March 31, 2022

SPACs: SEC Rule Proposal Seeks to Level Playing Field with Traditional IPOs

Yesterday, the SEC announced rule proposals intended to enhance disclosure and investor protection in SPAC initial public offerings and in de-SPAC transactions. Here’s the 372-page proposing release & here’s the 3-page fact sheet. The SEC is pitching the proposal as a way to level the playing field between SPACs & traditional IPOs, which SEC Chair Gary Gensler emphasized in his statement on the proposal. This excerpt from the fact sheet summarizes the additional disclosure & investor protections for SPAC IPOs & de-SPACs that would be put in place under the proposed rules:

– Enhanced disclosures regarding, among other things, SPAC sponsors, conflicts of interest, and dilution;

– Additional disclosures on de-SPAC transactions, including with respect to the fairness of the transactions to the SPAC investors;

– A requirement that the private operating company would be a co-registrant when a SPAC files a registration statement on Form S-4 or Form F-4 for a de-SPAC transaction;

– A re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction;

– An amended definition of “blank check company” to make the liability safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statements, such as projections, unavailable in filings by SPACs and certain other blank check companies; and

– A rule that deems underwriters in a SPAC initial public offering to be underwriters in a subsequent de-SPAC transaction when certain conditions are met.

The proposal would also add a new Rule 145a, which provides that a business combination 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. The proposal also addresses the status of SPACs under the Investment Company Act and would establish a non-exclusive “safe harbor” for SPACs that, among other things, enter into a de-SPAC agreement within 18 months of their IPO & complete the deal within 24 months following the IPO.

The proposed rules about the fairness of the transaction would require disclosure similar to that required in going private deals and, like the going private rules, are intended to incentivize sponsors to shape the transaction process in a more investor-favorable way.  The biggest news in the rule proposal is probably the loss of the PSLRA safe harbor for projections in de-SPAC transactions, which is something that the Staff has telegraphed was coming for a long time.  However, the extension of Section 11 liability to the de-SPAC target & the potential that the IPO underwriters might also face Section 11 liability for the de-SPAC are also significant. As usual, Tulane’s Ann Lipton has a Twitter thread that’s full of insights on some of the issues raised by the proposal

SPACs’ status under the Investment Company Act has been another hot topic in recent months, and the safe harbor approach came as a bit of a surprise to me in light of the publicly expressed views of the current head of the SEC’s Division of Investment Management. Frankly, if the SEC wanted to drive a stake through the heart of SPACs, this could have been the place to do it.

Commissioner Peirce once again dissented from the SEC’s decision, essentially arguing that the SEC came to bury SPACs, not to regulate them. She states that the rules would impose “a set of substantive burdens that seems designed to damn, diminish, and discourage SPACs because we do not like them, rather than elucidate them so that investors can decide whether they like them.”

As per the new normal for comment periods, this one expires 30 days after publication in the Federal Register or May 31, 2022, whichever is later.

John Jenkins