The SEC’s Division of Corporation Finance recently issued “CF Disclosure Guidance: Topic No. 1” summarizing the Division’s frequent comments on Form 8-K reports fi led by shell companies (i.e. a SEC registered reporting company that has no or nominal operations and assets (excluding cash and cash equivalents)) to report reverse mergers and similar transactions by which they cease to be shell companies.4
Generally, in a “reverse merger,” a shell company acquires a private operating company, with the result that the operating company becomes a public company. The combined company is required to fi le a Form 8-K report, sometimes referred to as a “Super 8-K,” within four business days after completion of the acquisition. The Form 8-K is required to provide the same information that would be required in a Form 10—in other words, the kind of fulsome disclosure that would be required if the operating company was fi ling a Form S-1 registration statement.
Frequent comments of the SEC include:
- The need for three years of audited fi nancial statements of the operating company (two years if the combined company is a smaller reporting company) and unaudited fi nancial statements for the most recently completed quarter as well as pro forma fi nancial statements of the combined companies;
- Enhancing disclosure about the post-transaction business of the combined company;
- Tailoring individual risk factors to the combined company’s specifi c facts and circumstances;
- Identifying in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) any signifi cant elements of historical income or loss that will not continue post-closing;
- Increasing disclosure about new directors and offi cers of the combined companies, including the specifi c experiences, qualifi cations, attributes and skills that led to their selection, part-time status, if applicable, and details of any formal agreements under which they allocate their time, and any involvement in certain legal proceedings during the last 10 years;
- Enhancing disclosure about compensation awards, practices and policies, including post-closing compensation arrangements for executive offi cers and directors and the material terms of any employment agreements. In addition, a summary compensation table must be provided for the shell company for the appropriate period of time and for the acquired company’s most recently completed fi scal year;
- Providing related party transaction disclosures for the last three completed fi scal years and the current fi scal year;
- Describing the standards used to determine whether directors are independent; and
- Disclosure about recent sales of unregistered securities.
These SEC comments serve as a useful reminder of key points to be covered in a “Super 8-K.”