Magazine article The CPA Journal

SEC Streamlines Disclosure Requirements Relating to Significant Business Acquisitions

Magazine article The CPA Journal

SEC Streamlines Disclosure Requirements Relating to Significant Business Acquisitions

Article excerpt

The SEC has adopted amendments to, among others, Rule 3-05 of Regulation S-X. The final rules, which are significantly less stringent than the proposed rules, address the difficulty in providing the required financial information pertaining to business acquisitions in a registration statement. In short, information relating to acquired companies is less likely to be required, and if it is required, it may not have to be provided as soon as before.

When unable to meet the financial statement requirements for an acquisition to be included in a registered public offering, companies have been seeking alternative means of financing. The SEC has expressed concern, however, about abusive practices associated with certain of those financings, in particular offshore securities offerings pursuant to Regulation S. By reducing the requirements for presenting audited financial statements of an acquired company in a registration statement, the new rules are intended to enable more companies to turn to the public markets to meet their financing needs. The SEC believes that easing the requirements for acquisitions will therefore reduce abusive practices related to alternate financings, especially those under Regulation S.

Requirements Relaxed in 1933 Ad Registration Statements

Previously, audited financial statements of businesses acquired or to be acquired were required to be included in 1933 Act registration statements before a company could proceed with a registered offering. However, registrants filing periodic reports under the 1934 Act were permitted to file audited statements of significant acquired businesses on Form 8-K up to 75 days after the transaction date. This inconsistency prevented 1934 Act reporting companies from a public offering of their securities if the financial statements of a target business were not available at the time of the 1933 Act registration. With this release, the SEC has conformed the rules for separate financial statements to be included in a 1933 Act registration statement to the 1934 Act requirements.

With certain exceptions, a registration statement may now be declared effective without including the separate financial statements of the target company, unless those statements had previously been filed with the SEC. In most cases, a registrant will not have to include financial statements for probable

business acquisitions, or for business acquisitions that were consummated 74 or fewer days before the registered offering of securities. The separate financial statements would be required in a subsequent 1934 Act filing, most likely on Form 8-K. "Blank Check" companies, as defined in Rule 419 of Regulation C, are not eligible for this relief.

The financial statements of probable acquisitions and recently acquired companies would continue to be required when the significance of the target company exceeds 50%, using the tests that have previously been established. Registrants may choose to include the financial statements of businesses below the 50% significance level on a voluntary basis. The SEC chose to omit the "readily available" criterion for including the financial statements during the 75 day period. The SEC reasoned that "readily available" provides so much discretion it is unlikely to result in a more prompt filing, and is likely to result in inconsistent application. The SEC believes the revised rules will be less subjective in their application.

The current relief for registered offerings that are not primarily of a capital raising nature and certain private placements is unchanged. For example, the offerings listed in the Instructions to Item 7 of Form 8-K may go forward without the financial statements of the acquired businesses, regardless of the level of significance, until 75 days following the acquisition.

The new rules also affect small business issuers (SBIs) and proxy statements. SBIs do not have to include the financial statements of acquired companies when the effective date of the registration statement is no more than 74 days after consummation of the business combination. …

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