The Securities and Exchange Commission’s Division of Corporation Finance has updated its Financial Reporting Manual, a guidebook intended to help SEC staff review compliance with reporting and disclosure rules. Although primarily intended for internal use, the updates serve as a resource for compliance officers, corporate counsel, and other who need to keep abreast of filing expectations.
Among the changes and clarifications included in the October 2014 update:
Transactions that Result in a Foreign Private Issuer Ceasing to be a Shell Company
A foreign private issuer may cease to be a shell company as a result of a reverse acquisition or merger. In this situation, the transaction, including financial statements of the other party to the transaction, must be reported on a Form 20-F within four business days of completion. The Form 20-F that is filed must include the same information as a registration of securities on Form 20-F.
If the foreign private issuer shell company engages in a transaction that causes it to lose its status as a foreign private issuer at the same time it ceases to be a shell company, reports filed or furnished during the remainder of the fiscal year may continue to be made using forms and requirements applicable to foreign private issuers.
‘Backdoor’ Listings by Foreign Companies
Foreign companies sometimes obtain a “backdoor” listing through a reverse recapitalization with a U.S. public shell. Even though substantially all of the operations are conducted outside of the U.S., the registrant would not be considered a foreign private issuer. In this situation, the transaction, including financial statements of the foreign company, must be reported on a Form 8-K within four business days of completion. The Form 8-K that is filed must include the same information as a registration of securities on Form 10.
The update specifies that the financial statements included in the Form 8-K must be prepared using U.S. GAAP for all periods presented, including those prior to the reverse recapitalization. Financial statements prepared using IFRS, as issued by the IASB or in a home-country GAAP reconciled to U.S. GAAP, are not be acceptable.
Predecessor Financial Statements
After an acquisition, financial statements of the predecessor should be included in Forms 10-K and 10-Q for the required comparative periods before the acquisition, in addition to those of the registrant. After the acquisition of a business by a special-purpose acquisition company registrant (SPAC), the financial statements of the registrant for periods prior to the acquisition may not ned to be included in Forms 10-K and 10-Q once the financial statements include the period in which the acquisition or recapitalization was consummated. Generally, these financial statements would also not be required in cases in which the registrant had only nominal income statement activity.
Nature of Real Estate Operations
The new guidance also addresses when a registrant acquires an equity interest in a pre-existing legal entity (such as a partnership, LLC, or corporation) that only holds real estate under lease and related debt, financial statements of the underlying property meeting the requirements of S-X 3-14 should be provided instead of S-X 3-05 financial statements if the acquisition is significant.
When a registrant acquires an equity interest in a pre-existing legal entity that engages in other activities, such as property management or development, financial statements of that entity meeting the requirements of S-X 3-05 generally are required if the acquisition is significant. A registrant should consult with the Office of Chief Accountant to the extent it believes S-X 3-14 financial statements are more appropriate due to the limited degree of operations other than leasing real estate. If S-X 3-14 financial statements are more appropriate due to the limited degree of operations other than leasing real estate, financial statements are required if the 10 percent or more significance level is met.
A complete explanation of these and other changes can be found here.
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