On January 24, 2024, the SEC issued a 581-page release which adopted new rules to govern SPAC IPOs and de-SPAC business combinations. To a large extent the new rules were adopted as proposed, but the SEC elected not to adopt some of its more contentious proposals. Time will tell how the adoption of these rules will affect market participants; many of the newly adopted disclosures and processes have already found their way into the market, and the new rules on liability have been expected for a long time. Accordingly, notwithstanding the adoption of these new rules, we expect de-SPAC transactions should remain a viable option for many companies looking to go public as compared to a traditional IPO if they view a de-SPAC as a better route.
Here are 9 key takeaways from the new rules:
- SPAC IPO Underwriters Will Not Automatically be Deemed Statutory Underwriters of the Subsequent De-SPAC Transaction. The SEC elected not to adopt its proposal that would have determined that a SPAC IPO underwriter who participates in a subsequent de-SPAC transaction is automatically deemed to be a statutory underwriter of the de-SPAC transaction. In addition, the SEC made clear that it does not intend “to signal that we believe that every de-SPAC transaction or offering of securities generally involves or needs the involvement of an underwriter.” The release also confirms that the SEC does not intend to suggest that a bank might be a statutory underwriter in traditional M&A unrelated to SPACs.
- At the same time, the adopting release reiterates the SEC’s view that a SPAC IPO underwriter could, based on the circumstances, be viewed as a statutory underwriter for the de-SPAC if it is “selling for the issuer or participating in the distribution of securities in the combined company to the SPAC’s investors and the broader public.” Given the ambiguity which the release creates on the statutory underwriter status of financial advisors and placement agents in de-SPAC transactions, it seems likely that the practice which has developed in de-SPAC transactions of banks creating a due diligence defense with legal opinions and comfort letters will continue.
- SPAC Boards are Not Required to Determine and Disclose Whether a De-SPAC is Fair. The SEC also did not adopt its proposal which would have required disclosure in a de-SPAC transaction of whether the SPAC thinks its de-SPAC transaction is “fair,” and the SEC release specifically states that SPAC sponsors do not need to obtain a fairness opinion. This is consistent with the SEC’s rules on IPOs and for traditional M&A, which do not require such board determinations. It also avoids liability and cost concerns raised by many commenters.
- The new SEC rules do require disclosure of the SPAC board’s determination if state or foreign law requires the SPAC’s board to determine whether the de-SPAC is advisable and in the best interests of the SPAC and its shareholders or to make any comparable determination. For example, Delaware law requires the board to determine if a merger is advisable – for a SPAC organized in Delaware, the disclosure in a de-SPAC prospectus would need to indicate if the board determined the transaction was advisable and discuss the material factors the board considered in making that determination. This is consistent with what has been disclosed historically, and it does not carry the risk associated with disclosure regarding the fairness of the transaction.
- The New Disclosure Requirements for SPAC IPOs and De-SPACs are Extensive But Manageable. The large bulk of the new SEC rules will add significant new disclosure requirements for SPAC IPO and de-SPAC transactions, particularly regarding sponsor conflicts of interest, sponsor compensation and potential future dilution at different redemption levels. However, a substantial amount of the new requirements are consistent with current market practice, or current best practice, such as requiring disclosure of the background of a de-SPAC transaction, material terms of financing, shareholder redemption rights, material interests of insiders, appraisal rights, beneficial ownership giving effect to the de-SPAC transaction, and the business, properties and legal proceedings of the target company. Some of the new requirements were borrowed from the going private or M&A rules, such as whether a majority of unaffiliated security holders is required to approve the de-SPAC, whether any unaffiliated representative acts on behalf of unaffiliated shareholders and whether the de-SPAC was approved by a majority of non-employee directors.
- The SEC declined to adopt some other proposals from commenters such as disclosure of net cash per share held by the SPAC or break-even points for shareholders or the SPAC sponsor. It also dropped its proposed requirement to include a SPAC organizational chart. The new disclosure rules will lead to some changes in SPAC IPO prospectuses and de-SPAC registration statements, but they should not tilt the balance between going public through a traditional IPO compared to a de-SPAC transaction.
- As in IPOs, Projections Used in De-SPAC Transactions will not Benefit from the Forward-Looking Statements Safe Harbor. As anticipated, the SEC adopted a new rule which results in the forward-looking statements safe harbor for projections not applying to de-SPAC transactions. The lack of safe harbor protection could increase the risk of disclosing projections in connection with de-SPAC transactions, but matches the standard of liability already currently applicable to IPOs. Time will tell what the absence of safe harbor protection will have on the use of projections in de-SPAC transactions - the SEC acknowledged that the bespeaks caution doctrine, and other SEC rules, may alternatively provide protection from liability to the use of projections even where the safe harbor is not available.
- The SEC also adopted some new disclosure requirements for projections contained in any SEC filings as well as projections used in de-SPAC transactions. The SEC adopted a new rule requiring disclosures in connection with projections which constitute non-GAAP financial measures in any SEC filing, but confirmed in response to comments that prior SEC staff guidance regarding projections provided to a financial advisor and disclosed in a merger proxy statement would continue to apply.
- The Target Company Will be Required to be a Co-Registrant on and Assume Liability for the Disclosure in Any S-4 or F-4 Filed in a De-SPAC Transaction. As proposed, the SEC will require a target company to become a co-registrant on any Form S-4 or F-4 filed by a SPAC (or a holding company) in a business combination. This means that the target company, its principal executive, accounting and financial officers, and its directors, will be liable for material misstatements or omissions in the disclosure in the Form S-4 and F-4, even where the target company is not the direct issuer of the securities in the transaction. This expands the liability of a target company and its officers and directors in a de-SPAC transaction to be similar to their liability in a traditional IPO.
- Any Business Combination of a SPAC with an Operating Company Will be Deemed to involve a Sale of Securities to the SPAC’s Shareholders, Which in Most Cases will Require SEC Registration and Liability for the Disclosure. As expected, the SEC adopted a new rule which provides that any business combination of a shell company including a SPAC with an operating company will be deemed to involve a sale of securities to the SPAC’s shareholders, which in most cases will require registration of the de-SPAC transaction, even if no securities are otherwise being offered. Similar to requiring the target company to be a co-registrant on any S-4 or F-4, this will expand the liability of a target company and its officers and directors for the disclosure in a de-SPAC transaction to be similar to their liability in a traditional IPO. This may increase liability in some deals, but the large majority of de-SPAC transactions in recent years were already being SEC-registered in any event.
- Disclosure Materials Must be Mailed 20 Days before the SPAC’s Shareholder Meeting. As proposed, the SEC will require a period of 20 days to elapse between mailing disclosure materials to shareholders and holding the SPAC’s shareholder meeting to approve a de-SPAC transaction. There is currently no minimum required period under securities law, and not all de-SPAC transactions historically have adhered to a 20-day requirement. Undoubtedly market participants will adjust to this development and build the 20 days into deal timetables. The key effect of this rule will be greater pressure to clear SEC comments, particularly as a SPAC reaches the deadline for when it must complete its initial business combination.
- The SEC Did Not Adopt a Provision That Suggested Many SPACs Might be or Become Investment Companies. The SEC declined to adopt a safe harbor to the Investment Company Act which would have suggested a SPAC could be an investment company if it did not comply with specified parameters, including where the SPAC has not signed a business combination agreement within 18 months or closed the business combination within 24 months.
- Instead, the SEC set out its views on the facts and circumstances that are relevant to whether a SPAC is an investment company: (1) a SPAC which owns US government securities, money market funds and cash is more likely not to be considered an investment company; (2) a SPAC which invests in government bonds or a minority interest is more likely to be an investment company; (3) a SPAC whose management spent a considerable amount of time managing the SPAC’s portfolio weighs in favor of the SPAC being an investment company; (4) a SPAC operating beyond 12 or 18 months raises concerns that it may be an investment company; (5) a SPAC that holds itself out as a fixed-income investment or as an opportunity to invest in Treasury securities is likely to be an investment company; and (6) a SPAC which merges with an investment company is likely to be an investment company at some point prior to the de-SPAC transaction.
- As with the question of statutory underwriter liability, the SEC declined to adopt its proposed rule, but provided guidance consistent with the premise of the withdrawn rule. Given the absence of clear lines, some SPACs may decide to follow some existing SPACS who have moved their funds into cash accounts after 12 or 18 months in order to eliminate any question about their investment company status.
- Compliance with the New Rules Will Not be Required for at Least 4 Months. Compliance with the new rules will not be required until 125 days after they are published in the Federal Register. This means that current SPAC IPOs under SEC review, and current de-SPAC transactions almost ready to close, will not be governed by the new rules if they close in the next few months. In addition, the new rules requiring in-line tagging of SEC filings by SPACs will not become effective until 490 days after they are published in the Federal Register.
While the new SEC rules mostly aim to make the de-SPAC transaction more similar to a traditional IPO, the SEC specifically declined to adjust a number of rules which penalize former SPACs as compared to companies who go public in a traditional IPO. These include (1) requiring the shareholders of former SPACs who use Rule 144 to comply with a current public information requirement forever, (2) treating former SPACs as ineligible issuers who cannot use free writing prospectuses for three years after the de-SPAC transaction, (3) prohibiting broker-dealers from using the Rule 137, 138 and 139 safe harbors for research reports about former SPACs for three years after the de-SPAC transaction and (4) prohibiting the use of Form S-8 by former SPACs until 60 days after filing Form 10 information. Updates to these and other rules will need to await the next rulemaking.