SEC Adopts Final Rules to Enhance Disclosure Requirements for SPACs
The Securities and Exchange Commission (SEC) recently made significant changes to special purpose acquisition companies (SPACs), shell companies, and the disclosure of projections with the adoption of final rules. These rules are aimed at protecting investors, enhancing disclosures, and aligning the regulatory framework for SPACs with traditional initial public offerings (IPOs).
Under the final rules, SPACs will now be required to provide comprehensive disclosures in their IPOs and de-SPAC transactions. This includes detailed information about SPAC sponsors, their affiliates, and promoters, such as their experience organizing SPACs, compensatory arrangements, and any potential conflicts of interest. Moreover, expanded disclosure will also be necessary regarding the target company and any circumstances that could lead to dilution for investors.
In certain cases, the target company in a de-SPAC transaction will need to collaborate with the SPAC and take responsibility for the disclosures in the de-SPAC registration statement. As a result, directors and officers of the target company could be at risk of potential liability for any material misstatements or omissions under the Securities Act of 1933.
The final rules introduce a new provision, Rule 145a, which categorizes any business combination involving a reporting shell company (including a SPAC) and another entity that is not a shell company as a sale of securities. Consequently, these transactions will require Securities Act registration, unless an exemption is available. Furthermore, the rules also harmonize the financial statement requirements for transactions involving shell companies and private operating companies, aligning them with those applicable to traditional IPOs.
Another key aspect of the final rules is the amendment to the definition of “blank check company.” This change makes the liability safe harbor in the Private Securities Litigation Reform Act of 1995 (PSLRA) for forward-looking statements, such as projections, unavailable in filings by SPACs and certain other blank check companies. The rules also necessitate enhanced disclosure related to projections, including information about the material bases and assumptions underlying them.
The SEC has also published an interpretation stating that a SPAC’s status as an “investment company” under the Investment Company Act of 1940 could be indicated by the duration of the SPAC, its composition of assets and income, and its failure to complete a de-SPAC transaction with a target company.
These final rules will come into effect 125 days after their publication in the Federal Register. Market participants, including SPAC sponsors, investors, and advisors, should take the time to familiarize themselves with these rules in order to ensure compliance and navigate the evolving regulatory landscape effectively.
Analyst comment
Positive news: The SEC’s adoption of final rules to enhance disclosure requirements for SPACs is a positive development for investors and the market. These rules aim to protect investors and align the regulatory framework for SPACs with traditional IPOs. Comprehensive disclosures will be required in SPAC IPOs and de-SPAC transactions, providing more transparency for investors. There will be increased disclosure regarding SPAC sponsors, affiliates, promoters, target companies, and potential conflicts of interest. Directors and officers of the target company may face liability for misstatements or omissions. The rules also harmonize financial statement requirements and enhance disclosure related to projections. Overall, these rules will enhance investor protection and ensure greater transparency in the market. Market participants should ensure compliance and adapt to the evolving regulatory landscape.
