The Securities and Exchange Commission (the “SEC”) has finalized its long-awaited rules regarding special purpose acquisition companies (“SPAC”). So, what are the key aspects of these rules that SPAC market participants should be aware of?
Key Aspects of the Final Rules
How the Final Rules Differ From the Proposal
Key Aspects of the Final Rules
The final rules are largely similar to the proposed rules that were issued by the SEC back in March of 2022, with two key distinctions described below under the heading “How the Final Rules Differ From the Proposal.” The final rules require, among other things:
- Detailed disclosure in connection with SPAC initial public offerings (IPOs) and de-SPAC transactions regarding:
- Background and compensation-related information for SPAC Sponsors, their affiliates and any promoters (collectively, “SPAC Sponsors”), including the amount of securities issued or to be issued to the SPAC Sponsor (and the price paid or to be paid for such securities), the details of any transfer or potential transfer of securities of the SPAC by the SPAC Sponsor, and any reimbursements payable to the SPAC Sponsor upon consummation of the de-SPAC transaction.
- Any potential or actual conflicts of interest concerning the SPAC Sponsor, its affiliates and promoters.
- Descriptions of the circumstances that may cause dilution to an investor and certain dilutive impact calculations.
- With respect to de-SPAC transactions, the target company’s business, property, legal proceedings, disagreements with its accountants, beneficial ownership and recent sales of unregistered securities, as required by Items 101, 102, 103, 304, 403 and 701 of Regulation S-K, respectively.
- Details regarding a de-SPAC transaction generally, including the background of the de-SPAC transaction and any related financing arrangements, whether the board determined the de-SPAC transaction to be advisable and in the best interests of the SPAC shareholders (if such determination was required by the law of the jurisdiction in which the SPAC is organized), and specific disclosures about any fairness opinions (or similar reports) actually obtained. Note that, as welcome relief from the proposed rules, fairness opinions (or similar reports) are not required to be obtained under the final rules. However, if a fairness opinion is obtained it must be filed as an exhibit or schedule to the corresponding filings.
- Heightened disclosure regarding projections:
- The final rules require heightened disclosure regarding projections included in a filing related to a de-SPAC transaction, including disclosure regarding who prepared the projections and for whom, as well as any material underlying assumptions and material bases for such projections.
- Identifying the target company as a co-registrant:
- The final rules make it so that registration statements filed in connection with de-SPAC transactions must identify the target company as a co-registrant, thereby subjecting the target company directors and officers to Section 11 liability and as a result, responsibility for the disclosures in the registration statement.
- Prohibiting reliance on the PSLRA safe harbor for forward-looking statements in de-SPAC transactions:
- The Private Securities Litigation Reform Act of 1995 (PSLRA) offers a safe harbor for forward-looking statements (including projections), protecting companies from liability in private actions under the Securities Act or the Exchange Act. Historically, this safe harbor did not cover forward-looking statements in certain offerings, including those made by blank check companies or those made in IPOs (including IPOs by SPAC issuers). However, SPAC practitioners typically relied on the safe harbor for disclosures in de-SPAC transactions.
- The final rules adopted a new definition of “blank check company” for purposes of the PSLRA to ensure that term included SPACs, such that the safe harbor will now be unavailable in de-SPAC transaction filings (similar to the unavailability in IPOs). The surviving company of a de-SPAC transaction will generally be able to rely on the PSLRA safe harbor, so long as it no longer qualifies as a “blank check company.”
- Treating all de-SPAC transactions as involving a sale of securities to the SPAC shareholders:
- The final rules provide that under new Rule 145a, “any direct or indirect 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” would be deemed a sale of securities under the Securities Act, such that the de-SPAC transaction will require Securities Act registration unless an exemption from registration is available (along with guidance explaining that Section 3(a)(9), an exemption commonly used in connection with certain exchanges of securities, will not be available for de-SPAC transactions).
- Additional financial statement requirements:
- The final rules also put in place new Article 15 of Regulation S-X which “more closely align the financial statement reporting requirements in business combinations involving a shell company and a target company with those in traditional IPOs.” As a result, in de-SPAC transactions, the financial statement requirements for the target company will more closely resemble those of a traditional IPO. This alignment encompasses audit requirements, the number of years of financial statements, and the age of financial statements required to be included in a registration statement for a de-SPAC transaction before it will be declared effective.
- Compliance with new technical requirements:
- Tagging the newly required disclosures in iXBRL format (including in registration statements, prospectuses, proxy and information statements as applicable).
- A 20-calendar-day minimum dissemination period for prospectuses and proxy and information statements filed for de-SPAC transactions.
- A reassessment of smaller reporting company (SRC) status shortly after completing a de-SPAC transaction and, if applicable, beginning to reflect non-SRC status in filings made 45 days after completing the de-SPAC transaction.
How the Final Rules Differ From the Proposal
As noted above, the final rules were largely adopted as proposed (reflecting certain technical modifications in response to comments), with the following key exceptions:
- Abandonment of Rule 140a regarding underwriter liability:
- In the proposed rules, the SEC (to much industry criticism) proposed to adopt Rule 140a in an attempt to clarify that anyone who “takes steps to facilitate the de-SPAC transaction” (including any related financing arrangements) would be deemed an “underwriter” as defined in Section 2(a)(11) of the Securities Act.
- The adoption of Rule 140a was abandoned in the final rules, with the SEC choosing instead to issue guidance to assist parties in applying the definition of “underwriter” to de-SPAC transactions, noting that the determination of underwriter status is a facts-and-circumstances analysis and that “the statutory definition of underwriter, itself, encompasses any person who sells for the issuer or participates in a distribution associated with a de-SPAC transaction,” and further clarifying for de-SPAC transactions that “an entity could be deemed a ‘statutory underwriter’ even though it may not be named as an underwriter in any given offering or may not be engaged in activities typical of a named underwriter in traditional capital raising.”
- Abandonment of Investment Company Act of 1940 (Company Act) safe harbor:
- As part of the final rules, the SEC abandoned the proposed safe harbor contemplated by Company Act Rule 3a-10, which would have carved out SPACs from the definition of investment company under the Company Act upon the satisfaction of certain criteria being met (including the requirement that a SPAC must enter into a definitive business combination agreement within 18 months after its IPO and close the de-SPAC transaction within 24 months).
- Instead, the SEC once again issued guidance as to their views on the facts and circumstances relevant to whether a SPAC is an investment company, noting that a “SPAC that holds only the sort of securities typically held by SPACs today, such as U.S. Government securities, money market funds and cash items prior to the completion of the de-SPAC transaction, and that does not propose to acquire investment securities, would be more likely not to be considered an investment company under Section 3(a)(1)(C).” However, the SEC further clarified that “asset composition is only one of the factors that should be considered” and that other factors need to be considered, including a SPACs duration, noting that “a SPAC’s activities may become more difficult to distinguish from those of an investment company the longer the SPAC takes to achieve its stated business purpose.”
As a result of the final rules and related guidance, we anticipate SPAC market participants will continue to implement the practices that developed following the initial rule proposal in March of 2022. For example, many of the detailed disclosure requirements from the final rules have already been integrated into transactions through the SEC review process. While the SEC declined to specifically adopt new rules and regulations regarding which parties to a SPAC transaction may be subject to underwriter liability or when a SPAC will be deemed an investment company, continuation of existing market practices related to those issues are likely to continue. This includes practices like the delivery of comfort letters and negative assurance letters in de-SPAC transactions and the holding of trust account funds by SPACs in an interest-bearing bank demand deposit account.
Ultimately, how the final rules and guidance are applied in practice, insights gained from subsequent SEC enforcement actions, and any remaining investor interest in SPAC transactions will collectively shape the continued evolution of SPACs within the capital markets ecosystem.
The rules will become effective 125 days following their publication in the Federal Register. In addition, registrants will have 490 days following publication in the Federal Register to comply with the iXBRL requirements set forth in the rules.
In the adopting release the SEC indicated its belief that “this extended period before the final rules are effective will provide sufficient time for an initial public filing to be made under the existing rules for any transactions that are currently pending or planned. Any filings made on or after the effective date must comply with the final rules.” Parties involved in filings before the effective date should be aware, however, that the SEC continues to push for enhanced disclosures in SPAC filings under the existing rules. This is evident from the most recent SPAC enforcement action, announced just one day after the SPAC rules were adopted, where the SEC fined a SPAC $1.5 million (payable upon closure of a de-SPAC transaction) for failure to disclose interactions with a potential target company in its IPO registration statement. Note also that any guidance from the release about how to interpret existing rules, particularly the guidance discussed under “How the Final Rules Differ From the Proposal,” should be considered already effective.
SEC news release
SEC fact sheet
SEC final rule
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We will continue to monitor developments with respect to these new requirements. If you have any questions regarding these new rules, please contact one of the listed authors of this article or your regular Orrick contact.