S-X Rule 3-05

Financial statements for acquired businesses

Summary

S-X Rule 3-05

Requires audited financial statements for a significant acquisition of a business that has closed, or as soon as the acquisition becomes probable, subject to a significance test
Applies to registration statements for public offerings or US listings (but not annual reports)
S-X Rule 11-01 generally requires pro forma financial information in the registration statement for the most recent fiscal year and most recent interim period

1996 amendment

Conformed rules for Securities Act registration statements to Exchange Act requirements
Previously, inability to obtain audited financials of target on a timely basis often led issuers to resort to unregistered offshore offerings

Business defined

Defined in S-X Rule 11-01(d) to include an operating entity or business unit, but excludes machinery and other assets that do not generate a distinct profit or loss stream
Acquisitions of related businesses are treated as a single acquisition for purposes of the significance tests
Businesses are considered related if they are owned by a common seller, under common management, or their acquisitions are conditional upon each other or a single common event

Probable defined

Means more likely than not
SEC Staff has taken the view that an acquisition becomes probable upon the signing of a letter of intent

Significance defined

Significance of an acquired business is evaluated under
S-X Rule 1-02(w) based upon three criteria

The amount of the issuers investment in the acquired business compared to the issuers total assets;
The total assets of the acquired business compared to the issuers total assets; and
The pre-tax income of the acquired business compared to the issuers pre-tax income;
in each case, based on the issuers most recent audited financial statements

If the acquired business exceeds 20% of any of the three significance criteria, then one year of audited financial information is required, as well as the interim financial information that would be required for the issuer
If it exceeds 40%, then two years of audited and interim financial information is required
I it exceeds 50%, three years of audited and interim financial information is required

SEC Rule

S-X Rule 3-05

Summary

Also referred to in Forms 10-K / 10-Q,
generally by reference to prior filings on Form 8-K

Rule generally requires separate audited target financials if consummation of a business combination has occurred or is probable

Rule is fully applicable where the registered securities are being offered to target's securityholders

Otherwise, extent of required financials is determined by use of a modified significant subsidiary test

If acquisition hasn't been consummated
If "final date" is no more than 74 days after consummation
*Not available, if target is a 50% significant subsidiary
*Not available, if registrant is a Rule 419 "blank check" company
Instead, file target financials on Form 8-K within 75 days of consummation
Rule 3-05(b)(4)