Middle Market M&A: Proposed 

Changes to Reg S-X Rule 3-05

Presented to

SEC Small Business Capital Formation Advisory Committee 

Matt Swartz

Partner 

Pillsbury Winthrop Shaw Pittman, LLP
The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

Matt Swartz background

• “Always thinks through everything from a reasonable market 

perspective of what’s fair.” Chambers USA, 2018

• 24 years as corporate, securities, M&A lawyer

• 100+ M&A transactions for buyers and sellers

• Practiced in Silicon Valley and Washington D.C.

• Served as director on corporate boards, including two with 

successful M&A exits

• Fun fact: Nebraska credentials!

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

Summarizing my view of the proposed changes to 

Reg. S-X 3-05 in one word...

Bravo!

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

Summarizing my view of the proposed changes to 

Reg. S-X 3-05 in two words...

Bravo, however...

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

Auction/“Managed Process”

• Typical middle market company sales process: “managed 

process”

• Which buyer has the most compelling offer? Factors:

o Price

o Certainty to close

• Does the buyer have the money?

• Reputation and speed to close

• Special requirements (e.g. CFIUS, audits)

• “Cultural fit”

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

General Types of Acquirors

• Private company

• Investment fund (private equity)

• Public company

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

Timing and certainty of closing, discretion

Type of Buyer Visibility of resources Audit-related 

condition/delay

Will the neighbors know 

in detail?

Private Company No No No

PE Fund By reputation No No

Small public company Yes Yes Yes

Big public company Yes No (usually) No (usually)

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

Target concerns about public company acquiror

• Is there a greater risk of not closing?

• Yes if small public company acquiror (likely to meet significance 

tests)

• No if large public company acquiror (because significance test 

likely not met)

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

The burden

• Regulation S-X 3-05 financial statement requirement:

o For small companies acquisition targets, obtaining audited financial 

statements impose expense and a delay

o Delay = uncertainty

o Uncertainty makes a bidder less competitive

o The expense and uncertainty of audits required make smaller public 

companies:

• Less appealing acquirors for targets

• Less able to grow by acquisition (because targets prefer other buyers)

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

Will proposed 3-05 Rule changes make it better?

• Yes, by diminishing the likelihood of a “significance” determination 

(revised tests) and the burden on targets (changes to target financial 

statement requirements)

• Particularly good change: Allowing IPO companies to omit pre- acquisition target financial statements where already included in 

consolidated financial statements for one year. 

• Will the changes make small public companies more competitive 

acquirors? Yes, probably. But they are still at a disadvantage 

compared to other common buyers.

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

A good step. what else could the Commission do?

• Move farther away from the audit requirement of “significant” 

targets, place more emphasis on detailed pro-forma information and 

explanation: relevance vs. reliability.

• Acquisitions by private equity funds have increased significantly 

over the last 15 years, while IPOs, particularly small IPOs, have 

declined significantly.

• Study the financial diligence of successful private equity firms: 

these successful acquirors do not always require audited financial 

statements from targets that don’t already have them

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The views represented here are those of the presenter and not 

necessarily those of Pillsbury Winthrop Shaw Pittman, LLP

Thank you!

• Thank you for having me as your guest,

• Thank you for your service to our country and dedication to sound 

capital markets, and

• Thank you for the thoughtful reform that the Commission has 

proposed.

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