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US Securities and Exchange Commission

SEC Staff is Playing Catch-Up Reviewing SPAC Filings

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

SPACs are everywhere these days.

This also means the SEC’s disclosure review team is playing catch-up to make sure their regulatory filings are appropriate. But the commission staff wants would-be SPACers to know that it is reviewing their registration or proxy statements as quickly as possible.

The number of SPACs—special purpose acquisition companies—shattered record last year, and SPAC initial public offerings (IPOs) are up nine times compared to last year’s figures.

Lindsay McCord, chief accountant of the SEC’s Division of Corporation Finance (CorpFin), said that hundreds of post-IPO SPACs are currently looking for a private company target.

“This has resulted in an historically unprecedented surge for CorpFin and our review program,” McCord said during the 19th annual financial reporting conference hosted virtually by Baruch College on May 5, 2021. “It’s truly difficult for us to keep up with this pace right now with the level of personnel we have.”

To make matters worse, she said that this has been occurring as the staff is working remotely because of the COVID-19 pandemic.

“We are trying our best to keep up,” McCord said. “If you don’t hear from us within 24 hours, do not think it means we are all taking a vacation. The volume is just higher than we ever planned for.”

A simple SPAC is a shell company that raises capital publicly for the sole purpose of identifying and merging with a target private operating company. The merger transaction infuses the target company with capital that it might otherwise raise in an IPO.

After raising funds, a SPAC first goes through the initial registration process with the SEC just like a traditional IPO by filing Form S-1 then identifies a target company. Following the IPO, the SPAC has 18 to 24 months to “de-SPAC” or complete a merger with the target company. Thus, SPACs are popular in part because the process is faster than a traditional IPO.

Reminder for Complete Filings

In the meantime, McCord said that the staff in general will not review a registration statement that is substantially incomplete.

“One of the questions I often receive in our office is whether we would start reviewing a filed registration statement or even a draft registration statement that’s just submitted but filed without an audit opinion even though the historical financial statements are within that document,” she said. “Just to be clear: the answer is no. The staff is not going to start reviewing financial statements before auditors complete its audit work.”

This is because the SEC staff are not the company’s independent auditors.

“And so, we want to make sure that that audit work has been completed before we start spending time reviewing it,” she said. “With the surge, it’s very difficult for us to start something that maybe has a lot of holes and make it an efficient process. So, a lot of these need to be substantially complete; it really does make the process more efficient for both the company … and for the staff.”

She also had some advice related to the target private operating company: PCAOB.

“Our expectations for the target private company financial statements that are going to be provided either in Form S-4 or proxy statement in relations to SPAC business combination is that that private target company financial statements should be audited in accordance with PCAOB standards,” McCord said. “This isn’t a U.S. GAAS audit opinion; this is PCAOB standard opinion….If you are a SPAC, and you are looking at targets, they might need to do additional audit work to move the level of audit up to PCAOB standards.”

The AICPA’s Auditing Standards Board (ASB) writes GAAS or auditing standards for private companies while the PCAOB promulgates standards for public companies.

Auditors say that it may require about one third more work for the upgrade from AICPA standards to PCAOB standards. (See SPACs are Hot but Difficult to Pull Off in the November 20, 2020, edition of Accounting & Compliance Alert.)

SPAC Warrants, CorpFin Perspective

In mid-April, CorpFin along with the Office of the Chief Accountant (OCA) issued a joint statement on SPAC warrants. Among other things, the statement said that in certain circumstances, warrants “should be classified as a liability measured at fair value, with changes in fair value each period reported in earnings.” This has caused some companies to issue restatements.

“Our statement was to remind our registrants of their disclosure obligations when there is material error in previously filed financial statements, so it should not come as a surprise to anyone,” McCord said.

SEC Acting Chief Accountant Paul Munter and Deputy Chief Accountant John Vanosdall, who also spoke at the conference in the meantime, emphasized that the statement was issued because it may apply to a broader SPAC community even though it was based on a specific consultation that the staff has done. They stressed that each company will have its own specific fact pattern, and the views in the statement are only for that specific fact pattern.


This article originally appeared in the May 6, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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