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SEC Proposes Rules to Enhance Disclosures and Investor Protections Relating to Special Purpose Acquisition Companies (SPACs)


On March 30, 2022, the Securities and Exchange Commission (“SEC”) proposed new rules and amendments (collectively, the “Proposed Rules”) aimed at enhancing disclosure and investor protection in initial public offerings (“IPOs”) by special purpose acquisition companies (“SPACs”) and in business combination transactions involving shell companies, such as SPACs, and private operating companies.  The full text of the Proposed Rules can be viewed here.

Background

In recent years, public securities markets in the U.S. have seen an unprecedented increase in the number of IPOs by SPACs. The rapid growth has heightened investor protection concerns about certain elements of the SPAC structure and the increasing use of shell companies as mechanisms for private operating companies to become public companies while avoiding certain safeguards built into the IPO process (sometimes referred to as “de-SPAC transactions”). The surge in SPAC IPOs has also renewed concerns about the use of projections, particularly with respect to business combination transactions in which projections about private operating companies may lack a reasonable basis. At the same time, concerns have arisen about whether some SPACs may be “investment companies” that are subject to the requirements of the Investment Company Act of 1940 (the “Investment Company Act”).

The Proposed Rules reflect an effort to address the ongoing concerns raised in previous SEC guidance regarding SPACs and de-SPAC transactions by proposing to codify at least a portion of the considerations set forth in such guidance.  More specifically, the Proposed Rules contemplate a number of new and revised disclosure requirements and other protection mechanisms, which, combined with additional proposed guidance and interpretive rules, are meant to address such concerns.

Enhanced Disclosures and Investor Protections

The Proposed Rules would add new Subpart 1600 of Regulation S-K, which would require enhanced disclosures and provide additional investor protections in SPAC IPOs and de-SPAC transactions, including:

  • Additional disclosures about the SPAC sponsors, potential conflicts of interest, and dilution;
  • Additional disclosures on de-SPAC transactions, including a requirement that the SPAC state (1) whether it reasonably believes that the de-SPAC transaction and any related financing transactions are fair or unfair to investors, and (2) whether it has received any outside report, opinion, or appraisal relating to the fairness of the transaction; and
  • Certain disclosures on the prospectus cover page, and in the prospectus summary of registration statements filed in connection with SPAC IPOs and de-SPAC transactions.

Additionally, in an effort to align the companies’ disclosures and legal obligations in de-SPAC transactions more closely with those in traditional IPOs, the Proposed Rules would also:

  • Amend the registration statement forms and schedules filed in connection with de-SPAC transactions to require additional disclosures about the private operating company;
  • Require that disclosure documents in de-SPAC transactions be disseminated to investors at least 20 calendar days in advance of a shareholder meeting or the earliest date of action by consent, or the maximum period for disseminating such disclosure documents permitted under the laws of the jurisdiction of incorporation or organization, if such period is less than 20 calendar days;
  • Deem a private operating company in a de-SPAC transaction to be a co-registrant of a registration statement on Form S-4 or Form F-filed by a SPAC with respect to a de-SPAC transaction (making the private operating company and its signing persons subject to liability under Section 11 of the Securities Act of 1933 (the “Securities Act”) as signatories to the registration statement);
  • Amend the definition of smaller reporting company to require a re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction;
  • Amend the definition of “blank check company” to include SPACs and certain other blank check companies for purposes of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), such that the safe harbor for forward-looking statements under the PSLRA would not be available to SPACs, including with respect to projections of target companies seeking to access the public markets through a de-SPAC transaction; and
  • Add a new Rule 140a, which deems anyone who has acted as an underwriter of the securities of a SPAC and takes steps to facilitate a de-SPAC transaction, or any related financing transaction or otherwise participates (directly or indirectly) in the de-SPAC transaction, to be engaged in a distribution and to be an underwriter in the de-SPAC transaction.

Business Combinations Involving Shell Companies

In an effort to provide the shareholders of a reporting shell company with more consistent Securities Act protections, regardless of transaction structure, the Proposed Rules would apply to the following:

  • By a new Rule 145a, deem that a business combination transaction 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 for purposes of the Securities Act; and
  • Through a new Article 15 of Regulation S-X, better align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for IPOs.

Projections Disclosures

The Proposed Rules would amend Item 10(b) of Regulation S-K to expand and update the SEC’s guidance on the presentation of projections of future economic performance in SEC filings to allow investors to better assess the reliability of the projections and whether they have a reasonable basis.  More specifically, amended Item 10(b) would state:

  • Any projected measures that are not based on historical financial results or operational history should be clearly distinguished from projected measures that are based on historical financial results or operational history;
  • It generally would be misleading to present projections that are based on historical financial results or operational history without presenting such historical measure or operational history with equal or greater prominence;
  • The presentation of projections that include a non-GAAP financial measure should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it is most closely related, and an explanation why the non-GAAP financial measure was used instead of a GAAP measure; and
  • The guidance applies to any projections of future economic performance of persons other than the registrant, such as the target company in a business combination transaction, that are included in the registrant’s SEC filings.

Additionally, in order to allow investors to better assess the basis of projections when they are used in SPAC business combination transactions, proposed Item 1609 of Regulation S-K would require the following disclosures:

  • With respect to any projections disclosed by the registrant, the purpose for which the projections were prepared and the party that prepared them;
  • All material bases of the disclosed projections and all material assumptions underlying the projections, and any factors that may materially impact such assumptions (including a discussion of any factors that may cause the assumptions to no longer be reasonable, material growth rates or discount multiples used in preparing the projections, and the reasons for selecting such growth rates or discount multiples); and
  • Whether the disclosed projections still reflect view of the board or management of the SPAC or target company, as applicable, as of the date of the filing; if not, then discussion of the purpose of disclosing the projections and the reasons for any continued reliance by the management or board on the projections.

Status of SPACs under the Investment Company Act

Lastly, the Proposed Rules would address the status of SPACs as “investment companies” under the Investment Company Act, by providing a safe harbor from such registration for SPACs that satisfy certain conditions that limit a SPAC’s duration, asset composition, business purpose and activities. A SPAC that fully complies with the conditions would not need to register as an investment company under the Investment Company Act.

To qualify under the proposed safe harbor provision, a SPAC would need to:

  • Maintain assets comprising only cash items, government securities, and certain money market funds;
  • Seek to complete a de-SPAC transaction after which the surviving entity will be primarily engaged in the business of the target company; and
  • Enter into an agreement with a target company to engage in a de-SPAC transaction within 18 months after its IPO and complete its de-SPAC transaction within 24 months of such offering.

Comments on the Proposed Rules are due 30 days after publication in the Federal Register or May 31, 2022, whichever is later.


For additional information related to anything contained in this alert, please contact one of the authors listed, or any member of our Securities Law Practice Group.

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