended December 31,
2020, and (2) the unaudited predecessor and successor periods included in
Question 1.
The staff noted that the FRM does not expressly discuss this circumstance and
the requirements for 1933 Act registration statements. Therefore, the rules
on what financial statements a registrant is required to provide in S-X Rule
3-02 apply. S-X Rule 3-02 refers to the audited financial statements of the
registrant and its predecessors. The financial statements required for a
forward acquisition may differ from the requirements when a SPAC-merger is
accounted for as a reverse recapitalization.
Question 3: Regarding Form 10-K, the Committee asked whether the staff
would object if the registrant were to omit the pre-merger historical
financial statements of the SPAC from its 2021 Form 10-K if it includes (1)
audited historical financial statements of the private operating company for
one or two years ended December 31, 2020 (predecessor), (2) audited
financial statements for the period January 1, 2021 through June 4, 2021
(predecessor) and (3) audited financial statements as of December 31, 2021
and for the periods June 5, 2021 through December 31, 2021 (successor). See
response to Question 1 as it applies to both a post-merger Form 10-Q and
Form 10-K.
B. Use of pro forma financial information for purposes of testing significance for S-X Rule 3-05 in a registration statement, including when the registrant (or operating company in a SPAC merger) has a successor/predecessor black line presentation.
The Committee and staff discussed two issues regarding the use of pro forma
financial information for purposes of testing significance for S-X Rule 3-05
in a registration statement:
Issue 1
S-X Rule 11-01(b)(3) permits registrants to measure significance using filed
pro forma financial information that only depicts significant business
acquisitions and dispositions consummated after the latest fiscal year-end
(FYE) for which the registrant’s financial statements are required to be
filed. While there is consistent understanding that a company conducting an
IPO can use pro forma financial information to test significance, the
Committee believes there is less clarity on whether the registrant can use
the pro forma financial information reflecting certain acquisitions for
which separate financial statements have been filed when multiple
acquisitions have closed since the latest FYE and prior to initial
submission of the draft registration statement.
To illustrate, the following example was discussed: Registrant A is a
calendar year-end EGC preparing for an IPO and has completed 2 acquisitions
since its latest FYE. Key assumptions and dates include:
Event
|
Date
|
Significance based on FY20 audited financial
statements
|
---|---|---|
A acquires Target X
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2/15/2X21
|
25%
|
A acquires Target Y
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4/15/2X21
|
22%
|
Initial confidential submission (DRS)
|
7/1/2X21
|
n/a
|
The Form S-1 includes Registrant A’s audited financial statements for the two
years ended 12/31/2X20 and unaudited interim financial statements for period
ended 3/31/2X21 and 3/31/2X20.
The Committee asked whether in this scenario, it would be permissible for the
registrant to use pro forma financial information that reflects an
acquisition consummated after the latest FYE for purposes of testing other
acquisitions that also have been consummated after latest FYE. In this
example, if Registrant A includes in the DRS (and ultimately the public
filing) the S-X Rule 3-05 financial statements and pro forma financial
information for Target X, can Registrant A use the pro forma financial
information in the DRS to test the significance of Target Y, or would the
registrant be precluded from using pro forma financial information and only
be able to use pro forma financial information for testing significance of
transactions occurring or becoming probable after the first public filing
date?
The staff stated that the requirements of S-X Rule 11-01(b)(3)(i)(B) must be
met to use pro forma financial information to test significance of a
consummated acquisition. If, as the example fact pattern indicates, the
required Target X financial statements and associated pro forma financial
information will be included in both the DRS and the publicly-filed Form
S-1, it appears application of S-X Rule 11-01(b)(3) to the DRS would be
acceptable as it would yield the same result as applying S-X Rule
11-01(b)(3) to the filing.
Issue 2
FRM 2025.10 indicates that, when a registrant that is a successor to a
predecessor company and does not have a full year of statement of
comprehensive income information available to use as the denominator in the
calculation of the income test, the calculation should only use the results
of operations of the successor period. The registrant may use pro forma
financial information for purposes of testing significance as if the
predecessor had been acquired (or change in control transaction occurred) at
the beginning of the fiscal year only with staff permission.
Again considering the above example, the Committee and staff discussed a
scenario in which Registrant A has a change in control in 2X20 and has a
black line presentation in its 2X20 results of operations required to be
reflected in the pro forma financial information as of the beginning of the
most recent year. The Committee asked the staff whether Registrant A could
test significance of Target Y using the pro forma financial information that
give effect to the acquisition of the predecessor entity (or change in
control) and the acquisition of Target X. In addition, if Registrant A is
unable to use the pro forma financial information reflecting the 2020 change
in control transaction, the Committee asked the staff for its position
regarding the appropriate way to apply the S-X Rule 11-01(b)(3) (i.e., is
the registrant precluded from using Rule 11-01(b)(3) or does it need to
derive alternative pro forma financial information?).
The staff noted that in the described fact pattern, a company would need to
write-in and request to measure significance using pro forma financial
information. S-X Rule 11-01(b)(3)(i)(B) refers to the use of pro forma
financial information that only depicts significant business acquisitions
and dispositions consummated after the latest fiscal year for which the
registrant’s financial statements are required to be filed. Additionally, as
noted in FRM 2025.10, Registrant A should preclear with the staff before
using pro forma financial information that gives effect to registrant’s
acquisition of predecessor as if it had occurred on January 1, 2020 for
purposes of calculating significance.
C. Applicability of the revenue component of the income test when testing the significance under S-X Rule 3-09 of an investee that is accounted for using the fair value option.
The Committee members asked the staff whether the revenue component of the
income test applies when testing the significance of an investee under S-X
Rule 3-09 when the investee is accounted for using the fair value option.
The staff indicated that they are continuing to consider whether the revenue
component of the income test is applicable in these circumstances and
registrants that believe it would be appropriate to apply the revenue test
are encouraged to talk to the staff.
Regarding the income component, FRM 2435.2 continues to apply, and states
that when testing significance of an investment accounted for using the fair
value option, “the income test should be computed using as the numerator the
change in the fair value reflected in the registrant’s statement of
comprehensive income. . . .”