A special purpose acquisition company (SPAC) is a shell company organized for the purpose of merging with or acquiring one or more unidentified private operating companies—a de-SPAC transaction—within a certain time frame.
Since 2020 the US public securities markets experienced an unprecedented surge in the number of initial public offerings (IPOs) by SPACs. The rapid increase heightened investor protection concerns about various aspects of the SPAC structure.
To address investors’ concerns, the SEC issued proposed rule 33-11048, Special Purpose Acquisition Companies, Shell Companies, and Projections. The proposed rule intends to improve the relevance, completeness, clarity, and comparability of the disclosures provided by SPACs at the IPO and de-SPAC transaction stages.
Comments on the proposed rule are due May 31, 2022, or 30 days after publication in the Federal Register, whichever is later.
The proposed rules and amendments would, among other things:
- Enhance disclosures with respect to compensation paid to sponsors, conflicts of interest, dilution, and the fairness of the business combination
- Align de-SPAC transactions with IPOs to address concerns associated with business combination transactions involving SPACs
- Provide additional guidance on the use of projections in SEC filings when used in connection with business combination transactions involving SPACs
- Assist SPACs in assessing when they may be subject to regulation under the Investment Company Act of 1940
The proposed rule would add new Subpart 1600 of Regulation S-K that would require disclosures in connection with IPOs by SPACs and in connection with de-SPAC transactions, including:
- Additional disclosures about the sponsor of the SPAC, potential conflicts of interest, fees paid, and dilution
- Disclosure stating whether the SPAC reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to investors
- Disclosure stating whether the SPAC received any outside report, opinion, or appraisal relating to the fairness of the transaction
- Certain disclosures on the prospectus cover page and in the prospectus summary of registration statements filed in connection with SPAC initial public offerings and de-SPAC transactions, including disclosures about potential redemptions by the sponsors
Aligning De-SPAC Transactions With IPOs
To provide investors with disclosures and liability protections comparable to those that would be present if the private operating company were to conduct a traditional IPO, the proposed rule would:
- Add Rule 145a under the Securities Act that would deem business combination transactions involving shell companies to involve a sale of securities to a reporting shell company’s shareholders
- More closely align the nonfinancial statement disclosure requirements with respect to the private operating company in disclosure documents for a de-SPAC transaction with the disclosure required in a Form S-1 or F- 1 for an IPO
- Add Article 15 of Regulation S-X to more closely align the required financial statements of private operating companies in connection with de-SPAC transactions with those required in registration statements on Form S-1 or F-1 for an IPO
- Treat the private operating company as a co-registrant when a SPAC files a registration statement on Form S-4 or Form F-4 for a de-SPAC transaction
- Require a re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction
- Amend the definition of blank check company so that the safe harbor for forward-looking information wouldn’t apply in filings by SPACs
- Provide that underwriters in a SPAC IPO are deemed underwriters in a subsequent de-SPAC transaction when certain conditions are met
Use of Projections in SEC Filings
To enhance the reliability of projections disclosure in connection with de-SPAC transactions, the proposed rule would update the guidance regarding the use of projections by amending Item 10(b) of Regulation S-K to include the following:
- Any projected measures that aren’t based on historical financial results or operational history should be clearly distinguished from projected measures that are based on historical financial results or operational history.
- It generally would be misleading to present projections that are based on historical financial results or operational history without presenting such historical measure or operational history with equal or greater prominence.
- The presentation of projections that include a financial measure not using US generally accepted account principles (GAAP) should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it’s most closely related, and an explanation for the use of the non-GAAP financial measure instead of a GAAP measure.
In addition, the proposed rule would add Item 1609 of Regulation S-K to address concerns specific to de-SPAC transactions by requiring a registrant to provide the following disclosures:
- The purpose for which the projections were prepared and the party that prepared the projections
- All material bases of the disclosed projections and all material assumptions underlying the projections, and any factors that may materially impact such assumptions
- Whether the disclosed projections reflect the view of the board or management of the SPAC or target company, as applicable, as of the date of the filing
Investment Company Act of 1940
The Investment Company Act of 1940 defines an investment company as any issuer that is or holds itself out as engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities.
To assist SPACS in determining whether they are subject to investment company regulation, the proposed rule would add a new safe harbor from the definition of an investment company. A SPAC that fully complies with the following proposed conditions wouldn’t need to register as an investment company:
- Maintain assets comprising only cash items, government securities, and certain money market funds
- Seek to complete a de-SPAC transaction after which the surviving entity will primarily engage in the business of the target company
- Enter into an agreement with a target company to engage in a de-SPAC transaction within 18 months after its IPO and complete its de-SPAC transaction within 24 months of such offering
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