Spac Reporting Requirements

Spac Reporting Requirements

Since PSPC has no underlying operating activity, the target is considered PSPC`s predecessor and must comply with all SEC filing and reporting requirements at closing. 5. Auditor Considerations. PSPC transactions are generally subject to additional review procedures to meet SEC and PCAOB requirements for auditing standards and independence. In addition, the proposed rule would require better disclosure and provide additional investor protection for PSPC IPOs and PSPC transactions. These requirements, which are primarily legal in nature, include, but are not limited to: PSPCS does not hold tangible assets other than cash prior to the closing of an acquisition; therefore, they are non-operational public “shell companies” as defined by the SEC (see Section 1160.2 of the SEC`s Financial Reporting Manual [FRM]). Since a PSPC does not have significant business activities prior to the completion of an acquisition, the target company becomes PSPC`s predecessor upon completion of the transaction, and the target company`s activities become those of a public company. Therefore, the target must be able to meet all the reporting requirements of listed companies that apply to the combined company. At OCA, we are committed to fostering strong U.S. capital markets and facilitating capital formation to help investors, companies looking to raise capital, and our economy as a whole. Whether a company enters the public markets through a merger with a PSPC, a traditional IPO or any other process, the quality and reliability of financial information and the quality of financial audits available to investors are critical to our efforts to protect investors and their confidence in our markets.

We encourage stakeholders to consider the risks, complexities and challenges associated with PSPC mergers, including carefully considering whether the target company has a clear and comprehensive plan in place to be ready to go public. As more private companies enter our public markets through these structures, we remind companies, their auditors, audit committee members and other stakeholders that the health of our public markets and the ability of companies to raise capital effectively in these markets depend on the ability of financial reporting participants to fulfill their respective professional responsibilities by providing High quality products. Satisfy investors` financial information. Special purpose acquiring corporations (SPACs) have been used for decades as vehicles for private companies to enter public markets, but they have recently become increasingly popular. [2] In the first two months of 2021 alone, it was reported that the number of new PSPCs and the amount of capital raised by these PSPCs already accounted for approximately three-quarters of all these activities in the past year. [3] A PSPC raises capital on the public markets for the sole purpose of identifying and merging with a target company, a private operating company. The merger of PSPC and the target company (“de-PSPC”) and related transactions may provide the target company with capital that it would otherwise have to raise through a traditional initial public offering (“IPO”) and, following the merger, PSPC shareholders and target shareholders own the now listed operating company. PSPC`s transactions involve their own risks to investors[4] at the time of PSPC`s initial offering, during PSPC`s research and merger with a target company, and after the merger if it operates as a combined public company. A merger with a PSPC can also present unique challenges for a private target company that wants to become a publicly traded company. It is essential that the boards, audit committee (if applicable), management and auditors of these operating companies fully understand and fulfill their respective professional responsibilities to ensure that the companies meet their obligations under federal securities laws and that investors receive high-quality financial reports at the time of amalgamation and on an ongoing basis during the subsequent periods.

Paul Munter, acting general author of the SEC book, recently highlighted five key considerations regarding PSPC transactions, including market and timing, financial reporting, internal control, corporate governance and audit committee, and auditor considerations. Pursuant to 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 as to the reliability of financial information and the preparation of financial statements for external purposes in accordance with GAAP. A target company must also assess the state of various functions, including the people, processes, and technology that must be in place to meet the SEC`s filing, audit, tax, governance, and investor relations requirements after the merger. It is important for the combined public company to have a competent and experienced management team that understands the reporting and internal control requirements and expectations of a publicly traded company and can effectively execute the company`s comprehensive plan on an expedited basis. 4, Corporate Governance and Audit Committee. Mr. Munter emphasized the importance of board and audit committee oversight to ensure a company provides high-quality financial reporting. He noted that an audit committee should be composed of “individuals with appropriate skills and backgrounds” to oversee the PSPC transaction and the combined company. It is also important for the statutory auditor to verify whether the appropriate acceptance and continuance procedures[17] have taken place when a former private audit client is preparing to go public as part of a SPAC merger.

While this process also takes place as part of a traditional IPO, the condensed timing and complexity of a de-SPAC transaction may require careful review and analysis in terms of assessing client continuity and require the accounting firm to make timely adjustments to its engagement team to ensure the team has the appropriate level of expertise and experience with SEC and PCAOB requirements. An important consideration to consider when deciding whether to accept or continue an audit relationship is the independence of the auditor under SEC rules. The independence of the statutory auditor is fundamental to the credibility of the financial statements and a shared responsibility between audit committees, management and statutory auditors. The independence of the auditor, the registration of the statutory auditor with the PCAOB and other audit-related requirements should be assessed at the beginning of the transaction, especially as these considerations may result in the recruitment of a new auditor or additional audit procedures for prior periods. Therefore, PSPC and the target company should ensure that the acquisition is not completed until all financial information required for Super 8-K, including financial statements that meet the SEC`s age requirements, is available and audited in accordance with PCAOB standards. The SEC is proposing to add a new Section 1600 to Regulation S-K, which would establish specific disclosure requirements for PSCPs related to, among other things, the sponsor, potential conflicts of interest, and dilution. Following the amalgamation of a PSPC with a private operating corporation, the financial statements of the target corporation become those of the combined corporation. Therefore, a target company has to spend a lot of time and resources on many technical accounting and reporting issues. When executing a SPAC transaction, the target should consider the following technical considerations for accounting and reporting to the SEC: Clear and honest communication between the audit committee, auditor and management is important to set expectations and act proactively if reporting, control, or audit issues arise during and after the merger process. Effective communication will also help set an “appropriate tone at the top” within the merged public company and help create and maintain an environment that promotes the integrity of the accounting process and the independence and quality of the audit. The composition of the audit committee is crucial to the effectiveness of this dialogue, as this type of communication can only take place if the audit committee is composed of individuals with the appropriate skills and backgrounds to oversee these processes in accordance with the requirements and expectations of the public company.

On the same day Mr. Munter made his statement, the SEC`s Corporate Finance Division issued an employee statement on PSPC. The statement dealt with: certain restrictions imposed on PSPC and the combined entity due to the status of the PSPC shell company (e.g. classification as an unauthorized issuer); the books and records and internal control requirements applicable to PSPC, the target company and the combined company; and the conditions for enrolment in national stock exchanges that the combined company must meet in order to maintain its listing. On March 30, the SEC issued a draft rule2 that would “strengthen investor protection in [IPOs] through [SPACs] and subsequent business combinations between PSCPs and private operating companies [also known as de-SPAC transactions].” The objective of the proposed regime is to “further approximate the final reporting requirements for business combinations involving a shell company and a private operating company [the “target company”] to those applicable to traditional [IPOs]”. As a result, the proposed amendments would result in, among other things, the following changes with respect to PSPC transactions: In addition, the rules clarify the number of financial statements that would be required for companies acquired by a target company (either prior to the business combination or in anticipation of likely acquisitions).

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