SEC Adopts New Rules Applicable to SPACs, Shell Companies and Projections

We previously noted in our March 31, 2022 alert that the U.S. Securities and Exchange Commission (SEC or Commission) held an open meeting on March 30, 2022 to consider proposed rules and amendments regarding special purpose acquisition companies (SPACs), shell companies, and projections disclosure. The proposed rules garnered substantial commentary throughout the SPAC, general business, and legal communities. Members of our SPAC practice submitted a comment letter to the SEC in response to the request for comment on the proposed rules and participated in an ABA subcommittee that submitted such a comment letter.

On January 24, 2024, the Commission met and adopted final rules by a 3-2 vote. 

The final rules were largely similar to the proposed rules except the final rules do not require: 

• The adoption of proposed Securities Act Rule 140a (the Statutory Underwriter Rule) that would have deemed anyone who has acted as an underwriter of the SPAC securities and takes steps to facilitate a de-SPAC transaction, or any related financing transaction or otherwise participates (directly or indirectly) in the de-SPAC transaction to be considered an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act such that the liability protections provided in traditional underwritten IPOs would apply to de-SPAC transactions; and 
• The adoption of proposed Rule 3a-10 which would have provided a safe harbor (the ICA Safe Harbor) from the definition of “investment company” under Section 3(a)(1)(A) of the Investment Company Act of 1940 (ICA) for SPACs that meet certain conditions. 

The Statutory Underwriter Rule and ICA Safe Harbor were the subject of substantial criticism from members of the SPAC business and legal community, including whether the SEC had sufficient statutory authority to adopt such rules. In the final rule release, the SEC opted to publish guidance in lieu of new rulemaking (i) to assist SPACs in determining whether they meet the definition of an investment company under the ICA and (ii) regarding whether statutory underwriter status under the Securities Act of 1933 (Securities Act) applies in de-SPAC transactions.

The remainder of the final rules were adopted substantially as proposed. Such rules include, among other items:

• Requirements for additional disclosures, including additional disclosures about SPAC sponsor compensation, conflicts of interest, dilution, the target company, and other information.
• In certain situations, the target company in a de-SPAC transaction shall be a co-registrant with the SPAC and assume responsibility for the disclosures in the de-SPAC registration statement.
• Any business combination transaction involving a reporting shell company, including a SPAC, shall be deemed a sale of securities to the reporting shell company’s shareholders.
• Make the liability safe harbor in the Private Securities Litigation Reform Act of 1995 (PSLRA) for forward-looking statements, such as projections, unavailable in filings by SPACs, and certain other blank check companies.

Background 

A SPAC is a “blank check” company formed for the purpose of engaging in a merger or other business combination with one or more operating businesses. SPAC sponsors typically have significant investing, financial, and/or operating experience, often with deep knowledge and contacts in a target industry. SPACs raise capital in a firm commitment initial public offering (IPO), typically by selling units composed of redeemable shares and warrants. The proceeds raised in the IPO are held in trust for the benefit of the IPO investors and are released to the combined company upon the consummation of a business combination or to the IPO investors in the event the SPAC is liquidated without consummating a business combination. SPACs typically have between 12-24 months to complete their initial business combination. 

From the perspective of a private company, a SPAC business combination represents an alternative way to go public. By engaging in a business combination with a SPAC, many private companies have been able to raise substantial amounts of capital beyond what could be raised in a traditional IPO and become public companies on their own schedule. From a transaction execution standpoint, a SPAC business combination combines elements of a public company M&A transaction and a traditional IPO. A private company combines with the SPAC in a merger or other business combination transaction. In most cases, the former private company stockholders own a majority of the combined company’s shares following completion of the business combination. 

Over the past few years, the U.S. public securities markets experienced a surge in the number of IPOs by SPACs. This rapid increase raised investor protection concerns regarding various aspects of the SPAC structure and the increasing use of shell companies as mechanisms for private operating companies to become public companies more generally. The surge in de-SPAC transactions also raised concerns about the use of projections, particularly with respect to pre-revenue private operating companies. As the SPAC market has grown, some commentators have also questioned whether some SPACs may be investment companies and therefore should be subject to the requirements of the ICA. 

In adopting the final rules, Chairman Gensler reiterated that the Commission feels that investors in de-SPAC transactions should have the traditional protections available in an IPO and that the adopted rules are meant to largely align with the “time tested” protections available in an IPO. In their dissents, Commissioners Peirce and Uyeda questioned whether the rules are intended to “impose crushingly burdensome regulations on SPACs as a form of merit regulation in disguise” to eliminate SPACs as a viable alternative for capital raising and going public.

Adopted Rules

Following the open meeting on January 24, 2024, the Commission adopted final rules involving a number of rule amendments related to SPACs, which are summarized in the SEC Fact Sheet and discussed below. 

A. Enhanced Disclosures and Enhanced Investor Protection

• Deeming the target company an issuer that must sign a Securities Act registration statement filed by a SPAC (or other shell company) in connection with a de-SPAC transaction, which means the target company’s officers and directors assume responsibility for the disclosures in the registration statement and are subject to liability under Section 11 of the Securities Act.
• Requiring additional disclosures under new Series 1600 of Regulation S-K regarding, among other things:
  • The compensation paid to SPAC sponsors (including the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters (which includes a description of any related adjustment mechanisms), and the price paid or to be paid for such securities), including a related statement on the outside front cover page of the prospectus with a cross reference and similar information included in the prospectus summary;
  • Any transfers or arrangements related to the transfer of SPAC securities by the SPAC sponsor or others and descriptions of any agreement, including any payments, between the SPAC sponsor and unaffiliated security holders of the SPAC regarding redemptions;
  • Description of any material terms of agreements regarding restrictions on when the SPAC sponsor and its affiliates may sell SPAC securities;
  • Description of any material potential or actual conflicts of interest;
  • Dilution related disclosures, including on the outside front cover disclosure in tabular format at quartile intervals based on redemption percentage thresholds, the offering price, net tangible book value per share and the difference between the offering price and net tangible book value per share;
  • Description of the background, material terms and effects of the de-SPAC transaction;
  • Disclosure of any report, opinion or appraisal from an outside party or unaffiliated representative materially relating to the determination of the board of directors that the de-SPAC transaction is advisable or the fairness of the de-SPAC transaction; and
  • Additional disclosures regarding any determination by a board of directors or similar body as to whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, if required by law.
• Requiring a 20-calendar day minimum dissemination period for prospectuses and proxy and information statements filed for de-SPAC transactions where consistent with local law.
• Requiring a re-determination of smaller reporting status following a de-SPAC transaction prior to making its first Commission filing (other than the Form 8-K with Form 10 information) beginning 45 days after the consummation of the de-SPAC transaction. Public float is measured within four business days after the de-SPAC transaction and annual revenues of the target company as of the most recently completed fiscal year reported in the Form 8-K.

B. Enhanced Protections in Shell Company Business Combinations 

• New Rule 145a provides that any business combination of a reporting shell company (that is not a business combination related shell company) involving another entity that is not a shell company, is deemed to involve an offer, offer to sell, offer for sale, or sale within the meaning of Section 2(a)(3) of the Securities Act.
• Revisions to Regulation S-X governing financial statement requirements applicable to transactions involving shell companies and private operating companies to generally align disclosures with those in IPOs. 

C. Enhanced Projections Disclosure

• An amended definition of “blank check company” to make the liability safe harbor in the PLSRA for forward-looking statements, such as projections, unavailable in filings by SPACs and certain other blank check companies.
• Disclosure requirements related to projections, including disclosure of the material bases and assumptions of projections. 
• Additional guidance on the use of projections in all SEC filings. 

D. Guidance Related to the Concept of “Distribution” within Section 2(a)(11), the Statutory Definition of an Underwriter and Applicability of the Investment Company Act of 1940

• The SEC provided additional guidance regarding the concept of a “distribution” within Section 2(a)(11) in the context of a de-SPAC transaction, noting that as a result of the transaction, public shareholders of the SPAC become owners of the combined operating company and are therefore distributed. The SEC also adopted Rule 145a which deems there to be a sale from the combined company to the SPAC’s existing shareholders even in de-SPAC structures where the target is not selling or distributing its own securities. 
• The Commission provided additional guidance on the statutory definition of an underwriter, noting “it is insufficient to conclude that a person is not an underwriter solely because he did not purchase securities from an issuer with a view to their distribution. It must also be established that the person is not offering or selling for an issuer in connection with the distribution of the securities, does not participate or have a direct or indirect participation in any such undertaking, and does not participate or have a participation in the direct or indirect underwriting of such an undertaking.” The SEC noted in a de-SPAC distribution, there would be an underwriter present where someone is selling for the issuer or participating in the distribution of securities in the combined company to the SPAC’s investors and the broader public and could be considered a statutory underwriter even though not named as an underwriter in any offering and may not be engaged in activities typical of a named underwriter in traditional capital raising. 
• The SEC provided its views on the facts and circumstances that are relevant to whether a SPAC meets the definition of an investment company under the ICA to assist SPACs in analyzing their status. The SEC noted that, depending on the facts and circumstances, a SPAC could be an investment company at any stage of its operation. The SEC noted specific facts that should be considered include an examination of the nature of SPAC assets and income, management’s activities, duration of the SPAC prior to entering into a de-SPAC agreement and closing the de-SPAC, whether the SPAC holds itself out in a manner that suggests investors should invest in its securities primarily to gain exposure to its portfolio of securities prior to the de-SPAC, and whether the SPAC merges with an investment company. 

Effective Date

The final rules become effective 125 days after publication in the Federal Register. Compliance with the structured data requirements that require tagging of information in Inline XBRL will be required 490 days after publication of the final rules in the Federal Register.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.