Topic No. 1: Staff Observations in the Review of Forms 8-K Filed to Report Reverse Mergers and Similar Transactions
Date: September 14, 2011
Summary: This guidance summarizes the Division of Corporation Finance's observations in the review of Forms 8-K filed to report reverse mergers and similar transactions.
Supplementary Information: The statements in this CF Disclosure Guidance represent the views of the Division of Corporation Finance. This guidance is not a rule, regulation or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved its content.
In an effort to provide companies with information as they prepare current reports on Form 8-K to report reverse mergers and similar transactions by which they cease to be shell companies, the Division of Corporation Finance has prepared this summary of common comments cited in reviews of these filings. These observations may or may not encompass an individual company’s particular facts and circumstances and this summary may not address all of the material disclosure issues applicable to a transaction. Each company should consider its own facts and circumstances when preparing its filings. These observations summarize and discuss certain rules and regulations that the U.S. Securities and Exchange Commission has adopted, but they are not a substitute for the rules and regulations. Only the rules and regulations themselves can provide you with the complete and definitive requirements applicable to your transaction.
In our reviews of Forms 8-K, we frequently refer companies to the specific disclosure requirements of Items 2.01, 5.01 and 9.01 of Form 8-K and ask them to evaluate carefully the facts and circumstances of their transactions and confirm that they have provided the required disclosures. In our comments, we frequently ask companies to support their conclusions that they are not shell companies as defined in Rule 12b-2 under the Securities Exchange Act of 1934.
Item 2.01 — Completion of Acquisition or Disposition of Assets
Item 2.01 of Form 8-K generally requires a company to provide specified disclosure after it has acquired or disposed of a significant amount of assets other than in the ordinary course of business. If that company was a shell company, as defined in Rule 12b-2 under the Exchange Act, immediately before the transaction, it must include the information that would be required if it were filing a Form 10 under the Exchange Act in its Form 8-K. We frequently remind companies that Instruction 2 to Item 2.01 makes clear that the term “acquisition” includes every purchase, acquisition by lease, exchange, merger, consolidation, succession or other acquisition. Where a company’s reverse merger or similar transaction fits within the scope of Instruction 2, we remind it of the Item 2.01 disclosure requirements.
Item 5.01 — Changes in Control of Registrant
Item 5.01 of Form 8-K requires a company to provide specified information about a change in control. Similar to the requirements of Item 2.01, if that company was a shell company, as defined in Rule 12b-2 under the Exchange Act, immediately before the transaction, it must include the information that would be required if it were filing a Form 10 under the Exchange Act in its Form 8-K. We frequently remind companies of this disclosure requirement.
Item 9.01 — Financial Statements and Exhibits
Financial statements of businesses acquired
We frequently remind companies that Item 9.01(a) of Form 8-K requires historical financial statements of private operating businesses acquired through reverse mergers or other transactions through which the reporting companies have ceased being shell companies. In our comments, we often remind
- smaller reporting companies that they must provide up to two years of audited financial statements of the acquired company as well as unaudited, interim financial statements for the most recently completed quarter, and;
- other companies that they must provide up to three years of audited financial statements of the acquired company and unaudited, interim financial statements for the most recently completed quarter.
Pro forma financial information
We often remind companies that Item 9.01(b) requires that they provide certain pro forma financial information. In our comments on pro forma financial information, we often ask questions about how the company has accounted for the reverse merger or similar transaction.
Shell company transactions
We often advise shell companies that Item 9.01(c) states that the financial statements and pro forma financial information required by Item 9.01 must be included in the initial Form 8-K report.
Our comments regarding exhibits are consistent with those we raise in any filing review. For example, where a company files documents presented in a language other than English, we remind it that Exchange Act Rule 12b-12(d) requires that it also file a translation into English.
Information Required by Form 10
Our comments on the information required by Form 10 are consistent with those we raise on Form 10 registration statements.
Although Item 101 of Regulation S-K requires a company to describe its business development during the last three years, given that the reported transactions significantly change the nature of the companies, we often ask companies to enhance their disclosure about post-transaction business.
In our comments, we ask companies to distinguish between current activities and planned activities. Where it isn’t clear how a company generates, or intends to generate, revenue, we ask for more detail. In many instances, we ask companies to provide clearer disclosure about holding company structures and control arrangements.
Regardless of whether risk factor discussions are provided pursuant to Item 503(c) of Regulation S-K or are provided voluntarily, we often ask companies to tailor individual factors to their specific facts and circumstances.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Pursuant to Item 303 of Regulation S-K, companies must present Management's Discussion and Analysis of Financial Condition and Results of Operations. In its MD&A, a company must address known trends, demands, commitments, events, or uncertainties that will have, or are reasonably likely to have, a material impact on the company's financial condition, operating performance, revenues, and/or income, or result in its liquidity decreasing or increasing in any material way. A company also must provide additional information about the quality and variability of earnings and cash flows so that readers can evaluate whether past performance is likely to be indicative of future performance. A company also should discuss whether it expects its financial position to remain at its current level or to increase or decrease. While our frequent comments requesting enhanced MD&A disclosure are consistent with our comments in other filing reviews, in our reviews of Forms 8-K filed to report reverse mergers or similar transactions, we often ask companies to identify any significant elements of historical income or loss that will not continue in the company's post-transaction operations.
Directors and Executive Officers
A reported transaction often results in a company having new directors and executive officers. In our comments, consistent with the requirements of Item 401 of Regulation S-K, we frequently ask companies for more information about the people serving in these capacities post-transaction. Pursuant to Item 401(e) of Regulation S-K, we often remind companies to discuss the specific experiences, qualifications, attributes or skills that led to the conclusion that those people named as directors should serve as directors of the post-transaction company.
We often ask companies to enhance disclosure about the business experience and backgrounds of directors and executive officers. Where a company indicates that its executive officers devote less than their full time to the company’s business, we ask for specific disclosure about the amount of time each executive officer devotes to the company’s business and for the details of any formal agreements under which they allocate their time to the company.
We often remind companies that Item 401(f) of Regulation S-K requires disclosure of events during a ten year period.
As appropriate, we remind companies of the reporting and disclosure requirements of Item 5.02 of Form 8-K (Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers).
We often seek enhanced disclosure about compensation awards, practices or policies. We frequently ask companies to describe the post-transaction compensation arrangements for their executive officers and directors and to disclose the material terms of employment agreements. Where a company describes material employment agreements, we will refer it to the filing requirements of Item 601(b)(10) of Regulation S-K.
We often remind companies that, in addition to providing the summary compensation table for the appropriate period of time, they must provide similar information for the acquired company’s most recently completed fiscal year and refer them to our Regulation S-K Compliance and Disclosure Interpretations 217.02 and 217.12.
Certain Relationships and Related Transactions, and Director Independence
We frequently remind companies that disclosure in response to the requirements of Item 404(d) of Regulation S-K in the context of the requirements of a Form 10 should cover the two fiscal years preceding the registrant’s last fiscal year, in addition to the period(s) specified in the Item.
We often ask companies to reconcile the information they describe elsewhere in their filings with the disclosure requirements of Item 404.
We often ask companies to describe the standards they use to qualify directors as independent.
Recent Sales of Unregistered Securities
We often remind companies of the Item 701 of Regulation S-K disclosure requirements.