The SEC announced rule proposals on March 30th intended to enhance disclosure and investor protection in special purpose acquisition companies’ initial public offerings and de-SPAC transactions. Check out the 372-page proposing release and three-page fact sheet.
The SEC is pitching the proposal as a way to level the playing field between SPACs and traditional IPOs, which SEC Chair Gary Gensler emphasized in his statement on the proposal. This excerpt from the fact sheet summarizes the additional disclosure and investor protections for SPAC IPOs and de-SPACs that would be put in place under the proposed rules:
– Enhanced disclosures regarding, among other things, SPAC sponsors, conflicts of interest, and dilution;
– Additional disclosures on de-SPAC transactions, including with respect to the fairness of the transactions to the SPAC investors;
– A requirement that the private operating company would be a co-registrant when a SPAC files a registration statement on Form S-4 or Form F-4 for a de-SPAC transaction;
– A re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction;
– An amended definition of “blank check company” to make the liability safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statements, such as projections, unavailable in filings by SPACs and certain other blank check companies; and
– A rule that deems underwriters in a SPAC initial public offering to be underwriters in a subsequent de-SPAC transaction when certain conditions are met.
The proposal also would add Rule 145a, which provides that a business combination involving a reporting shell company and another entity that is not a shell company constitutes a “sale” of securities to the reporting shell company’s shareholders, and would establish a nonexclusive Investment Company Act safe harbor for SPACs that enter into a de-SPAC agreement within 18 months of their IPO and complete the deal within 24 months.
The proposed rules about the fairness of the transaction would require disclosure similar to that required in going private deals and are intended to incentivize sponsors to shape the transaction process in a more investor-favorable way.
The biggest news in the rule proposal is probably the loss of the Private Securities Litigation Reform Act safe harbor for projections in de-SPAC transactions, which is something the Staff has telegraphed was coming for a long time. The extension of Section 11 liability to the de-SPAC target and the potential the IPO underwriters might face Section 11 liability for the de-SPAC, however, are also significant. Tulane University’s Ann Lipton has a Twitter thread with insights on some of the issues raised by the proposal.
SPACs’ status under the ICA has been another hot topic in recent months, and the safe harbor approach came as a bit of a surprise to me in light of the publicly expressed views of William Birdthistle, head of the SEC’s Division of Investment Management. Frankly, if the SEC wanted to drive a stake through the heart of SPACs, this could have been the place to do it.
Commissioner Hester Peirce once again dissented from the SEC’s decision, essentially arguing the SEC came to bury SPACs, not regulate them. She said the rules would impose “a set of substantive burdens that seems designed to damn, diminish and discourage SPACs because we do not like them, rather than elucidate them so investors can decide whether they like them.”
As per the new normal for comment periods, this one expires 30 days after publication in the Federal Register or May 31st, whichever is later.
— John Jenkins, DealLawyers.com, March 31, 2022
