The United States Securities and Exchange Commission (“SEC”), by a 3-2 vote, recently adopted new rules and amendments pertaining to special purpose acquisition companies (“SPACs”) (“SPAC Rules”)[1] to “enhance disclosures and provide additional investor protection” in SPAC initial public offerings (“IPOs”) by and in subsequent business combination transactions between SPACs and target companies (“de-SPAC transactions”).[2] The SPAC Rules also “address investor protection concerns more broadly with respect to shell companies and blank check companies, including SPACs,”[3] which will have significant implications. These SPAC Rules became effective as of July 1, 2024.[4]
In the past decade, SPAC IPOs and de-SPAC transactions have been a popular alternative to a traditional IPO. This vehicle brought private companies to the public markets faster and required less disclosures, thus circumventing the stringent SEC review process that would be required by a traditional IPO. As a result, investors have lost billions of dollars in de-SPAC transactions due to lack of disclosures and substantial amount of litigation against SPACs have ensued.
Given the complexities and risks of a SPAC, the SPAC Rules attempt to curb lack of disclosures and increase investor protection. As the SEC Chair Gary Gensler stated, “[j]ust because a company uses an alternative method to go public does not mean that its investors are any less deserving of time-tested investor protections. Today’s adoption will help ensure that the rules for SPACs are substantially aligned with those of traditional IPOs, enhancing investor protection through three areas: disclosure, use of projections, and issuer obligations. Taken together, these steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions.”[5]
The SPAC Rules require further disclosure pertaining to conflicts of interest, SPAC sponsor compensation, dilution, and other information that is important to investors in SPAC IPOs and de-SPAC transactions, as well as requiring registrants to provide additional information about the target company to investors that will help investors make more informed voting and investment decisions in connection with a de-SPAC transaction.[6] One rule in particular would require a target company and SPAC in a de-SPAC transaction be a co-registrants and sign the registration statement filed in connection with the de-SPAC transaction, thus assuming responsibility and any potential legal liabilities.[7] Another rule would now remove SPACs from having any safe harbor for forward-looking statements under the Private Securities Litigation Reform Act (“PSLRA”).[8]
In sum, the SEC’s adoption of these rules makes it clear that SPACs will have less room for error, as it shows the SEC’s focus on protecting SPAC investors by requiring more disclosure with higher scrutiny. While these new rules will have significant impact on SPACs, and thus threaten the attractiveness of the SPAC IPO and de-SPAC transaction, the SPAC Rules ensure further protections for investors. Regardless, investors need to remain cautious as these new SPAC Rules get implemented and potentially challenged by future litigation.
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[1] Securities Special Purpose Acquisition Companies, Shell Companies, and Projections, 89 Fed. Reg. 14158 (Feb. 26, 2024).
[2] https://www.sec.gov/newsroom/press-releases/2024-8.
[3] Id.
[4] Id.
[5] Id.
[6] Securities Special Purpose Acquisition Companies, Shell Companies, and Projections, 89 Fed. Reg. at 14171.
[7] Special Purpose Acquisition Companies, Shell Companies, and Projections, Release No. 11265 (Jan. 24, 2024) [89 Fed. Reg. at 14211] (“[t]he final rules will ensure that, when a registration statement is filed for a de-SPAC transaction, a target company, its principal executive officer or officers, its principal financial officer, its comptroller or principal accounting officer, and a majority of its board of directors or persons performing similar functions sign the registration statement. These signatories, among others, will be liable under section 11, for any material misstatements or omissions in the registration statement (subject to a due diligence defense for all parties other than an issuer) and will thereby be held accountable to investors for the accuracy of the disclosures in the registration statement that previously would have been signed only by the SPAC or a holding company and its officers and directors.”).
[8] Id. at 14229 (The SEC’s commentary and final rule states that the SEC “believe[s] that it is appropriate that forward-looking statements made in connection with de-SPAC transactions should be treated similarly with forward-looking statements made in traditional IPOs, because the de-SPAC transaction results in public shareholders acquiring a formerly private company, similar to an IPO. In both IPOs and de-SPAC transactions, similar informational asymmetries exist between issuers (and their insiders and early investors) and public investors and there are similar risks of generating unfounded interest on the part of investors. In both IPOs and de-SPAC transactions, there is no track record of public disclosure to help investors evaluate projections. Moreover, these risks do not disappear merely because a blank check company raised more than $5 million in a firm commitment underwritten IPO (and therefore may not be issuing penny stock). The definitions of “blank check company” we are adopting and the concomitant changes to the availability of the PSLRA will help protect investors because blank check companies may take more care in avoiding the use of forward-looking statements that are unreasonable. As we discuss in detail below, we are not barring the use of forward-looking statements and recognize that forward-looking statements can provide useful and necessary disclosure.”).