D.3 Proxy/Registration Statement Requirements
The SPAC’s shareholders are generally required to vote on the
transaction in which the SPAC merges with the target. Therefore, the
proxy/registration statement must include the information below related to the
target.
D.3.1 Financial Statement Requirements
Regulation S-X, Article 15, prescribes the financial statement
requirements for the target in a proxy/registration statement. The
proxy/registration statement must include the target’s (1) annual financial
statements audited in accordance with PCAOB standards and (2) unaudited interim
financial statements, depending on the timing of the transaction (see Section 2.4.3 for
guidance on requirements related to the age of financial statements; the age of
financial statements of a target company in a proxy/registration statement
should be the same as they would be if the target company was completing its own
traditional IPO). Generally, the target must include annual audited financial
statements for three years. However, there are two
scenarios in which this required period may be reduced from three years to two
years:
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SRCs — In a manner consistent with the requirements described in paragraphs 1140.3, 5110.1, and 5110.3 of the FRM, a target may provide two years of audited financial statements rather than three years if the target would meet the definition of an SRC when filing a registration statement on its own (i.e., it had less than $100 million in revenue in the last fiscal year for which audited financial statements are available). See Section 1.5 and Appendix B for further discussion of SRCs.
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EGCs — A target may provide two years of audited financial statements rather than three years provided that the target would qualify as an EGC if it were conducting its own IPO of common equity securities. See Section 1.6 and Appendix C for further discussion of EGCs.
The number of years of financial statements required,as well as
the age of the financial statements, must be reassessed (1) each time an
amendment to the proxy/registration statement is filed and (2) when the Super
Form 8-K is filed or amended.
The audited annual financial statements must include (1) balance
sheets as of the end of the two most recent fiscal years and (2) statements of
comprehensive income, cash flows, and changes in shareholders’ equity for the
two or three most recent fiscal years (see discussion above). Depending on the
timing of the transaction, unaudited interim financial statements may be
required. When needed, interim financial statements must include (1) an interim
balance sheet as of the end of the most recent interim period after the latest
fiscal year-end (see Section
D.3.2) and (2) statements of comprehensive income, cash flows, and
changes in shareholders’ equity for the year-to-date period from the latest
fiscal year-end to the interim balance sheet date and the corresponding period
in the prior fiscal year.
D.3.1.1 Financial Statement Presentation and Disclosure Requirements
In accordance with Regulation S-X, Rule 15-01(b), the
target’s financial statements must be presented as if the target were filing
an initial registration statement related to its equity securities.
Accordingly, the target must comply with SEC rules and regulations,
including SEC
Regulation S-X and SEC
Staff Accounting Bulletins, both of which govern
presentation and disclosures in the financial statements. For further
discussion, see Chapter
3.
The target’s financial statements must also comply with
public-company GAAP, which may trigger additional presentation and
disclosure requirements. Such requirements include, for example, those
related to mezzanine equity classification (ASC 480), segment- and
entity-wide disclosures (ASC 280), EPS (ASC 260), disaggregation of revenues
(ASC 606), and incremental business combination disclosures (ASC 805). For
further discussion, see Chapter 5. In addition, the target’s financial statements
generally must reflect the adoption of new accounting standards on the basis
of the dates required for public companies. However, we understand that the
SEC staff will not object if a target uses private-company (non-PBE)
adoption dates when (1) the SPAC is an EGC that has elected to defer the
adoption of accounting standards by using private-company adoption dates,
(2) the target would qualify as an EGC if it were conducting its own IPO of
common equity securities, and (3) the combined company would qualify as an
EGC after the transaction (see paragraph 10120.2 of the FRM for a
discussion of assessing EGC eligibility after the transaction).
D.3.1.2 Financial Statements of Acquired or to Be Acquired Businesses and Real Estate Operations
As stipulated by Regulation S-X, Rule 15-01(d), target companies that are
determined to be the predecessor(s) in a SPAC transaction must apply
Regulation S-X, Rule 3-05 or Rule 8-04, for SRCs to an acquired or to be
acquired business (other than a predecessor) (or, for real estate
operations, Regulation S-X, Rule 3-14 or Rule 8-06, for SRCs). For more
information about applying these rules to non-SRCs, see Sections
2.5 and 2.6; however, it should be noted
that, for SPAC transactions, significance test calculations should be
performed by using the financial information of the predecessor (rather than
the SPAC) in the denominator.
D.3.1.3 Financial Statements and Summarized Financial Information for Equity Method Investments
Targets with EMIs should consider the reporting and
disclosure requirements in Regulation S-X, Rules 3-09, 4-08(g), and
10-01(b)(1). (For more information about these rules for non-SRCs, see
Section
2.7.) In addition, we understand that, for SPAC transactions,
significance test calculations should be performed by using the financial
information of the predecessor (rather than the SPAC) in the denominator
(although Regulation S-X, Article 15, does not specifically indicate
this).
D.3.1.4 Auditing and Review Standards
Audits for private companies are typically subject to AIPCA
auditing standards; however, for SPAC transactions, Regulation S-X, Rule
15-01(a), requires that the audit of the target that becomes the SPAC’s
predecessor be performed in accordance with PCAOB standards (note that, when
a SPAC acquires multiple targets, the financial statements of a
nonpredecessor target may be audited in accordance with either PCAOB or
AICPA standards as long as the auditor is a PCAOB-registered public
accounting firm). Therefore, even if the target has previously been audited,
the target’s auditor will generally need to perform additional procedures
and issue an auditor’s report stating that the audit was performed in
accordance with PCAOB standards (the report will be included in the
proxy/registration statement). In addition, interim financial statements are
generally reviewed by the target’s auditors.
As discussed in Section 6.7.6.3, CAMs must be included
in auditors’ reports that refer to PCAOB standards, except when the
registrant qualifies as an EGC. We believe that it would be appropriate to
omit CAMs from auditors’ reports on the financial statements of a target in
the proxy/registration statement if (1) the SPAC is an EGC, (2) the target
would qualify as an EGC if it were conducting its own IPO of common equity
securities, and (3) the combined company will qualify as an EGC after the
transaction.
In addition, the registered accounting firm must also meet the independence
requirements in Regulation S-X, Article 2. In certain cases, the target may
be required to change its independent auditor to move forward with the
transaction. This could be the case because, for example, the audit firm is
not registered with the PCAOB or is not in compliance with the SEC’s
independence rules for its audits of the years for which SEC independence is
required.
For further discussion of auditing and review standards, including
independence considerations, see Chapter
6.
D.3.2 Age of Financial Statements
The age of financial statements of a target company in a SPAC proxy/registration
statement should be the same as it would if the target company was completing
its own traditional IPO (as stipulated in Regulation S-X, Rule 15-01(c)). See
Section 2.4.3 for further discussion.
D.3.3 Pro Forma Financial Information
The proxy/registration statement must include pro forma financial information
that reflects the close of the transaction. See Chapter 4
of Deloitte’s Roadmap SEC Reporting Considerations for Business
Acquisitions for more information about pro forma
information reflecting an acquisition. The discussion below expands on
considerations related to de-SPAC transactions.
The preparation of the pro forma financial information will
depend on the determination of the accounting acquirer. As discussed in
Section 6.8.8 of Deloitte’s Roadmap Business
Combinations, if the target is identified as the accounting
acquirer, the transaction may be a reverse recapitalization (i.e., the SPAC,
which is a shell company, is the legal acquirer but not the accounting
acquirer). However, in other instances, the SPAC may be identified as the
accounting acquirer and the transaction may be an acquisition of either (1) a
business or (2) a group of assets (if the target does not meet the U.S. GAAP
definition of a business).
For a reverse recapitalization, the pro forma adjustments would
give effect to the issuance of the target’s equity interests in exchange for the
net assets of the SPAC and subsequent recapitalization. For an acquisition in
which the SPAC is determined to be the accounting acquirer, the pro forma
adjustments would reflect the consideration transferred and the target’s assets
and liabilities, including goodwill (if applicable), measured in accordance with
ASC 805. In either circumstance, additional adjustments may be necessary to
reflect (1) the target’s acquisition of a significant acquiree (or significant
acquirees) or (2) other financing transactions that will occur at or before the
close of the transaction. Note that the above list of pro forma adjustments is
not exhaustive, and SPACs and targets should carefully analyze the structure of
the transaction to appropriately reflect the pro forma results.
Connecting the Dots
Because the pro forma financial information will reflect
the accounting for the transaction and any related financing, the target
must preliminarily determine the appropriate accounting before the close
of the transaction. For more information, see Sections D.4 (on identifying the
accounting acquirer), D.5 (on financial statement presentation for reverse
recapitalizations), and D.7 (on classifying
share-settleable earn-out arrangements), as applicable.
In addition, the SPAC’s public shareholders typically have
redemption rights through which they may elect to redeem their shares in the
SPAC for their initial investment before the close of the transaction. As a
result, the amount of cash the SPAC will have at the closing is unknown at the
time the proxy/registration statement is filed. In accordance with Regulation
S-X, Rule 11-02(a)(10), the SPAC will need to present multiple pro forma
scenarios to reflect a range of possible results (e.g., by assuming no
redemptions and assuming maximum redemptions) because the outcome of the
redemption scenario may vary. In some cases, the level of redemptions may
influence the identification of the accounting acquirer and, thus, the
accounting for the transaction. In such circumstances, the pro forma financial
information may need to reflect the SPAC as the accounting acquirer in one
scenario and the target as the accounting acquirer in another scenario.
Irrespective of the accounting for the transaction, the SPAC and
the target should carefully consider any income tax impacts and related pro
forma adjustments associated with the transaction. These adjustments will
largely depend on the structure of the transaction and the planned corporate
structure of the combined company. Special consideration should be given to Up-C
structures since these can result in additional tax complexities. See Section 11.7.4.1 of
Deloitte’s Roadmap Income
Taxes for further discussion of income tax considerations
related to Up-C structures.
D.3.4 Other Financial and Nonfinancial Information
In addition to the financial statements discussed above, the
proxy/registration statement must include the following disclosures related to
the target:
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MD&A of financial condition and results of operations(Regulation S-K, Item 303). See Section 4.3 for details related to the requirements associated with this item.
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Quantitative and qualitative disclosures about market risks (Regulation S-K, Item 305). Unless the target would qualify as an SRC (see Appendix B for more information), these disclosures generally must include a description of the impact that certain market risks (e.g., interest rate risk) may have on the target.
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A description of the target’s business (Regulation S-K, Item 101); properties (Regulation S-K, Item 102); legal proceedings (Regulation S-K, Item 103); and directors and officers (including their compensation) (Regulation S-K, Items 401, 402, and 404).
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Risk factors related to the target (Regulation S-K, Item 105).
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If applicable, changes in and disagreements with accountants on accounting and financial disclosure (Regulation S-K, Item 304).
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Security ownership of certain beneficial owners and management, including such information reflecting the consummation of the SPAC transaction and any related financing transaction (Regulation S-K, Item 403).
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Recent sales of unregistered securities (Regulation S-K, Item 701).
In addition to the information discussed above, the
proxy/registration statement must include the following disclosures related to
the de-SPAC transaction:
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The role of the SPAC sponsor, its affiliates, and promoters, including, but not limited to, their experience in organizing SPACs and any involvement with other SPACs; their roles and responsibilities in managing the SPAC; any agreements or understandings with the SPAC with respect to determining whether to proceed with a de-SPAC transaction; and the nature and amounts of compensation that has been or will be payable.
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As indicated in Regulation S-K, Item 1603(b), actual or potential material conflicts of interest that could arise regarding (1) “whether to proceed with a de-SPAC transaction” or (2) “the manner in which the [SPAC] compensates a SPAC sponsor, officers, or directors or the manner in which a SPAC sponsor compensates its officers and directors.”
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Details related to potential sources of dilution, including material probable or consummated transactions such as shareholder redemptions, compensation of the SPAC sponsor, warrants, convertible securities, and PIPE financings.
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The background of and reasons for the transaction as well as the material terms and effects of the transaction, including any related financing transactions.
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If required by applicable law of the jurisdiction of the SPAC’s organization, a determination by the SPAC’s board of directors (or similar governing body) of whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, along with the factors considered in making such a determination. If an outside opinion, report, or appraisal related to the fairness of the de-SPAC transaction was received, it must also be provided as part of the de-SPAC registration/proxy statement.