4.1 Overview

In recent years, apart from undertaking the traditional IPOs or other financing activities, many private operating companies have merged with SPACs to raise capital. A SPAC is a newly formed company that raises cash in an IPO and uses that cash or the equity of the SPAC, or both, to fund the acquisition of a private operating company (the “target”). After a SPAC merges with a target, the target’s financial statements become those of the combined public company. Therefore, a target will need to devote a considerable amount of time and resources to technical accounting and reporting matters. Since a SPAC’s shareholders are required to vote on the transaction, the SPAC may file either (1) a proxy statement on Schedule 14A or (2) a combined proxy and registration statement on Form S-4. These documents must include the target’s financial statements, which are expected to comply with public-company GAAP disclosure requirements as well as SEC rules and requirements. The financial statement requirements and review of a proxy/registration statement are largely consistent with the requirements and review for a traditional IPO. Therefore, the discussion below related to IPO registration statements may also apply to SPAC transactions.

Once submitted to or filed with the SEC, an IPO registration statement is processed and reviewed by the Division staff. A company can generally expect the staff to complete its initial review and furnish the first set of comments within 30 calendar days. While the number of comments issued during the initial review can vary substantially, a registrant may expect, on the basis of a sample of recent IPOs, approximately 23 comments.1 Upon receiving such comments, the company would respond to each of them and reflect requested edits, as well as any other updates, in an amended IPO registration statement, which the SEC will also review. After the initial filing, the SEC’s review time can vary significantly but typically is within two weeks. A company can expect several rounds of comment letters with follow-up questions on responses to original comments as well as additional comments on new information included in the registration statement. For additional information about the IPO registration statement process, see Deloitte’s Roadmap Initial Public Offerings.

The SEC staff’s review of the initial registration statement is typically comprehensive, covering reporting, accounting, and legal issues. In addition, the SEC staff’s comments often focus on the following reporting topics (most of which are further discussed in Section 3.2):

• Registrant financial statement issues, including predecessor reporting (Regulation S-X, Rule 3-01).
• Significant business acquisitions (Regulation S-X, Rule 3-05).
• Investments in equity method investees (Regulation S-X, Rule 3-09).
• Guarantors of registered securities (Regulation S-X, Rules 3-10 and 13-01).
• Restrictions on dividends or net assets (Regulation S-X, Rules 4-08(e), 5-04, and 12-04).
• Pro forma financial information (Regulation S-X, Article 11).

It is also common for the SEC staff to comment on IPO registration statements to address accounting and disclosure topics such as (1) complex equity instruments (see Sections 2.4 and 2.8); (2) share-based compensation, including equity securities issued as compensation in periods before an IPO (commonly referred to as “cheap stock” considerations) (see Section 2.21); (3) revenue recognition (see Section 2.18); (4) MD&A (see Section 3.1); and (5) non-GAAP measures and metrics (see Section 3.4). In addition, the SEC staff comments on certain issues that are more specific to IPO registration statements; such issues are discussed in this chapter.

The SEC also frequently comments on the need for expanded disclosures about the actual and expected impact of recent emerging issues. For example, comment letters have focused on the need for expanded disclosures about the impacts of the COVID-19 pandemic, supply-chain disruptions, inflationary pressures, rising interest rates, Russia’s invasion of Ukraine, risks related to international operations, and environmental issues such as climate change. Recently, the SEC staff has also issued more comments asking registrants to provide and expand on required disclosures related to risks associated with operations in China (see Section 5.3 for further discussion of China-based operating companies). To further assist registrants, the Division has released several sample comment letters regarding some of the emerging issues. See Section 3.3.2 for further information.