April 1, 2021

Corp Fin’s “SPAC” Statement: All That Glitters Is Not Gold

Yesterday afternoon, Corp Fin issued this “Staff Statement” to highlight accounting, financial reporting & governance issues that they want people to carefully consider before taking private companies public via a SPAC. Acting Chief Accountant Paul Munter also issued this statement to further emphasize the complex financial reporting & audit considerations that come into play with these transactions. These statements are being made at the Staff level and aren’t approved by the Commission, but they underscore that people at the SEC think the SPAC frenzy warrants caution.

Corp Fin’s statement points out that private companies need to thoroughly lay the groundwork for going public – even if they’re not doing it via a traditional IPO. Here are a few (paraphrased) reasons why:

– Financial statements for the acquired business must be filed within four business days of the completion of the business combination pursuant to Item 9.01(c) of Form 8-K. You aren’t entitled to the 71-day extension of that Item.

– The SPAC – and the combined company – need adequate expertise, books & records and internal controls to be able to meet reporting deadlines, satisfy the form & content requirements of financial statements, adopt accounting standards that may not have applied when private, understand “predecessor” implications, and generally ensure that they’re providing timely & reliable reporting

– The combined company will need to continue to satisfy quantitative & qualitative listing standards – e.g., the SPAC may lose round lot holders during the business combination; the private operating company may not have in place adequate independent director oversight, appropriate audit committee expertise, or a code of ethics

In addition, the Staff wants everyone to understand that going the SPAC route means that the combined company will be more restricted in future capital raising transactions. For example, for 3 years following the business combination, they’ll be an “ineligible issuer” (no WKSI status, no FWPs, etc.) – and also during that 3-year period, they won’t be able to incorporate by reference on Form S-1.

These limitations on capital raising aren’t new rules – they’re really just saying that the more recent “fast track” alternatives aren’t available to former shells. But they bear emphasis with the business crowd who are excited about a fast deal now and will be decidedly less excited about a slow deal later. Do yourself a favor and put it in writing!

ESG: Pru Previews Progress Before Annual Meeting

Prudential has been one of the ongoing leaders in sustainability disclosure. In late 2019, the company adopted a “multi-stakeholder” focus – and in 2020, it used its sustainability report to share progress under that framework. This year, we’re getting an even earlier look at some of Pru’s most impactful metrics – via this first-of-its-kind “summary ESG report” that was posted to the company’s sustainability page last week. It’s 18 pages long – and gives details on:

– The status of the Company’s Global Environmental Commitment’s operational and investment targets.

– Employees’ race/ethnicity and gender by job category, including preliminary EEO-1 data for 2020.

– Actions taken to support the Company’s nine commitments to racial equity, including disclosure of our diversity talent goals, which will serve as a baseline to illustrate our progress going forward.

– Disclosure of the Company’s gender and pay equity results.

The report was posted the same day the company filed its proxy statement. As usual, the proxy statement is very fulsome – and on page 58, it gives details on the “diversity modifier” that’s mentioned in the ESG summary as a way the company is supporting its commitment to racial equity. Although the company typically doesn’t post its full sustainability report until May/June, the ESG summary report provides key info to investors and other stakeholders in advance of the annual meeting on May 11th.

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Liz Dunshee