The proxy statement should generally include three years of financial statements of the target company consisting of:
- The consolidated and audited balance sheets as of the end of the two most recent fiscal years
- The audited statements of income and cash flows for each of the three most recent fiscal years
Exceptions for smaller reporting and emerging growth companies
An exception to the three-year requirement exists for smaller reporting companies (SRCs). A target company is permitted to only provide two years of auditing financial statements in the proxy statement if the target company isn’t an SEC reporting company and if it would otherwise meet the SRC definition.
Another exception exists for emerging growth companies (EGCs). Only two years of audited financial statements are permitted to be included in the proxy statement when the following criteria is met:
- The SPAC is an EGC
- The SPAC has yet to file its first Form 10-K
- The target company would be an EGC if it were conducting an IPO of common equity securities
Age of financial statements
Depending on the timing of the filing of the proxy statement, unaudited interim financial statements may be required.
The interim financial statements of the target company isn’t required to be included in the proxy statement if the audited balance sheet is as of a date no more than 134 days before the effective date of the proxy statement, or the mailing date of the proxy statement.
Conversely, if the audited balance sheet is as of a date that’s 135 or more days before the effective date of the proxy statement, the financial statements must be updated to include the target company’s interim financial statements as of an interim date that’s no more than 134 days before the effective date of the proxy statement.
The interim financial statements may be unaudited.
Audited financial statement permissions
The SPAC is permitted to include audited financial statements of the target company for the fiscal year preceding the target company’s most recently completed fiscal year if the proxy statement is filed within 45 days after the target company’s fiscal year-end.
In this case, the unaudited interim financial statements through the third quarter of the most recently completed fiscal year must be included.
However, the audited financial statements for the most recently completed fiscal year are required in the proxy statement if they’re available or become available before the effective date.
Auditing standards
In a SPAC acquisition transaction, the target company's financial statements become those of the registrant upon consummation of the merger. As such, the target company’s financial statements included in the proxy statement are expected to be audited in accordance with Public Company Accounting Oversight Board (PCAOB) standards.
An audit of the nonpublic target company would be required under both the PCAOB standards and generally accepted auditing standards because the audit of the target company’s financial statements wouldn’t be subject to the PCAOB’s jurisdiction.
The auditor must also be independent under PCAOB and SEC independence rules.
Accounting standards updates
As noted above, upon completion of the acquisition of the target company by a SPAC, in a reverse recapitalization the historical financial statements of the target company become those of the registrant.
This means that Accounting Standards Updates issued by the FASB typically need to be implemented and adopted in accordance with the effective dates for public business entities.
There are some exceptions to this general rule. One exception is if the target company will continue to qualify as an EGC after the close of the acquisition and the SPAC is an EGC and elected to defer complying with new or revised accounting standards.
Pro forma financial information
The proxy statement should include pro forma information prepared in accordance with Article 11 of Regulation S-X that reflects the accounting for the assumed close of the acquisition of the target company by the SPAC.
Combined pro forma financial statements should be included in the proxy statement, along with historical and pro forma per share data of the SPAC and historical and equivalent pro forma per share data of the target company for the following items:
- Book value per share as of the date financial data is presented
- Cash dividends declared per share for the period for which financial data is present
- Income (loss) per share from continuing operations for the periods for which financial data is presented
Consistent with SEC Release Number 33-10890, the requirement to provide pro forma selected financial data in accordance with Item 301 of Regulation S-K has been eliminated.
Super 8-k filings and disclosure requirements
The Super 8-K is essentially a Form 8-K that includes information that’s equivalent to the presentation and disclosure requirements of a Form 10 initial registration statement.
No later than four business days after the consummation of the acquisition of the target company by a SPAC, the combined company must file a Super 8-K that includes the following disclosure items:
- Item 2.01, Completion of Acquisition or Disposition of Assets
- Item 5.01, Changes in Control of Registrant
- Item 5.06, Change in Shell Company Status
- Item 9.01, Financial Statements and Exhibits
The Super 8-K should include all content required by a Form 10 initial registration statement, including:
- Discussion of risk factors in accordance with Item 105 of Regulation S-K
- Financial information as required by Items 301, 303, and 305 of Regulation S-K
- Financial statements as required by Regulation S-X and the supplementary financial information as required by Item 302 of Regulation S-K
It’s also important to note that if there are required changes to the pro forma information filed in the proxy statement — for example, when the financial statements of target company are updated to include an additional interim period — the pro forma financial information will need to be updated and included in the Super 8-K.
Ongoing reporting requirements
After completing the acquisition of a target company by a SPAC, the combined entity will be the registrant and must comply with all Securities Exchange Act of 1934 (Exchange Act) reporting requirements on an ongoing basis.
As the SPAC doesn’t have an underlying operating business, the target company is considered the SPAC’s predecessor and must comply with all SEC filing and reporting requirements upon completion of the acquisition.
Financial information of the registrant’s predecessor is required for all periods before the merger, with no lapse in audited periods or omission of other required information about the registrant.
This is especially important to remember when the close of the acquisition crosses over a period end.
For example, audited annual financial statements of the target company may be required to be filed on Form 8-K to eliminate a lapse in audited periods when, at the time of closing of the acquisition, the latest financial information of the target company included in filings with the SEC are its nine-month period interim financial statements and the age of those financial statements aren’t current under the SEC’s rules.
Internal controls
After an acquisition closes, the target company will need to verify it has the resources, processes, and systems to evaluate internal controls.
Under Section 404(a) of the Sarbanes-Oxley Act of 2002, management is responsible for maintaining a system of internal control over financial reporting (ICFR) that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
Management is responsible for maintaining evidential matter, including documentation, to provide reasonable support for its assessment. This rule applies to most issuers that file reports pursuant to the Exchange Act.
An external auditor is also required to conduct procedures over the processes in place — typically as walkthroughs — to fully understand and identify the likely sources of potential misstatements where a necessary control is missing or ineffectively designed.
If the target company is subject to Rule 404(b) after completing the SPAC transaction, auditor attestation of the company’s ICFR will need to be provided — meaning an audit report on the effectiveness of internal controls would be required.
Exemptions
Title I of the Jumpstart Our Business Startups (JOBS) Act provides an EGC a five-year exemption from the ICFR auditor attestation requirement or until the loss of EGC status.
In addition, an issuer that’s not an accelerated or large accelerated filer isn’t subject to the ICFR auditor attestation requirement. The SEC amended the definitions to filer status in 2020, which are included in SEC Release Number 34-88365–Amendments to the accelerated and large accelerated filer definitions.
Assessment limitations
In regard to the above requirements, the SEC staff provided guidance in Section 215 of the Compliance & disclosure interpretations of regulation s-k that it may not always be possible for the issuer to conduct an assessment of the target company’s ICFR in the period between the consummation date of a reverse acquisition and the date of management’s assessment of ICFR required by Item 308(a) of Regulation S-K.
In transactions where the legal acquirer is a nonoperating public shell company, the internal controls of the legal acquirer may no longer exist as of the assessment date, or the assets, liabilities, and operations may be insignificant when compared to the consolidated entity.
As a result, the SEC staff noted that in certain circumstances it won’t object to the exclusion of management’s assessment of ICFR in the Form 10-K covering the fiscal year in which the acquisition of the target company was completed.
