Last week, John Coates, the Acting Director of the SEC’s Division of Corporation Finance (“Corp Fin”), released a statement discussing liability risks in de-SPAC transactions.
The statement focused in particular on the concern that companies may be providing overly optimistic projections in their de-SPAC disclosures, in part based on the assumption that such disclosures are protected by a statutory safe harbor for forward-looking statements (which is not available for traditional IPOs). Director Coates’s statement questions whether that assumption is correct, arguing that de-SPAC transactions may be considered IPOs for the purposes of the statute (and thus fall outside the protection offered by the statutory safe harbor). He therefore encourages SPACs to exercise caution in disclosing projections, including by not withholding unfavorable projections while disclosing more favorable projections.
The statement has received considerable media attention and is plainly part of a broader effort by the Commission staff to identify potential securities law and policy concerns with the growing SPAC market. In addition to statements by staff in the Division of Corporation Finance, the effort includes:
- The widely reported informal investigation into SPAC transactions by the Enforcement Division;
- The March 31 statement by the Chief Accountant about the challenges of public-company readiness; and
- The SEC staff raising specific questions with multiple auditing firms principally about whether SPACs are correctly accounting for their warrants. SPACs typically treat the warrants as equity, and reportedly the staff has concerns that depending on the terms some SPAC warrants that can be cash-settled may be debt.
At the same time, Director Coates’s statement does not announce any new requirements, and it was already clear that SPACs should not release materially misleading projections, such as by selectively disclosing favorable projections. It is also worth noting that the statutory safe harbor only applies in private litigation, and not to actions brought by the SEC itself. Thus, participants in a de-SPAC transaction should already be aware of the risk that their projections will not be protected by the statutory safe harbor in all instances.
Perhaps the most significant takeaways from Director Coates’s statement are that the SEC remains intensely focused on SPACs, that the agency is receptive to public concerns about disclosures of projections, and that it is seeking to apply public pressure on SPACs to be more careful about such disclosures.
Director Coates’s specific argument that the IPO exclusion to the statutory safe harbor could currently apply to de-SPAC transactions is novel. The term “initial public offering” is not defined in the statutory safe harbor because it has a plain meaning—i.e., the initial offering by a company of its securities to the public. In the typical de-SPAC transaction, securities are issued by the already public SPAC. Moreover, as the statement itself recognized, the text of the statutory safe harbor separately references “initial public offerings” and “offerings of securities by a blank check company,” making it difficult to argue that the term “initial public offerings” was intended to encompass de-SPAC transactions. While it is possible that the definitions applicable to this statutory language could be changed by future regulatory action, such actions would take time and would be unlikely to apply retroactively.
Nonetheless, regardless of the applicability of the statutory safe harbor, it remains advisable for companies to consider disclosing the assumptions underlying their projections and the key risks that could lead actual results to differ. It is also notable that, although Director Coates’s statement primarily focused on projections, he also stated that there are “significant investor protection questions” concerning whether “current liability provisions give those involved – such as sponsors, private investors, and target managers – sufficient incentives to do appropriate due diligence on the target,” “especially since SPACs are designed not to include a conventional underwriter at the de-SPAC stage.” We anticipate that this perceived lack of gatekeepers during the de-SPAC process may be an issue that receives additional attention from the SEC and private litigants going forward.
If you have any questions concerning these issues, please reach out to your regular firm contact or the above-listed authors.