SEC warns of risks to private companies merging with SPACs

Rick Steves

The SEC pointed out that if the SPAC is listed on a national securities exchange, in order to remain listed after the merger, the combined company must satisfy quantitative and qualitative initial listing standards upon consummation of the business combination.

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Hours after the UK FCA announcing a public consultation regarding strengthening investor protections in deals involving special purpose acquisition companies (SPACs), the US Securities and Exchange Commission has issued a statement about SPACs.

The regulator is addressing certain accounting, financial reporting, and governance issues that should be carefully considered before a private operating company undertakes a business combination with a SPAC.

SPACS are shell companies that are subject to certain limitations that should be considered before undertaking such a transaction:

– Financial statements for the acquired business must be filed within four business days of the completion of the business combination pursuant to Item 9.01(c) of Form 8-K. The registrant is not entitled to the 71-day extension of that Item;
– The combined company will not be eligible to incorporate Exchange Act reports, or proxy or information statements filed pursuant to Section 14 of the Exchange Act, by reference on Form S-1 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, which has consequences during that period that include that the combined company:
cannot qualify as a well-known seasoned issuer;
– may not use a free writing prospectus;[7]
– may not use a term sheet free writing prospectus available to other ineligible issuers;
– may not conduct a roadshow that constitutes a free writing prospectus, including an electronic roadshow; and
– may not rely on the safe harbor of Rule 163A from Securities Act Section 5(c) for pre-filing communications.

The regulator also made reference to Books and Records and Internal Control Requirements as reporting obligations among the most important for effective and reliable financial information for investors and markets.

In addition, the SEC points out that if the SPAC is listed on a national securities exchange, in order to remain listed after the merger, the combined company must satisfy quantitative and qualitative initial listing standards upon consummation of the business combination.

A private company merging with a SPAC should consider how it will maintain a listing throughout and after the merger as any material risks associated with delisting could trigger disclosure requirements for the combined company.

The combined company also must meet qualitative standards such as requirements regarding a majority independent board of directors, an independent audit committee consisting of directors with specialized experience, independent director oversight of executive compensation and the director nomination process, and a code of conduct applicable to all directors, officers, and employees.

There is a risk that a private operating company that has not prepared for an initial public offering and is quickly acquired by a SPAC may not have these elements in place in order to meet the listing standards at the time required, the regulated stated.

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