Post-SPAC Merger Considerations

After a SPAC merger closes, the combined company has to file a registration statement on Form S-1 to register shares issued when the warrants issued within the SPAC’s IPO are exercised and the other unregistered and outstanding shares. Companies emerging from SPAC mergers usually don’t qualify to use Form S-3 because the combined entity lacks a 12-month history of Exchange Act reporting.

When eligible, companies may file a shelf registration statement on Form S-3 and related prospectus supplements to consummate follow-on equity offerings for general corporate purposes. However, they can’t qualify as well-known seasoned issuers for 3 years following a change in shell company status (SPAC merger). It suggests that any shelf registration statement filed on Form S-3 is subject to SEC staff review and must be declared effective, unlike an automatic shelf registration statement filed by a well known seasoned issuer.

If the registration statement is filed before a periodic report that reflects the SPAC merger, no new financial information should be required. However, suppose the SPAC merger was accounted for as a reverse recapitalization, and therefore, the registration statement is filed after filing such a periodic report. In that case, it could require recasting the prior annual financial statements of the target to reflect the recapitalization within the subsequent SPAC merger.

Post-transaction Exchange Act reporting

After the closing of the SPAC merger, the combined company will be publicly traded and is liable for complying with ongoing Exchange Act filing requirements.

Forward merger presentation and disclosures financial statement

After the SPAC merger, the historical financial statements of the predecessor become the financial statements of the combined company. In the case of a forward merger (i.e., a business combination), because a SPAC generally has nominal operations before the merger, the target operating company is typically designated as the predecessor of the merged entity. Thus, applying purchase accounting to the target’s financial statements during a forward merger leads to a new basis of accounting to be reflected in the successor’s financial statements after the transaction. To stress the change in reporting entity, the successor and predecessor periods would be separated by a black line within the standalone financial statements, almost like the presentation within the standalone financial statements of an acquire after a business merger when pushdown accounting is applied.

For instance, if the SPAC merger occurred on 30 September, the 31 December statements of operations, comprehensive income, cash flows and changes in shareholders’ equity would include a nine-month predecessor period and a 3-month successor period separated by a black line. The columns associated with each period would generally be labelled “Predecessor Entity” and “Successor Entity”. Also, the notes to the financial statements would reflect the relevant information for the predecessor and successor periods. The notes to the financial statements also would discuss the basis of presentation as a consequence of the transaction. The financial statement disclosures should also include traditional business combination related items, including purchase price allocation and pro forma disclosures.

Reverse recapitalization presentation and disclosures financial statement

Reverse recapitalizations don’t result in a new basis of accounting, and the financial statements of the merged entity represent a continuation of the target’s financial statements in many respects. However, the reverse recapitalization emphasizes unique accounting, w.r.t.  the entity’s equity accounts, EPS and transaction costs.

Shareholder’s equity of the accounting acquirer is presented as the equity of the combined company as follows:

• Capital stock

  The capital stock account of the target is carried forward in a reverse recapitalization. However, the balance is adjusted to reflect the par value of the outstanding capital stock of the SPAC, including the number of shares the SPAC issued to effect the acquisition. Any corresponding offset is recognized as an adjustment to the additional paid-in capital account.

• Additional paid-in capital

  The additional paid-in capital account of the target is carried forward and adjusted for any change in par value of the outstanding capital stock and is increased to reflect the effective issuance of shares to the SPAC shareholders in the transaction.

• Retained earnings

  Retained earnings of the target are carried forward.

For periods before the reverse recapitalization, shareholders’ equity of the combined company is presented based on the historical equity of the target restated using the exchange ratio to reflect the equity structure of the SPAC.

EPS recast for periods before the acquisition date. Under the guidance in ASC 805-40-45-1 through 45-2.  The retroactive restatement is based on the same number of weighted average shares outstanding that the accounting acquirer presents as outstanding in each historical period.

MAS is registered with PCAOB, USA and assist its clients with SEC filings including S-1, F-1 Regulation-A, Regulation-CF, and10 Ks, preparation of US GAAP financial statements, drafting the SEC filings ensuring they comply with all statutory requirements in a timely manner. If you have any questions or wish to know more about post-SPAC merger considerations, kindly contact us.