SEC Proposes New Rules for SPACs

On March 30, the Securities and Exchange Commission (SEC) introduced new rules and amendments governing initial public offerings by special purpose acquisition companies (SPACs) and business combination transactions involving shell companies, such as SPACs, and private operating companies. If adopted, the rules would bring SPACs more in line with traditional practices for initial public offerings (IPO), particularly by amending safe harbor rules and leaving SPACs open to investor lawsuits for unrealistic earnings projections.

According to the SEC’s Fact Sheet, the proposed new rules and amendments would, among other things:

• Enhance disclosures and provide additional investor protections in SPAC initial public offerings and in business combination transactions between SPACs and private operating companies (de-SPAC transactions):
  • New disclosure requirements on sponsors, target companies, conflicts of interest and dilution;
  • Additional disclosures for de-SPAC transactions, with respect to the fairness of the transaction, and a requirement that the private company be a co-registrant;
  • Provides for the re-determination of smaller reporting company status within four days following the de-SPAC;
  • Amends the definition of “blank check company” to remove the liability safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statements, in filings by SPACs; and
  • Provides that when certain conditions are met, the underwriters of the SPAC offering be deemed the underwriters in the subsequent de-SPAC transaction.
• Deems the treatment, under the Securities Act of 1933, of business combination transactions involving a reporting shell company and a private company to constitute the sale of securities to the reporting shell company’s shareholders. Further amends the financial statement requirements for the private company to align with those required in an IPO;
• Provides additional guidance on the use of projections in SEC filings to allow investors to better assess the reliability and basis of the projections ; and
• Addresses the status of SPACs as “investment companies” under the Investment Company Act of 1940.  Further provides that a SPAC compliant with the rule’s conditions on market assets, surviving entity business and de-SPAC completion timing would not need to register as an investment company under the Act.

In SEC Chair Gary Gensler’s published remarks, he stated:

“For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations. Today’s proposal would help ensure that these tools are applied to SPACs.”

Commissioner Allison Herren Lee’s published remarks included this statement:

“The complexity and the novelty of the SPAC structure have yielded a host of questions, including whether shareholders have adequate insight into the compensation, incentives, and potential conflicts related to the SPAC sponsors, whether the absence of traditional investor protections and liability, or at least uncertainty about their application at the de-SPAC stage, leaves shareholders vulnerable.”

In a dissenting statement, Commissioner Hester M. Peirce said:

“The proposal—rather than simply mandating sensible disclosures around SPACs and de-SPACs, something I would have supported—seems designed to stop SPACs in their tracks. The proposal does not stop there; it also makes a lot of sweeping interpretations of the law that are not limited in effect to the SPAC context.”

The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

For additional information about the proposed rules, contact us.

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