Guidance on Navigating the SEC’s Final Rules on SPAC IPOs and De-SPAC Transactions

March 7, 2024

Ringing in the new year, as expected, the Securities and Exchange Commission (SEC) adopted final rules for transactions involving Special Purpose Acquisition Companies (SPACs). These rules, detailed in the 581-page release, add new sections to Regulations S-K and S-X. The rules become effective 125 days following publication in the Federal Register, so likely sometime in June of this year.

Here is a summary of the new rules and some guidance for compliance.

Disclosure Requirements

The new rules require:

  • Experience and Involvement: Detailed disclosure of the SPAC sponsor’s experience in organizing SPACs and the extent of its involvement in other SPACs.
  • Roles and Responsibilities: Disclosure of the sponsor’s roles in managing the SPAC, including its business operations and material responsibilities.
  • Compensation and Securities Arrangements: Disclosure of compensation details for the sponsor, including securities issued in connection therewith and transfer restrictions thereon.
  • Identity and Interests of Controlling Persons: Disclosure of information about controlling persons and their material interests in the SPAC sponsor.
  • Redemption Arrangements: Disclosure of arrangements related to the redemption of SPAC securities between the sponsor and unaffiliated shareholders.
  • Conflicts of Interest: Disclosure of potential conflicts of interest among SPACs, their affiliates, and investors to enhance transparency in operations.
  • Dilution Risks: Disclosure of scenarios that may lead to investor dilution, including compensation paid to sponsors or affiliates and redemptions.
  • Board Opinion on de-SPAC transactions: Disclosure of the board’s evaluation of the de-SPAC transaction, including a non-exhaustive list of factors considered by the board in making its determination, such as third-party reports and financial terms.
  • New Cover Page Disclosure: Key disclosures related to sponsor compensation, dilution, and conflicts of interest must be standardized on the cover page of the prospectus summary of registration statements.
  • Expanded Target Company Disclosure: Expanded disclosures for the target company in a de-SPAC transaction, encompassing business description, property, legal proceedings, accounting disagreements, security ownership, and recent unregistered securities sales.
  • De-SPAC Background: Detailed disclosure for the background, rationale, terms, and impact of a proposed de-SPAC transaction, including related financing arrangements.

Technical Changes

  • Minimum Dissemination Period: A minimum 20-day dissemination period for prospectuses, proxy, or information statements related to a de-SPAC transaction is required.
  • SRC Status Evaluation: Post-de-SPAC, the combined company must reassess its Smaller Reporting Company status, reflecting any changes in filings 45 days post-closing.
  • De-SPAC as Sale of Securities: The new rules classify a de-SPAC transaction involving a reporting shell company and a non-shell entity as a sale of securities under Section 2(a)(3) of the Securities Act.
  • Enhanced Financial Statement Requirements: The financial statement requirements for de-SPAC transactions have been revised to align more closely with traditional IPOs.
  • Structured Data Requirements: Consistent with recent SEC practices, the new rules include structured data requirements for filings.
  • Investment Company Status Considerations: The SEC refrained from adopting a safe harbor for SPACs under the Investment Company Act. Instead, SPACs must evaluate their investment company status based on specific circumstances, with guidance on actions that might tip the scales toward such a status.

Liability Considerations

The new rules create some new liability considerations of which you should be aware:

  • Target Company as Co-Registrant: Under the new rules, the target company in a de-SPAC transaction becomes an issuer, with its key officers and a majority of its board required to sign the registration statement, thus incurring Section 11 liability under the Securities Act for misstatements or omissions.
  • Underwriter Status: The SEC’s broad interpretation of “underwriter” status in de-SPAC transactions includes any party selling for the issuer or participating in a distribution, avoiding a specific rule for parties acting as underwriters in a SPAC IPO and subsequent de-SPAC transaction. As underwriter status can result in statutory liability under the 1933 Act, you should be keenly aware of this additional exposure.
  • Projections and Forward-looking Statements: Enhanced disclosure for projections in de-SPAC transactions is mandated. Additionally, new definitions in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act exclude SPACs from the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Significance of the New Rules

The SEC’s final rules represent a monumental shift in the regulation of SPACs, emphasizing enhanced disclosures, investor protection, and aligning de-SPAC transactions with traditional IPO standards. As the financial landscape adapts to these changes, the rules are poised to significantly impact SPAC operations and investor relations in several ways:

  • Enhanced Investor Protection: By requiring more comprehensive disclosures, the rules aim to safeguard investors in SPAC IPOs and de-SPAC transactions.
  • Accountability for Projections: Removing safe harbor protections, the rules hold SPACs accountable for their forward-looking statements, thus addressing over-promising in de-SPAC transactions.
  • Target Company Liability: The rules extend liability to SPAC targets, ensuring more responsible disclosure in de-SPAC registrations.

We expect that these changes will have profound implications for how SPACs operate and are perceived in the capital markets. Whether the stated goal of harmonizing SPAC IPOs and de-SPAC transactions with traditional IPOs is successful is yet to be seen, but sponsors and the professionals who support them should be aware of these forthcoming changes when structuring transactions.

For further information, contact your Croke Fairchild lawyer or David Lopez-Kurtz at the contact information below.

David Lopez

Office: 872.224.2940
Telegram: @davidlopezkurtz