– The SEC recently adopted new rules and amendments (SPAC Rules) aimed at enhancing disclosures and providing additional investor protection in initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and subsequent business combination transactions.
– The goal of the new rules is to address information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions.
– The SPAC Rules were adopted by a vote of 3 to 2 on Jan. 24, 2024, with the aim of protecting investors in SPAC and de-SPAC transactions. 1. The SPAC Rules require greater disclosure of information related to SPAC sponsor compensation, conflicts of interest, dilution, and the target company in SPAC IPOs and de-SPAC transactions.
2. In certain situations, the target company in a de-SPAC transaction must be a co-registrant with the SPAC and assume legal responsibility for disclosures under the Securities Act.
3. All business combination transactions involving a reporting shell company, including SPACs, are deemed to be a sale of securities to the reporting shell company’s stockholders.
4. The regulatory treatment of projections in de-SPAC transactions is aligned with that in traditional IPOs under the PSLRA.
5. The Commission provides guidance to help SPACs determine if they meet the definition of an investment company under the Investment Company Act and to determine statutory underwriter status under the Securities Act in de-SPAC transactions. 1. SPAC rules mandate that the names of all co-registrants appear on the cover page of the registration statement.
2. The target company is now considered a registrant and must sign the Securities Act registration statement filed by a SPAC in connection with a de-SPAC transaction.
3. Additional disclosure requirements include information on SPAC sponsor compensation, material roles and agreements between SPAC sponsors and the SPAC, and conflicts of interest between SPAC sponsors, officers, directors, and the target company.
4. SPAC registration statements must include a description of potential future dilution following a SPAC IPO, while de-SPAC registration statements must describe potential dilution for non-redeeming stockholders.
5. The board’s determination of whether the de-SPAC transaction is in the best interests of the SPAC and its stockholders must be disclosed, if required by law.
6. Following a de-SPAC transaction, the registrant must redetermine its Smaller Reporting Company (SRC) status within 45 days, and such redetermination must be reflected in subsequent filings. 1. The SPAC Rules impose a 20-calendar-day minimum dissemination period for prospectuses and proxy and information statements filed for de-SPAC transactions.
2. The SPAC Rules require that a de-SPAC transaction be registered under the Securities Act or otherwise qualify for an exemption.
3. The SPAC Rules align the financial statement reporting requirements in business combinations involving shell companies and private operating companies with those of traditional IPOs.
4. The SPAC Rules make the PSLRA’s safe harbor for forward-looking statements unavailable for SPACs, aligning the regulatory treatment of projections by SPAC entities with that of traditional IPOs. -The SEC did not adopt a nonexclusive safe harbor from the definition of “investment company” under Section 3(a)(1)(A) for SPACs.
-The SEC provided factors for SPACs to consider when determining whether they are an investment company, including the nature of their assets and income, management, and duration of operation.
-SPACs that hold typical securities held before the de-SPAC transaction, have active management seeking de-SPAC transactions, and have been operating for a longer duration may be more likely to be considered an investment company under Section 3(a)(1)(C). – SPACs are more likely to be considered investment companies if they market themselves as a way for investors to gain exposure to a portfolio of securities before a de-SPAC transaction.
– If a SPAC engages in a de-SPAC transaction with a target that meets the definition of investment company, it is likely to be considered an investment company itself.
– The SEC will continue to apply the terms “distribution” and “underwriter” broadly based on the specific facts and circumstances of the transaction, including in de-SPAC distributions.
– The SPAC Rules will become effective 125 days after publication in the Federal Register, except for the requirement to use Inline XBRL, which will not be mandatory until 490 days after publication.
– The new rulemaking reflects a desire by SEC Chair Gary Gensler and others to treat SPACs as an alternative method of conducting an IPO and will likely have a dampening effect on the SPAC market. 1. The SEC has adopted new rules to enhance investor protections related to SPACs, shell companies, and projections.
2. The number of SPAC IPOs declined from 613 to 31 from 2021 to 2023, according to SPAC Analytics.
3. The rules release includes information on the requirements for SPACs and shell companies to provide quantitative and qualitative information about market risk.
4. The information in the alert is for general education and should not be used as the sole source of information when analyzing legal problems.
https://www.hklaw.com/en/insights/publications/2024/02/a-summary-and-early-analysis-of-sec-final-spac-rules
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