As we discussed in our posting at the end of 2020, “SEC Focus on SPACs“, special purpose acquisition companies (SPACs) have become an important investment vehicle and source of M&A activity and the focus of heightened attention from the SEC staff. SPAC transactions include initial public offerings and business combinations.
In 2021, we’ve seen a continued surge in SPAC IPOs and SPAC business combination (de-SPAC) transactions. SPACs provide a source of capital when public company capital can be expensive and difficult to get. SPACs – while limited in some fundamental ways – allow non-public companies to go public faster than a traditional IPO.
On March 31, 2021, the SEC provided more guidance about SPACs. The Division of Corporation Finance issued “Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies” (available here), which summarizes the restrictions on a company after a de-SPAC transaction and describes books and records, internal controls and stock exchange listing requirements as they apply to SPACs.
The Office of the Chief Accountant (OCA) issued a Public Statement by the Acting Chief Accountant, “Financial Reporting and Auditing Considerations of Companies Merging with SPACs” (available here), which describes some of the financial reporting and governance challenges of a private company entering the public markets through a de-SPAC transaction.
While the SEC guidance last year focused primarily on disclosure issues, this new guidance emphasizes practical problems that SPACs (and the private companies with whom they merge) face when doing a de-SPAC transaction and then when they continue on as a public reporting company.
The Corp Fin Staff Statement and the OCA Public Statement do not create any new requirements or change the way the rules work. They do, however, point out a number of peculiarities of how SPACs are treated under the securities laws and regulations. They also present in a coherent, concise way a number of practical problems that arise in de-SPAC transactions.
The Corp Fin Staff Statement points out that SPACs are shell companies (with no or nominal non-cash or cash equivalent assets or operations). Shell companies are treated differently than other companies by the SEC’s rules. For example, there is no 71 day grace period for filing acquired company financial statements. That is unlikely to create a problem, because the target company financials will have to be included in the proxy statement for the merger before the Form 8-K is due, but it illustrates how shell companies are not treated the same as other companies.
Other examples in the Corp Fin Staff Statement include that, after a de-SPAC transaction, the combined company is not eligible to use Form S-8 for 60 days, and the combined company will be an “ineligible issuer” for three years, which means it cannot use a free writing prospectus or even a term sheet free writing prospectus (Rule 164(e)(2)). It cannot be a WKSI, or conduct a typical electronic roadshow nor can it use incorporation by reference in a Form S-1 filing, in each case for three years after its de-SPAC transaction. Although not mentioned by the SEC in this guidance, another consideration for management is the one-year holding period that will apply under Rule 144 on resales.
While SPACs are typically listed on Nasdaq or the NYSE (preempting blue sky laws), the Corp Fin Staff Statement reminds companies that they will need to satisfy the quantitative and qualitative listing standards following a de-SPAC transaction as well, which can present challenges. Unlike a typical public company acquisition of a private company, because the SPAC shareholders have a right to redeem their shares at the time of a de-SPAC transaction, it is possible that there would not be a sufficient number of round-lot holders to meet the applicable listing requirement. The Corp Fin Staff Statement also notes that a private company becoming public through a de-SPAC transaction must meet the corporate governance requirements of a listed company and may need to identify, elect and on-board a newly-constituted independent board and audit committee and plan so that they can adequately oversee the preparation and audit of the company’s financial statements, books and records and internal controls. Disclosure will be required if there is a material risk of the company being de-listed.
Both the Corp Fin Staff Statement and the OCA Public Statement (in more detail) identify accounting issues as an area of potential practical problems for private companies going public through a de-SPAC transaction. Both internal control over financial reporting (ICFR) and disclosure controls and procedures (DCP) are required for public companies to meet their financial statement and other disclosure requirements. The OCA Public Statement emphasizes that private companies often do not have experience with preparing public company compliant financial statements, including accounting for the de-SPAC transaction itself. Under accounting standards, there are a number of accommodations for private companies that allow them to operate with fewer accounting staff and often to omit some aspects of financial statements that would be required of a public company. Shifting from satisfying private company standards to public company standards can take time, planning, additional staff and resources. Even the company’s auditor may need to change. Those requirements may be incompatible with the desired speed to the public markets that a de-SPAC transaction offers.
The OCA Public Statement emphasizes the critical role that board and audit committee oversight play in meeting the goal of providing high quality, reliable information to investors and calls on board members, companies and other market participants to strive to maintain the quality of financial disclosures as well as tone at the top.
If you have questions about SPAC IPOs or de-SPAC transactions, reach out to your usual Locke Lord contact or any of the authors.