On March 30, 2022, the SEC voted 3-1 (Commissioner Peirce dissenting) to propose a package of rules and rule amendments governing special purpose acquisition companies (SPACs), SPAC initial public offerings (IPOs) and SPAC mergers with a target company (de-SPACs). Part of the proposed amendments would also apply to any shell company business combination, whether or not a SPAC is involved.
Major themes of the proposal include:
- Regulating the use of projections in de-SPACs
- Aligning disclosure in de-SPACs with regular-way IPOs
- Creating potential liability in the de-SPAC for IPO underwriters
- Specific disclosure rules tailored to SPACs and de-SPACs and to shell company business combinations
The proposal is complex, and detailed analysis will be needed to identify its full implications. In a nutshell, if the proposal is adopted, SEC rules would change in the following ways.
1. New rules for SPAC IPO disclosures. There would be new rules for disclosure in a SPAC IPO, set forth in a new Part 1600 of Regulation S-K. These would include:
- New requirements for the prospectus cover (including a table showing the impact of redemptions on pro forma net tangible book value).
- New requirements for the prospectus summary.
- Additional detail for the dilution table.
- Specific disclosure requirements concerning SPAC sponsors and their conflicts of interest.
2. New rules for de-SPAC disclosures. There would be new rules for disclosure in a de-SPAC transaction, also contained in new Part 1600 of Regulation S-K and in new Item 15-01 of Regulations S-X. These would include:
- A minimum dissemination period of 20 calendar days before the shareholder meeting.
- Specific requirements for the cover page, the summary, and dilution disclosure.
- Enhanced target disclosure:
- Requiring the target to be a co-registrant on the de-SPAC registration statement.
- Required disclosures about the target, parallel to those that would be required in an IPO of the target.
- Specific financial statement requirements for the target (which largely codify existing practices).
- Specific disclosures about the transaction process, based on those applicable in “going private” transactions subject to Rule 13(e)-3:
- Background of the transaction.
- The SPAC’s position on whether the de-SPAC is fair or unfair to the SPAC’s public shareholders.
- Information about any report, opinion or appraisal from an outside party relating to the consideration or to fairness. Any such report would also have to be filed as an exhibit.
- A new rule providing that if a Schedule TO is filed in connection with the redemption right of SPAC shareholders, it must contain disclosure concerning the target company as required in a Form S-4 for the de-SPAC transaction, to enable SPAC shareholders to make an informed redemption decision.
3. New rules about projections.
- The proposed rules would amend existing Rule 10(b) of Regulation S-K – which sets forth Commission policy on use of projections in filings – to add considerations about non-GAAP measures and about the use of historical information. This would not be limited to de-SPACs.
- There would be a specific Item 1609 in Regulation S-K that applies only to projections in de-SPAC transactions and requires specific disclosures.
- The new rules would amend existing definitions to make clear that Information provided in connection with a de-SPAC transaction is not eligible for the safe harbor for forward-looking statements under the PSLRA. This would settle a debate opened by then-Director of Corporation Finance John Coates back in April 2021, and would generally subject forward-looking statements made in a de-SPAC to the disclosure liabilities applicable to traditional IPOs.
4. Underwriter liability in the de-SPAC. A proposed new Rule 140a would specify that any underwriter in a SPAC IPO that “takes steps to facilitate the de-SPAC transaction” will be deemed to be an underwriter in the de-SPAC transaction. The SEC has highlighted that they expect this to result in underwriters engaging in more robust due diligence practices.
5. SPAC safe harbor under the Investment Company Act of 1940. There would be a new Rule 3a-10 under the Investment Company Act of 1940 providing a safe harbor under the definition of “investment company” for a SPAC that meets specified criteria. The criteria partly, but not fully, track the features of a “standard” SPAC. The safe harbor would be non-exclusive, so its impact on SPAC practices is uncertain.
6. New Rule 145a. A proposed new rule would provide that any business combination of a reporting shell company with a non-shell company is deemed to involve a sale of securities to the shareholders of the reporting shell company.
The comment period is short: May 31, 2022, or 30 days after Federal Register publication if that is later. An interesting implementation question, on which the proposing release appears to be silent, is the impact of the new rules (once adopted) on existing SPACs or pending de-SPACs.
We’re working on a detailed analysis of the proposal and its implications and will share our analysis on Cleary M&A and Corporate Governance Watch as soon as practicable. Stay tuned.