On January 24, 2024, the Securities and Exchange Commission (the SEC), following a 3-to-2 vote of the SEC's Commissioners, announced the adoption of new final rules and amendments intended to enhance disclosures and provide additional investor protections in initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and target companies (de-SPAC transactions).

As long expected by market participants, the SEC's new rules largely aim to harmonize the disclosure regime and legal liabilities between SPAC IPOs and de-SPAC transactions, on the one hand, and traditional IPOs, on the other. SEC Chair Gary Gensler stated that "Today's adoption will help ensure that the rules for SPACs are substantially aligned with those of traditional IPOs, enhancing investor protection through three areas: disclosure, use of projections, and issuer obligations."

Among other things, the final rules and amendments make the following changes to SPAC IPO and de-SPAC transactions:

Enhanced Disclosures
  • The compensation of, and conflicts of interest involving, the SPAC's sponsor team in the SPAC's IPO and any potential de-SPAC transaction.
  • More information about private targets seeking to enter the public markets through a de-SPAC transaction.
  • The dilution that investors may experience as a result of the de-SPAC transaction.
  • Any agreements, arrangements, or understandings between the SPAC sponsor team and unaffiliated security holders of the SPAC regarding their redemption of outstanding securities.
  • New disclosures on the front cover and in the summary of prospectuses regarding the time frame for the SPAC to consummate a de-SPAC transaction, redemptions, dilution, conflicts of interest, and SPAC sponsor compensation.
  • Disclosure of factors considered by a SPAC's board of directors in making a decision to proceed with a de-SPAC transaction.
Liabilities
  • Target companies will now be required to sign registration statements filed by a SPAC in connection with the de-SPAC merger transaction, making the target a "co-registrant."
  • The Private Securities Litigation Reform Act of 1995's safe harbor for forward-looking statements will become unavailable for certain blank check companies, including SPACs.
Projections
  • Projected financial information must have a reasonable basis.
  • Projected measures that are not based on historical financial results or operational history will be required to be clearly distinguished from those projections based on historical results or operational history.
  • It will be considered misleading to present projections that are based on historical financial measures or operating history without presenting such historical measures or operational history with equal or greater prominence.
  • De-SPAC transaction registrants ae required to provide disclosures on the purpose for including projections in a filing and the party that prepared the projections, the material bases of disclosed projections and whether the projections reflect the view of the board and management of the SPAC or the target company, as applicable.
Tender Offer Filing Obligations
  • Any Schedule TO filed in connection with a de-SPAC transaction will be required to contain substantially the same information about a target that is required under the proxy rules.
  • A SPAC must comply with the procedural requirements of the tender offer rules when conducting the transaction for which the Schedule TO is filed.
Smaller Reporting Company Status
  • Post-de-SPAC transaction registrants must redetermine the SPAC's smaller reporting company ("SRC") status prior to the time it makes its first SEC filing (other than the Form 8-K filed with Form 10 information) and to reflect this determination in its next periodic report instead of waiting until its next annual determination date.
  • The public float must be measured as of a date within four business days after the consummation of the de-SPAC transaction and annual revenues must be measured using the annual revenues of the target as of its most recently completed fiscal year.


The final rules differ in certain respects from the rules that were proposed on March 30, 2022 (as discussed in our April 4, 2022 Capital Markets & Securities Law Watch blog post), including:

  • Fairness Opinions: the proposed rules initially would have required a statement from the SPAC as to whether it reasonably believed that a de-SPAC transaction (and related financing transactions) was fair or unfair to the SPAC's unaffiliated shareholders. After receiving a number of comments that the proposed rule could be interpreted to require a fairness opinion (even if not explicitly required), the SEC noted that the final rules revised new Item 1606(a) to focus on situations in which a determination as to the advisability of the de-SPAC transaction is required by the law of the jurisdiction in which the SPAC was organized, which they believe makes clear that Item 1606(a) does not require the de-SPAC transaction to be substantively fair or the SPAC to make a fairness determination when it is not otherwise required to do so under state or applicable foreign corporate law.
  • Underwriter Liability: the proposed rules included a new Rule 140a that would clarify that anyone who acts an underwriter in a SPAC IPO and participates in the distribution associated with a de-SPAC transaction by taking steps to facilitate that transaction (or a related financing transaction) is engaged in the distribution of securities of the surviving public entity and would be treated as underwriter under Section 2(a)(11) of the Securities Act (i.e. liability protections similar to those in traditional underwritten IPOs would apply to de-SPAC transactions in which a statutory underwriter has participated). After receiving comments about the impact of the proposed Rule 140a on the SPAC market due to increased costs and liability/litigation risks, the SEC decided to decline to adopt the proposed Rule 140a, but provided general guidance regarding statutory underwriter status and followed existing practice of applying Section 2(a)(11) flexibly.
  • ICA Safe Harbor: the proposed rules included a new Rule 3a-10 under the Investment Company Act, which would have provided a safe harbor from the definition of an investment company for certain SPACs. The SEC decided not to adopt Rule 3a-10, and instead provided its view on the facts and circumstances that are relevant to whether a SPAC meets the definition of an investment company.

The new rules and amendments are set to take effect 125 days after their publication in the Federal Register. Compliance with structured data requirements, involving the tagging of information pursuant to new subpart 1600 of Regulation S-K in Inline XBRL, will be required 490 days after the rules are published in the Federal Register.

The announcement today of the new rules discussed above highlights the increased scrutiny that SPACs and de-SPAC transactions have undergone in recent years, and it remains to be seen whether these new requirements will further cool off the SPAC market. As Commissioner Hester Peirce noted in a statement on the adoption of the new rules, "the rule will exacerbate a problem—the shrinking pool of public companies—by closing down one road into the public markets. Certain features of [SPACs] needed fixing, but the market was fixing them before the Commission proposed this rule."

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