On September 14, 2011, the SEC issued guidance regarding the filing of Forms 8-K to report transactions by which companies listed on U.S. exchanges cease to be shell companies, such as reverse merger transactions. This type of guidance is the first of its kind, and arises in connection with proposed rule changes concerning going public through reverse mergers (as we discussed in August 2011), a method used by many Chinese companies criticized for fraud and accounting irregularities (as we discussed in June 2011, July 2011 and August 2011).
The guidance is aimed at enhanced disclosures commonly requested by the SEC’s Division of Corporation Finance when reviewing Forms 8-K. With respect to Forms 8-K, the SEC reminds reporting companies that were shell companies immediately prior to the transaction in question to:
- include information that would be required if the reporting company were filing a Form 10 in its Form 8-K, including specific information regarding any change of control and the acquisition or disposal of a large amount of assets other than in the ordinary course of business; and
- provide historical financial statements of private businesses acquired through reverse mergers.
With respect to the information contemplated by Form 10, the SEC reminds reporting companies to improve disclosures regarding post-transaction:
- operations (e.g., how the company will general revenue and be structured and controlled); and
- directors and officers, including their business experience, backgrounds and allocation of time to the business.
OUR TAKE: U.S. regulators are running parallel paths to safeguard investors in connection with transactions by which private companies go public in the U.S. through shell companies, including proposed rule changes, reporting guidance and audit pressure. Issuers should pay close attention to rule changes and SEC guidance when contemplating the mechanics and reporting associated with reverse merger and similar transactions. Investors should continue to be vigilant in evaluating the companies in which they desire to invest.