2.12 IPO/Initial Registration Statements

The reporting considerations in this section are unique to situations in which financial statements of acquirees are required in an initial registration statement. Since a company filing an initial registration statement has not previously filed any financial statements with the public, it may find certain parts of Rule 3-05 for acquired businesses difficult to apply. For example, a new registrant would not have been required to file a Form 8-K with audited financial statements of a significant acquiree when the acquisition was consummated.

Registrants should also review the guidance in Deloitte’s Roadmap Initial Public Offerings and consider consulting with their auditors and SEC legal counsel to determine the appropriate SEC reporting requirements.

As discussed in Section 2.1, Rule 3-05 applies to any acquisition of a business. However, the acquiree’s financial statements are not required once the registrant’s audited financial statements reflect the operating results of the acquiree for at least:

Nine months if any of the results of the significance tests are greater than 20 percent but none are greater than 40 percent.
A complete fiscal year if the results of any of the significance tests are greater than 40 percent.

A registrant is required to test the significance of acquirees only during (1) the most recent full fiscal year presented in its audited financial statements and (2) the subsequent interim period through the date the initial registration statement is filed and declared effective by the SEC. As a result, the registrant will not need to present the preacquisition financial statements for acquisitions that occurred before the beginning of the most recent audited fiscal year presented by the registrant (i.e., acquisitions that occurred in the comparative fiscal years presented) unless the omission of such financial statements would be misleading.

The table below summarizes whether preacquisition financial statements are required for an acquiree on the basis of the timing of the acquisition and the significance threshold.

Significance	Acquisition Closed Before the Most Recent Full Fiscal Year Presented	Acquisition Closed During the Most Recent Full Fiscal Year presented	Acquisition Closed After the Most Recent Full Fiscal Year Presented	Probable Acquisition (Not Yet Consummated)
Is 20 percent or less	No	No	No	No
Exceeds 20 percent but not 40 percent	No	If the acquisition closed during the fiscal first quarter, no; otherwise yes. See Section 2.12.1 for further details.	Yes — see Section 2.12.1 for further details.	No — see Section 2.12.2 for further details.
Exceeds 40 percent but not 50 percent	No	Yes	Yes — see Section 2.12.1 for further details.	No — see Section 2.12.2 for further details.
Exceeds 50 percent	No	Yes	Yes	Yes

2.12.1 Grace Period

Financial statements of a significant acquired business that do not exceed 50 percent significance (on the basis of any of the three significance tests) are not required in a registration statement that is filed or declared effective before the 75th day after the consummation of the acquisition. (See the discussion of Company D in Example 2-53.) However, these requirements may be accelerated if certain acquisitions are significant in the aggregate, as noted in Section 2.9. In addition, the required financial statements and pro forma financial information must be filed on Form 8-K within 75 days of the close of the transaction.

2.12.2 Aggregate

As discussed in Section 2.9, when filing a registration statement, a registrant must evaluate the aggregate significance of (1) less than 50 percent probable acquisitions; (2) greater than 20 percent, but less than 50 percent, significant consummated acquisitions within the grace period; and (3) any individually insignificant (20 percent or less) businesses acquired since the end of the registrant’s most recently completed fiscal year presented.

2.12.3 Financial Statements Used to Measure Significance

Generally, in the determination of significance, the most recent preacquisition annual financial statements of an acquiree are compared with a registrant’s most recent preacquisition audited annual consolidated financial statements (see Section 2.3.1).

Example 2-51

Registrant A acquired Company B on December 15, 20X4; Company C on January 15, 20X5; and Company D on July 15, 20X6. Registrant A and Companies B, C, and D have December 31 fiscal year-ends. Registrant A plans to file an initial registration statement on September 15, 20X6. Significance should be calculated for each acquisition as follows:

Compare C’s financial statements for the fiscal year ended December 31, 20X4, with A’s audited financial statements for the fiscal year ended December 31, 20X4.
Compare D’s financial statements for the fiscal year ended December 31, 20X5, with A’s audited financial statements for the fiscal year ended December 31, 20X5.

Registrants are required to test the significance of acquirees only during (1) the most recent full fiscal year presented in their audited financial statements and (2) the subsequent interim period through the date the initial registration statement is filed and declared effective by the SEC.

Because the acquisition of B occurred before the most recent full fiscal year presented by A, generally there is no requirement to test B for significance.

In the case of a registrant that is conducting an IPO, we understand that the SEC staff will not object if the registrant evaluates an acquiree’s significance by using pro forma financial information that reflects the effect of a prior significant acquisition (or disposition) consummated after the latest fiscal year-end for which its audited financial statements are required to be presented and for which financial statements of the prior significant acquiree and related pro forma financial information are included in the registration statement. If the registrant includes the financial statements and related pro forma financial information of the prior significant acquiree in a draft registration statement, it must ultimately provide them in a public filing as well. It would not be appropriate to use pro forma financial information to evaluate the significance of an acquiree if such information were only included in the draft registration statement but not the registration statement that was publicly filed.

At the September 2021 CAQ SEC Regulations Committee joint meeting with the SEC staff, the staff stated that a registrant must meet the requirements of Regulation S-X, Rule 11-01(b)(3)(i)(B), to use pro forma financial information when testing the significance of a consummated acquisition.

A registrant must also consider the other conditions discussed in Section 2.3.1.2 when using pro forma financial information to evaluate the significance of an acquiree in an IPO/initial registration statement.

Example 2-52

Company M, a non-EGC calendar-year-end company, intends to submit a draft registration statement in July 20X9. It reasonably expects to file publicly in November 20X9 and have its initial registration statement declared effective in December 20X9.

On March 15, 20X9, M acquired Company N, a nonregistrant whose fiscal year-end is also December 31. Because the acquisition of N exceeds 20 percent, M will be required to include separate audited financial statements of N and the related pro forma financial information in its draft registration statement and, ultimately, in a public filing.

On June 15, 20X9, M acquired Company P, a nonregistrant whose fiscal year-end is also December 31. To measure the significance of the acquisition of P, M could use either (1) the pro forma information as of and for the year ended December 31, 20X8, that reflects the acquisition of N that is expected to be included in a draft registration statement in July 20X9 and publicly filed in November 20X9 or (2) its historical audited financial statements as of and for the year ended December 31, 20X8, that did not reflect the acquisition of N. Company M must use the option it elects for all three significance tests. If it elects to use the pro forma financial information, it must (1) prepare a pro forma balance sheet as of December 31, 20X8, that reflects the acquisition of N for use in the determination of P’s significance and (2) continue to use such information for future acquisitions and dispositions until it files its first Form 10-K (i.e., for the year ending December 31, 20X9). On the basis of the investment, asset, and income test, assume that the highest level of the significance of the acquisition of P is:

Eighteen percent on the basis of M’s pro forma information as of and for the year ended December 31, 20X8, that reflects the acquisition of N.
Twenty-three percent on the basis of M’s historical audited financial statements as of and for the year ended December 31, 20X8, that did not reflect the acquisition of N.

If M were to use its historical audited financial statements, it would need to provide the separate financial statements of P along with pro forma financial information since the significance exceeds 20 percent. However, because M elected to use its pro forma information that reflects the acquisition of N, no separate financial statements of P are required since the significance of the acquisition of P does not exceed 20 percent.

If M’s IPO is delayed in such a way that M would be required to provide its audited financial statements for the year ended December 31, 20X9, when it first publicly files its initial registration statement, the significance of the acquisition of P must be evaluated by using M’s historical audited financial statements for the year ended December 31, 20X8. Company M is no longer able to use its pro forma financial information because the acquisition of P was not consummated after the latest fiscal year-end for which M’s audited financial statements are required to be presented (i.e., December 31, 20X9).

2.12.4 Periods of Preacquisition Financial Statements Required

If preacquisition financial statements are required, a registrant determines the number of periods to provide on the basis of the significance levels described in Section 2.3.

Example 2-53

Registrant A, a calendar-year-end company that does not qualify as an EGC, is planning to file its initial registration statement on or around September 15, 20X6. It will provide its historical financial statements for the following periods in its initial registration statement:

Audited balance sheets as of December 31, 20X5, and December 31, 20X4.
Audited statements of operations, comprehensive income, cash flows, and changes in stockholders’ equity for each of the three years in the period ended December 31, 20X5.
Unaudited financial statements as of and for the periods ended June 30, 20X6, and June 30, 20X5.

Registrant A made the following acquisitions:

Company	Acquisition Date	Highest Level of Significance	Years Required	Financial Statements Required*
B	December 15, 20X4	60%	N/A	Because the acquisition of B occurred before the most recent full fiscal year presented by A, B’s preacquisition financial statements are not required.
C	January 15, 20X5	55%	2	Because C has not been included in A’s audited results for a complete fiscal year, A must provide two years of preacquisition financial statements: C’s financial statements as of and for the years ending December 31, 20X4, and December 31, 20X3.
D	July 15, 20X6	25%	1	While one year of audited financial statements will eventually be needed, as of the initial filing date, no financial statements of D are required on the basis of the accommodation for recently consummated business acquisitions, commonly referred to as the grace period (see Section 2.12.1). In any amendment to the IPO registration statement filed 75 or more days after the consummation, audited financial statements as of and for the year ended December 31, 20X5, as well as unaudited interim information as of and for the period ended June 30, 20X6, would be required. In addition, if A completes its IPO during the grace period, the required financial statements and pro forma financial information must be filed on Form 8-K within 75 days of the close of the transaction.
* Assumes that all acquired companies are calendar-year-end companies and that the registrant is not using the accommodation to omit the acquiree’s balance sheet (see Section 2.12.5), when applicable.

Rule 3-06 permits the use of an acquiree’s audited financial statements for a period of nine to twelve months to satisfy one year of financial statement requirements. For example, for a transaction that closed in the fourth quarter (e.g., November 15, 20X6) for which one year of audited preacquisition financial statements is required, a registrant could provide audited financial statements for the nine month period ended before acquisition (e.g., the nine months ended September 30, 20X6) in lieu of audited financial statements for the prior fiscal year (e.g., the year ended December 31, 20X5) and unaudited information for the appropriate interim period (e.g., the nine months ended September 30, 20X6).

2.12.5 Omitting a Balance Sheet for a Significant Business Acquisition

In accordance with Rule 3-05(b)(4)(iv), a separate balance sheet of the acquiree is not required if the registrant’s most recent audited balance sheet is for a date after the acquisition was consummated. The registrant is still required to provide the acquiree’s statements of operations, comprehensive income, and cash flows for the appropriate periods.

Example 2-54

Registrant A acquired Company B on December 15, 20X7. Both A and B have a December 31 fiscal year-end. The highest level of significance for the acquisition of B was 35 percent. Registrant A plans to file an initial registration statement in March 20X8 that will include A’s audited financial statements as of December 31, 20X6 and 20X7, and for the three years ended December 31, 20X7. Registrant A is required to include B’s audited financial statements for one year in the initial registration statement. See Section 2.3.

Because A’s audited balance sheet as of December 31, 20X7, is for a date after the acquisition was consummated, B’s balance sheet may be omitted. Registrant A is still required to provide B’s statements of operations, comprehensive income, and cash flows for the appropriate periods.

2.12.6 Omitting Financial Statements of Acquired Entities From Draft Registration Statements

Historically, registration statements filed with the SEC were immediately accessible to the public via EDGAR, the SEC’s online public database. However, EGCs may confidentially submit certain IPO registration statements to the SEC. In 2017, the SEC extended a similar benefit to non-EGCs, allowing them to also voluntarily submit draft IPO registration statements to the SEC staff for nonpublic review. See Section 1.4.2 of Deloitte’s Roadmap Initial Public Offerings for a discussion of draft registration statements and the nonpublic review process.

While each draft of a registration statement is generally expected to contain all information required by SEC regulations, there is an accommodation available to companies that allows them to omit acquiree financial statements in certain circumstances. Specifically, under the accommodation, a company may omit financial information from a nonpublic draft registration statement for historical periods currently required if the company reasonably believes that it will not be required to include these historical periods at the time of the public filing (or, for EGCs, at the time of the contemplated offering). Thus, a company may omit from its draft registration statement Rule 3-05 financial statements (and the related pro forma financial information discussed in Chapter 4) if the company reasonably believes that those financial statements will not be required at the time of the public filing (or, for EGCs, at the time of the contemplated offering). See the SEC staff’s C&DIs on (1) Securities Act Forms (Questions 101.04 and 101.05) and (2) the FAST Act (Questions 1 and 2).

Example 2-55

A calendar-year-end non-EGC registrant that plans to submit an initial draft registration statement in the fall of 20X7 completes a significant acquisition in the fourth quarter of 20X6. The acquisition is significant in such a way that one year of the acquiree’s financial statements would generally be required under Rule 3-05. The company plans to update its draft registration statement to include its 20X7 annual financial statements before a public filing in 20X8. Thus, after that update, the acquired business will have been part of the company’s financial statements for a sufficient amount of time to eliminate the need for separate financial statements. In this scenario, the CF-OCA will not delay its review of the draft registration statement in the fall of 20X7 even though the acquiree’s financial statements and the related pro forma financial information are omitted from the submission.

2.12.7 Waiver Requests Under Rule 3-13

When preparing an initial registration statement, a registrant may wish to seek relief from complying with the various reporting requirements under Regulation S-X, particularly those that are burdensome but may not be material given the total mix of information available to investors. For example, in an IPO, the registrant’s historical financial statements presented may exhibit significant growth, but certain acquisitions may not be material to the registrant’s current operations. If a registrant believes that as a result of the literal application of the significance test it would be required to provide, for an acquired business under Rule 3-05, financial statements that are not material, not relevant, or not meaningful to investors, the registrant may consider submitting — to the CF-OCA — a Rule 3-13 waiver request to omit or substitute such financial statements. While recent changes to Rule 3-05 were intended to modernize the requirements and are expected to reduce the number of waivers, registrants may still seek modifications to their reporting requirements under Rule 3-13 as the SEC staff continues to entertain these requests. For more information, see Section 1.5.

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This SEC Reporting Interpretations manual provides comprehensive guidance; however, the manual does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.