On January 24, 2024, the U.S. Securities and Exchange Commission (the “SEC”) adopted new final rules relating to special purpose acquisition companies (“SPACs”). The new rules affect both initial public offerings (“IPOs”) for SPACs and so-called “de-SPAC” transactions involving target companies who enter into a business combination with SPACs. In summary, the new rules appear intended to harmonize the requirements (and potential liability for SPAC acquisition targets) of de-SPAC transactions with those of a traditional initial public offering, to the extent such requirements did not already apply. In particular, the new rules limit the ability to rely on previously available protections regarding the use of projections, render acquisition targets clearly liable under the Securities Act of 1933 (the “Securities Act”) and omit the safe harbor included in the proposed rules from SPACs being deemed investment companies under the Investment Company Act of 1940. In certain circumstances, the new rules actually impose more stringent requirements on de-SPAC transactions, such as longer minimum dissemination periods for proxy statements in de-SPAC transactions than those that apply in IPOs[1].
In recent years, the option of a private business combining with a SPAC had acquired a reputation for having certain advantages over traditional IPOs, including greater flexibility with respect to the use of financial projections, a considerably faster IPO and de-SPAC process (at the expense of more potential scrutiny during the de-SPAC review process), and potential benefits from the expertise and knowledge of the officers and directors of the SPAC that might not otherwise be available. Conversely, SPACs have also drawn scrutiny for the potentially dilutive effects that the sponsor ownership structure might have on other stockholders (sponsors have traditionally enjoyed a 20 percent preferred equity return[2]), and the returns that de-SPAC transactions have historically offered compared to conventional IPOs.
New Disclosure Requirements and Considerations for SPAC Acquisition Target Companies
In the past few years, it has been common for SPACs and acquisition targets to include financial projections in proxy statements or registration statements on Form S-4, which has not been typical in conventional IPOs due to the unavailability of the safe harbor provided by the Private Securities Litigation Reform Act (“PSLRA”) for initial public offerings or offerings by blank check companies[3]. The new rules explicitly provide that this safe harbor is also not available for projections in de-SPAC filings[4].
The new rules also explicitly provide that the acquisition target company is considered a co-registrant under the Securities Act. This means, among other things, that the principal officers (including the CEO and CFO) and a majority of the board of directors of the target must sign the registration statement relating to the de-SPAC transaction, and that these individuals will be subject to strict liability under Section 11 of the Securities Act[5].
The new rules also include a range of additional disclosure requirements relating to projections, including (a) clear distinctions between projections based on historical results of operations and those not based on such historical results, and (b) the date of and purpose for which the projections were prepared, the views of the preparer of such projections and whether such projections still reflect the views of management and the board of directors[6]. While it has been standard practice to disclose a determination whether the proposed transaction is fair or unfair to the SPAC’s unaffiliated securityholders, such disclosure is now required if such a determination is required under the laws of the SPAC’s jurisdiction of organization.
Also, the new rules include several additional disclosure requirements relating to potential and actual conflicts of interest between the SPAC’s sponsor, officers and directors, affiliates, and promoters, additional biographical and other information regarding such persons, enhanced disclosure regarding possible dilution to investors, and technical requirements that new disclosures be tagged in Inline XBRL for ease of electronic searching and discovery[7].
Investment Company Act Considerations
The SEC declined to adopt the safe harbor in the proposed rules under which a SPAC would not be deemed an “investment company” under the Investment Company Act of 1940 (the “40 Act”). Instead, the SEC adopted a facts and circumstances test, including the following factors: (a) the nature of the assets and income of the SPAC (e.g. if it does not hold investment securities as defined under the 40 Act and does not propose to acquire any, it is not likely to be deemed an investment company); (b) whether management is actively attempting to enter into a de-SPAC transaction, and whether management is in the business of providing advice, analysis or reports concerning securities; (c) the duration of time the SPAC operates prior to entering into an agreement with a target company; (d) whether it holds itself out in a manner that suggests investors should invest primarily to gain exposure to its portfolio of securities; or (d) whether the SPAC engages or proposes to engage in a de-SPAC transaction with an investment company[8].
It bears pointing out that considering the SEC’s refusal to accept the proposed safe harbor, SPACs whose strategy or mandate involves potential acquisitions in the asset management or investment management industries should prepare for the likelihood of registering as an investment company, even if a proposed target has already done so. In addition, the new rules present challenges for SPACs or target companies who are considering minority investments, or who operate or propose to operate in foreign jurisdictions where majority ownership is restricted by local law, as such investments would likely constitute investment securities under the 40 Act.
Conclusion
The new de-SPAC rules are voluminous and comprehensive in their scope, and this is only a summary of their contents and reach. While these new rules confirm that current SEC policy seeks to impose stringent requirements on SPACs and their activities, they are not unexpected, nor do they prohibit SPACs or possible target companies from exploring possible transactions.
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[1] https://www.sec.gov/files/rules/final/2024/33-11265.pdf, p. 174-175.
[2] https://www.sec.gov/news/statement/gensler-statement-final-rule-01242
[3] https://www.sec.gov/files/rules/final/2024/33-11265.pdf, p. 232-233.
[4] https://www.sec.gov/files/rules/final/2024/33-11265.pdf, p. 256-258.
[5] https://www.sec.gov/files/rules/final/2024/33-11265.pdf, p. 192.
[6] https://www.sec.gov/files/rules/final/2024/33-11265.pdf, p. 352-356.
[7] https://www.sec.gov/files/rules/final/2024/33-11265.pdf, p. 64-66.
[8] https://www.sec.gov/files/rules/final/2024/33-11265.pdf, p. 365-370.
