In a little more than a month, the SEC's proposed special purpose acquisition company (SPAC) rules have started to reshape the market landscape. In a concise statement issued on May 9, a prominent investment bank announced it would be "reducing [its] involvement in the SPAC business in response to the changed regulatory environment." For those familiar with the new rules – and the liability they foreshadow – this may come as no surprise.

As suggested in a post last month on potential increases in exposure for SPAC underwriters, participants in the space are clearly wary of any looming risks. The proposed rule would redefine who could be considered an "underwriter" for the purposes of Section 2(a)(11) of the Securities Act of 1933. While not currently accountable to investors in the de-SPAC transaction, the new definition would leave SPAC initial public offering (IPO) underwriters vulnerable to suit from de-SPAC investors if the IPO underwriter took steps to facilitate the de-SPAC transaction, any related financing transaction or, even more broadly, otherwise participated in the de-SPAC transaction. This vulnerability is particularly concerning for SPAC IPO underwriters who might be on the hook simply for deferring compensation to the later de-SPAC phase, especially given that their limited access to de-SPAC materials might curtail the likelihood of a successful due diligence defense.

Given the proposal's broad strokes, it is no wonder that investment banks are skittish. And with no sign yet from the Commission that these fears are overblown, this same apprehension may soon be seen in financial advisors and private investment in public equity (PIPE) investors. As these regulatory developments continue, the SECond Opinions Blog will continue to monitor the SPAC space, keeping an eye on any forthcoming rules and clarifications from the SEC, as well as developments in private securities litigation against SPACs, their sponsors and combination targets.