The U.S. Securities and Exchange Commission (“SEC”) recently proposed a set of new rules regulating special purpose acquisition companies (“SPACs”) that will essentially make SPAC transactions more in line with traditional initial public offerings (“IPOs”) in terms of disclosure, marketing, and issuer obligations. According to SEC Chair Gary Gensler, since SPACs present an alternative method to go public from traditional IPOs, the proposed rules are representative of Aristotle’s famous maxim to “treat like cases alike” in terms of investor protection.
A SPAC, also known as a blank-check company, is typically a shell company that is organized for the purpose of merging with or acquiring one or more unidentified target companies (a “de-SPAC transaction”) within a certain time frame (often two years) that conducts an initial public offering of $5 million or more in units consisting of redeemable shares and warrants.
If adopted, the proposed rules would require SPAC financial statements to be more closely aligned with the financial statements required in registration statements for initial public offerings. Specifically, the SEC’s proposed rules would:
- Require additional disclosures about the sponsor(s) of the SPAC, including the sponsors’ compensation, potential conflicts of interest, and dilution, including a statement concerning whether the de-SPAC transaction and any related financing transaction are fair or unfair to investors;
- Require that disclosure documents in de-SPAC transactions be disseminated to investors at least 20 calendar days in advance of a shareholder vote on the merger;
- Subject a target company and its signatories to liability under Section 11 of the Securities Act for an IPO registration statement filed by a SPAC;
- Require that any business combination of a public shell company with a non-shell company entity be deemed a “sale” to the shell company’s shareholders for the purposes of the Securities Act;
- Require a company to re-determine whether it qualifies as a smaller reporting company following a SPAC business combination, prior to its first SEC filing;
- Deem any SPAC underwriter who takes steps to facilitate a de-SPAC transaction, or any related financing transaction, to be engaged in a distribution and to be an underwriter in the de-SPAC transaction; and
- Remove the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995 (PSLRA) for SPACs, including with respect to fiscal projections of target companies, by amending the definition of a “blank check company” to encompass SPACs.
The SEC noted that a number of factors may have prompted the proposed changes, including relatively poor returns for investors in companies following a de-SPAC transaction; inadequate disclosures about potential benefits, risks, and effects for investors; a lack of information about the potential benefits for the sponsor and other affiliates of the SPAC; and inadequate disclosures about potential conflicts of interest between sponsors and retail investors. The SEC expects the proposed new rules to improve the usefulness and clarity of the information provided to investors and to provide investors with improved and potentially earlier access to more consistent, comprehensive, and readily comparable information to enable them to make more informed voting, investment, and redemption decisions in connection with SPAC transactions.
The proposed rules surrounding disclosure, marketing, and issuer obligations could also address concerns raised by the Council of Institutional Investors Research and Education Fund, which has previously pointed out the disconnect that exists between the interests of investors and the interests of SPAC sponsors, who can be handsomely rewarded simply for closing a deal, regardless of the viability of the newly public company as a long-term investment.
On the other hand, the proposal is viewed by some as unduly stifling. Dissenting commissioner Hester Peirce stated that “[t]he proposal—rather than simply mandating sensible disclosures around SPACs and de-SPACs, something I would have supported—seems designed to stop SPACs in their tracks.” She added that “[t]he typical SPAC would not meet the proposal’s parameters without significant changes to its operations, economics, and timeline.”
The proposed amendments are currently open for public comment until May 31, 2022. Comments may be submitted electronically at https://www.sec.gov/rules/proposed.shtmlor via email torule-comments@sec.gov. Submissions should reference File Number S7-13-22. If comments are sent via email, this file number should be included on the subject line of the email.