On April 8, 2021, for the third time in ten days, the Staff of the Securities and Exchange Commission (SEC) issued cautionary guidance to private operating companies considering going public in the United States through a merger with a special purpose acquisition company (SPAC), referred to as a deSPAC transaction. John Coates, Acting Director of the Division of Corporation Finance, released a public statement explaining the securities law liability risk associated with deSPAC transactions and confirming the SEC’s current focus on ensuring IPO-like protections for investors in deSPAC transactions.
SEC Focus on Financial Projections
Specifically, Acting Director Coates focused on potential liability for the financial projections of the private operating company commonly included in deSPAC transaction registration statements. These financial projections are used by a SPAC’s board as part of its determination of whether to pursue a business combination with the private operating company and are evaluated by investors in the PIPE transactions that regularly accompany deSPAC transactions. Certain practitioners have asserted that the financial projections disclosed in a registration statement for a deSPAC transaction should have the benefit of the safe harbor for forward-looking information set forth in the Private Securities Litigation Reform Act (PSLRA), unlike forward-looking statements made in connection with a traditional initial public offering (IPO), which are specifically excluded from the PSLRA. However, Acting Director Coates asserted that any perceived difference in liability between a deSPAC transaction and a conventional IPO “seems uncertain at best.” Coates questioned whether the carve-out from the PSLRA for IPOs also should apply in a deSPAC transaction, given that the registration statement for the business combination is the operating company’s first introduction to the public markets. To remedy any potential uncertainty, Acting Director Coates suggested that the SEC consider a rulemaking process to provide additional clarity as to the agency’s view of whether the PSLRA applies in connection with deSPAC transactions. Because there are fewer gatekeepers in the deSPAC process than a traditional IPO, Coates also questioned whether the SEC should reconsider the concept of an “underwriter” in a deSPAC transaction in order to potentially encourage greater diligence in the deSPAC process by the financial professionals involved.
Although Acting Director Coates acknowledged the value of financial projections to business combinations and deSPAC investors, he also underscored the importance of disclosure that is complete, accurate and not misleading. In light of this guidance and the SEC Staff’s other recent statements on deSPAC transactions, private operating companies pursuing deSPAC transactions would be well advised to ensure that there is a reasonable basis for any financial projections provided as part of the deSPAC process. Additionally, financial projections, as well as any other forward-looking information included in deSPAC registration statements, should be presented in a fair and balanced manner, with a description of the key risks and assumptions and the other factors that may cause an operating company’s results to materially diverge from those contained in the financial projections.
Three recent public statements by the SEC Staff make clear that the SEC is paying close attention to the SPAC and deSPAC markets amid a surge in the use of SPACs to take companies public. Acting Director Coates’ remarks foreshadow continued focus on deSPAC transactions in the coming months both in the form of potential SEC rulemakings as well as on the enforcement front.