On March 31, 2021, the SEC published two SPAC related statements:

The SEC’s Acting Chief Accountant, Paul Munter, issued a Public Statement titled “Financial Reporting and Auditing Considerations of Companies Merging with SPACs,”

and

The Division of Corporation Finance issued a “Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies.”

Here are highlights of the issues addressed in the two pronouncements.

The Chief Accountant’s Statement addressed considerations in several complex areas related to “de-SPACing” transactions:

Market and Timing, including the challenges that can arise from the limited time a SPAC has to identify an acquisition candidate and the pressures this can create for the candidate to meet the reporting requirements for the de-SPACing transaction and subsequent SEC reporting,

Financial Reporting, including the need for qualified professionals to deal with complex issues frequently found in financial reporting for SPAC related companies,

Internal Control, including both Internal Control Over Financial Reporting and Disclosure Controls and Procedures requirements,

Corporate Governance and Audit Committee issues, with a focus on the need for appropriate board and audit committee oversight after a de-SPACing transaction, and

Auditor matters, in particular the SEC’s requirements for auditor independence as they relate to SPAC transactions.

CorpFin’s Statement focused on:

Shell Company Restrictions, including the requirements for a “Super 8-K” and a reminder that a former shell company will be an “ineligible issuer” for three years following the completion of a business combination,

Books and Records and Internal Control Requirements, with a reminder that after a SPAC related business combination the company will need “the necessary expertise, books and records and internal controls to provide reasonable assurance of timely and reliable financial reporting,” and

Initial Listing Standards of National Securities Exchanges, including reminders about continuing listing and governance requirements.

The issues mentioned above, as well as all the other detailed guidance in both Statements, will be addressed in our April 20 conference, “The SPAC Life Cycle: Business, Legal and Accounting Considerations Forum 2021.”

As always, your thoughts and comments are welcome!

In recent months the SEC has announced a number of ESG iniatives ranging from an increasing focus on ESG matters in the review process to an ESG focused task force in the Enforcement Division.

To help “bring together agency actions and the latest information about environmental, social and governance investing” the SEC has added a new web page – “SEC Response to Climate and ESG Risks and Opportunities.”  You can find a link to the recent “Request for Comment on Climate Disclosure” on the new web page.

As always, your thoughts and comments are welcome!

Thanks to the ever-vigilant Alyson Claybaugh of Intelligize, below are two recent SEC comments focused on human capital resources disclosures.  Both comments relate to Form S-1 disclosures:

Employees, page 132

17. Please amend your disclosure to describe any human capital measures or objectives that you focus on in managing your business, if material. See Item 101(c)(2)(ii).

Business
Employees, page 100

2. Please amend your disclosure to provide a more detailed discussion of your human capital resources, including any human capital measures or objectives upon which you focus in managing your business. For example, describe any measures or objectives that address the development, attraction, and retention of personnel. See Item 101(c)(2)(ii) of Regulation S-K. Alternatively, please tell us why you believe you are not required to include this disclosure.

The above comments provide reminders about this now effective requirement in Regulation S-K Item 101:

“A description of the registrant’s human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”

As always, your thoughts and comment are welcome!

On February 24, 2021, Acting Chair Allison Herren Lee issued this “Statement on the Review of Climate-Related Disclosure.”  In the statement she directs CorpFin to “enhance its focus on climate-related disclosure in public company filings.”  She also refers to the SEC’s 2010 Release FR 82 – Commission Guidance Regarding Disclosure Related to Climate Change.  Acting Chair Herren Lee indicates that experience gathered in the staff’s review of climate-related disclosures will be used to update this guidance.

As always, your thoughts and comments are welcome!

On February 1, 2021, Satyam Khanna was named Senior Policy Advisor for Climate and ESG in the office of Acting Chair Allison Herren Lee.

As noted in this Press Release, in this new role, Mr. Khanna will “advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.”

You can read more about the role and Mr. Khanna’s background in the Press Release.

It has been a while since CorpFin issued a “Dear CFO” letter.  These sample comment letters, which historically started with the salutation “Dear CFO,” advise companies about rapidly emerging disclosure and accounting concerns.  On February 8, 2021, with an update in the salutation to “Dear Issuer,” the staff issued this “Sample Letter to Companies Regarding Securities Offerings During Times of Extreme Price Volatility.”

Among the issues the sample letter addresses are:

• Providing an appropriate description of the volatility of the company’s stock price,
• Including risk factors addressing price volatility, and
• Explaining the effects of a potential “short squeeze” on investors.

In these times of volatility and change it will be interesting to see how many “Dear Issuer” letters the SEC promulgates.

As always, your thoughts and comments are welcome!

As we discussed in this post, the SEC’s Final Rule, “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information,” was published in the Federal Register on January 11, 2021.

The Rule’s transition provisions provide a mandatory transition date but also allow voluntary early compliance.  Both transition provisions are based on the Final Rule’s February 10, 2021 effective date.  The mandatory transition for a company is its first fiscal year that ends after August 9, 2021, which is 210 days after the effective date.  Companies may voluntarily apply the new rule, on an S-K item-by-item basis, in any filing made on or after the effective date of February 10, 2021.

This means a company that files a Form 10-K on or after February 10, 2021, has the option to selectively early implement the changes to each individual S-K item:

• Selected financial data (S-K Item 301)
• Quarterly information (S-K Item 302)
• MD&A (S-K Item 303).

In this post, we reviewed the details and pros and cons of early implementation for selected financial data (S-K Item 301) and quarterly information (S-K Item 302).

Here is an overview of the MD&A changes in S-K Item 303.  In future posts we will explore each change in detail.

The Final Rule:

• Adds a new Item 303(a), Objective, to make the principal writing objectives in FR 36 and FR 72 part of the core MD&A guidance;
• Amends Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources, including an emphasis on a company’s ability to generate and obtain adequate amounts of cash and providing more details about future cash requirements;
• Amends current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations, including a focus on describing causal factors and underlying reasons in both quantitative and qualitative terms;
• Adds a new Item 303(b)(3), Critical accounting estimates, to clarify and codify previous Commission guidance in FR 72 on critical accounting estimates;
• Replaces current Item 303(a)(4), Off-balance sheet arrangements, with a more principles-based requirement to disclose their impact, if material;
• Eliminates current Item 303(a)(5), Tabular disclosure of contractual obligations., replacing it with a new, more principles-based, liquidity and capital disclosure requirements that include this information to the extent material;
• Amends current Item 303(b), Interim periods (amended Item 303(c)) to allow for sequential-quarter analysis in Form 10-Q; and
• Removes old paragraph (a)(3)(iv) about inflation disclosures as this requirement is essentially embedded in the principles-based MD&A requirements.

We will explore the details of these changes in upcoming posts.

As always, your thoughts and comments are welcome!

Special Purpose Acquisition Companies, or SPACs, have become a go-to vehicle for raising capital and becoming publicly traded.  This exponential growth has created a multitude of disclosure issues.  The 1933 Securities Act transaction disclosure requirements do not generally apply when a SPAC acquires an operating company.  Disclosure requirements for unique SPAC issues, including the economic stake that sponsors have in the SPAC and the process the SPAC uses to set the subsequent acquisition price, are frequently unclear.

On December 22, 2020, CorpFin issued Disclosure Guidance Topic 11, Special Purpose Acquisition Companies, to present their views about disclosure considerations for SPAC IPO and business combination transactions.

Disclosure considerations discussed for a SPAC IPO include:

• Possible conflicts of interest for the SPAC sponsors,
• Incentives that exist or may arise for sponsors to complete a business combination,
• Compensation arrangements with underwriters, and
• How the terms of securities held by sponsors may differ from those of the public shareholders.

Disclosure considerations surrounding SPAC subsequent business combination transactions include:

• Terms of any additional financing,
• How the target company was identified and evaluated, and
• Services and fees related to underwriters.

The Disclosure Guidance Topic provides more details in each of these areas.  Additionally, this is clearly not an all-inclusive list.  It provides the core principles that SPACs should consider as they provide disclosures to investors.

As always, your thoughts and comments are welcome!

PS -If you want to learn more about SPACs on April 20 we will have a new conference:

The SPAC Life Cycle: Business, Legal and Accounting Considerations Forum 2021

As we discussed in this post, on January 11, 2021,  the SEC’s November 19, 2020 Final Rule, “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information,” was published in the Federal Register.

The Final Rule will be effective on February 10, 2021.  The transition provisions provide a mandatory transition date but also allow voluntary early compliance.  Companies must apply the rule for their first fiscal year that ends after August 9, 2021.  They may voluntarily apply the new rule, on an S-K item-by-item basis, in any filing made on or after the effective date of February 10, 2021.

This means that a company that will file its Form 10-K on or after February 10, 2021, has the option to implement some or all of the changes to MD&A (S-K Item 303), selected financial data (S-K Item 301), and quarterly information (S-K Item 302).

This post explores the relatively simple choices for S-K Item 301 and 302.  In coming posts we will explore the MD&A changes in S-K Item 303.

Selected Financial Data

The change for selected financial data is very simple.

On page 162, the Final Rule removes the selected financial data requirement from Regulation S-K:

5. Remove and reserve § 229.301.

On page 182, the Final Rule makes a corresponding change to the instructions for Form 10-K:

25. Amend Form 10-K (referenced in § 249.310) by:
    ……..
26. Removing and reserving Item 6 (“Selected Financial Data”) of Part II.

Companies have the option to implement this change and omit Item 6 from a Form 10-K filed on or after February 10, 2021.  This is independent of the period end of the financial statements in the Form 10-K.

The rationale for removing this disclosure is fairly straightforward.  In the Final Rule the SEC states:

The Commission proposed to eliminate Item 301 in part because of advances in technology since the item’s adoption in 1970 that allow for easy access to the information required by this item on the Commission’s Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”).  The Commission also noted that Item 301 was originally intended to elicit disclosure of material trends and that requiring five years of selected financial data is not necessary to achieve this because of the requirement for discussion and analysis of trends in Item 303.

With this information readily available from several other sources and the existing requirement to disclose material trends in MD&A, this seems a good time to eliminate this disclosure!

Additionally, since Item 6 will no longer exist in Form 10-K after a company’s mandatory transition date, this item will have to be removed after that date.

Quarterly Information

The change for quarterly information on page 162 of the Final Rule is not as simple.  The Final Rule provides the following revised language for S-K Item 302:

            229.302 (Item 302) Supplementary financial information.

(a) Disclosure of material quarterly changes. When there are one or more retrospective changes to the statements of comprehensive income for any of the quarters within the two most recent fiscal years or any subsequent interim period for which financial statements are included or are required to be included by § 210.3-01 through 210.3-20 (Article 3 of Regulation S-X) that individually or in the aggregate are material, provide an explanation of the reasons for such material changes and disclose, for each affected quarterly period and the fourth quarter in the affected year, summarized financial information related to the statements of comprehensive income as specified in Rule 1-02(bb)(ii) of Regulation S-X and earnings per share reflecting such changes.

Again, companies have the option to implement this change and omit the quarterly information from a Form 10-K as long as it has not been materially, retrospectively changed.  As with the change for selected financial data, this applies to Form 10-Ks filed on or after February 10, 2021, and is independent of the period end of the financial statements in the Form 10-K.  Companies may make this change in a Form 10-K for December 31, 2020, as long as the report is filed on or after February 10, 2021.

The rationale for this change is discussed in the Final Rule:

We continue to believe that requiring quarterly financial data when there have not been one or more retrospective changes that are material, either individually or in the aggregate, would duplicate disclosures provided elsewhere, such as in Forms 10-Q or, in the case of fourth quarter results, can be derived from annual results disclosed in the Form 10-K. Our amendments eliminate these duplicative disclosures. We do, however, agree with commenters that timely disclosure of the effects of material retrospective changes may be important to investors, and lack of such disclosure could impact the ability to derive fourth quarter information when there have been such changes.

Again, this seems like the right time to implement this change.

More about the changes to MD&A in coming posts, and as always, your thoughts and comments are welcome!