On September 14, 2011, the staff of the Division of Corporation Finance issued a new form of guidance titled CF Disclosure Guidance: Topic No. 1 "Staff Observations in the Review of Forms 8-K Filed to Report Reverse Mergers and Similar Transactions." Of all the various forms of informal guidance that the Division of Corporation Finance issues, this guidance will be very helpful to companies because it provides helpful tips on how to prepare disclosures in some fairly narrow circumstances. It should be noted that this guidance is for informational purposes only and is not a rule, regulation or statement of the SEC, and the SEC has neither approved nor disapproved its content. This guidance will likely be the first of a series with more topics to come.

In this guidance, the staff summarizes common comments cited by the staff when reviewing Forms 8-K filed to report reverse mergers and similar transactions by which companies cease to be shell companies. The most common comments regard the specific disclosure requirements of Items 2.01, 5.01 and 9.01 of Form 8-K and the information required by Form 10. For Item 2.01, the Division reminds companies that the term "acquisition" includes every purchase, acquisition by lease, exchange, merger, consolidation, succession or other acquisition, and therefore, these transactions must be disclosed. Also, if the company was a shell company, as defined in Rule 12b-2 under the Exchange Act, immediately before the transaction, it must include the information that would be required if it were filing a Form 10 under the Exchange Act in its Form 8-K. Like Item 2.01, the staff points out that Item 5.01 has the same requirement, but for a change in control as opposed to an acquisition.  

The guidance gives helpful information regarding several topics from Item 9.01:  

  • Companies that are small business issuers are reminded to include two years of audited financial statements and interim financials for acquired companies, while other companies include three years of audited financials and interim financials.
  • Pro forma financial information should include an explanation of how the company has accounted for the reverse merger or similar transaction.
  • Shell companies must include the financial statements and pro forma financial information required by Item 9.01 in the initial Form 8-K report.
  • Companies are also reminded that when documents are presented in a language other than English, the company must also file a translation into English in accordance with Exchange Act Rule 12b-12(d).

Finally, the guidance also gives tips for the information included in Form 10:

  • Companies should enhance their disclosure about post-transaction business by distinguishing between current activities and planned activities; explaining how a company generates, or intends to generate, revenue; and clearly disclosing holding company structures and control arrangements.
  • Companies should tailor individual risk factors to their specific facts and circumstances.
  • In presenting the Management's Discussion and Analysis of Financial Condition and Results of Operations, companies should identify any significant elements of historical income or loss that will not continue in the company's post-transaction operations in addition to the other required disclosures.
  • With regards to directors and executive officers, companies should discuss the specific experiences, qualifications, attributes or skills that led to the conclusion that those people named as directors should serve as directors of the post-transaction company; the amount of time each executive officer, if part-time, devotes to the company's business; and the details of any formal agreements under which the part-time executive officer allocates time to the company – all for a period of 10 years.
  • In addition to providing the summary compensation table for the appropriate period of time, companies must provide similar information for the acquired company's most recently completed fiscal year, describe the posttransaction compensation arrangements for their executive officers and directors, and disclose the material terms of employment agreements.
  • Item 404(d) of Regulation S-K in the context of the requirements of a Form 10 regarding certain relationships and related transactions should cover the two fiscal years preceding the registrant's last fiscal year, in addition to the period(s) specified in the Item, and companies should reconcile the information they describe elsewhere in their filings with the disclosure requirements of Item 404.
  • Companies should describe the standards they use to qualify directors as independent.
  • Companies should comply with Item 701 of Regulation S-K disclosure requirements with regards to recent sales of unregistered securities.