Chapter 1 — Introduction to Initial Public Offerings

1.7 Special-Purpose Acquisition Companies

A SPAC is a newly created company that raises cash in an IPO and uses it to fund the acquisition of one or more private operating companies. After the IPO, the SPAC’s management looks to complete an acquisition of a target company within the period specified in its governing documents (e.g., 24 months). If an acquisition cannot be completed within this time frame, the cash raised in the IPO must generally be returned to investors. Because SPACs hold no assets other than cash before completing an acquisition, they are nonoperating public “shell companies” as defined by the SEC. If a target is identified and the SPAC is able to successfully complete the acquisition transaction, the private operating company target will succeed to the SPAC’s filing status as a result of the merger. On the closing date of the acquisition, the former private operating company, as the predecessor to the SPAC registrant, becomes a public company and must be able to meet all the public-company reporting requirements applicable to the combined company.

A SPAC’s shareholders are often required to vote on the merger transaction, so the SPAC may file a proxy statement on Schedule 14A or a combined proxy and registration statement on Form S-4 to effect the transaction. These documents must include audited financial statements of the private operating target. The target’s financial statements must comply with SEC rules and regulations, including Regulation S-X and SEC Staff Accounting Bulletins, both of which govern presentation and disclosures in the financial statements. At the September 2018 CAQ SEC Regulations Committee joint meeting with the SEC staff, the SEC indicated that private operating company SPAC target financial statements are expected to comply with public-company GAAP disclosure requirements, including those related to segments and earnings per share (EPS). Further, the SEC noted that such financial statements should include any required financial statements for significant probable and consummated acquisitions under Regulation S-X, Rule 3-05, “as if it were the private operating company’s [IPO].” Further, because the private operating company is considered the predecessor to the registrant, financial statements included in Form S-4 or the merger proxy must be audited in accordance with PCAOB standards. In addition, the target’s financial statements cannot reflect Private Company Council (PCC) accounting alternatives or practical expedients applicable to non-PBEs and 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 if (1) the SPAC is an EGC that has elected to defer the adoption of accounting standards by applying 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 will qualify as an EGC after the transaction (see paragraph 10120.2 of the FRM for a discussion of assessing EGC eligibility after the transaction). (Chapter 3 provides further guidance on financial statement requirements.)

Audited financial statements should generally be presented for both the SPAC and the target entity (or entities) for the three most recent fiscal years. However, there are two scenarios in which the SEC staff would not object when a registrant presents two years of annual financial statements rather than the otherwise required three years:

SRCs — In a manner consistent with paragraph 1140.3 of the FRM, a target may provide two years of audited financial statements rather than three years if the target (1) is not an SEC reporting company and (2) would otherwise meet the definition of an SRC (e.g., it reported less than $100 million in annual revenues in its most recent fiscal year for which financial statements are available).
EGCs — In a manner consistent with paragraph 10220.7 of the FRM, a target may provide two years of audited financial statements rather than three years if all of the following apply: (1) the SPAC is an EGC, (2) the SPAC has not yet filed or been required to file its first Form 10-K, and (3) the target would qualify as an EGC if it were conducting its own IPO of common equity securities.

Changing Lanes

In March, 2022, the SEC issued a proposed rule that would expand the circumstances in which target companies may report two years of financial statements in a proxy/registration statement. Under proposed Regulation S-X, Rule 15-01(b), two years of the target’s financial statements would be permitted in a proxy/registration statement for transactions involving an EGC SPAC and a target that would qualify as an EGC if it were conducting its own IPO of common equity securities. This determination would no longer depend on whether the EGC SPAC has filed, or was already required to file, its first annual report.

The SPAC and its target must also comply with the requirements related to the age of financial statements in SEC filings. (See Section 2.5 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions for further interpretive guidance on the age of financial statements.) Within four days of the closing of the acquisition, the combined company must file a Form 8-K (referred to as a “Super Form 8-K”) that includes all the information that would be required if the former private operating company had registered securities on Form 10. There is no 71-day grace period for providing audited financial statements of the formerly private operating company in the Super Form 8-K, as there may have been if the acquisition had been between two operating companies.8 Accordingly, the SPAC and the private operating target should take care to ensure that the acquisition is not closed until all the financial information required for the Super Form 8-K is available, including financial statements that comply with the SEC’s age requirements and are audited in accordance with PCAOB standards. Paragraph 12220.1 of the FRM provides more information about the requirements related to the Super Form 8-K.

In addition, to avoid a gap or lapse in the target’s financial statement periods after a transaction, the combined company may need to amend its Super Form 8-K to provide updated financial statements of the target. For example, if the transaction closes soon after the target’s fiscal quarter or year-end, the Super 8-K generally will not include the target’s financial statements for the most recently completed period. In such a case, the combined company will need to amend its Super 8-K to provide the recently completed annual or interim period on or before the registrant’s due date for its Form 10-Q or Form 10-K for that same period.

It can be complex to determine the ICFR attestation requirements that apply to management and the auditor after the close of a SPAC transaction. The phase-in exception in Regulation S-K, Item 308, for an IPO, under which management’s report and the auditor’s attestation on ICFR are not required before the second annual report, typically does not apply in a transaction with a SPAC. Further, if the SPAC is an EGC, the EGC status of the combined entity would also have to be assessed after the close of the transaction to determine whether the combined company could continue to qualify for the scaled disclosure requirements applicable to EGCs, including relief from the auditor’s attestation report. These transactions often involve a change in auditors, and if the SPAC’s year-end differs from that of the target, they may also involve a change in fiscal year-end. Given the complex reporting requirements associated with SPAC acquisitions, private operating companies contemplating such transactions should consider consulting with legal and financial reporting advisers as early as possible.

In addition to the matters discussed above, entities considering a SPAC transaction should take into account key differences between the SEC reporting requirements related to traditional IPOs (sale of newly issued common shares to the public) and those for SPAC transactions, some of which are summarized in the table below.

Topic	Traditional IPOs (Sale of Newly Issued Common Shares)	SPAC Transactions9
Financial statement periods required in the IPO document	Two years of financial statements are required for SRCs and EGCs. Three years of financial statements are required for all other registrants.	Two years of financial statements are required if: The operating company would separately be an SRC, or All of the following apply: The SPAC is an EGC; The SPAC has not yet filed or been required to file its first Form 10-K; and, The target would qualify as an EGC. Three years of financial statements are required in all other scenarios.
Adoption dates of accounting standards	EGCs can irrevocably elect to defer adoption of new accounting standards on the basis of adoption dates used for private companies (non-PBEs).	The target company may defer adoption of new accounting standards only if (1) the SPAC is an EGC that has elected to defer the adoption of accounting standards by applying 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 will qualify as an EGC after the transaction.
Confidential or nonpublic submissions of the IPO document	Confidential or nonpublic submissions to the SEC staff are allowed for all companies undertaking an IPO (i.e., EGCs and non-EGCs). Such submissions, and any associated SEC comment letter responses, may continue to be submitted confidentially or nonpublicly until they must be filed publicly as described in Section 1.4.2.	If a registrant files on Form S-4, the SEC staff may agree to review the initial nonpublic draft Form S-4 if it is submitted within 12 months of the SPAC’s IPO. However, SEC comment letter responses and all subsequent amendments must be filed publicly.
Pro forma information included in the IPO document	Pro forma information is not required unless the registrant has other transactions for which pro forma information is required in accordance with Regulation S-X, Article 11.	An entity must provide pro forma information for the accounting impact of the (1) SPAC transaction and (2) any other transactions for which pro forma information is required in accordance with Regulation S-X, Article 11.
Prospective financial information included in the IPO document	Prospective financial information (i.e., forecasted information) is generally not presented.	Prospective financial information generally must be presented if the boards of directors of the company and SPAC used such forecasted information in evaluating the transaction.
Initial quarterly periodic reporting obligation	The registrant becomes subject to the SEC’s periodic reporting requirements beginning with the first quarterly or annual period after consummation of the IPO. The first Form 10-Q, for the quarter after the most recent period included in the registration statement, is due on the later of 45 days after the effective date or the date the Form 10-Q would otherwise be due if the company had been a public filer. For example, if an IPO becomes effective on April 15, 20X1, and includes financial statements through December 31, 20X0, the first Form 10-Q required will be for the quarter ended March 31, 20X1, and must be filed 45 days after April 15, 20X1.	The combined company retains the previous SEC reporting obligations of the SPAC and must file financial statements for quarterly or annual periods that end before the close of the transaction on the basis of the SPAC’s filing deadlines, without reference to the closing date of the transaction, even if not included in the Super Form 8-K. For example, if the SPAC transaction closes on April 15, 20X1, the Super 8-K due within four days must only include annual financial statements through December 31, 20X0. The combined company retains the SPAC’s requirement to file a Form 10-Q for March 31, 20X1, for the SPAC and an amended Super Form 8-K with the financial statements of the target company for March 31, 20X1, by the relevant Form 10-Q due date (i.e., 45 days for nonaccelerated filers).
Ongoing reporting requirements related to ICFR	Management’s report and the auditor’s attestation on ICFR are not required before the second annual report. The auditor’s report may also not be required afterward to the extent that the registrant is an EGC or nonaccelerated filer.	If the SPAC filed its first annual report before the close of the transaction, management’s report on ICFR is required in the next annual report after the close of the transaction. However, as noted in Section 215.02 of the C&DIs on Regulation S-K, the SEC may not object to the exclusion of management’s report (and the auditor’s report) on ICFR depending on the closing date of the transaction and other conditions. We recommend that management consult with its legal counsel and auditors before excluding reports on ICFR.

Changing Lanes

SEC Proposed Rules Released in March 2022

SPAC-Related Investor Protections

This proposed rule would “enhance investor protections in [IPOs] by [SPACs] and in subsequent business combination transactions between SPACs and private operating companies [also known as de-SPAC transactions].” The objective of the proposed rule is to “more closely align the financial statement reporting requirements in business combinations involving a shell company and a private operating company [the ‘target’ company] with those in traditional [IPOs].” Accordingly, the proposed amendments, if finalized, would change the requirements discussed above, including those related to the financial statements that must be provided in the registration statement, prospective financial information, and ongoing reporting requirements.

When planning for SPAC transactions, entities should be mindful of the unique considerations noted above as well as other specific accounting and SEC reporting considerations, including the evolving requirements outlined in the proposed rule. For additional information on SPAC transactions, see Deloitte’s October 2, 2020 (updated April 11, 2022), Financial Reporting Alert.

Enhancements to Climate-Related Disclosure Requirements

Under this proposed rule, public companies would be required to enhance and standardize their climate-related disclosures. Companies completing an IPO and private operating companies (targets) merging with a registrant (including a SPAC) would be subject to the proposed rule’s requirements. Disclosures for target companies would be provided in the proxy statement or Form S-4 filed in advance of the transaction. The proposed rule does not provide any exemption for EGCs undertaking an IPO; therefore, such entities would be subject to the same disclosure requirements as non-EGCs. For more information about the proposed rule, see Deloitte’s March 21, 2022 (updated March 29, 2022), Heads Up.

SEC Final Rule Released in July 2023

Cybersecurity-Related Disclosures

In July 2023, the SEC issued a final rule that requires registrants to provide enhanced disclosures about “cybersecurity incidents and cybersecurity risk management, strategy, and governance.” However, the final rule does not establish new disclosure requirements for registration statements. Rather, the SEC reiterated its 2018 interpretive guidance, which states that “[c]ompanies should consider the materiality of cybersecurity risks and incidents when preparing the disclosure that is required in registration statements.” See Deloitte’s July 30, 2023, Heads Up for more information about the final rule and February 23, 2018, Heads Up for more information about the interpretive guidance.

Footnotes

Under Item 2.01 of Form 8-K, a registrant is required to file a Form 8-K to announce a significant business acquisition within four business days of consummation and to include the required financial statements within 71 calendar days.

The discussion herein applies to SPAC transactions in which (1) a domestic SPAC merges with a domestic target and (2) the SPAC has identified only one target for the transaction. SPAC transactions result in additional complexity when foreign entities or multiple targets are involved. In addition, we have recently observed new structures in which either the target or a newly formed company acquires the SPAC (e.g., a structure frequently referred to as a “double dummy” transaction). Such transactions may be viewed as the IPO of the target and, thus, different considerations may apply (e.g., two years of financial statements may be appropriate if the target qualifies as an EGC, and the confidential filing process may be available for a longer period).