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Financial Reporting Manual

Dec. 11, 2017

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TOPIC 12 - Reverse Acquisitions and Reverse Recapitalizations

12100GENERAL

(Last updated: 9/30/2008)

The acquisition of a private operating company by a non-operating public shell corporation typically results in the owners and management of the private company having actual or effective voting and operating control of the combined company. The staff considers a public shell reverse acquisition to be a capital transaction in substance, rather than a business combination. That is, the transaction is a reverse recapitalization, equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation accompanied by a recapitalization. The accounting is similar to that resulting from a reverse acquisition, except that no goodwill or other intangible assets should be recorded.

12200REPORTING ISSUES

(Last updated: 9/30/2008)

12210General

12210.1SEC rules do not directly address a registrant’s financial reporting obligations in the event that it acquires another entity in a transaction accounted for as either a reverse acquisition or reverse recapitalization. For accounting purposes, the legal acquiree is treated as the continuing reporting entity that acquired the registrant (the legal acquirer). Reports filed by the registrant after a reverse acquisition or reverse recapitalization should parallel the financial reporting required under GAAP—as if the accounting acquirer were the legal successor to the registrant’s reporting obligation as of the date of the acquisition.  The level of significance is irrelevant as the accounting acquirer is considered to be the registrant’s predecessor.

12210.2Registrants should assure that:

  1. filings with the SEC result in timely continuous reporting, with no lapse in periodic reports filed, and
  2. no audited period exceeds 12 months.

12220Form 8-K

12220.1Reverse Recapitalization with a Shell Company

  1. A shell company is a registrant (other than an asset-backed issuer) that has no or nominal operations and either has:
    1. no or nominal assets,
    2. assets consisting solely of cash and cash equivalents, or
    3. assets consisting of any amount of cash and cash equivalents and nominal other assets.
  2. For transactions between a shell company and a private operating company whereby the registrant ceases to be a shell company, a Form 8-K that includes Items 2.01, 5.01, 5.06 and 9.01 must be filed no later than four business days after the consummation of the acquisition. The Form 8-K must include for the private operating company all content required by a Form 10 initial registration statement. The financial statement periods required in the Form 8-K are based on the earlier of the filing date of the 8-K or the due date of the 8-K reporting the transaction. (Last updated: 3/31/2009)

    As noted in Section 5230.1, the staff looks to the accounting acquirer’s eligibility as a SRC at the time of the reverse acquisition for purposes of the disclosures to be provided in the Form 8-K.  Accordingly, if the accounting acquirer meets the definition of a smaller reporting company, the age of its financial statements required to be included in the Form 8-K is determined by applying S-X 8-08.  An accounting acquirer not meeting the definition of a smaller reporting company, however, should comply with the updating requirements of S-X 3-12. (Last updated: 3/31/2012)
  3. In certain circumstances, the due date or filing date of the Form 8-K, whichever is earlier, occurs after the end of the private company’s most recently completed annual or quarterly period, but before financial statements for that annual or quarterly period would be required to be presented in a Form 10. In these circumstances the financial statements of the private operating company required by Items 2.01(f) and 9.01 of Form 8-K may not include the private company’s most recently completed annual or quarterly period.

    The registrant, however, remains subject to Exchange Act Rules 13a-1 and 13a-13, or 15d-1 and 15d-13, requiring annual and quarterly reports, respectively. The registrant must file its applicable annual and quarterly reports. Additionally, the registrant must file an amended Form 8-K with the financial statements of the private operating company’s most recently completed annual or quarterly period prior to the date of the reverse recapitalization, as applicable, within the number of days applicable based on the shell company’s filing status (60, 75, and 90 days for annual periods and 40, 40, and 45 days for interim periods for large accelerated, accelerated, and non-accelerated filers, respectively) after the private operating company’s period end.
    (Last updated: 12/31/2011)

    For example, assume a non-accelerated shell and private operating company both have a calendar year end and the reverse recapitalization takes place on February 1, 20X2. Within four business days of the transaction, the audited financial statements of the private operating company for the year ended December 20X0 and the unaudited financial statements for the interim period ended September 30, 20X1 and comparable prior period would be filed on Form 8-K, in addition to the other information required by Items 2.01, 5.01, 5.06, and 9.01, as described above. The registrant would file its annual report on Form 10-K for the year ended December 31, 20X1 within 90 days after December 31, 20X1. In addition, the registrant would file the same information that would be required in a Form 10-K of the private operating company in an amended Form 8-K by the same Form 10-K due date – 90 days after December 31, 20X1.
    (Last updated: 3/31/2011)
  4. There is no 71 day extension of time available to file the content for the private operating company, the pro forma information, or other required information.
  5. For transactions between a shell company that is a foreign private issuer and a private operating company whereby the registrant ceases to be a shell company, a Form 20-F should be filed no later than four business days after the consummation of the acquisition that includes all of the information for the private operating company that Form 20-F requires for registration of securities. Foreign private issuers that elect to report on domestic issuer forms should file the required information on a Form 8-K and not Form 20-F.
  6. Rule 13a-1 applies to a foreign private issuer shell company that ceases to be a shell company upon consummating a transaction with a private operating company. In certain circumstances where the due date or filing date, whichever is earlier, of the Form 20-F reporting the transaction is within three months after year end, the financial statements of the private operating company required by Rule 13a-19 may not include the most recent full fiscal year. In these cases, the surviving entity shall file the information that would be required to be included in an annual report for the private operating company for the most recent fiscal year. The surviving entity shall file the required information on a Form 20-F within the time period required.
  7. There is no Exchange Act Rule 12b-25 extension of the time available to file a reverse acquisition with a shell company reported on Form 20-F.
  8. If the legal acquirer/registrant previously filed the required information, such as in a proxy statement or Form S-4/F-4, the registrant may identify in the Form 8-K or 20-F the previous filing in which all the disclosures are included, instead of repeating the disclosures in the 8-K or 20-F.

NOTE: If a public shell that is a smaller reporting company enters into a reverse acquisition with a public or non-public operating company, refer to Topic 5, Smaller Reporting Companies, for a discussion of smaller reporting company eligibility requirements.

12220.2Reverse Acquisition with a domestic registrant that is not a shell company

(Last updated: 6/30/2012)

  1. Report the acquisition in an Item 2.01 Form 8-K no later than 4 business days after the consummation of the reverse acquisition.   If the accounting acquirer’s financial statements are not included in that Form 8-K, the registrant should so indicate in the Form 8-K and state when the required financial statements will be filed. That Form 8-K also should include disclosures under Item 4.01 about any intended change in independent accountants, under Item 5.01 about any change in control of the registrant, and under Item 5.03 about any changes in fiscal year end from that used by the registrant prior to the acquisition, as applicable. Most typically, registrants adopt the fiscal year and auditor of the accounting acquirer, but that is not required.
  2. Financial statements of the accounting acquirer (the legal acquiree) and S-X Article 11 pro forma financial information giving effect to the reverse acquisition should be filed in an Item 9.01 Form 8-K when available, but no later than 71 calendar days after the date that the initial Form 8-K reporting the transactions must be filed (that is, the date which is 4 business days after the transaction is consummated plus 71 calendar days). If the required financial statements and pro forma financial information are not available to be provided with the initial Form 8-K, they must be filed by amendment to that form. After consummation, the accounting acquirer’s financial statements become the financial statements of the registrant under U.S. GAAP. The Form 8-K should include the following with respect to the accounting acquirer:
    1. Audited financial statements for the three most recently completed fiscal years; or two years, if the registrant is a smaller reporting company; and
    2. Unaudited interim financial statements for any interim period and the comparable prior year period.

      NOTE: See Section 10120.2 to determine whether the registrant qualifies as an EGC for purposes of filing its Form 8-K subsequent to the merger transaction.

      See Section 10220.5 regarding financial statement requirements in a Form 8-K when the transaction involves an EGC operating company. (Last updated: 6/30/2013)

  3. S-X 3-06 that permits the filing of financial statements of an acquired business for nine to twelve months to satisfy one year would not apply to the financial statements of the accounting acquirer/legal acquiree in a reverse acquisition. The financial statements of the accounting acquirer are deemed to be predecessor financial statements, which should be filed for the periods required by S-X 3-01 through 3-04.
  4. Even though an issuer complies with Exchange Act requirements following a reverse acquisition, Securities Act form provisions may require it to provide more current audited financial statements and MD&A of the accounting acquirer/legal acquiree in a Securities Act registration statement. In other words, the requirement to file audited financial statements and MD&A of the accounting acquirer/legal acquiree may be accelerated when a Securities Act registration statement is filed. (Last updated: 12/31/2011)

12230Change in Accountants

(Last updated: 6/30/2009)

12230.1Unless the same accountant reported on the most recent financial statements of both the registrant and the accounting acquirer, a reverse acquisition always results in a change in accountants. A Form 8-K filed in connection with a reverse acquisition should provide the disclosures required by S-K 304 under Item 4.01 of Form 8-K for the change in independent accountants, treating the accountant that no longer will be associated with the registrant’s financial statements as the predecessor accountant.

12230.2The disclosures required by S-K 304 with respect to any changes in the accounting acquirer’s auditor which occurred within 24 months prior to, or in any period subsequent to, the date of the accounting acquirer’s financial statements must be provided in the first filing containing the accounting acquirer’s financial statements.

12230.3In a reverse recapitalization with a shell company, any change in accountants during the two most recent fiscal years and interim period for the accounting acquirer must  be reported in the Form 8-K, as it is required by Item 14 of Form 10. Any change must be reported even if a successor accountant reaudits all of the periods of the financial statements contained in the Form 8-K.

12240Change in Fiscal Year

12240.1A Form 8-K filed in connection with a reverse acquisition should disclose under Item 5.03 of the Form 8-K any intended change in fiscal year from the fiscal year end used by the registrant prior to the acquisition.

12240.2A change in fiscal year end cannot result in the lapse in reporting any periods of financial statements for either the registrant or the operating company whose financial statements become those of the registrant after consummation of the acquisition.

12240.3For example, assume a reverse acquisition between 2 public reporting companies occurs on July 15. The legal acquirer has a July 31 year-end and the accounting acquirer has a December 31 year-end. The legal acquirer changed its year end to December 31 in conjunction with a reverse acquisition. The accounting acquirer should still file a Form 10-Q for the quarter ended June 30 even if it were technically eligible to file a Form 15 to cease its reporting prior to the due date of the Form 10-Q. Otherwise, there would be a lapse in periodic reporting for the accounting acquirer for the three and six months ended June 30. It is not sufficient to file a Form 8-K that includes these financial statements and related information.

The legal acquirer would continue to file all periodic reports as they become due for periods ending prior to the consummation of the merger. If the merger is consummated after the latest Balance Sheet date but prior to the due date of the latest periodic report, a subsequent events footnote to the financial statements should describe the reverse merger.

12240.4Transition Reports

(Last updated: 6/30/2011)

If the registrant adopts the fiscal year of the accounting acquirer (operating company): If the registrant continues the fiscal year of the legal acquirer (registrant):
  • If the accounting acquirer is a public reporting company, file periodic reports for periods ending prior to the consummation of the acquisition as they become due in the ordinary course of business. Starting with the periodic report for the quarter in which the acquisition was consummated, file reports based on the fiscal year of the accounting acquirer. Those financial statements would depict the operating results of the accounting acquirer, including the acquisition of the registrant (legal acquirer) from the date of consummation. This report should also include financial statements of the accounting acquirer for any subsequent interim periods that were not included in its S-X 3-05 financial statements previously filed on Form 8-K or 20-F, to avoid any lapses in reporting.
  • If the accounting acquirer is a private operating company, file a Form 8-K or 20-F if the original Form 8-K or 20-F filed for the reverse acquisition did not include audited financial statements of the accounting acquirer for the latest fiscal year end or quarter that already passed. The surviving entity should file the required information on an amended Form 8-K or 20-F within the time period specified in the appropriate annual or quarterly report form from the accounting acquirer’s fiscal year or quarter end.
  • For example, a legal acquirer has an 8/31 year end and the accounting acquirer has a 10/31 year end. The acquisition took place on 11/10/X5. The 8-K included financial statements of the accounting acquirer for the three years ended 10/31/X4 and interim period ended 7/31/X5. A Form 8-K or 20-F for the year ended 10/31/X5 should be filed to include the financial statements of the accounting acquirer for the year ended 10/31/X5, to avoid a lapse in reporting.
  • This would apply to both a shell reverse acquisition and a reverse acquisition between two companies that have a business.
If the accounting acquirer is also a public company, it should file all reports due for periods ending prior to the acquisition to avoid any lapses in reporting, despite its ability to file a Form 15.
  • File periodic reports for periods ending prior to the consummation of the acquisition as they become due in the ordinary course of business.
  • If the accounting acquirer also is a public company, it should file all reports due for periods ending prior to the acquisition to avoid any lapses in reporting, despite its ability to file a Form 15.
  • File a transition report on Form 10-K,
    10-Q or 20-F containing the audited financial statements of the accounting acquirer for the necessary transition period (generally, from the end of the accounting acquirer’s most recently completed fiscal year to the next following date corresponding with the end of a fiscal year of the legal acquirer). For example, a legal acquirer has a 7/31 FYE and an accounting acquirer has a 12/31 FYE. A seven month transition period would result and need to be filed on Form 10-K.
  • The transition report on Form 10-K is due no later than 90 days (45 days for transitional report on Form 10-Q) after the consummation of the acquisition for non-accelerated filers; and no later than 75 days for accelerated filers and 60 days for large accelerated filers (40 days for transitional report on Form 10-Q). The Form 10-Q for the combined entity should be filed within the required time period after the end of the quarter during which the acquisition was consummated (45 days for non-accelerated filers and 40 days for accelerated filers).
  • The transition report on Form 20-F for a transition period more than six months is due no later than six months after the consummation of the acquisition. The transition report on Form 20-F for periods of six months or less (but more than one month) is due no later than three months after consummation of the acquisition.
  • For both bullet points above, no transition report is required if the transition period is one month or less.

12250Auditor Issues

(Last updated: 6/30/2009)

12250.1Reverse Recapitalization with a Public Shell Company

  1. In a reverse recapitalization by a non-public company (accounting acquirer) with a public shell company, the financial statements of the accounting acquirer filed in the 8-K or 20-F must be audited by a public accounting firm registered with the PCAOB.
  2. The auditor of the accounting acquirer would need to be independent under PCAOB/SEC independence rules for all years required to be in the filing because the Form 8-K must contain Form 10 content, and Form 10 requires financial statements meeting the requirements of Regulation S-X. For Form 20-F, the auditor of an accounting acquirer that is a foreign private issuer must comply with SEC/PCAOB independence rules at least for the latest fiscal year as long as the auditor is independent in accordance with home-country standards for earlier periods. [S-X 2-01(f)(5)(iii)]

12250.2Reverse Acquisition with a Registrant that is Not a Shell Company

  1. Reverse acquisitions involving two operating companies in which the accounting acquirer is a non-public company may result in PCAOB/SEC auditor issues once the acquisition is consummated and the financial statements of the non-public company become those of the registrant.
  2. The auditor of the S-X 3-05 or S-X 8-04 financial statements of an accounting acquirer/legal acquiree that is a non-public company need not be registered with the PCAOB because the pre-consummation financial statements are not those of an issuer on the date of the filing. A nonregistered accountant could reissue its opinion on the pre-acquisition financial statements of the accounting acquirer after consummation of the acquisition. A nonregistered accountant could also audit a restatement of the accounting acquirer’s financial statements for periods ended prior to the consummation of the acquisition up until the date that the first periodic report is filed that contains post-merger financial statements. Once the post-acquisition financial statements are filed, a nonregistered accountant could not perform the work on the restatement of or retrospective application of a change in accounting principle in the pre-acquisition financial statements or otherwise update or dual date its report on those financial statements because those financial statements become the registrant’s financial statements on the date the post-acquisition financial statements are filed. (Last updated: 12/31/2011)
  3. After consummation of the acquisition, a PCAOB registered auditor must audit or review the post-acquisition financial statements of the registrant because the non-public company’s financial statements become the issuer’s financial statements.
  4. Normally, auditors of S-X 3-05 financial statements of non-public companies need not comply with the independence standards of the PCAOB or SEC as long as the auditors comply with the AICPA independence standards. However, after consummation of a reverse acquisition between two operating companies, the auditor of the registrant’s financial statements (previously those of the accounting acquirer) must be independent in accordance with PCAOB/SEC independence rules for all periods presented because the non-public company’s financial statements become the issuer’s financial statements. This may require a reaudit of prior period financial statements of the accounting acquirer. A registrant should consult with OCA in advance of the reverse acquisition if it believes there may be an independence issue between the auditor and the accounting acquirer under PCAOB/SEC rules.

For example: A public company that is not a shell merged with a private operating company on November 1, 20X1. Both companies have a December 31 year-end. The Form 8-K filed by the registrant included audited financial statements for the three years ended December 31, 20X0 and unaudited interim financial statements for the nine months ended September 30, 20X1 for the non-public operating company. The financial statements could be and were audited by a nonregistered accountant. The December 31, 20X1 Form 10-K would reflect the financial statements of the accounting acquirer for the three years ended December 31, 20X1, for which the auditor(s) must be independent under PCAOB/SEC rules for all years. A PCAOB registered accountant would need to audit the year ended December 31, 20X1 and future years and review any interim financial statements filed on Form 10-Q beginning in 20X2.

12260Registration and Proxy Statements for Mergers, Acquisitions and Similar Transactions

For purposes of applying the Item 14/Schedule 14A and Form S-4/F-4 financial statement requirements to a reverse acquisition transaction, follow the legal form of the transaction. For example, the accounting acquirer/legal target is the “target” for purposes of applying these rules, and Part C of Form S-4 or F-4 should be followed for the target company. This is due to the fact that the merger has not been consummated yet, so the additional disclosures required for an issuer do not yet apply to the legal target.

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