Chapter 1 — Introduction to Initial Public Offerings

1.7 Special-Purpose Acquisition Companies

1.7 Alternatives to Traditional IPOs

1.7.1 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. Key SPAC-related considerations are discussed below; see Appendix D for a more detailed discussion of SPACs.

Changing Lanes

On January 24, 2024, the SEC issued a final rule related to the financial reporting and disclosure requirements for SPACs. The final rule aims to (1) “enhance investor protections in [IPOs] by [SPACs] and in subsequent business combination transactions between SPACs and private operating companies (commonly known as de-SPAC transactions)” and (2) “more closely align the treatment of private operating companies [target companies] entering the public markets through de-SPAC transactions with that of companies conducting traditional IPOs.” In summary, the final rule:

Provides new requirements related to a SPAC’s IPO registration statement and its subsequent de-SPAC registration/proxy statement, such as additional disclosure requirements related to the SPAC sponsor and financial projections.
Addresses certain liability matters by requiring the target company in a de-SPAC transaction to be a co-registrant with the SPAC in the de-SPAC registration/proxy statement.
Codifies, through new Article 15 of Regulation S-X, various requirements related to the financial statements included in SPAC IPO registration statements and de-SPAC registration/proxy statements as well as filings made after the de-SPAC transaction.

For more information about the final rule, see Deloitte’s February 6, 2024, Heads Up.

A SPAC’s shareholders are often required to vote on a merger transaction, so the SPAC may file 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 (SABs), both of which govern presentation and disclosures in the financial statements. 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 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 if filing a registration statement on its own.
EGCs — A target may provide two years of audited financial statements rather than three years if the target would qualify as an EGC if it were conducting its own IPO of common equity securities.

The SPAC and its target must also comply with the requirements related to the age of financial statements in SEC filings. For further interpretive guidance on the age of financial statements, see Section 2.4.3. 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.

Further, 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 Form 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 Form 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.

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
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.	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 Form 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 a 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.

1.7.2 Reverse Mergers

Like de-SPAC transactions, reverse mergers allow private entities to become public companies without undertaking a traditional IPO. A reverse merger may involve a public operating company or a public shell company (e.g., a SPAC) (a reverse merger with a public shell company would largely be consistent with the reporting requirements outlined in Section 1.7.1). For a public operating company, a reverse acquisition occurs when the public company legally acquires another operating company and the target operating company is determined to be the accounting acquirer in accordance with ASC 805-40. The accounting acquirer (i.e., the target company) should be treated as the legal successor to the registrant’s reporting obligations as of the date of the acquisition.

Before an exchange of equity interests that completes a reverse merger, shareholders are often required to vote on the merger transaction. As a result, the legal acquirer may file a proxy statement on Schedule 14A or a combined proxy and registration statement on Form S-4 to effect the transaction. The accounting acquirer generally does not file a Form S-4 or Schedule 14A, since these forms typically reflect the legal form of the transaction rather than the accounting form. When determining the financial statements of the legally acquired (i.e., target) entity to include in Form S-4, registrants should refer to Item 17(b)(7) of this form, which states that financial statements included should be the same as those that “would be required in an annual report sent to security holders under Rules 14a-3(b)(1) and (b)(2) . . . if an annual report was required.”

A target’s premerger financial statements included in a related Form S-4, proxy statement, or both, may be audited in accordance with AICPA standards (unless the target is an issuer). However, once the financial statements are presented as the registrant’s historical financial statements (i.e., once the reverse merger is reported in an SEC filing), any reissuance of audited premerger target financial statements would have to be audited in accordance with PCAOB standards.

After the completion of a reverse merger, the registrant is required to file a Form 8-K with the SEC to report the transaction. In the event of a reverse acquisition, a Form 8-K, Item 2.01, must be issued within four business days of the consummation of the reverse acquisition. The Form 8-K should also include Item 4.01 if there is a change in independent accountants, Item 5.01 if there is a change in control of the registrant, and Item 5.03 if there is a change in the domestic registrant’s fiscal year-end.

Once available, the financial statements of the legal acquiree and pro forma financial information under Regulation S-X, Article 11, must be filed in a Form 8-K, Item 9.01. The Item 9.01 must be filed within 71 calendar days after the required filing date of the initial Form 8-K. The financial statements required for the legal acquiree include (1) the audited financial statements for the two most recently completed fiscal years and (2) unaudited interim financial statements for any interim period and the comparable prior-year period. If the registrant meets the definition of an SRC, only the audited financial statements for the two most recently completed fiscal years are required. Note that Regulation S-X, Rule 3-06, which allows a period of nine to twelve months to satisfy the one-year requirement, does not apply to the legal acquiree’s financial statements in a reverse acquisition. Instead, because the legal acquiree is the predecessor, the financial statements filed must be for the periods required by Regulation S-X, Rules 3-01 through 3-04.

After the transaction is consummated, the historical financial statements of the target become those of the registrant. Therefore, the target’s historical financial statements will replace those of the legal acquirer beginning with the filing of the financial statements that first include the transaction. For example, if the transaction closes on March 15, 20X4, the financial statements for the interim period ended March 31, 20X4, will first include the transaction. Therefore, the financial statements included in the March 31, 20X4, Form 10-Q and all future filings will represent those of the target and no longer the legal acquirer. The target’s financial statements would show the acquisition of the legal acquirer.

1.7.2.1 Sign-and-Close Transactions

Reverse mergers may be structured as “sign-and-close” transactions, which can be defined as transactions in which all agreements are signed at the close of the transaction. These transactions differ from the more common process in which a definitive merger agreement is signed several weeks or months before the closing date of the merger. National exchanges generally require a shareholder vote to approve a transaction in which 20 percent or more of a registrant’s outstanding common equity will be issued for a merger. The structure of sign-and-close transactions may be such that security holder approval is not required before the transaction because the transaction includes a mix of consideration comprising cash, common stock that is less than 20 percent of the registrant’s outstanding common equity, and convertible preferred securities. However, shareholder approval often would be required for the conversion of the convertible preferred securities into common equity at a later point.

On November 17, 2023, the SEC issued Question 151.02 of the SEC’s C&DIs on Proxy Rules and Schedules 14A/14C, which addresses a common scenario associated with sign-and-close transactions. If, after the acquisition, a registrant files a Schedule 14A of Regulation 14A proxy statement to obtain security holder approval of the conversion of the convertible preferred securities transferred as part of consideration paid, the registrant must consider whether acquisition-related information (including a target’s preacquisition financial statements) is required under Note A of Schedule 14A.

Note A of Schedule 14A states that when any matter to be voted on (e.g., the conversion of convertible preferred shares to the registrant’s common stock) involves another matter (e.g., the acquisition), information must be provided regarding the other matter if such information is required by other items of Schedule 14A. The staff noted that the requirement to include information regarding the involvement of another matter under Note A of Schedule 14A depends on whether a reasonable security holder would be substantially likely to consider such a matter important in making a voting determination. The staff believes that, when convertible preferred securities are exchanged as part of consideration paid in an acquisition, the subsequent authorization to convert said securities to common stock represents the registrant’s obligations as a part of the transaction. As a result, as indicated in C&DI Question 151.02, the staff believes that “authorization of additional shares of common stock is an integral part of the acquisition . . . [t]herefore, the proposal to authorize additional shares of common stock ‘involves’ the acquisition.” Accordingly, the staff believes that the registrant must include information regarding the acquisition within the proxy statement. However, such information may be omitted if it has already been disclosed or if the registrant’s historical filings include all necessary information regarding the acquisition. Therefore, even if a target’s financial information was not disclosed before the close of the transaction (on the basis that shareholder approval was not required), the information may be required in a proxy statement seeking approval to convert convertible preferred shares issued as consideration into common shares of the registrant.

Footnotes

Under Form 8-K, Item 2.01, 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).