The SEC Division of Corporation Finance staff recently issued a statement addressing certain accounting, financial reporting and governance issues that should be carefully considered before a private company undertakes a business combination with a special purpose acquisition company (SPAC).
Financial statements for the acquired business must be filed within four business days of the completion of the business combination, and certain “books and records” and internal control requirements generally apply to the combined company after the business combination. It is important for a SPAC and the private operating company to consider these requirements when planning for a business combination because the private company may not have prior experience with annual or interim reporting, including, among other matters:
- Application of SEC rules and disclosure requirements, such as those related to reporting deadlines, filer status and its impact on disclosure, predecessor determination, the form and content of financial statements, and when other entity financial statements and pro forma financial information are required; and
- Adoption of new accounting standards in the financial statements required in the business combination filing or the subsequent Form 8-K that are not yet effective for private companies.
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, which include certain corporate governance requirements, such as those 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. Advance planning may be necessary to identify, elect and on-board a newly constituted independent board and audit committee, and for them to adequately oversee the preparation and audit of the company’s financial statements, books and records, and internal controls.
For other information regarding the transition from private-company to public-company status, see RSM’s Guide to Going Public.