TheCorporateCounsel.net

If you don’t work with SPACs, you may be thinking that you can ignore the SPAC rule changes that the SEC adopted last week. Sadly, that is not the case. In his dissenting statement, Commissioner Uyeda cautioned that the part of the adopting release that provides guidance on “investment company” determinations is broadly applicable. Here’s an excerpt:

All types of issuers – not just SPACs – should pay heed to this guidance because the framework for investment company status determinations could have implications for an operating company that temporarily derives income from investment securities. Would a pharmaceutical company that takes more than 12 or 18 months to bring a drug to market suddenly find itself primarily engaged in the business of investing in securities? While targeted at SPACs, the knock-on effects of this guidance could raise serious legal and compliance issues across a wide array of issuers. Part of the Commission’s obligation under the Administrative Procedure Act requires that an administrative agency provide due notice of what is being proposed. With respect to this guidance, that did not occur.

Commissioner Uyeda included an addendum to his statement that further criticizes the guidance. In particular, he takes issue with using an arbitrary 12- or 18-month timeframe as a factor in whether SPACs that have not completed a business combination need to register as investment companies. He makes this prediction, which doesn’t seem too far-fetched (especially for SPACs that hold “investment securities”):

As a practical matter, when faced with such strong language, issuers and their legal counsels will need to weigh the risk that the bright line duration limits set forth in the guidance will be used as a basis to bring enforcement actions.

– Liz Dunshee