SEC Issues Statements on Special Purpose Acquisition Companies (SPACs)

Last week, the SEC issued two statements regarding issues related to special purpose acquisition companies (SPACs).

Accounting and Reporting Considerations

The Division of Corporation Finance published guidance addressing accounting, financial reporting, and governance issues that private companies should consider before entering into a business combination with a SPAC. Because SPACs are subject to certain limitations, the SEC warns, private businesses should consider the following before a transaction:

  • Financial statements for the acquired business must be filed within four business days of the completion of the business combination;
  • The combined company will not be eligible to incorporate Exchange Act reports, or proxy or information statements filed until three years after the completion of the business combination;
  • The combined company will not be eligible to use Form S-8 for the registration of compensatory securities offerings until at least 60 calendar days after the combined company has filed current Form 10 information; and
  • The combined company will be an “ineligible issuer” under Securities Act Rule 405 for three years following the completion of the business combination.

Books and Records and Internal Controls Considerations

The SEC statement also reiterated existing books and records and internal control requirements which generally apply both to a) SPACs before any business combination and b) the combined company after the transaction. These requirements include:

  • Maintaining accurate books and records that reflect the issuer’s transactions and disposition of assets;
  • Maintaining internal controls procedures regarding management’s control, authority and responsibility over the issuer’s assets; and
  • Effectively and reliability reporting on internal controls over financial reporting (IFCR) and disclosure controls and procedures (DCP).

Additionally, the SEC’s Acting Chief Accountant, Paul Munter, issued a statement that also addressed financial reporting considerations, as well as matters significant to audit committees, auditors, boards of directors and management teams. Key highlights of Munter’s statement include:

  • Market and timing considerations related to the speed at which SPACs generally need to complete their mergers (18-24 months);
  • Financial reporting considerations, including application of GAAP vs. IFRS standards, disclosure requirements, and effective dates of recent accounting standards;
  • Internal control considerations, notably ICFR requirements under Section 404(a) of the Sarbanes-Oxley Act (SOX);
  • Corporate governance and audit committee considerations, such as communication, oversight and other expectations; and
  • Auditor considerations, notably related to the timing and complexity associated with SPAC transactions vs. traditional IPOs.

In his closing, Munter emphasized careful consideration for private businesses considering pursuing a SPAC transaction: “We encourage stakeholders to consider the risks, complexities, and challenges related to SPAC mergers, including careful consideration of whether the target company has a clear, comprehensive plan to be prepared to be a public company.”

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