On January 24, 2024, the U.S. Securities and Exchange Commission (SEC) adopted new rules and amendments aimed at enhancing disclosures and adding investor protections in initial public offerings (IPOs) by Special Purpose Acquisition Companies (SPACs) and in their subsequent de-SPAC transactions (LINK).
Background of Strengthened SPAC Regulations
These changes were essentially a foregone conclusion, having been slated for consideration at an SEC meeting in March 2022. However, it appears that a fierce debate ensued among SPAC-related parties over the nearly two-year period that followed, and the impression is that the rules took longer to finalize than originally anticipated. The adoption of these rule changes was reportedly decided by a narrow 3-to-2 vote within the SEC.
Key Details of the Revisions
The revisions are extensive and detailed, spanning 581 pages, but the main points are as follows:
- Requires more detailed disclosures regarding SPAC sponsor compensation, potential conflicts of interest, dilution, and other factors.
- Under certain circumstances, the target company in a de-SPAC transaction will be a co-registrant with the SPAC on SEC filings, and as such, will jointly share liability for the disclosures in the registration statement related to the de-SPAC.
- Business combination transactions involving shell companies, including SPACs (i.e., de-SPAC transactions), will be deemed a sale of securities from the target company to the existing investors of the shell company (SPAC).
- The “safe harbor” for forward-looking statements under the Private Securities Litigation Reform Act of 1995 (PSLRA), which was traditionally available to SPACs, will no longer apply.
Purpose of the Revisions
As SEC Chair Gary Gensler stated, these revisions are intended to “strengthen investor protections… through three main areas: disclosure, the use of projections, and issuer obligations,” aiming to “help ensure that the rules for SPACs are aligned with those of traditional IPOs.”
Impact of Strengthened SPAC Regulations
These disclosures will have a significant impact on listings via SPACs, which were considered advantageous compared to traditional IPOs. This is particularly true because the safe harbor provision for forward-looking financial projections will no longer be applicable. Previously, when a SPAC disclosed financial projections, it was shielded from liability by the PSLRA. As long as the projections were not intentionally false, the company was not held accountable even if the forecasts differed from actual results.
With this safe harbor now removed by the revisions, it is believed that disclosing financial projections will become more difficult. In fact, the safe harbor does not apply to traditional IPOs, and it is extremely rare for companies to disclose financial projections in a U.S. IPO. In the future, SPACs will no longer be able to boost their stock price by disclosing hockey-stick projections, eliminating a key difference in stock price formation compared to traditional IPOs.
Conclusion
The SPAC market was already on a decline when the review of these rules was first announced in March 2022. It is now the consensus view among market participants that SPACs will lose even more of their advantages, and that the “SPAC boom” is, so to speak, coming to an end.
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