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SEC Proposes New SPAC Disclosure Rules
04/05/2022On March 30, 2022, the Securities Exchange Commission (“SEC”) published its long-awaited proposed rules and rule amendments applicable to special purpose acquisition companies (“SPACs”) for comment by May 31. The stated purpose of the proposed rules, which would impose significant changes to the rules affecting SPACs, is to “more closely align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for an initial public offering.” If adopted in their current form, the proposed rules would:- Increase disclosure requirements relating to SPAC sponsors, conflicts of interest, dilution of shareholder interests, and de-SPAC transactions generally, including with respect to the presentation of projections of future economic performance in SPAC business combination transactions. For example, the proposed rules would require SPACs to:
- expressly state whether they believe the proposed de-SPAC transaction and any associated financing (including a PIPE transaction) is fair or not to unaffiliated public investors; and
- describe the bases for that opinion in reasonable detail, including valuations of the private company, projections, third-party opinions and the dilutive effect on common shareholders of the de-SPAC and any financing transactions.
- Eliminate safe harbor protection under the PSLRA for projections (and other forward-looking statements) in SPAC mergers.
- Deem SPAC IPO underwriters to also be underwriters of a subsequent de-SPAC transaction if they are involved in the de-SPAC process as a financial advisor, placement agent, or other role relevant to the completion of the transaction, which would subject the underwriters to increased liability under the securities laws. The SEC release also asserts that “other parties that perform activities necessary to the successful completion of de-SPAC transactions,” such as financial advisors and PIPE investors, could be “statutory underwriters” even if they did not underwrite the SPAC IPO.
- Create a safe harbor to prevent SPACs from being considered investment companies under the Investment Company Act of 1940. The criteria include: (1) maintenance of assets comprising only cash items, government securities, and certain money market funds; (2) seeking to consummate a de-SPAC transaction where the surviving entity is primarily engaged in the business of the target company; and (3) entering an agreement with a target to engage in a de-SPAC transaction within 18 months of the SPAC’s IPO and completing the transaction within 24 months of the IPO.
- Impose additional registration and disclosure requirements on target companies, including: (1) a re-determination of smaller reporting company status within four days of shareholder approval, and (2) requiring the target to co-register with the SPAC on the Form S-4 or F-4 such that the target would be a seller for purposes of liability under Section 11 of the Securities Act.
- Extend Securities Act liability to a business combination transaction involving a reporting shell company and non-shell company by defining the transaction as a sale of securities to the reporting shell company’s shareholders. Under the rules, SPACs would be considered “reporting shell companies.”
