SEC Proposes Rule Amendments Regarding SPACs, Shell Companies, and Projections
On March 30, 2022, the SEC issued a rule proposal aimed at improving investor protections in connection with both initial public offerings made by special purpose acquisition companies (SPAC) and in the potential corresponding business combination event, referred to commonly as a “de-SPAC” transaction.
According to the proposed rule, in 2020 and 2021, more than half of all initial public offerings were conducted by SPACs. This led to concerns about the level of disclosure surrounding sponsor compensation, conflicts of interest, due diligence, and de-SPAC transactions. The proposed rule aligns with guidance and comments made by the SEC in recent months about expanded disclosure, including their December 9, 2021 prepared remarks.
The proposed rules look to improve investor protections by:
- Requiring specialized disclosure requirements related to compensation paid to sponsors, conflicts of interest, dilution, and the fairness of de-SPAC transactions
- Addressing adequate levels of care through underwriter liability and target co-registration
- Amending financial statement requirements
- Establishing a safe harbor under the Investment Company Act of 1940 for SPACs that meet certain conditions
The proposed rules would require expanded disclosure at various stages of the SPAC process and across related filings. Sample disclosure items include:
- The nature and amounts of all compensation that has or will be awarded to, earned by, or paid to the sponsor, its affiliates, and any promoters for all services rendered in all capacities to the SPAC and its affiliates, as well as the nature and amounts of any reimbursements to be paid to the sponsor, its affiliates and any promoters upon the completion of a de-SPAC transaction
- A description of material potential sources of future dilution following a SPAC’s initial public offering, as well as tabular disclosure of the amount of potential future dilution from the public offering price that will be absorbed by non-redeeming SPAC shareholders, to the extent quantifiable
- A statement as to (1) whether it reasonably believes the de-SPAC transaction and any related financing transaction 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
- Plain English disclosures on the prospectus cover would include, among other things, the time frame for the SPAC to consummate a de-SPAC transaction, redemptions, sponsor compensation, material financing transactions, and conflicts of interest
- Information useful to investors to assess the bases of financial projections used in de-SPAC transactions and determine to what extent they should rely on such projections
Underwriter Liability & Target as Co-Registrant
In an effort to motivate certain parties to exercise an adequate level of care, the proposed rule would deem anyone who has acted as an underwriter of the SPAC securities and assists in facilitating a de-SPAC transaction to be an underwriter in the de-SPAC transaction.
The proposed rules would deem the target in a de-SPAC transaction to be a co-registrant when a SPAC files a registration statement for a de-SPAC transaction, thereby making the target and its signing persons subject to liability under Section 11 of the Securities Act as signatories to the registration statement.
Financial Statement Updates
The SEC states their view is that “the manner in which a company goes public should not generally result in substantially different financial statement disclosures being provide to investors.” In this connection, the proposed rule will more closely align financial statement reporting in de-SPAC transactions with those of traditional IPOs.
1940 Act Safe Harbor
The proposed rule would provide a safe harbor from the definition of “investment company” under the Investment Company Act for SPACs that satisfy certain conditions that limit a SPAC’s duration, asset composition, business purpose, and activities.
Where the proposal stands
This rule is in the public comment phase, and the release specifies multiple areas and topics on which they are seeking the industry’s input. The comment period ends on the latter of 30 days after publication in the Federal Register or May 31, 2022 (which is 60 days from the date of the Proposal).
Compliance considerations for SPAC sponsors
Whether SPACs are a passing fad or a lasting form of taking companies public, firms sponsoring SPACs need to consider several operational and compliance considerations. Download our white paper to explore the many concerns asset managers should keep in mind when sponsoring a SPAC.
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