SEC proposal aims to make SPACs more like traditional IPOs
In the past few years, U.S. listings by way of a business combination following the initial public offering (“IPO”) of a special purpose acquisition company (“SPAC”) and a private operating company have become an increasingly popular alternative to the traditional IPO, with SPAC IPOs raising more than $240 billion to finance such acquisitions in 2020 and 2021 and accounting for more than half of all SEC-registered IPOs during that period, according to the U.S. Securities and Exchange Commission (the “SEC”). The SEC has proposed new rules that seek to level the playing field between going public by way of a traditional IPO versus by way of a de-SPAC transaction and, in so doing, potentially limit significantly the continued appeal of this recent capital markets phenomenon.
Among other things, the proposal would make the following changes:
- Projections – Clarify that the statutory safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) would not be available for forward-looking statements (such as projections regarding the target or the combined business) made in connection with a de-SPAC transaction.
- Underwriter definition – Deem any person who has acted as an underwriter in a SPAC IPO that takes steps to facilitate the de-SPAC transaction, or any related financing transaction (including the public investment in private equity, or PIPE, transaction) or otherwise participates (directly or indirectly) in the de-SPAC transaction, to be engaged in a distribution of the securities of the surviving public entity and to be an underwriter, in each case, within the meaning of Section 2(a)(11) under the U.S. Securities Act of 1933 (the “Securities Act”).
- Investment Company Act safe harbor – Provide a new safe harbor for a SPAC from registration under the Investment Company Act of 1940, as long as certain conditions are satisfied, including that the SPAC’s assets must consist solely of U.S. government securities or money-market funds and cash items, and that the SPAC must enter into an agreement with a target to engage in a de-SPAC transaction within 18 months after its IPO and complete the de-SPAC transaction no more than 24 months after its IPO.
- IPO and de-SPAC disclosure – Prescribe disclosure in SPAC IPO registration statements regarding the SPAC sponsors, conflicts of interests and dilution of investors’ equity interests. In connection with the de-SPAC transaction, the proposal would (i) accelerate the disclosure of target information by requiring disclosure to SPAC shareholders before they are required to make voting, investment or redemption decisions in connection with the proposed transaction, thereby subjecting such disclosure to liability under Sections 11 and 12 of the Securities Act, and (ii) require that the target company be treated as a co-registrant of filings made in connection with the de-SPAC transaction, thus exposing its management and director signatories to liability for material misstatements or omissions contained in such filings. In addition, the proposals would impose minimum time periods in advance of which prospectuses, proxy and information statements filed in connection with the de-SPAC transaction must be distributed to shareholders.
- Fairness of the de-SPAC transaction – Require the SPAC to include certain statements regarding the fairness of the de-SPAC transaction and any related financing transactions to unaffiliated shareholders, as well as the basis for such statements.
- Smaller reporting company status – Require the surviving entity following a de-SPAC transaction to re-determine its eligibility for smaller reporting company status within four business days of the completion of the transaction.
- Shell companies – Deem a business combination transaction involving a reporting shell company and another entity that is not a shell company to be a sale of securities. The proposal would also align the required financial statements of private operating companies in transactions involving shell companies with those required in IPO registration statements.
Comments are due by May 31, 2022, or 30 days after Federal Register publication, whichever is later.