SEC Adopts Final Rules Regarding SPAC IPOs and SPAC Business Combinations

On Jan. 24, 2024, the Securities and Exchange Commission (SEC) adopted final rules that significantly expand disclosure and other requirements for initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and subsequent business combination transactions between SPACs and target companies (de-SPAC transactions).^[1]The final rules also amend the definition of “blank check company” to exclude SPACs from the safe harbor under the Private Securities Litigation Reform Act of 1995 (PSLRA) for projections and other forward-looking statements.

Key Aspects of the New SEC Rules

Enhanced Disclosures

The final rules require expanded disclosures for SPAC IPOs and de-SPAC transactions, including under new Subpart 1600 of Regulation S-K.

Sponsor information

New Item 1603(a) of Regulation S-K requires detailed disclosure regarding SPAC sponsors. This includes details about their business activities, professional background, significant roles, any agreements they have with the SPAC, its officers, directors or affiliates concerning the decision-making process for proceeding with a de-SPAC transaction, as well as a description of any payments or agreements regarding redemptions between a SPAC sponsor and any unaffiliated security holders of the SPAC. This Item also requires comprehensive disclosure of compensation awarded to, earned by or paid to SPAC sponsors, their affiliates and promoters.

Conflicts of interest

New Item 1603(b) requires disclosure of actual or potential material conflicts of interest relating to decisions to proceed with a de-SPAC transaction or compensation of the SPAC sponsor or its officers or directors that may arise between the SPAC sponsor or its affiliates, the SPAC’s directors, officers or promoters or the target company’s directors and officers and unaffiliated security holders of the SPAC. Examples include contractual or fiduciary duties owed to companies other than the SPAC or relationships between the SPAC sponsor and potential de-SPAC targets.

Dilution

New Items 1602 and 1604 require disclosures regarding material dilutive effects of compensation and security issuances to the SPAC sponsor, its affiliates and promoters, and tabular dilution disclosures on the outside front cover of the prospectus in the prospectus summary.

Other Disclosure Obligations

• • The final rules require expanded nonfinancial disclosures about the target company in a de-SPAC transaction, in part to ensure that investors receive this information in a timely manner to make voting, investment or redemption decisions in connection with a de-SPAC transaction.
  • New Item 1605 requires a summary of the background and negotiations of a de-SPAC transaction; a description of related financing transactions, including payments from the SPAC sponsor to investors; the reasons for engaging in the particular de-SPAC transaction; and an explanation of material differences in the rights of security holders of the post-business combination company.
  • New Item 1606(a) requires disclosure of the SPAC board's determination whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, when required by the SPAC’s jurisdiction of formation.
  • New Item 1606(b) requires disclosure of material factors the board considered in making any such determination, including, to the extent considered, target company valuation, financial projections and the terms of related financing transactions, including related PIPE financings.
  • New Item 1607 requires additional disclosures if the SPAC or SPAC sponsor has received any external reports, opinions or appraisals materially relating to the fairness of the de-SPAC transaction.

Legal Liability Standards

The new rules expand the potential liability for de-SPAC transactions, with the goal of aligning them more closely with traditional IPOs. The updates require the target company in a de-SPAC transaction to become a co-registrant with the SPAC, subject to potential Securities Act liability when a registration statement on Form S-4 or Form F-4 is filed in a de-SPAC transaction.

Additionally, new Rule 145a deems any business combination of a reporting shell company (including a SPAC) with another entity that is not a shell company to involve a sale of securities to the reporting shell company’s shareholders. The SEC explained its view that a de-SPAC transaction results in SPAC shareholders effectively exchanging each of their shares for a “new security” of the combined operating company, and that the registration statement for a Rule 145a transaction should register the exchange of all of the shell company shares outstanding immediately before the business combination, even if the shell company shareholders do not actually receive shares in the transaction. See Adopting Release at footnotes 954, 963.

In addition, the final rules amend the definition of “blank check company” to exclude SPACs from the safe harbor under the PSLRA for projections and other forward-looking statements.

Additional Requirements

The final rules also impose a 20-calendar-day minimum dissemination period for prospectuses, proxy statements and information statements filed in connection with de-SPAC transactions.

In addition, the final rules will require the reevaluation of a company’s status as a smaller reporting company following the completion of a de-SPAC transaction. Subsequently, any required filings must accurately reflect this determination within 45 days of finalizing the de-SPAC transaction.

Expanded Requirements for Projections

New Item 1609 of Regulation S-K requires additional disclosures for projections in de-SPAC transactions. Companies involved in de-SPAC transactions must now disclose why they made specific projections and who created the projections and provide details about the key elements and factors that influenced these projections. Additionally, the disclosures must indicate whether the projections still align with the views of the SPAC or the target company’s board or management as of the most recent practicable date prior to the filing.

Also, as discussed above, the final rules exclude SPACs from the protection of the PSLRA safe harbor for forward-looking statements. As a result, SPAC sponsors should carefully assess potential legal risks when determining whether and how to utilize projections in de-SPAC transactions.

In addition, the SEC has expanded its guidance on the use of projections in all SEC filings through amendments to Item 10(b) of Regulation S-K. These amendments require clear differentiation between projections that are based on historical results and those that are not, with historical results having equal or greater prominence when applicable. Projections featuring non-GAAP measures must clearly define those measures, describe the directly comparable GAAP measure, and explain the rationale for using the non-GAAP measure instead of the GAAP measure. Significantly, these guidelines extend to projections from entities other than the registrant, such as the target company in a business combination transaction included in the registrant’s filings.

Significant Proposals Not Adopted

Instead of enacting final rules on statutory underwriter status in de-SPAC transactions and the treatment of SPACs under the Investment Company Act of 1940, the SEC has provided guidance on these subjects.

Investment Company Act

The SEC did not adopt the safe harbor under proposed Rule 3a-10 under the Investment Company Act to exempt SPACs from being classified as investment companies. Instead, the SEC provided guidance on factors that may lead to such classification. These factors include:

• The nature of SPAC assets and income, including evaluation of the amount and type of investment securities held and any emphasis on achieving investment returns on assets
• Management activities, including evaluation of whether SPAC officers and employees conduct active portfolio management
• The duration of SPAC operations without completing a de-SPAC transaction, including consideration of the one-year period for “transient investment companies” pursuant to Rule 3a-2 under the Investment Company Act and the 18-month period under the SEC’s position regarding blank check companies pursuant to Rule 419 under the Securities Act
• Whether a SPAC holds itself out in a manner suggesting that investors should invest in its securities primarily to gain exposure to its portfolio of securities
• Whether a SPAC merges with or proposes to merge with an investment company as the target in a de-SPAC transaction

Statutory Underwriter Status

The SEC initially proposed new Rule 140a, which would have provided that certain banks involved in de-SPAC transactions, including M&A advisors and placement agents, are statutory “underwriters” under Section 2(a)(11) of the Securities Act. However, the SEC did not adopt this proposed rule and instead provided guidance on statutory underwriter status. The SEC views de-SPAC transactions as distributions of securities, and parties involved may be considered statutory underwriters in certain situations. While there are arguments against underwriter liability in many cases, financial institutions are likely to remain cautious and may seek extensive diligence as well as negative assurance and comfort letters in connection with de-SPAC transactions.

Effective Dates and Compliance

The new rules will become effective 125 days after publication in the Federal Register. However, compliance with the structured data XBRL requirements will be required 490 days after publication in the Federal Register.

^[1]_{Additional details are included in the adopting release provided with the SEC’s press release and the accompanying summary fact sheet, which are available at https://www.sec.gov/news/press-release/2024-8.}