SEC adopts new SPAC rules

Peirce decries ‘fancy legal footwork’ in guidance

A divided SEC on Wednesday approved a suite of new SPAC rules that backers hope will bring the once-booming asset class in line with the traditional IPO markets.

Under the new rules adopted at the commission’s Wednesday open meeting are requirements that:

  • SPACs and their target companies must jointly register, jointly file (and be jointly liable) for Securities Act registration statements at the time of a de-SPAC transition;
  • Target firms obtain assurance from a PCAOB-licensed and inspected auditors;
  • Firms file additional information about SPAC sponsors, sponsors’ compensation, conflicts of interest, dilution and details target company, with the dilution disclosures on a prospectus’ cover page, summary and within the prospectus;
  • SPAC boards of directors disclose any fairness opinions “if required by law, and any outside report, opinion, or appraisal received that materially relates to the de-SPAC transaction”;
  • The dissemination of prospectuses, proxy and information statements at least 20 days before a de-SPAC transaction; and
  • A “re-determination of smaller reporting company status following the consummation of a de-SPAC transaction and requiring such re-determination to be reflected in filings beginning 45 days after the de-SPAC transaction’s consummation,” according to a fact sheet distributed by regulators.

Regulators also adopted new rule 145a, “which would provide that any direct or indirect business combination of a reporting shell company (that is not a business combination related shell company) involving another entity that is not a shell company, is deemed to involve an offer, offer to sell, offer for sale, or sale within the meaning of Section 2(a)(3) of the Securities Act,” and a financial statement similar to traditional IPOs that apply “to transactions involving shell companies and private operating companies.”

The new rules repeal safe harbor provisions governing forward-looking statements from blank-check companies. At the de-SPAC phase of a deal, firms must disclose “all material bases of the projections and all material assumptions underlying the projections,” the commission’s fact sheet states.

‘Fancy legal footwork’

Commission Chairman Gary Gensler said Wednesday’s rules were long overdue.

“Suppose a group of strangers came up to you and said: ‘I have a company. It doesn’t do much of anything, but sometime in the next two years, we’ll merge with another company. I don’t know what that company is yet,’” the chairman said. “What if I told you that, if the strangers complete a merger, they get to pocket 20 percent of your investment? This essentially describes what SPACs do.”

Republican Commissioners Hester Peirce and Mark Uyeda voted against the new rules. They said it would over-burden an already dwindling industry, and Peirce condemned “the fancy legal footwork” in substituting guidance for hard-and-fast (and legally challengeable) rules. Peirce urged Gensler to conduct a retrospective review five years from the rules’ adoption, to see whether the rules have finished off the SPAC industry for good.

Regulators claim they want to protect investors and facilitate capital formation with the new rules, Uyeda said. “There may be a far simpler explanation,” he said. “We simply don’t like them.”

The bubble has already burst on the SPAC industry, Uyeda added. “Today’s rules show that the Commission intends that they never return,” he said.

After the craze

Ahead of Wednesday’s meeting, regulators acknowledged that the markets may have already rendered their verdict on SPACs. The industry boomed to nearly $150 billion from almost nowhere in 2021. It has since all but collapsed.

Still, authorities say the new rules are necessary part of the post-craze cleanup that may also prevent future problems. “The final rules would also address investor protection concerns more broadly with respect to shell companies and blank check companies, including SPACs,” the fact sheet states.

Regulators say the final rules adopted during Wednesday’s meeting are different from what the commission first proposed in 2022 in four ways:

  • They abandon proposed rule 140a, which included a broad definition of SPAC and de-SPAC underwriters. That’s now replaced with guidance language meaning that firms could be held liable as underwriters depending on the facts and circumstances of a given case.
  • They abandon a requirement that all SPAC boards issue a fairness opinion. Now, only firms with governing documents that require such opinions will have to issue them.
  • They expand the small company redetermination period to 45 days. And
  • Replace a safe harbor requirement under the Investment Company Act with staff guidance language backers hope will help SPACs (and their investors) understand the SPAC’s potential status as an investment company.

The new rules will take effect 125 days after they’re published in the Federal Register.