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New Rules On SPAC, Shell Companies And The Use Of Projections: Business Combinations Involving Shell Companies

On January 24, 2024, the SEC adopted final rules enhancing disclosure obligations for SPAC IPOs and subsequent de-SPAC business combination transactions. The rules are designed to more closely align the required disclosures and legal liabilities that may be incurred in de-SPAC transactions with those in traditional IPOs. The new rules spread beyond SPACs to shell companies and blank check companies in general.

At ANTHONY, LINDER & CACOMANOLIS, PLLC, our securities lawyers help companies all over the country navigate SEC regulation changes.

Enhanced Disclosures When Compensation Is Paid And Co-Registration

The SEC specifically requires enhanced disclosures with respect to compensation paid to sponsors, conflicts of interest, dilution, and the determination, if any, of the board of directors (or similar governing body) of a SPAC regarding whether a de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders. The SEC has also adopted rules that deem any business combination transaction involving a reporting shell company, including a SPAC, to involve a sale of securities to the reporting shell company’s shareholders and has amended several financial statement requirements applicable to transactions involving shell companies.

In addition, the new rules require that a private operating company be a co-registrant when an SPAC files an S-4 or F-4 registration statement associated with a business combination; minimum dissemination periods for the distribution of shareholder de-SPAC communications; require a re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction; and amend the definition of a “blank check company” to make the liability safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statement such as projections, unavailable in filings by SPACs and other blank check companies. Although the SEC did not adopt a proposed rule that would deem underwriters in a SPAC IPO to be underwriters in a de-SPAC transaction, they have provided guidance under the current rules, which could result in the same conclusion. Moreover, the rules provide guidance on investment company determinations, which impact all public companies.

Business Combinations Involving Shell Companies

A “reverse merger” is a process whereby a private operating company goes public by acquiring a controlling interest in and merging with a public operating or public shell company. The SEC created many rules that impose limitations on public companies that are or ever were a shell company and that effect reverse mergers with public shell companies.

In particular:

  • Must comply with new Rule 145(c) and file a registration statement as to all reverse merger transactions;
  • Must comply with New Rule 15-01(a), amended Rule 1-02(d) as to financial statements included in the business combination registration statement;
  • Financial statements and Form 10 information for the acquired business must be filed within four business days of the completion of the business combination in a Super 8-K (financial statements for an acquired business by a non-shell are not due until 71 days following the filing of the initial closing 8-K).
  • A shell company and post business combination company will be an ineligible issuer for three years following completing a business combination and, as such, (i) is not entitled to use a free writing prospectus in its IPO or subsequent offerings; (ii) cannot qualify as a well-known seasoned issuer (WKSI); (iii) may not use a term sheet free writing prospectus available to other ineligible issuers; (iv) may not conduct a road show that constitutes a free writing prospectus, including an electronic road show (see for more on road shows and eligibility considerations); and (v) may not rely on the safe harbor of Rule 163A from Securities Act Section 5(c) for pre-filing communications made more than 30 days prior to the filing of the registration statement (see for more on gun jumping).
  • A shell company and post business combination company doesn’t qualify to use incorporation by reference in Exchange Act reports, proxy or information statements, or Form S-1 (including forward incorporation by reference) until three years after completing a business combination (see for more on incorporation by reference).
  • A shell company and post business combination company cannot use a Form S­8 to register any management equity plans until 60 days after completing a business combination and filing Form 10 information.
  • A shell company and post business combination company may not file an S-3 in reliance on Instruction I.B.1 (full shelf) or 1.B.6 (the baby shelf rule) until 12 months after it ceases to be a shell and has filed “Form 10” information (i.e., the information that would be required if the company was filing a Form 10 registration statement) with the SEC reflecting its status as an entity that is no longer a shell company.
  • Holders of shell company securities may not rely on Rule 144 for resales of their securities until one year after the company completes a business combination and has filed current “Form 10” information with the SEC reflecting its status as an entity that is no longer a shell company; and so long as such company remains current in its SEC reporting obligations.
  • The unavailability of Rule 145(c) on a Form S-1 resale registration statement. That is, affiliates of the private company who received securities of the public company in the business combination will be statutory underwriters with respect to re-sales of those securities and as such they may be sold only in a fixed price offering in which such investors are named as underwriters in the prospectus.

New Rule 145a: Shell Companies And Exemptions

New Rule 145a deems any business combination of a reporting shell company involving another entity that is not a shell company to entail a sale of securities to the reporting shell company’s shareholders. Nothing in Rule 145a would prevent or prohibit the use of a valid exemption, if available, for the deemed sale of securities. There is no such known available exemption, and the SEC rule release not only does not suggest one but specifically clarifies that Section 3(a)(9) would not be available.

Accordingly, every reverse merger with a publicly reporting (and trading) shell company, including SPACs, will require the filing of a registration statement on Form S-4/F-4 or S-1/F-1. Not only would result in enhanced liabilities for signatories to any registration statement and potential underwriter liability, but under Securities Act Section 11(a)(4) would impose liability on experts, including every accountant, engineer, or appraiser, or any person whose profession gives authority to a statement made by him, who has, with consent, been named as having prepared or certified any part of the registration statement or prepared or certified any report or valuation which is used in connection with the registration statement.

Rule 145a: Excluded Transactions

There are several exemptions to Rule 145a, including (i) business combinations between two bona fide non-shell entities; (ii) business combination related shell companies (i.e., shell companies formed for the sole purpose of effectuating a change in domicile or triangular merger); and (iii) a business combination between two or more shell companies.

Financial Statement Requirements In Business Combinations Involving Shell Companies

After a business combination involving a shell company, the financial statements of the private operating company become those of the public reporting company for financial reporting purposes. In other words, the private operating company becomes the predecessor for purposes of financial reporting, including the prior year lookback periods.

The new rules more closely align the financial statement reporting requirements in business combinations involving a shell company and a private operating company with those in traditional IPOs. For the most part, the amendments improve the financial statement requirements in a business combination transaction.

Audit As Defined Under Rule 15-01(a) And Amended Rule 1-02(d)

The SEC has adopted new Rule 15-01(a) and amended Rule 1-02(d), as well as the instructions for Forms S-4 and F-4 to align the definition of “audit” with IPO requirements. In particular, Rule 15-01 updated the term “audit” to mean “an examination of the financial statements by an independent accountant in accordance with the standards of the PCAOB for the purpose of expressing an opinion thereon.”

Rule 1-02 was amended to cross-reference the new Rule 15-01. The combined effect of the changes is that a predecessor to a shell company (i.e. the target company) is required to comply with the same definition of audit as if it were filing for an IPO. The instructions for Forms S-4 and F-4 were amended for consistency.

New Rule 15-01(b): Financial Statements

New Rule 15-01(b) provides that the financial statements required in an S-4/F-4 proxy or information statement for a business that is combined with a shell must be the same as if that business were completing an IPO. The new rule applies to all businesses that are combined with a shell company and not just one that would be considered a financial predecessor.

Stale Financial Statements And Extensions

Although generally, the current rules are consistent as to when financial statements go “stale” for purposes of a registration statement, an SEC reporting company may extend its third quarter financial statement period for an additional 45 days (90 days from year-end) if it has timely filed all SEC reports in the prior 12 months. That is, an SEC reporting company that has filed all its reports in a timely manner for the prior 12 months may use its third quarter financial statements until the due date for its annual report. Since a SPAC is a reporting company, under the current rules, an S-4 could contain financial statements that would be considered stale in an IPO.

To rectify this disparity, the SEC has adopted new Rule 15-01(c) to align the age requirements for financial statements for each business involved in a business combination with a shell company filed on Form S-4 or F-4 with those for an issuer in an IPO on Form S-1 or F-1. The new rule applies to all businesses that are combined with a shell company and not just one that would be considered a financial predecessor.

The Acquisition Of A Business Or Real Estate Operation

The rules also add clarifying provisions related to the financial statement requirements of businesses acquired or to be acquired by the target. When an operating public company engages in an acquisition, financial statement requirements are determined using significance and probability tests applying Rule 3-05 or Rule 8-04 for a smaller reporting company. For a summary of these rules, see

These provisions would dictate when the financial statements of a non-predecessor business that has been acquired or is probable to be acquired, by a shell company registrant or its predecessor (the main target) should be included in the registration statements or proxy statements related to the business combination. However, this could lead to unintended consequences. The significance tests in Rule 1-02 do not address the scenario when there is both a shell company registrant and a business that is or will be its predecessor. Because a shell company has nominal activity and, therefore, the denominator for the tests would be minimal, the application of such tests generally results in an acquisition being significant at the maximum level, which suggests that the existing sliding scale for business acquisitions may not be effective in this context.

In order to address the ineffectiveness of the existing sliding scale in these specific transactions, the amendments to Rule 1-02(w) require the significance of the acquired business that is not the predecessor to be calculated using the predecessor’s financial information as the denominator instead of that of the shell company registrant. New Rule 15-01(d)(1) directs registrants to Rule 1-02(w)(1) in order to determine how significance is measured in certain shell company business combination transactions. New Rule 15-01(d)(2) clarifies when and how financial statements for a recently acquired or to be acquired business should be filed.

The new rules also tie in existing Rule 3-05(b)(4)(i), which provides that financial statements of a recently acquired or to be acquired business may be omitted from a registration or proxy statement when the significance of that acquisition, under the required significance tests in Rule 3-05, is measured at 50% or less. Rule 3-05 further provides that such omitted financial statements must be filed under cover of Form 8- K within 75 days after consummation of the acquisition.

That is, where the predecessor has acquired a business or real estate assets, it can rely on 3-05(b)(4)(i) to omit financial statements from the S-4 or F-4 but would need to file such financial statements in a Form 8-K within 75 days of consummation of the acquisition. To be clear the 75 days is determined as of the date of the acquisition not of the de-SPAC business combination and as such could be less than 75 days from the closing of the de-SPAC transaction. The SEC has also amended Item 2.01(f) of Form 8-K to clarify that the financial statement disclosure requirement applies to the predecessor and not the former shell company.

Financial Statements Of A Shell Company Registrant After Combining With A Predecessor

To add consistency, since the post business combination financial statements are that of the target company, new Rule 15-01(e) allows a company to exclude the financial statements of a shell company, including a SPAC, for periods prior to the acquisition once the following conditions have been met: (i) the financial statements of the predecessor have been filed for all required periods through the acquisition date, and (ii) the financial statements of the combined entity include the period in which the acquisition was consummated. The rule applies regardless of whether the de-SPAC transaction is accounted for as a forward acquisition of the target private operating company by the SPAC or a reverse recapitalization of the target private operating company.

Legal Counsel And Advice For Ever-Changing SEC Regulations

Our securities lawyers at ANTHONY, LINDER & CACOMANOLIS, PLLC, follow the ever-changing regulations and SEC updates closely. We will do the work to understand how changes impact your company’s financial interests and prospective mergers and acquisitions.

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Our experienced securities lawyers are available for consultation by appointment. To schedule a consultation to discuss any specific questions that you might have about the evolving SEC regulations, contact our office by calling 877-541-3263 or by sending an inquiry through our online form. We serve clients throughout the United States.