Though the final rules will not be expected until the end of this year, according to Bloomberg, major banks are leaving the SPAC market. Some have has paused IPOs of new SPACs, others have ended involvement with SPACs they previously took public, and yet others are ending relationships with current SPAC clients.
The proposed rules are open for public comment until the later of May 31, 2022 or the date that is 30 days after their official publication in the Federal Register.
On March 30, 2022, the Securities and Exchange Commission (the SEC) proposed a sweeping set of rules governing special purpose acquisition companies (SPACs) and SPACs’ subsequent purchase of a target (de-SPACs). The proposed rules would expand the list of activities that can be considered as underwriting activities, such as financial advisor in a de-SPAC, placement agent in a related private investment in public equity (PIPE), etc.
As noted by SEC Chairman Gary Gensler, the proposed rules are intended to align the treatment of SPACs with the treatment of traditional initial public offerings (IPOs), as well as to provide greater transparency and protections to investors.
Enhanced Disclosure Requirements
The proposed rules would require disclosure regarding, among other things: (1) SPAC sponsors’ identity and information; (2) potential material conflicts of interest; (3) potential dilution in connection with SPAC IPOs and de-SPAC transactions; (4) additional information on target companies and de-SPAC transactions, including the fairness of de-SPAC transactions; and (5) additional information on projections of future economic performance. Many of the disclosure requirements are based on existing rules and guidance. It is notable that the private operating company (i.e., the target company) would now be a co-registrant when a SPAC files a registration statement on Form S-4 or Form F-4 for a de-SPAC, which would impose Section 11 liability on the target company.
Conforming de-SPAC Transactions and SPAC IPOs to Traditional IPOs
The proposed rules would impose obligations applicable to traditional IPOs on SPAC IOSs and de-SPAC transactions. The proposed rules would treat a de-SPAC transaction as a sale of securities that would require the filing of a registration statement. This will be accomplished in several aspects.
First, forward-looking statements, such as projections, are within the liability safe harbor provided by the Private Securities Litigation Reform Act of 1995 (the PSLRA) in certain situations. One major advantage currently enjoyed by SPACs is the ability to use projections, while traditional IPOs cannot. The amendment of the definition of “blank check company” would make the safe harbor unavailable for forward-looking statements provided in connection with a de-SPAC transaction. By increasing the exposure to potential liability of SPAC sponsors in connection with the use of projections in marketing materials and disclosures relating to SPAC IPOs, de-SPAC transactions, and related ﬁnancings (including PIPEs), there would be a massive undercut to the advantage of these offering structures.
Second, the proposed rules would require a re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction. This would make the lighter, less onerous, scaled disclosure requirements available to smaller reporting companies unavailable to some surviving entities.
Third, the proposed rules would require that disclosure documents filed in connection with a de-SPAC transaction be distributed to shareholders within 20 days.
PIPE Purchaser to Statutory Underwriter
If the proposed rules are accepted, it is possible that the SEC will consider purchasers in a PIPE to be statutory underwriters in a subsequent de-SPAC transaction. Such classification would subject participants in the SPAC ecosystem, who had been previously able to avoid such exposure, to onerous underwriter liability. In order to mitigate exposure, and avail themselves of certain defenses, PIPE purchasers may need to engage in burdensome due diligence on the target, increasing the cost associated with such investments.
The proposed rules also address the status of SPACs as “investment companies” under the Investment Company Act. If the proposal is adopted, a SPAC that fully complies with the rule’s conditions would not need to register as an investment company under the Investment Company Act. The proposed rules also address business combinations involving shell companies.