As the US securities markets continue to see a surge in the use and popularity of special purpose acquisition companies (SPACs), the Securities and Exchange Commission (SEC) has issued several public statements to address the risks and concerns pertaining to business combinations between private operating companies and shell companies—and specifically SPACs.
As discussed in more detail in our article, SPAC Transactions: Accounting and Reporting Considerations, a SPAC is a public shell company created to acquire private operating companies with the intention to bring those private operating companies public.
On April 8, 2021, John Coates, the Acting Director of the SEC’s Division of Corporation Finance, issued a public statement, SPACs, IPOs and Liability Risk under the Securities Laws, to address the concerns around the increased capital going into SPACs. The statement discusses the legal liability that attaches to disclosures included in filings related to a de-SPAC transaction.
It’s also noted that the SEC staff is continuing to look carefully at fillings and disclosures by SPACs and their private targets, and seeking clear disclosures, so that the public can make informed investment and voting decisions about these transactions.
Accounting and Reporting Considerations
On March 31, 2021, the SEC’s Division of Corporation Finance issued a staff statement, Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies, to highlight certain accounting, financial reporting, and governance issues private companies should consider prior to undertaking a business combination with a SPAC, including:
- Shell company restrictions
- Books and records and internal control requirements
- Initial listing standards of national securities exchanges
On March 31, 2021, Paul Munter, the SEC’s Acting Chief Accountant, issued a public statement, Financial Reporting and Auditing Considerations of Companies Merging with SPACs, to address the risks and challenges of private companies merging with SPACs and the related financial reporting considerations.
The statement highlights some of the key considerations of a private company entering the public markets through a merger with a SPAC, including:
- Market and timing
- Financial reporting
- Internal controls
- Corporate governance and audit committees
On April 12, 2021, John Coates and Paul Munter issued a public statement, Staff Statement on Accounting and Reporting Considerations for Warrants Issued By Special Purpose Acquisition Companies (“SPACs”), to address the accounting for warrants issued in connection with a SPAC’s formation and initial registered offering.
The statement highlights potential accounting implications of certain terms that may be common in warrants included in SPAC transactions, including indexation and tender offer provisions.
The statement also addresses financial reporting considerations that apply if a registrant and its auditors determine there’s an error in previously filed financials statements.
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For more information on the accounting and financial reporting considerations for SPAC transactions, contact your Moss Adams professional.