A Summary and Early Analysis of SEC Final SPAC Rules

By vote of 3 to 2, the U.S. Securities and Exchange Commission (SEC or Commission) on Jan. 24, 2024, adopted new rules and amendments (SPAC Rules) pertaining to special purpose acquisition companies (SPACs),¹ with the stated goal to "protect investors by addressing information asymmetries, misleading information and conflicts of interest in SPAC and de-SPAC transactions."² A SPAC is a type of blank check or shell company that through an initial public offering (IPO) raises public capital for the sole purpose of identifying and merging with a private operating company. In the interim, the offering proceeds are placed into a trust or escrow account. After finding a suitable target for acquisition, the SPAC merges with the target, which effectively results in the private target becoming a publicly traded, SEC-reporting company (de-SPAC transaction).

The SPAC Rules are intended to enhance disclosures and provide additional investor protection in SPAC IPOs and subsequent de-SPAC transactions with target companies.³ The rules also broadly address investor protection concerns with respect to shell companies and blank check companies, including SPACs.

Among other things, the SPAC Rules:⁴

• increase disclosure requirements for SPAC sponsor compensation, conflicts of interest, dilution, the target company and other information that is important to investors in SPAC IPOs and de-SPAC transactions
• require, in certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company) and thus assume legal responsibility under the Securities Act of 1933, as amended (Securities Act), for the disclosures in the registration statement filed in connection with the de-SPAC transaction
• deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company's stockholders
• take steps to align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA)

In addition, the Commission provides guidance to assist SPACs in assessing when they may meet the definition of an investment company under the Investment Company Act of 1940, as amended (Investment Company Act), and assist parties in determining statutory underwriter status under the Securities Act in connection with de-SPAC transactions.

SPAC IPOs and De-SPAC Transactions

Private Company as Co-Registrant.⁵ The SPAC Rules address the Commission's belief that, in substance, it is the private operating company that issues or proposes to issue its securities as securities of the newly combined public company following a de-SPAC transaction. Accordingly, the target company will now be an issuer that must sign the Securities Act registration statement filed by a SPAC (or other shell company) in connection with a de-SPAC transaction. To this effect, the SPAC rules:

• mandate that the names of all co-registrants appear on the cover page⁶
• declare that the target company is a registrant and not merely a signatory to the registration statement
• revise the instructions to Forms S-4 and F-4 to provide that in de-SPAC transactions involving the purchase of assets or a business, the term "registrant" includes the seller of the business or assets⁷
• expand the instructions to Forms S-4, F-4, S-1 and F-1 to require that the target company and its related Section 6(a) signatories sign a registration statement for a de-SPAC transaction filed by a holding company
• expand Section 11 liability to the target (strict liability), its principal executive officers and board of directors (subject to a due diligence defense) or similar governing body for any material misstatements or omissions in the registration statement⁸

Additional Disclosure Requirements.⁹ The SPAC Rules impose additional disclosure requirements regarding, among other things:

• SPAC sponsor compensation
• the material roles, responsibilities and existing agreements between the SPAC sponsors and the SPAC
• the controlling persons of the SPAC sponsor and any persons who have direct or indirect material interests in the SPAC sponsor
• conflicts of interest between 1) the SPAC sponsor or its affiliates, 2) SPAC officers, directors or promoters and the target company's officers or directors, and 3) unaffiliated security holders of the SPAC
• SPAC registration statements, excluding those for a de-SPAC transaction, requiring that they include a description of all material potential sources of future dilution following a SPAC IPO, including tabular disclosure¹⁰
• de-SPAC registration statements requiring that they include a description of all material potential sources of future dilution that non-redeeming stockholders may experience by electing not to tender their shares in a de-SPAC transaction¹¹
• for each redemption level, disclosure of the company's valuation at or above which the potential dilution results in the amount of the non-redeeming stockholders' interest per share being at least the IPO price per share of common stock
• inclusion of a description of the model, methods, assumptions, estimates and parameters necessary to understand tabular disclosure of redemption scenarios and potential dilution of stockholder interests¹²
• disclosure of the board's determination of whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its stockholders, if required by law, and any outside report, opinion or appraisal received that materially relates to the de-SPAC transaction¹³

Redetermination of Smaller Reporting Company (SRC) Status.¹⁴ SRC status allows companies to avoid certain disclosure required in a traditional IPO.¹⁵ Currently, most SPACs qualify as SRCs. Under the current rules, a SPAC may retain SRC status following a de-SPAC transaction until its next annual determination date if the SPAC is the legal entity that is the reporting company following the de-SPAC transaction. Under the SPAC Rules, the registrant must redetermine its SRC status after completion of the de-SPAC transaction, and such redetermination must be reflected in filings beginning 45 days after consummation of the de-SPAC transaction.

Minimum Dissemination Period.¹⁶ The SPAC Rules impose a 20-calendar-day minimum dissemination period for prospectuses and proxy and information statements filed for de-SPAC transactions where consistent with local law.

Shell Company Business Combinations

The SPAC Rules include new Rule 145a to provide that "any direct or indirect business combination of a reporting shell company involving another entity that is not a shell company, is deemed to involve an offer, offer to sell, offer for sale, or sale" within the meaning of Section 2(a)(3) of the Securities Act.¹⁷ This has the effect of requiring that a de‑SPAC transaction be registered under the Securities Act or otherwise qualify for an exemption.¹⁸

The SPAC Rules also adopt new Article 15 of Regulation S-X to more closely align the financial statement reporting requirements in business combinations involving shell companies and private operating companies with those of traditional IPOs.¹⁹

Projections Disclosure

The SPAC Rules adopt a definition of "blank check company" under the PSLRA that captures SPACs, thus making the PSLRA's safe harbor for forward-looking statements unavailable for SPACs. The new definition provides that "the term blank check company means a company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person."²⁰ This definition of "blank check company" in Rule 405 and Rule 12b‑2 aligns the regulatory treatment of projections by SPAC entities with that of traditional IPOs in an effort to discourage blank check companies from making unreasonable forward-looking statements.

For de-SPAC transactions, the SPAC Rules also include disclosure requirements related to projections, including disclosure of "all material assumptions underlying the projections, and any factors that may impact such assumptions."²¹

Lastly, the SPAC Rules update and expand guidance on the use of projections in all SEC filings, including a mandate that companies distinguish between projected measures that are or are not based on historical financial results or operational history.²²

SEC Guidance on Investment Company Status and Underwriter Status

In addition to the SPAC Rules, the SEC chose to issue guidance, rather than adopt formal rules, with respect to determining 1) whether a SPAC constitutes an "investment company" under the Investment Company Act and 2) the liability of underwriters participating in the IPO.

Investment Company Status.²³ The SEC chose not to adopt its initial proposed rule to provide a nonexclusive safe harbor from the definition of "investment company" under Section 3(a)(1)(A), reasoning that determination of investment company status was heavily fact-dependent. Instead, the SEC provided the following factors as instructive in a SPAC's analysis of whether it is an investment company:²⁴

• The Nature of the SPAC's Assets and Income: A SPAC that holds only the sort of securities typically held by SPACs prior to the completion of the de-SPAC transaction – such as U.S. government securities, money market funds and cash items – and does not propose to acquire investment securities, would be less likely to be considered an investment company under Section 3(a)(1)(C).
• Management: A SPAC appears more like an investment company if the officers, directors and employees of the SPAC did not actively seek a de-SPAC transaction or spent a considerable amount of their time actively managing the SPAC's portfolio for the primary purpose of achieving investment returns.
• Duration: The longer a SPAC has been operating prior to entering into an agreement with a target company and completing the de-SPAC transaction, the more difficult it is to distinguish the SPAC from an investment company.
• Holding Out: A SPAC is more likely to be an investment company if it markets itself in a manner that suggests that investors should invest in its securities primarily to gain exposure to its portfolio of securities prior to a de-SPAC transaction.
• Merger with an Investment Company: A SPAC is likely to be an investment company if it were to engage or propose to engage in a de-SPAC transaction with a target that meets the definition of investment company because it would be proposing to be engaged in the business of investing, reinvesting and trading in securities.

Statutory Underwriter Status.²⁵ The SEC also stopped short of adopting its initial proposal that would have subjected underwriters participating in the IPO to potential liability under Section 11 of the Securities Act with respect to the de-SPAC transaction if the underwriter facilitates the de-SPAC transaction or participated (directly or indirectly) in the de-SPAC transaction. Instead, the SEC guidance reflects an intention to continue applying the statutory terms of "distribution" and "underwriter" as broadly as the facts and circumstances of the transaction may warrant. For example, in a de-SPAC distribution, there may exist an underwriter "where someone 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."²⁶

Compliance Date

The SPAC Rules will become effective 125 days after publication in the Federal Register, except that compliance with the requirement to use Inline XBRL will not be mandatory until 490 days after publication in Federal Register.

Conclusion

In sum, the new rulemaking reflects a call by SEC Chair Gary Gensler and others to treat SPACs as an alternative method of conducting an IPO under the SEC's policy framework. The SPAC Rules will affect SPACs, shell companies and the use of projections in SEC filings. The effect of these rules will likely dampen any resurgence of the already cool SPAC market.²⁷

Notes

¹ The new rules and amendments were adopted as part of "Special Purpose Acquisition Companies, Shell Companies, and Projections," Release No. 33-11265 (Jan. 24, 2024) (Adopting Release). The SEC had issued "Proposed Rules" (Proposed Rules) on March 30, 2022.

² "SEC Adopts Rules to Enhance Investor Protections Relating to SPACs, Shell Companies, and Projections," SEC 2024-8 (Jan. 24, 2024) (Rules Release).

³ Rules Release.

⁴ "SPACs, Shell Companies, and Projections: Final Rules," SEC 2024-8 (Jan. 24, 2024).

⁵ Adopting Release, page 180.

⁶ Adopting Release, page 193.

⁷ Adopting Release, page 203.

⁸ Adopting Release, page 192.

⁹ Adopting Release, page 40.

¹⁰ Adopting Release, page 406.

¹¹ Adopting Release, page 94.

¹² Adopting Release, page 94.

¹³ Adopting Release, page 136.

¹⁴ Adopting Release, page 211.

¹⁵ For example, SRCs are not required to provide quantitative and qualitative information about market risk pursuant to Item 305 of Regulation S-K.

¹⁶ Adopting Release, page 173.

¹⁷ Adopting Release, page 512.

¹⁸ Adopting Release, page 468.

¹⁹ Adopting Release, page 21.

²⁰ Adopting Release, page 257.

²¹ Adopting Release, page 345.

²² Adopting Release, page 479.

²³ Adopting Release, page 360.

²⁴ Adopting Release, page 365.

²⁵ Adopting Release, page 279.

²⁶ Adopting Release, page 287.

²⁷ From 2021 to 2023, the number of SPAC IPOs declined from 613 to 31. Source: SPAC Analytics.

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