SPAC Audit Considerations After the 2024 SEC Final Rules

A special purpose acquisition company has two audit lives. First it is a shell with a trust account and a short list of transactions. Then it merges with an operating business, and the audit file suddenly has a target company, a registration statement and a different group of readers. On January 24, 2024, the SEC adopted final rules that changed who answers for the disclosure in that second stage. For a CPA firm, they change the questions to settle at engagement acceptance, the target's financial statement work and the timetable.

What the final rules do

The SEC's fact sheet on the rules describes four main moves.

1. More disclosure. The rules require additional disclosure about SPAC sponsors, sponsor compensation, conflicts of interest, dilution and the target company, in both SPAC IPOs and de-SPAC transactions. They also require disclosure of any board determination on whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, if required by law, and of any outside report, opinion or appraisal received that materially relates to the transaction.
2. Target as co-registrant. In certain situations, the target company in a de-SPAC transaction must be a co-registrant with the SPAC or another shell company. The target thus becomes an issuer that signs the Securities Act registration statement and takes responsibility for its disclosure.
3. Shell business combinations are sales of securities. New Rule 145a provides that a direct or indirect business combination of a reporting shell company, other than a business combination related shell company, with an entity that is not a shell company is deemed to involve an offer or sale within the meaning of Section 2(a)(3) of the Securities Act. The rules also align the financial statement requirements for transactions involving shell companies and private operating companies with those in traditional IPOs.
4. Projections. The rules define "blank check company" for purposes of the Private Securities Litigation Reform Act, which makes that Act's safe harbor for forward-looking statements unavailable to blank check companies including SPACs. In de-SPAC transactions, they require disclosure of all material bases of the projections and all material assumptions underlying them, and they update the SEC's guidance on projections in all filings.

Other provisions set a minimum 20-calendar-day dissemination period for prospectuses and proxy or information statements filed for de-SPAC transactions where consistent with local law, and a re-determination of smaller reporting company status after consummation, reflected in filings beginning 45 days after the de-SPAC closes. The SEC also provided guidance on when a SPAC may meet the definition of an investment company under the Investment Company Act of 1940 and on statutory underwriter status.

The rules took effect on July 1, 2024. Compliance with the Inline XBRL tagging requirements for new subpart 1600 of Regulation S-K runs on a longer schedule, 490 days after the rules' publication in the Federal Register, and the tagging mechanics are covered in Inline XBRL tagging review for small filers.

What this means for the audit teams

The SPAC audit

The shell's audit has few accounts, and the risk sits in the few. The trust account balance, the sponsor and related-party arrangements, deferred underwriting amounts and the classification of shares that holders can redeem are where the file's evidence needs to be strongest. The disclosure rules put sponsor compensation, conflicts of interest and dilution in the registration statement, so the related-party work should be built to support those statements. See related party transactions and ASC 850 related party disclosures.

The target's financial statements

Aligning financial statement requirements with traditional IPOs means the target's audit file should be built as an IPO file from the start, with the periods, scope and opinions a first-time registrant needs. See S-1 financial statement requirements for first-time registrants for the structure that applies. A target audit planned only to private-company scope fails that test.

Co-registrant status

When the target co-registers, its officers and directors sign a registration statement that includes the financial statements. The audit firm that signs the target's report should expect an engagement conversation about what the target's management now represents, and about timing, since the report appears in a document with the target's own liability attached. Document in the engagement letter which entity is the client, who is responsible for each part of the registration statement and who instructs the firm.

Projections

Projections are management's, and the rules require the registration statement to disclose their material bases and assumptions. An auditor's work does not extend to the projections unless an engagement says so, and the file should record that distinction. Where the firm is asked to look at a projection model, the scope, if agreed, belongs in a separate engagement letter.

Timetable

The 20-calendar-day minimum dissemination period for de-SPAC prospectuses and proxy statements, where consistent with local law, sets the last date by which the audited statements and consents must be final. Counting backward from the shareholder meeting, the report date, consent and any subsequent-events procedures need to fit before the document is sent.

A worked timeline

Tidewater Acquisition Corp, a SPAC, signs a merger agreement with Northfield Robotics, a private company. The parties plan a shareholder meeting on a Thursday.

• Day 0 (meeting). Shareholder meeting.
• Day minus 20. The latest date the proxy statement and prospectus can be sent to meet the 20-calendar-day minimum.
• Day minus 25. Target audit report, auditor consent and final statements signed off, leaving five days for filing and printing.
• Day minus 40. Draft statements and subsequent events inquiry plan reviewed with Northfield's management.
• Day minus 60. Engagement letter signed with Northfield as co-registrant, covering the periods it must present.

The dates work backward from the meeting, not forward from the last audit procedure.

Smaller reporting company status after closing

The rules require a SPAC's smaller reporting company status to be re-determined following the de-SPAC, and the result reflected in filings beginning 45 days after consummation. A combined company that was scaled as a SPAC may face a different disclosure set after closing. The audit firm for the combined company should confirm status early because it governs which financial statement rules apply. See smaller reporting company and emerging growth company definitions.

Where CORAA fits

CORAA prepares ready-to-review audit files for US CPA firms, including trust account roll-forwards, related-party schedules and period maps. The firm keeps the client, the review and the signature. See /us.

Sources

• SEC, Fact Sheet: SPACs, Shell Companies, and Projections: Final Rules: https://www.sec.gov/files/33-11265-fact-sheet.pdf
• SEC, Special Purpose Acquisition Companies, Shell Companies, and Projections (final rule page): https://www.sec.gov/rules-regulations/2024/01/s7-13-22

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error