iThe initial rule proposals were issued in March 2022, and were followed by a comment period. Chair Gensler and others noted that the public feedback received was considered when revising the initial proposed rules and prompted a number of edits. Chair Gensler, along with Commissioners Crenshaw and Lizárraga, voted in favor of adopting the new rules, while Commissioners Uyeda and Peirce opposed.
Background
SPACs are companies without commercial operations that were formed to raise capital through an IPO for the purpose of acquiring or merging with existing operating companies and are often referred to as “blank check” companies. This approach presents several advantages over a conventional IPO, including the facilitation of capital access for companies in times of market volatility and other restrictive conditions that may affect liquidity. In short, SPACs provide an alternative pathway for private companies to go public in lieu of a traditional IPO.
Conflicting Positions Explained
As was discussed repeatedly during the SEC’s open meeting on January 24, SPACs were immensely popular from 2020 to 2021 during the “SPAC Boom,” but have more recently declined in frequency. For years, there has been great debate as to whether SPAC business combinations should be treated differently or similarly to traditional IPOs. In traditional IPOs investors benefit from a range of protections under federal securities laws, while in SPAC business combinations, these same protections are not guaranteed.
Many have raised concerns that the typical SPAC structure lacks important investor protections, including but not limited to disclosure and transparency policies and requirements under the Investment Company Act. Many supporters of these proposed rules have taken the position that SPAC investors are deprived of investor protections fundamental to traditional IPOs, making SPAC IPOs and business combinations fertile ground for certain market players to exploit retail investors with less experience and sophistication.
Other officials and commenters, including SEC Commissioner Peirce, have taken the opposing position that SPAC business combinations should continue to be treated differently from traditional IPOs, and that these new rules will only impose greater difficulty on SPACs when attempting to gain access to the public market. Further, critics of the new rules have taken the position that the SEC should implement a tailored set of rules that apply only to SPACs, rather than “wrapping up” SPACs with imposing regulations, arguing that doing so will continue to chill the market landscape, hindering the vibrancy of private companies and making SPACs prohibitively expensive pathway for small companies to use in accessing the public markets.
Underwriter Status and Liability in Securities Transactions
As acknowledged during the open meeting, underwriters serve a crucial gatekeeping function meant to protect the investing public in the distribution of a new issuer’s securities to public markets. Commenters have expressed concerns that, in the context of de-SPAC transactions, individuals, and/or companies that may play the traditional role of an underwriter are not necessarily considered to be an “underwriter” under the Securities Act, thereby making their potential liabilities unclear. In light of these concerns, the SEC considered proposed Rule 140a, which — had it been adopted — would have stated that anyone that acts as an underwriter in a SPAC IPO and participates in the corresponding de-SPAC transaction is definitively engaged in the “distribution” of securities and is therefore an “underwriter” within the meaning of the Securities Act.
Though it received some support, the proposed Rule 140a primarily received criticisms and caused concern, specifically from law firms and the American Bar Association. These commenters argued that this Rule 140a would increase costs associated with de-SPAC transactions, and that it could also result in heightened liability and/or litigation risks for transaction participants. Ultimately, the SEC chose not to adopt Rule 140a. In declining to make such adoption, the SEC agreed that the term “underwriter” does not have unlimited applicability, pointing out that the definition already covers a wide scope of actors. Going forward, the SEC will continue its longstanding practice of applying the statutory terms of “distribution” and “underwriter” broadly and flexibly as opposed to formulaically, while considering relevant facts and circumstances.
Takeaways
Overall, the key adjustments to the final rules that SPACs and their sponsors and target companies should prepare for primarily relate to enhanced disclosure requirements.
Taking effect on May 28, 2024, (125 days after the publication in the Federal Register), the new rules will require, among other things, SPACs to divulge SPAC sponsors, conflicts of interest that may exist within SPACs, and potential dilution risks. SPACs will be required to make non-financial disclosures about the target private operating company during the de-SPAC business combination. The final new rules will also aim to hold SPACs accountable for their use of forward-looking statements, removing safe harbor protections, and implementing additional disclosure requirements on companies making projections in conjunction with de-SPAC transactions. The new rules endeavor to hold SPACs accountable for projections that investors may rely on, requiring that target companies sign de-SPAC registration statements, holding them accountable for misleading disclosures, and defining de-SPAC transactions as sales, subjecting such transactions to registration under the Securities Act.
SPACs, sponsors, and their business combination targets are encouraged to consult counsel as they prepare for and adjust to the implementation of these new rules, particularly when making decisions on required and prohibited disclosures.
Emily B. Lewis contributed to this article.
