On January 24, 2024, the Securities and Exchange Commission (SEC) adopted final rules intended to better protect investors in initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and in their subsequent de-SPAC transactions.
A SPAC is a vehicle created by a sponsor organization to publicly raise funds via a SPAC IPO. The purpose is to form a registered shell company to acquire a private operating company. The operating company then becomes the registrant (de-SPAC).
A surge in SPAC activity in 2020, 2021 and 2022 was largely driven by the perception that the SPAC process is quicker and more cost-effective than the traditional IPO route.
The SPAC market has recently faced numerous challenges, including complexities of certain accounting matters, potential conflicts of interest with sponsor organizations, and scrutiny of operating forecasts and projections. Projections often included in the registration statements for SPACs are generally not permissible in the registration statements for a traditional IPO.
The new rules are intended to temper excessively optimistic projections promised to investors. Financial statement requirements will be more aligned with those in traditional IPOs.
In its announcement about of the adoption of the new rules, the SEC stated: “Given the complexity of these transactions, the Commission seeks to enhance investor protection in SPAC IPOs and de-SPAC transactions with respect to the adequacy of disclosure and the responsible use of projections."
“Just because a company uses an alternative method to go public does not mean that its investors are any less deserving of time-tested investor protections,” said SEC Chair Gary Gensler. “Today’s adoption will help ensure that the rules for SPACs are substantially aligned with those of traditional IPOs, enhancing investor protection through three areas: disclosure, use of projections, and issuer obligations. Taken together, these steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions.”
The new requirements include:
- More enhanced disclosures about SPAC sponsor compensation.
- Disclosures around conflicts of interest involving the SPAC’s sponsor team and any target company parties.
- Dilution impacts investors may see as a result of the de-SPAC.
- More background information about the target company.
- Certain other disclosures (for example, timing of transaction and board of directors’ discussions) that are important to investors in de-SPAC transactions and SPAC IPO’s.
- In certain cases, the SEC will require the target company to sign the registration statement filed by a SPAC. This makes the target company a co-registrant, and thus it will assume responsibility for the disclosures in the registration statement.
- Projections of financial information must have a reasonable basis and should include information about the purpose of the forward-looking information, key assumptions utilized to prepare such projections.
- The new rules also require re-determination of smaller reporting company status right after completion of the de-SPAC transaction before filing of the first SEC filling rather than waiting for the annual re-determination period.
What This Means for Companies
Prepare for Enhanced Disclosure Requirements: Companies must be ready to disclose more comprehensive information about their financial health, business plans, and potential conflicts of interest. This includes a detailed analysis of the assumptions behind financial projections as previously mentioned.
Review Legal Liabilities: Particularly for entities involved in de-SPAC transactions, it is crucial to understand the new legal liabilities that come with being a co-registrant, as these could impact both SPACs and target companies.
The rules become effective 125 days after publication in the Federal Register.
The adoption of these rules illustrates the SEC’s increased interest and scrutiny over such transactions during the past few years. It will be interesting to see if they have an impact on the number of SPAC and de-SPAC transactions in the future.
Weaver’ Public Company Practice Group provides audit, tax and advisory services to public companies of all sizes from smaller reporting companies to large accelerated filers, and across a broad spectrum of industries. For assistance with preparing for these new rules or other information about our SPAC services, contact us.
Authored by Zeeshan Khan, Robert Deaton, and Phil Ilgenstein.