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SEC Proposes New Rules for SPACs

Read the full SEC Proposed Rules and SEC Fact Sheet

On March 30, 2022, the U.S. Securities and Exchange Commission (SEC) proposed new rules aimed to enhance disclosure and bolster investor protection relating to initial public offerings and business combinations by Special Purpose Acquisition Companies (SPACs). The proposed rules come on the heels of a 2021 that saw an unprecedented number of IPOs by SPACs leading the SEC to cite “heightened investor protection concerns about various aspects of the SPAC structure and the increasing use of shell companies as mechanisms for private operating companies to become public companies” and “renewed concerns about the use of projections, particularly with respect to business combination transactions in which projections about private operating companies may lack a reasonable basis.”

Key aspects of the SEC proposed rules include the following:

Definition of Underwriters in a de-SPAC Transaction

The proposal indicates that underwriters involved in a SPAC’s IPO who are also involved in the de-SPAC transaction or any related financing transaction, or otherwise participate (directly or indirectly) in the de-SPAC transaction, will be deemed to be engaged in the distribution of the securities of the combined company resulting from the de-SPAC transaction. The proposal also indicates that the definition of an underwriter may also apply to other participants in de-SPAC transactions such as financial advisors, PIPE investors, or other advisors.

Expanding the definition of an underwriter and deeming their participation to be an engagement in the distribution of securities of the combined company would potentially subject defined underwriters to liability for material misstatements or omissions in de-SPAC registration statements and potentially require significant additional due diligence on target companies by the underwriters, akin to the due diligence underwriters would perform for a traditional IPO.

Fairness of the de-SPAC Transaction

The proposed rules would also require disclosures in the de-SPAC registration statement concluding on the fairness of the transaction as well as any related financing to unaffiliated security holders. The proposed rules would require a discussion of the bases for the fairness determination including any third-party reports (Fairness Opinions) prepared for the SPAC and detailed disclosures of such reports and how they were prepared.

Fairness Opinions are not always prepared in de-SPAC transactions; however, they may become necessary in de-SPAC transactions to meet the disclosure requirements under the proposed rules.

Projections and Safe Harbor

The Private Securities Litigation Reform Act of 1995 provides a safe harbor from liability associated with forward-looking statements. The proposed rules would amend the definition of “blank check company” to disallow the safe harbor from liability on forward-looking statements made in de-SPAC marketing or transaction disclosures. Projections made by companies are disclosed as forward-looking statements. Generally, when a de-SPAC disclosure document contains projections, they are included because existing rules mandate disclosure of all information the SPAC’s board of directors considered in assessing the de-SPAC transaction. These disclosures typically emphasize this fact and indicate that disclosed projections were prepared for internal purposes only.

Proposed rules would enhance disclosures around projections to include the purpose for and party that prepared projections, the material bases and assumptions used to prepare projections as well as whether the disclosed projections still reflect the view of the board or management of the SPAC or target company as of the date of filing.

Investment Company Act

The SEC proposal includes a safe harbor for SPACs that would deem a SPAC to not be classified as an investment company under the Investment Company Act of 1940, if the following conditions are met:

• Assets held by a SPAC must be held in only government securities, government money market funds and/or cash;
• A SPAC’s activities must be limited to seeking a single de-SPAC transaction as a result of which the surviving public entity will be primarily engaged in the business of the target company or companies and will have a class of securities registered on a national securities exchange;
• The activities of a SPAC’s officers, directors and employees must be primarily focused on activities related to seeking a target company, and the board of directors of the SPAC would have to adopt a resolution of this business purpose; and
• A SPAC must announce a business combination within 18 months of its IPO and complete a business combination within 24 months of its IPO.

Additional Enhanced Disclosures

There are several additional disclosure requirements in the SEC’s proposal related to SPAC IPOs and de-SPAC transactions including the following:

• The sponsor’s experience and background, any arrangements between the persons that control the sponsor, and all compensation that has or will be awarded to the sponsor or any affiliates or promoters;
• Any conflicts of interest between the unaffiliated security holders of the SPAC and the sponsor, its affiliates or the SPAC’s officers, directors, or promoters; and
• Tabular disclosure of potential dilution that shareholders may experience in both the SPAC IPO and in the de-SPAC transaction.

Next Steps

The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer. A significant volume of comments from the public could delay issuance of any final rules; however, the proposal is expected to be finalized prior to the end of the year.

What Should SPACs and Target Companies Do Now?

• Consult with Centri and your legal advisors to ensure registration and financial statement disclosures in SPAC and de-SPAC transactions are adequate and appropriate.
• Assess the need for a fairness opinion in a de-SPAC transaction.
• Ensure parties and advisors participating in de-SPAC transactions are aware of the proposed rules and potential timing of the effectiveness of any final ruling.
• Take inventory of all arrangements and agreements between sponsor, SPAC, target, and advisors.

If you’re ready for the next steps listed above or interested in learning more, reach out to Centri for information about our expertise in SPAC and De-SPAC transactions, as well as Fairness Opinions/Valuation Services.