SEC Proposes Enhancements to Disclosure Requirements and Investor Protections Related to SPACs, Shell Companies, and Projections
April 1, 2022
On March 30, 2022, the SEC issued a proposed rule, Special Purpose Acquisition Companies, Shell Companies, and Projections. The proposal would “enhance investor protections in initial public offerings [IPOs] by special purpose acquisition companies [SPACs] and in subsequent business combination transactions between SPACs and private operating companies [also known as de-SPAC transactions].”
The proposed rule’s objective is to “more closely align the financial statement reporting requirements in business combinations involving a shell company and a private operating company [target company] with those in traditional [IPOs].” Accordingly, the proposed rule would provide for the following with respect to de-SPAC transactions:
- PCAOB audit requirement — Existing staff guidance would be codified by requiring that the financial statements of a target company included in a de-SPAC registration statement on a Form S-4, Form F-4, or a proxy or information statement (collectively referred to herein as a “de-SPAC registration/proxy statement”) be audited in accordance with PCAOB standards.
- Financial statement periods — The proposal would expand the circumstances in which target companies may report two years of financial statements in a de-SPAC registration/proxy statement.
- Age of financial statements — The age of financial statements of a target company in a de-SPAC registration/proxy statement would be based on whether the target company would qualify as a smaller reporting company if it were filing its own registration statement.
- Acquired or to be acquired businesses — Existing financial reporting practice would be codified by requiring the target company to apply Regulation S-X, Rule 3-05 or 8-04 (or Rule 3-14 for real estate operations) to an acquired or to be acquired business (other than a predecessor). Further, significance test calculations would be performed by using the target company’s financial information as the denominator.
- SPAC financial statement requirements after a de-SPAC transaction — Existing financial reporting practice would be codified by allowing the registrant to omit the pre-combination financial statements of the SPAC once the (1) financial statements of the SPAC have been filed for all required periods through the acquisition date and (2) financial statements of the post-combination registrant include the period in which the acquisition was consummated.
In addition, the proposed rule would require enhanced disclosures and provide additional investor protections for SPAC IPOs and de-SPAC transactions. These requirements, which are primarily legal in nature, include, but are not limited to, the following:
- Expanded disclosures — In the Form S-1 or Form F-1 related to the SPAC IPO, the de-SPAC registration/proxy statement, or both, registrants would be required to provide enhanced disclosures (in inline XBRL format) regarding, among other things, the SPAC sponsors, conflicts of interest, dilution, projections, the fairness of the de-SPAC transaction to the SPAC investors, and aligning the target company’s disclosures with those required in an IPO that are generally filed on Form 8-K four days after the close of the de-SPAC transaction.
- Target as a co-registrant — The target company would be a co-registrant when a SPAC files a registration statement on Form S-4 or Form F-4 for a de-SPAC transaction.
- Smaller reporting company (SRC) status — A re-determination of SRC status would be performed within four days after the consummation of a de-SPAC transaction.
- Projections — As a result of the amended definition of “blank check company,” the safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statements, such as projections, would be unavailable in filings by SPACs and certain other blank check companies. In addition, the proposed rule would expand and update the Commission’s guidance on the presentation of projections.
- Underwriters — Underwriters in a SPAC IPO would be deemed underwriters in a subsequent de-SPAC transaction when certain conditions are met.
- Sale of securities — The de-SPAC transaction would be deemed a sale of target securities to SPAC shareholders.
- Minimum dissemination period — Generally, there would be a minimum 20-calendar-day dissemination period for proxy/registration statements.
- Investment Company Act of 1940 — The proposal would provide a new safe harbor for a SPAC that, upon meeting certain conditions, would not be an investment company and therefore would not be subject to the Investment Company Act of 1940.
Comments on the proposed rule are due 30 days after the date of its publication in the Federal Register or May 31, 2022, whichever is later.
For more information about the current SPAC requirements, see Deloitte’s October 2, 2020 (last updated December 2, 2021), Financial Reporting Alert. Also see the press release and fact sheet, as well as statements by SEC Chair Gary Gensler and Commissioners Allison H. Lee, Hester M. Peirce, and Caroline A. Crenshaw, on the SEC’s Web site.