Enhanced Disclosures and Protections: SEC’s Latest Move on SPAC IPOs and Transactions
The Securities and Exchange Commission (SEC) has adopted new rules to enhance investor protections in Special Purpose Acquisition Company (SPAC) Initial Public Offerings (IPOs) and de-SPAC Transactions.
SPACs have surged in popularity in recent years as an alternative to traditional IPOs and as a method for private companies to access public markets by combining with SPACs instead of selling their equity securities in a traditional IPO.
A sharp increase in the volume of SPACs organized by sponsors to raise capital that would be used to acquire or merge with unidentified target companies, led the SEC to raise concerns about the adequacy of disclosures provided to SPAC investors with respect to their IPOs and subsequent acquisitions of target companies, commonly known as de-SPAC transactions. Those concerns include, among others, the adequacy of disclosures regarding sponsor compensation, conflicts of interest, the effects of dilution in de-SPAC transactions and the ability of SPACs to provide operating company projections directly to investors in a de-SPAC transaction. Traditionally, this was a key difference between de-SPAC transactions and traditional IPO’s because the safe harbor provisions available to SEC registrants under the Private Securities Litigation Reform Act of 1995 (PSLRA) do not apply to statements made by private companies in an IPO.
The SEC adopted final rules addressing these concerns on January 24, 2024. The rules, along with a fact sheet highlighting key aspects and their objectives, are available at www.sec.gov. The new rules and amendments broadly align the protections afforded to investors in SPAC IPOs and de-SPAC transactions with those that apply in a traditional IPO, in part, by having amended the definition of what is considered a “blank check” company. The amended definition of a “blank check” company makes the safe harbor provisions under the PSLRA unavailable to SPACs.
The final rules respond to concerns raised by the SEC in proposed rules released in March 2022. The proposed rules aimed to enhance protections for investors by requiring SPACs and target companies to provide greater transparency in their filings about potential risks associated with investing in SPACs and de-SPAC transactions.
In large part, the proposed rules were centered around an intention to provide SPAC investors with the same protections that investors receive in registrations of securities that are subject to the Securities Act of 1933. A central tenet of the final rules is the SEC’s view that shareholders of a reporting shell company, including any SPAC, should receive the same disclosures and protections under the Securities Act of 1933 in a de-SPAC transaction because there is a fundamental change in the nature of their investment when a business combination occurs with another entity that is not a shell company.
Key aspects of the final rules principally include:
- Requirements on the part of SPACs to provide investors with enhanced disclosures about sponsor compensation, conflicts of interest, dilution and a determination, if any by a SPAC’s board of directors, as to whether a de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders.
In connection with de-SPAC transactions, SPACs will now be required to provide a minimum of 20 calendar days as the dissemination period for the distribution of proxy materials to security holders and re-determine whether they qualify for smaller reporting company status at time of a de-SPAC transaction.
Business combination transactions involving a reporting shell company, including a SPAC, will be considered a sale of securities to the reporting shell company’s shareholders. Further, the target company will now be considered a co-registrant in a de-SPAC transaction, thereby subjecting the target company to the requirements of the Securities Act of 1933 as a signatory to a registration statement.
The number of years of financial statements applicable to target companies that would be considered predecessors in a SPAC business combination reported in a Form S-4, F-4 and proxy or information statement, will now be aligned to the financial statement requirements that would apply to a private business completing a traditional IPO of its equity securities.
SPACs will still be permitted to furnish investors with target company projections in de-SPAC filings; however, SPACs and target companies will have to comply with enhanced disclosure requirements that would provide investors with greater transparency about the material elements of any projections, including significant assumptions, without the availability of safe harbor protections under the PSLRA.
The Commission did not adopt a proposed rule to clarify that anyone who acts as an underwriter in a SPAC IPO and participates in a distribution of securities associated with a de-SPAC transaction would be deemed an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act. As a practical matter, there are no changes to any rules as to who may be considered an underwriter in any distribution of securities. Nonetheless, co-registration requirements imposed upon private operating companies going public through a de-SPAC transaction means that they would be acting as an issuer engaged in a sale of their own equity securities and as such, the requirements of offerings conducted under the Securities Act of 1933 would apply to all involved.
The final rules will be published in the Federal Register and will become effective 125 days after publication. Compliance with the structured data requirements, which require tagging of information disclosed pursuant to new subpart 1600 of Regulation S-K in Inline XBRL, will be required 490 days after publication of the rules in the Federal Register.
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