April 8, 2022
As the market for special purpose acquisition company (SPAC) initial public offerings (IPOs) continues to grow exponentially – with over $83 billion and $160 billion raised in 2020 and 2021, respectively – the SEC is stepping in to propose changes to the provisions of the federal securities laws that would treat SPACs more like traditional IPOs.
The SEC’s proposal includes enhanced disclosures regarding, among other things, SPAC sponsors, conflicts of interest, and dilution. The proposal would also require additional disclosures on de-SPAC transactions, including with respect to the fairness of these transactions to the SPAC investors. The proposal also captures private operating companies, deeming them to be “co-registrants” under any registration statement filed regarding the de-SPAC transaction.
The proposal would deem underwriters in a SPAC IPO to be underwriters in a subsequent de-SPAC transaction when certain conditions are met, and it would also amend the definition of “blank check company” to make it more difficult to rely on the liability safe harbor from private litigation.
With respect to the de-SPAC transaction, the proposed rule would deem a business combination transaction involving a reporting shell company and another entity that is not a shell company to constitute a sale of securities to the reporting shell company’s shareholders. This would better align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for IPOs.
The SEC is also proposing a new rule under the Investment Company Act that would establish a safe harbor from investment company act status for SPACs under certain conditions.
This rulemaking reflects the SEC’s view that SPAC IPOs are a way around the more regulated traditional IPOs, and that investors deserve the protections they receive from traditional IPOs. These include protections with respect to information asymmetries, fraud, conflicts, marketing practices, gatekeepers, and issuers. The rulemaking is in addition to the SEC’s enforcement efforts, where Chair Gary Gensler has signaled a continued emphasis on aggressive enforcement action related to SPACs.
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