SEC committee recommends greater regulation of SPACs and Rule 10b5-1 plans
SPAC recommendations focus on disclosure, while Rule 10b5-1 recommendations include cooling-off periods, disclosure, Form 4 filings for non-U.S. companies
The Securities and Exchange Commission’s (the “SEC”) Investor Advisory Committee recently voted to send non-binding recommendations to the SEC that would require more disclosure by special purpose acquisition companies (“SPACs”). The committee also voted to approve recommendations that would impose greater restrictions on Rule 10b5-1 trading plans.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the committee, whose members come from outside the SEC, is authorized to submit findings and recommendations for review and consideration by the SEC. While the recommendations are only advisory, they provide some useful guidance as to areas the SEC might address in its proposed rulemakings. In its regulatory flexibility agenda, the SEC indicated that it could propose amendments to Rule 10b5-1 as early as October 2021, and to the rules governing SPAC disclosure by April 2022.
SPAC disclosure recommendations
In its recommendations, the committee advises the SEC to regulate SPACs more intensively by requiring enhanced focus and stricter enforcement of existing disclosure rules under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) in the following areas:
- Disclosure of the role of the SPAC sponsor (and/or insiders or affiliates such as celebrity sponsors/advisors), including disclosure of the sponsor's appropriateness, expertise, and capital contributions, as well as an overview of any potential conflicts of interest.
- Plain English disclosure in the SPAC registration statement (beyond mere financial footnotes) around the economics of the various participants in a SPAC process, including the “promote” (e.g., founder shares) paid and their impact on dilution sufficient to enable a retail investor to make a meaningful comparison of the upside potential and downside risks of a SPAC transaction compared to other SPACs as well as other types of investment opportunities.
- Disclosure that includes a clear description (with diagrams or charts as appropriate) in the SPAC registration statement of the mechanics and timeline of the SPAC process, including the precise nature of the instrument being purchased, the events required in the next two years for value appreciation of that instrument, and the details of the shareholder approval process at the time of de-SPAC (e.g., whether shareholders are permitted to vote for a deal while simultaneously redeeming their shares).
- Disclosure in the SPAC registration statement regarding the opportunity set and target company areas of focus, including a clearer discussion of the boundaries of the search area and attributes of acceptable and unacceptable companies and the ground rules for any changes to the search area.
- Disclosure regarding the competitive pressure and risks involved in finding appropriate targets and reaching market acceptable prices for those companies (i.e., disclosure beyond mere risk factors in the risk factor section of the SPAC registration statement), as well as disclosure regarding the absorption of expenses by the sponsor in the event there is not a successful de-SPAC transaction.
- Disclosure of the acceptable range of terms under which any additional funding (such as public investment in private equity, or “PIPEs”) might be sought at the time of acquisition/redemption.
- Disclosure regarding the manner in which the sponsor plans to assess the capability of potential targets to be a SEC-reporting company from a governance and internal control perspective, and whether the sponsor will take any steps to ensure the target can meet minimum preparedness/quality standards for operating as a public company.
- Disclosure about the minimum pre-de-SPAC diligence the sponsor will commit to regarding the accounting practices used by the target company, including audit history, use of GAAP and non-GAAP pro forma numbers, and audit committee (composition; communication between committee, auditor and management).
During his remarks before the committee meeting, SEC Chair Gary Gensler said he was particularly interested in strengthening disclosure regarding dilution.
Notably, these recommendations focus only on disclosure, and do not address arguably more difficult issues such as:
- Liability, including the liability of financial advisors and PIPE placement agents, that arise in connection with SPAC IPOs.
- Whether a SPAC should (or should not) be deemed an investment company under the U.S. Investment Company Act of 1940, the key argument in a recent lawsuit filed against Pershing Square Tontine Holdings.
The SEC could, of course, decide to address these and other issues on its own when it proposes its rule amendments.
Rule 10b5-1 recommendations
Gensler has also expressed concerns with Rule 10b5-1 under the Exchange Act as it currently stands. The rule provides affirmative defenses for corporate insiders and companies to trade in the company’s securities as long as they adopt their trading plans in good faith, before becoming aware of material non-public information.
The committee's recommendations for changes to Rule 10b5-1 include the following:
- Require a “cooling off" period of at least four months between the adoption or modification of a Rule 10b5-1 plan and the execution of the first trade under the newly adopted or newly modified plan.
- Do not allow overlapping plans (i.e., a single person or entity may not have more than one Rule 10b5-1 plan at a time).
- Require electronic submission of Form 144.
- Require enhanced public disclosure of Rule 10b5-1 plans, including:
- Proxy statement disclosure of the number of shares covered (i.e., scheduled for sale) under Rule 10b5-1 trading plans by each of the named executive officers.
- Proxy statement disclosure of the total number of shares covered (i.e., scheduled for sale) under “corporate” Rule 10b5-1 trading plans (i.e., Rule 10b5-1 plans established by the issuer itself for the purpose of selling treasury shares).
- Disclosure on Form 8-K of the adoption, modification, or cancellation of Rule 10b5-1 plans, and the number of shares covered, on a timely basis (i.e., change Form 8-K rules to include changes to plans by affiliates as material non-public information requiring an 8-K).
- Enhance disclosure of 10b5-1 trades, including the modification of Form 4 to include the following new, required fields:
- Checkbox to indicate whether a specific trade was pursuant to a Rule 10b5-1 plan.
- A new field to indicate the date of associated Rule 10b5-1 plan adoption or modification.
- Ensure all companies with any securities listed on U.S. exchanges (including ADRs and ADSs filing Form 20-Fs) are subject to Form 4 reporting requirements.
These recommendations are largely in line with the concerns that Gensler expressed earlier, which focused on cooling-off periods, plan cancellations, disclosure and multiple plans. The recommendation relating to Form 4 reporting requirements was not addressed by Gensler, however, and would be a significant change in reporting requirements for non-U.S. companies listed on U.S. exchanges.
We will continue to monitor developments with respect to the committee’s recommendations and welcome any queries you may have.