In a significant development for the financial markets, the US Securities and Exchange Commission (SEC) has, after nearly two years of deliberation, voted three to two to adopt final rules regulating initial public offerings (IPOs) and business combinations involving special purpose acquisition companies (SPACs). The culmination of a thorough review process, the final rules align closely with the SEC's proposals from March 2022, marking a pivotal moment in the evolving landscape of SPACs.
Key Departures from Original Proposal:
The SEC has made notable adjustments from its initial proposal, opting against creating a new Rule 140a under the Securities Act, which would have deemed underwriters in a SPAC IPO as underwriters in subsequent business combinations. Additionally, the SEC chose not to establish a safe harbor under the Investment Company Act for specific SPACs, and removed a requirement for SPACs to state their belief in the fairness of business combinations to unaffiliated security holders.
Effective Date:
The final rules, detailed across an extensive 581 pages, are set to become effective 125 days following their publication in the Federal Register. This comprehensive regulatory framework introduces new disclosure items, adding Subpart 1600 to Regulation S-K and Article 15 to Regulation S-X, aimed at enhancing transparency in SPAC IPOs and business combinations.
Liability Concerns for SPAC IPO Underwriters:
A focal point of contention in the SEC's 2022 proposal was the potential liability of underwriters in SPAC IPOs for subsequent business combinations. Although the SEC refrained from creating a new rule establishing deemed underwriter liability, it reiterated the view that a SPAC's business combination qualifies as a distribution of securities, potentially exposing parties to statutory underwriter status and associated liability under Section 11 of the Securities Act.
SPAC Status Under the Investment Company Act:
The SEC declined to implement a safe harbor for SPACs regarding potential registration as investment companies under the Investment Company Act. Instead, the SEC outlined factors that could lead to such registration, including specific investment activities, the duration of SPAC operations without completing a business combination, and marketing approaches that portray the SPAC as an alternative to traditional investments.
Target Companies as Co-Registrants:
In line with the proposed rules, the SEC confirmed that target companies in a SPAC's business combination will be considered issuers, subjecting their signing individuals to Section 11 liability for material misstatements or omissions. This places additional reporting obligations on target companies under the Exchange Act until they terminate or suspend reporting.
Projections and the PSLRA Safe Harbor:
The final rules make the PSLRA's safe harbor for forward-looking statements unavailable to SPACs. The SEC introduced new definitions of "blank check company," limiting the protection previously afforded. Enhanced disclosure requirements for projections in SPAC business combinations were also established.
Substantive Fairness Determinations:
Departing from the proposed requirement for SPACs to state the fairness of business combinations, the SEC now mandates disclosure of determinations made by the SPAC's board of directors if required by the jurisdiction of the SPAC's organization. This alleviates potential conflicts faced by SPAC boards in aligning with SEC scrutiny.
SRC Status Redetermination:
The SEC has introduced rules necessitating the re-determination of smaller reporting company (SRC) status following a SPAC's business combination. SRCs, benefiting from scaled-down disclosure requirements, must reassess their status within 45 days post-business combination.
The adoption of the final rules by the US Securities and Exchange Commission represents a significant milestone in the regulation of special purpose acquisition companies (SPACs) and initial public offerings (IPOs). The extensive 581-page framework introduces nuanced changes from the initial proposal, addressing key concerns surrounding underwriter liability, SPAC status under the Investment Company Act, co-registration of target companies, projections, and substantive fairness determinations.
As the financial landscape adapts to these comprehensive regulations, stakeholders will need to navigate the intricacies of enhanced disclosure requirements and liability considerations. The SEC's measured approach aims to strike a balance between promoting transparency and addressing potential challenges in the dynamic realm of SPACs and IPOs, setting the stage for a more informed and regulated marketplace.
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