Special Purpose Acquisition Companies, Shell Companies, and Projections

A Small Entity Compliance Guide[1]

Table of Contents

This compliance guide is divided into the following parts:

I.  Introduction
II.  Who is affected by the final rules?
III.  What changes were made by the final rules?
IV.  What are the compliance dates of the rules?
V.  Guidance on statutory statuses
VI.  Other resources
VII.  Contacting the Commission

I. Introduction

On January 24, 2024, the Securities and Exchange Commission (the “Commission”) adopted new rules to enhance investor protection related to special purpose acquisition companies (“SPACs”), shell companies, and projections.

A. SPAC IPOs and De-SPAC transactions

The new rules enhance investor protections in initial public offerings (“IPOs”) by SPACs and in subsequent business combination transactions between SPACs and private operating companies (known as de-SPAC transactions). The new rules include new subpart 1600 of Regulation S-K which requires new disclosures in connection with SPAC IPOs and de-SPAC transactions. These new requirements include disclosure of compensation paid to sponsors, conflicts of interest, dilution, and any determination of a board of directors (or similar governing body) of the SPAC regarding whether a de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, if required by law, or any comparable determination.

The new rules also require a minimum dissemination period for the distribution of security holder communication materials in connection with de-SPAC transactions. The new rules also require the re-determination of smaller reporting company[2] (“SRC”) status following de-SPAC transactions. In addition, the new rules require the target company in a de-SPAC transaction to be a co-registrant on the registration statement where a SPAC or another shell company registers shares to be issued in a de-SPAC transaction.

B. Shell Companies

Several new rules apply to shell companies. The new rules provide that any direct or indirect business combination of a reporting shell company that is not a business combination related shell company involving another entity that is not a shell company is a sale of securities to the reporting shell company’s shareholders. The new rules also provide for new financial statement requirements applicable to transactions involving shell companies.

C. Forward-Looking Statements and Projections

Several new rules relate to forward-looking statements and projections. The new rules require certain disclosures, including material assumptions, when projections are disclosed in connection with de-SPAC transaction filings. The new rules also amend existing rules setting forth the Commission’s views on important factors to be considered in formulating and disclosing projections in filings with the Commission. In addition, the new rules provide new definitions of “blank check company” for purposes of the Private Securities Litigation Reform Act of 1995 (“PSLRA”) that have the effect of making the PSLRA safe harbors for forward-looking statements unavailable to these blank check companies.

II. Who is affected by the final rules?

The final rules affect a variety of entities, including the following:

• Filers of registration statements in SPAC IPOs.
• Filers of registration statements, proxy statements, information statements, tender offer statements, or Forms 8-K in connection with de-SPAC transactions, including target companies in de-SPAC transactions.
• Target companies in de-SPAC transactions.
• Reporting shell companies that are not business combination related shell companies and entities that are not shell companies that are involved in business combinations with these aforementioned types of shell companies.
• Any entity making a filing with the Commission that includes projections.
• Blank check companies.

III. What changes were made by the final rules?

A. What changes were made by the final rules regarding SPAC IPOs and de-SPAC transactions?

1. New Subpart 1600 of Regulation S-K

• Item 1601 (Definitions): Defines the terms de-SPAC transaction, SPAC, SPAC sponsor, and target company.

• Item 1602 (Registered offerings by SPACs): Applies to SPAC IPOs. Requires certain disclosures on the prospectus outside front cover page, in the prospectus summary, and in the prospectus body. Disclosure areas include: time frame to consummate a de-SPAC transaction, redemption rights, compensation paid to and securities issuances to SPAC sponsors and others, dilution, conflicts of interest, manner of identification of target companies, terms of trust or escrow accounts, terms of securities offered, and additional financings.

• Item 1603 (SPAC sponsor; conflicts of interest): Applies to SPAC IPOs and de-SPAC transactions. Requires information about SPAC sponsors, SPAC sponsor affiliates, and promoters. Disclosure areas include: name, form of organization, character of business, experience in connection with other SPACs, roles and responsibilities, agreements concerning proceeding with a de-SPAC transaction, certain compensation and securities issuances, reimbursements, controlling persons and material interest holders, agreements regarding redemptions of securities, and agreements regarding restrictions on sales of securities. Also requires conflicts of interest disclosure and disclosures concerning fiduciary duties to other companies.

• Item 1604 (De-SPAC transactions): Applies to de-SPAC transactions. Requires certain disclosures on the prospectus outside front cover page, in the prospectus summary, and in the prospectus body. Disclosure areas include: any determination of a board of directors (or similar governing body) regarding whether a de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, if required by law, or any comparable determination, as well as material factors related to the determination and outside reports, opinions, or appraisals received that materially relate to the de-SPAC transaction; compensation paid to and securities issuances to SPAC sponsors and others; conflicts of interest; background and material terms of the de-SPAC transaction; dilution; financing transactions; and redemption rights.

• Item 1605 (Background of and reasons for the de-SPAC transaction; terms of the de-SPAC transaction; effects): Applies to de-SPAC transactions. Disclosure areas include: background of the de-SPAC transaction, material terms of the de-SPAC transaction (including a description of the transaction and any related financing transaction and reasons for engaging in the transaction and the structure and timing of the transaction), differences in security holder rights, accounting treatment, Federal income tax consequences, effects of the de-SPAC transaction (including benefits and detriments), material interests in the de-SPAC transaction and any related financing transaction, redemption rights, and appraisal rights.

• Item 1606 (Board determination about the de-SPAC transaction): Applies to de-SPAC transactions. Disclosure areas include: any determination of a board of directors (or similar governing body) of a SPAC regarding whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, if required by law, or any comparable determination; material factors considered in making the determination; whether or not the de-SPAC transaction must be approved by a majority of unaffiliated shareholders; and whether or not an unaffiliated representative has been retained to act solely on behalf of unaffiliated shareholders to negotiate the terms of the de-SPAC transaction or prepare a report concerning the approval of the de-SPAC transaction.

• Item 1607 (Reports, opinions, appraisals, and negotiations): Applies to de-SPAC transactions. Requires disclosure concerning any outside reports, opinions, or appraisals received that materially relate to the de-SPAC transaction, including those related to the fairness of the consideration offered in the de-SPAC transaction. Requires disclosure in the areas of: identity and qualifications of preparers, method of selecting preparers, certain material relationships, and, if applicable, whether the preparer recommended the amount of consideration or target company valuation. Requires a summary of certain negotiations, reports, opinions, or appraisals, including: procedures followed, findings, recommendations, and bases for and methods of arriving at those findings and recommendations. Requires such reports, opinions, or appraisals to be filed as exhibits to the registration statement or schedule or included in the schedule.

• Item 1608 (Tender offer filing obligations): Applies if a SPAC files a Schedule TO for the redemption of securities offered to shareholders, including in connection with a de-SPAC transaction or an extension of the timeframe to complete a de-SPAC transaction. Requires a Schedule TO to include the information required by certain instructions to Forms S-4 and F-4 and provisions of Schedule 14A when a SPAC files a Schedule TO pursuant to Rule 13e-4(c)(2) (concerning issuer tender offers) under the Securities and Exchange Act of 1934 (“Exchange Act”) for any redemption of securities offered to shareholders. Also requires the redemption to be conducted in compliance with all other provisions of Rule 13e-4 and Exchange Act Rules 14e-1 through 14e-8 (Regulation 14E).

• Item 1610 (Structured data requirement): Applies to both SPAC IPOs and de-SPAC transactions. Requires all information disclosed pursuant to subpart 1600 of Regulation S-K to be provided as structured data using Inline XBRL. Quantitative disclosure must be detail-tagged and narrative disclosure must be block text-tagged.

2. Minimum Dissemination

The minimum dissemination requirements under the new rules apply to registration statements, proxy statements, and information statements that are used in de-SPAC transactions. Under the new rules, these materials in connection with de-SPAC transactions must be distributed to security holders no later than the lesser of:

• 20 calendar days prior to the date on which the meeting of security holders is to be held or action is to be taken in connection with the de-SPAC transaction or

• the maximum number of days permitted for dissemination under the applicable laws of the jurisdiction of incorporation or organization.

3. SRC Status Re-determination

Through changes to the definition of an SRC, the new rules provide for earlier re-determination and reflection of SRC status following a de-SPAC transaction. Under the new rules, upon the consummation of a de-SPAC transaction, an issuer must re-determine its SRC status prior to its first Commission filing following the de-SPAC transaction (although certain Form 8-K filings do not trigger this requirement).[3]

Under the new rules, in determining SRC status after a de-SPAC transaction:

• public float is measured within four business days after the consummation of the de-SPAC transaction and
• annual revenues are those of the target company as of the most recently completed fiscal year reported in the Super 8-K.

The re-determined SRC status must be reflected in the combined company’s filings beginning 45 days after consummation of the de-SPAC transaction.

4. Non-Financial Disclosure

The new rules require certain non-financial information about the target company (where the target company is not an Exchange Act reporting company)[4] in connection with a de-SPAC transaction. Such non-financial information includes the following: description of business, description of property, legal proceedings, changes in and disagreements with accountants on accounting and financial disclosure, security ownership of certain beneficial owners and management (assuming completion of the de-SPAC transaction and any related financing transaction),[5] and recent sales of unregistered securities.

5. Co-registration

Under the new rules, the target company must sign a Securities Act of 1933 (“Securities Act”) registration statement filed by a SPAC (or other shell company) in connection with a de-SPAC transaction and must be designated as a registrant on the registration statement cover page. These new requirements apply to the seller of a business or assets where a de-SPAC transaction involves the purchase of a business or assets.

B. What changes were made by the final rules regarding shell companies?

1. Rule 145a

Rule 145a provides that any direct or indirect business combination of a reporting shell company (that is not a business combination related shell company) involving another entity that is not a shell company is deemed to involve a sale of securities to the reporting shell company’s shareholders. Where Rule 145a applies, that sale will need to be registered under the Securities Act, unless there is an applicable exemption.

2. Financial Statements: New Rule 15-01 of Regulation S-X (Acquisitions of Businesses by a Shell Company (Other than a Business Combination Related Shell Company)) and Certain Amendments to Regulation S-X     

New Rule 15-01 provides for new financial statement requirements applicable to acquisitions involving shell companies (other than business combination related shell companies). The Commission also adopted several amendments to existing Regulation S-X provisions. The new rules and amendments are summarized below:

• Rule 15-01(a) (Audit requirements):
  • Defines the term “audit” (or “examination”), when used in regard to financial statements of an entity that is or will be a predecessor to a shell company (other than a business combination related shell company), to mean an examination of the financial statements by an independent accountant in accordance with the standards of the Public Company Accounting Oversight Board (“PCAOB”).
  • Defines the term “audit” (or “examination”), when used in regard to financial statements of an entity that is not a predecessor that are included in a registration statement or proxy statement filed for a combination with an issuer that is a shell company (other than a business combination related shell company), to mean an examination of the financial statements by an independent accountant in accordance with either the standards of the PCAOB or U.S. generally accepted auditing standards (“U.S. GAAS”).
• Rules Concerning Financial Statements:
  • Rule 15-01(b) (Financial statements):
    • Requires, when financial statements of a target business that will be combining with a shell company (other than a business combination related shell company) are required in a registration statement or proxy statement, that the target business’s financial statements comply with Regulation S-X as if the filing were a Securities Act registration statement for the IPO of the target business’s equity securities. 
    • This rule affects the number of years of financial statements required. As a result, a target business that is an emerging growth company (“EGC”)[6] would only be required to file two years of financial statements.
  • Form 8-K, Item 2.01(f):
    • Relates to requirements to file information that would be required when filing a general form for registration of securities on Form 10 under the Exchange Act, i.e., information in a Super 8-K.
    • The item requirement was amended to refer to acquired businesses or real estate operations that are predecessors.
    • The item requirement also was amended to provide that where, at the time of filing, the predecessor meets the conditions of an EGC, the registrant need not present audited financial statements for the predecessor for any period prior to the earliest audited period presented in its financial statements included in a previously filed registration or proxy statement for the transaction resulting in the loss of shell company status.   
• Rule 15-01(c) (Age of financial statements):
  • Requires that the financial statements of a business that will be acquired by a shell company (other than a business combination related shell company) comply with the requirements in Rule 3-12 of Regulation S-X as if the financial statements were included in an initial registration statement in determining the age of financial statements of the business in the registration statement or proxy statement of the registrant.
  • Provides that—when a business that will be acquired by a shell company (other than a business combination related shell company) qualifies to be an SRC based on its annual revenues as of the most recently completed fiscal year for which audited financial statements are available—the financial statements of that business may comply with the requirements in Rule 8-08 of Regulation S-X in connection with the inclusion of financial statements of that business as if in an initial registration statement in determining the age of financial statements of the business in the registration statement or proxy statement of the registrant.
  • A key effect of the new rule is that the third quarter financial statements of non-public target businesses will go stale 45 days after fiscal year end.
• Rules Involving Acquisitions Issues:
  • Rule 15-01(d) (Acquisition of a business or real estate operation by a predecessor): 
    • Requires registrants to apply Rule 3-05 of Regulation S-X to acquisitions of a business that is not or will not be the predecessor. Registrants may apply Rule 8-04 of Regulation S-X to acquisitions of a business that is not or will not be the predecessor when the predecessor would qualify to be a SRC based on its annual revenues as of the most recently completed fiscal year for which audited financial statements are available if it were filing a registration statement alone. 
    • Requires registrants to apply Rule 3-14 of Regulation S-X to acquisitions of a real estate operation that is not or will not be the predecessor. Registrants may apply Rule 8-06 of Regulation S-X to acquisitions of a real estate operation that is not or will not be the predecessor when the predecessor would qualify to be an SRC based on its annual revenues as of the most recently completed fiscal year for which audited financial statements are available if it were filing a registration statement alone.
    • Directs registrants to Rule 1-02(w)(1) of Regulation S-X (definition of “significant subsidiary”) (see below) for rules on applying the significance tests to acquisitions of a business or real estate operation that is not or will not be the predecessor. Significance of the acquisition is determined using the consolidated financial statements of the predecessor and not those of the shell company registrant.
    • Requires that, when the financial statements of a recently acquired business that is not or will not be the predecessor are omitted from a registration statement or proxy statement pursuant to Rule 3-05(b)(4)(i) of Regulation S-X, those financial statements must be filed in a Form 8-K by the later of the filing of the Form 8-K filed pursuant to Item 2.01(f) of Form 8-K or 75 days after consummation of the acquisition. Provides similar requirements when the financial statements of a recently acquired real estate operation that is not or will not be the predecessor are omitted from a registration statement or proxy statement pursuant to Rule 3-14(b)(3)(i) of Regulation S-X.
  • Rule 1-02(w) (definition of “significant subsidiary”): Amended the definition to provide that, in an acquisition by a predecessor to a shell company, the predecessor’s consolidated financial statements should be used for purposes of tests in the definition instead of those of the shell company registrant.
• Rule 15-01(e) (Financial statements of shell company):
  • Provides that, after a shell company registrant (other than a business combination related shell company) acquires a business that is its predecessor, the financial statements of the shell company for periods prior to consummation of the acquisition are not required to be included in any filing once two conditions are met:
    • the financial statements of the predecessor have been filed for all required periods through the acquisition date and
    • the financial statements of the registrant include the period in which the acquisition was consummated. 
  • If a registrant is to acquire or has acquired a shell company (other than a business combination related shell company), the financial statements of the shell company must be included in any filing that requires the registrant’s financial statements, as if the shell company were the registrant for the filing, unless the financial statements of the registrant include the period in which the acquisition of the shell company was consummated.

C. What changes were made by the final rules regarding forward-looking statements and projections?

1. Item 1609 of Regulation S-K (Projections in de-SPAC transactions)

New Item 1609 of Regulation S-K applies to projections disclosed in connection with de-SPAC transactions. When projections are disclosed in a filing, Item 1609 requires disclosure of the purpose of the projections, the party that prepared the projections, underlying material bases and assumptions of the projections, and whether or not the projections (either of the SPAC or the target company, as applicable) reflect the views of the management or board of directors about future performance as of the most recent practicable date prior to the date of the disclosure document required to be disseminated to security holders.  

2. Projections in Any Commission Filing—Amendments to Item 10(b) of Regulation S-K

The Commission amended Item 10(b) of Regulation S-K, which sets forth the Commission’s views on important factors to be considered when formulating and disclosing projections in filings with the Commission. The amendments address how projections that are not based on historical financial results or operational history should be distinguished and the prominence they should be given. For projections that include financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), the amendments state that there should be a clear definition or explanation of the non-GAAP financial measure, a description of the GAAP financial measure to which a non-GAAP financial measure is most directly comparable, and an explanation why the non-GAAP measure was selected instead of a GAAP measure.

3. Forward-Looking Statements and PSLRA Safe Harbor—New Definitions of “Blank Check Company”

The new rules provide new definitions of “blank check company” for purposes of the PSLRA.  These new definitions of “blank check company” have the effect of making the PSLRA safe harbors for forward-looking statements unavailable to these blank check companies.

For a complete description of the new rules, please refer to the adopting release.

IV. What are the compliance dates of the rules?

The new rules are effective on July 1, 2024, except with respect to structured data requirements, which require that disclosures made under the new rules where these requirements apply must be tagged beginning June 30, 2025.

V. Guidance on statutory statuses

In the adopting release, the Commission also provided guidance on underwriter status in connection with transactions involving SPACs and on investment company status of SPACs.

VI. Other resources

The adopting release can be found on the Commission’s website at https://www.sec.gov/files/rules/final/2024/33-11265.pdf.

The Commission’s disclosure forms can be accessed on the agency’s website at https://www.sec.gov/forms.

VII. Contacting the Commission

The Commission’s Division of Corporation Finance (“Division”) is happy to assist small companies and others with questions regarding the new rules. You may contact the Division for this purpose at (202) 551-3400 or https://www.sec.gov/forms/corp_fin_interpretive.

Questions on other Commission regulatory matters concerning small companies may be directed to the Division’s Office of Small Business Policy at (202) 551-3460.

The Commission’s Division of Investment Management’s Chief Counsel’s Office is also available to assist small companies and others with questions regarding investment companies, including regarding the investment company guidance in the adopting release. You may contact this office for this purpose at (202) 551-6825 or IMOCC@sec.gov.