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Earlier this year, the NYSE submitted a proposed rule change to the SEC that would extend the period during which a SPAC that hasn’t completed a deSPAC can remain listed on the Exchange, if that SPAC has entered into a definitive agreement for its deSPAC.  On Tuesday, the SEC issued a release instituting proceedings to determine whether or not to approval the rule proposal.  While the SEC stressed that it hasn’t determined whether or not to approve the rule, this excerpt from the release suggests it’s heading toward a “thumbs down” of the NYSE’s proposal in its current form:

The Exchange has proposed a fundamental change to the well-established requirement that a SPAC’s Business Combination must be consummated within three years or face delisting, and is seeking to extend this time requirement to allow up to 42 months for a SPAC to complete its Business Combination if the SPAC has entered into a “definitive agreement” to consummate its Business Combination.20 In support of the proposed change, the Exchange states that once a definitive agreement is entered into, a SPAC “represents a significantly different investment” because more information will be available to investors about the operating asset the SPAC intends to own.

The three-year limit, however, was put in place to provide protection for public shareholders by restricting the time period a SPAC could retain shareholder funds without consummating a Business Combination. The Exchange does not address how the proposal would affect shareholder protection or why it is appropriate for a SPAC to retain shareholder funds past the current maximum time period of three years and how that would be consistent with the investor protection and public interest requirements of Section 6(b)(5) of the Act.

Accordingly, the Commission believes there are questions as to whether the proposal is consistent with Section 6(b)(5) of the Act and its requirements, among other things, that the rules of a national securities exchange be designed to protect investors and the public interest and whether the Exchange has provided an adequate basis for the Commission to conclude that the proposal would be consistent with Section 6(b)(5) of the Act.

The SEC also points out that the proposal to extend the listing raising concerns under the Investment Company Act, since the SEC noted in the adopting release for its SPAC disclosure rules that SPACs that hang around for an extended period with their assets invested primarily in securities start to look an awful lot like investment companies, and that this concern grows greater the longer it takes for a SPAC to complete a deSPAC deal.

– John Jenkins