Freshfields Bruckhaus Deringer US LLP has provided a comment letter to the Securities & Exchange Commission with respect to the SEC’s proposed rulemaking regarding special purpose acquisition companies and business combinations involving SPACs.
Following a record number of SPAC IPOs and de-SPAC business combinations during 2020 and 2021, the SEC’s proposed rulemaking has unfortunately had a chilling effect on the SPAC and de-SPAC market during 2022, and threatens to severely curtail what has become an attractive avenue for private companies to access the public markets in the United States. The SEC’s proposals aim to even the playing field between the de-SPAC business combination and the traditional IPO, but in many ways make the de-SPAC transaction much less certain and attractive in comparison.
Freshfields’ comments focus on the following key elements of the SEC’s rulemaking:
- Increased Underwriter Liability. The SEC’s proposal provides that any underwriter of the SPAC’s IPO who takes steps to facilitate the de-SPAC transaction or any related financing transaction, or otherwise participates (directly or indirectly) in the de-SPAC transaction, will incur statutory underwriter liability for the disclosures made in the de-SPAC transaction, thereby requiring such underwriter to serve in a gatekeeper function to ensure the adequacy of the disclosures being made.
However, this proposal is inconsistent with the statutory definition of the term “underwriter” and decades of cases interpreting that definition, and inappropriately conflates the SPAC’s IPO with its later business combination. This could arguably make financial advisors in traditional M&A transactions similarly liable for the disclosure documents in those transactions, would potentially make the SPAC IPO underwriters liable for projections and fairness determinations which are not included in traditional IPOs, and could result in fewer investment banks participating in SPAC transactions in order to avoid potential liability.
- Disclosure of the Fairness of a de-SPAC Transaction. The SEC’s proposal requires companies to state whether the SPAC reasonably believes that the de-SPAC transaction and any related financing transaction is fair or unfair to unaffiliated security holders and to discuss in reasonable detail the material factors upon which their belief is based.
However, there is no similar requirement in traditional IPOs and merger transactions, the requirement would likely require SPACs to obtain fairness opinions in order to support the disclosure, the disclosure goes beyond what is typically stated in a fairness opinion, the fairness requirement could invite litigation following de-SPAC transactions, and the requirement has been copied from the vastly different going private context which is inherently much more conflicted.
- New Investment Company Act Safe Harbor. The SEC’s proposal provides a safe harbor for SPACs from the requirement to register as an investment company so long as, among other things, the SPAC reaches an agreement with a target company within 18 months after its IPO and consummates its de-SPAC transaction within 24 months after its IPO.
However, this safe harbor is not necessary because the SEC and courts generally have never before viewed SPACs as investment companies. In particular, regarding the suggested time horizons, the stock exchanges provide 36 months for SPACs to complete their business combinations, and many SPACs historically and currently are not able to satisfy the 18 month and 24 month requirements of the safe harbor.
- Treating de-SPAC Transactions More Like Traditional IPOs. Given the SEC’s articulated aim of treating de-SPAC business combinations more like traditional IPOs, the Freshfields comment letter urges the SEC to make other changes in its rules in order to further this goal, including:
- allowing SPACs to use free writing prospectuses immediately;
- allowing SPACs to become WKSIs after 1 year like traditional newly public companies;
- allowing the shareholders of SPACs to utilize the Rule 144 resale safe harbor in the same manner as the shareholders of traditional newly public companies;
- allowing research analysts for SPACs to utilize the traditional research safe harbors in Rule 138 and 139; and
- allowing SPACs to file Form S-8 immediately after the closing of the de-SPAC transaction.
The Freshfields comment letter also addresses many other aspects of the SEC’s rule proposal, including (1) the proposed dilution disclosure requirement, (2) disclosure regarding promoters, (3) disclosure regarding director votes against or abstaining from the de-SPAC transaction, (4) the requirement to affirm projections as of the date of the filing, (5) the requirement to make the target company a co-registrant on the SPAC’s registration statement, (6) the requirement to register all de-SPAC transactions whether or not they involve an offer of securities, and (7) the timing of effectiveness of the proposals.
The Freshfields comment letter can be found here.