Securities Regulation and Corporate Governance


Securities Regulation and Corporate Governance > Posts > SEC Staff Issues Cautionary Guidance Related to Business Combinations with SPACs
SEC Staff Issues Cautionary Guidance Related to Business Combinations with SPACs

​There were more initial public offerings (“IPOs") of special purpose acquisition companies (“SPACs") in 2020 alone than in the entire period from 2009 until 2019 combined, and in the first three months of 2021, there have been more SPAC IPOs than there were in all of 2020. All of these newly public SPACs are looking for business combinations and many private companies are or will be considering a combination with a SPAC as a way to go public.

After an IPO, a SPAC has a limited amount of time to acquire a target company. Many of these business combinations move quickly and a private company becomes a public reporting company in a relatively short period of time. It is important for sponsors, target companies and investors to be aware of some of the special attributes of SPACs and the post-business combination public company.

On March 31, 2021, the staff of the Division of Corporation Finance (the “Staff") of the Securities and Exchange Commission (the “SEC") issued a statement addressing certain accounting, financial reporting and governance issues related to SPACs and the combined company following a SPAC business combination.

Shell Company Restrictions

Before contemplating a business combination, both SPACs and their target companies must consider the following limitations that arise from the SPAC's status as a Shell Company:

  • Target Financial Statements in 4 Business Days: The financial statements for the acquired business must be filed within four business days of the completion of the business combination (See Item 9.01(c) of Form 8-K). The registrant is not entitled to use the 71-day extension under Item 9.01(c).
  • No Incorporation by Reference in Form S-1 for 3 Years: The combined company will not be eligible to incorporate by reference Exchange Act reports, or proxy or information statements filed pursuant to Section 14 of the Exchange Act, until three years after completion of the business combination. (See General Instruction VII.D.1(b) to Form S-1.)
  • No Form S-8 until 60 days after filing current Form 10 information: 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. (See General Instruction A.1 to Form S-8.)
  • “Ineligible Issuer" for 3 Years: The combined company will be an “ineligible issuer" under Rule 405 of the Securities Act for three years following the completion of the business combination.  During those three years, the registrant:
    • cannot qualify as a well-known seasonal issuer;
    • may not use a free writing prospectus (see Rule 164(e)(1) under the Securities Act);
    • may not use a term sheet free writing prospectus available to other ineligible issuers (see Rule 164(e)(2) under the Securities Act);
    • may not conduct a roadshow that constitutes a free writing prospectus, including an electronic roadshow (see Rule 433(a)-(b) under the Securities Act); and
    • may not rely on the safe harbor of Rule 163A for pre-filing communications under Section 5(c) of the Securities Act (see Rule 163A(b)(3)(ii) under the Securities Act).

Books and Records and Internal Controls Requirements

The registrant must (both as a SPAC before the business combination and as the combined operating company after the business combination):

  • maintain books, records, and accounts in reasonable detail that accurately and fairly reflect the issuer's transactions and dispositions of its assets (see Section 13(b)(2)(A) of the Exchange Act);
  • devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that:
    1. transactions are executed in accordance with management's authorization;
    2. transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and to maintain accountability for assets;
    3. access to assets is permitted only in accordance with management's authorization; and
    4. the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences reasonable assurances about management's control, authority, and responsibility over the issuer's assets
      (see Section 13(b)(2)(A) of the Exchange Act);
  • establish and maintain adequate internal control over financial reporting (“ICFR") and disclosure controls and procedures (“DCP") (see Section 404(a) of the Sarbanes Oxley Act of 2002, and Rule 13a-15 and Rule 15d-15 under the Exchange Act);
  • evaluate the effectiveness of the issuer's ICFR at the end of its fiscal year (except for its first annual report) and disclose such assessment in the annual report (see Rule 13a-15 and Rule 15d-15 under the Exchange Act and Item 308 of Regulation S‑K); and
  • evaluate and disclose the effectiveness of DCP more frequently, quarterly for domestic issuers (see Rule 13a-15 and Rule 15d-15 under the Exchange Act and Item 308 of Regulation S‑K).

    In some instances, where management of the combined company is unable to assess ICFR in the fiscal year in which the transaction was consummated, the staff would not object if the combined company were to exclude management's assessment of ICFR in the Form 10-K covering the fiscal year in which the transaction was consummated (see Compliance and Disclosure Interpretation for Regulation S-K, Question 215.02).

Initial Listing Standards of National Securities Exchanges

The combined company after the business combination must satisfy quantitative and qualitative standards:

  • for initial listing upon consummation of the business combination (see NYSE Listed Company Manual Section 102, Section 802.01, and Section 3 – Corporate Responsibility, and Nasdaq Rule 5300, 5400 or 5500 Series and Rule 5600 Series – Corporate Governance Requirements);
  • the quantitative standards are designed to ensure a company has:
  • sufficient public float,
  • sufficient investor base, and
  • sufficient trading interest to provide the depth and liquidity necessary to promote fair and orderly markets;
  • regarding corporate governance, such as:
  • requirements regarding a majority of 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.(see NYSE Listed Company Manual Sections 303A.01, 303A.04-.07, 303A.10; Nasdaq Rules 5605(b)(1), (c)(2), (d), (e)(1); Nasdaq Rule 5610).
A combined company seeking to list must meet minimum standards, such as:
  • the number of round lot holders;
  • the number of publicly held shares;
  • the market value of publicly held shares; and
  • the share price.
    (see NYSE Listed Company Manual Section 102.01A, Section 802.01 and, for example, for the Nasdaq Global Select Market, Nasdaq Rule 5315(e), (f)(1), (f)(2).)
​If the combined company fails to satisfy a listing standard (or receives a notice regarding non-compliance from the national securities exchange), the combined company must consider certain disclosure requirements:
  • the issuer must file an Item 3.01 Form 8-K to report, among other things, receipt of the notice and any action or response that it has determined to take in response to the notice; and
  • the non-compliance with a listing standard may also present a material risk requiring disclosure under Item 105 of Regulation S-K.

We would like to thank Rodrigo Surcan in our New York office for his work on this article.

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