New SEC Rules on Investments and SPACs

On March 30, 2022, the U.S. Securities and Exchange Commission (SEC) approved, by a 3-to-1 vote, a 372-page proposal of numerous rules regarding disclosures and procedural requirements for special purpose acquisition companies (SPACs). SEC Chair Gary Gensler stated that their purpose was to impose many of the regulations applicable to traditional initial public offerings (IPOs) on SPACs, stating that SPAC investors “deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.”1

If these sweeping regulations are implemented as proposed, they may significantly affect capital markets practices for both issuers and underwriters, and open up new avenues for regulatory enforcement and additional private securities litigation. Even before these proposed regulations, SPACs were already being sued almost twice as much as traditional IPOs, with 32 SPAC securities class actions filed in 2021, a more than sixfold increase compared to 2020.2 In addition, the SEC had previously brought various enforcement actions against participants in SPAC transactions. The proposed rules are open for public comment through at least May 31, 2022, and entities and underwriters operating in the SPAC space may wish to consider whether and how to respond to the SEC’s proposal.

Background

SPACs are shell companies that raise funds through an underwritten IPO with the goal of acquiring a yet-to-be-identified operating company. Once the SPAC identifies the target company, it completes a business combination (the “de-SPAC” transaction) resulting in a combined public company.

Although SPACs have existed for decades, they only became increasingly popular over the last several years, as evidenced by the amount of capital raised by SPACs doubling from $80 billion in 2020 to more than $160 billion in 2021. Proponents of SPACs have cited their capital formation flexibility and nimbleness in bringing new companies to market, as referenced in SEC Commissioner Hester M. Peirce’s statement opposing the proposed rules: “SPACs brought many new companies into our public markets—a welcome trend after decades of decline in the number of public companies.”3 On the other hand, critics of SPACs have argued they disproportionately benefit insiders and lack adequate disclosures,4 and the SEC has been signaling some kind of new forthcoming rules. Roughly a year ago, the acting director of the Division of Corporation Finance issued a statement saying SEC staff was “continuing to look carefully” at filings by SPACs and their targets, and that “[a]ny simple claim about reduced liability exposure for SPAC participants is overstated at best, and potentially seriously misleading at worst.”5 The proposed rules are the culmination of that effort.

While some of the proposed rules mirror current best practices, others may present a “square peg/round hole” aspect, as they appear to mix and match different concepts of potential liability under the 1933 Securities Act (‘33 Act) and the 1934 Securities Exchange Act (‘34 Act). This asymmetry arises most clearly in connection with projections of future performance. Whereas in a traditional IPO governed by the ’33 Act, companies typically do not offer projections of future performance, in the merger context governed by the ’34 Act, a SPAC board’s analysis of projections of the combined company is essential both to satisfying the board’s fiduciary duties and to ensuring an informed shareholder vote.

The Proposed Rules

The SEC’s proposed rules would affect SPAC IPOs and de-SPAC transactions in the following ways:

The proposed rules would revise the requirements for target company financial statements in de-SPAC transactions to put them in the same position as a traditional IPO. In general, this would benefit target companies that qualify as smaller reporting companies or emerging growth companies.

The SEC’s proposal, open for public comment through at least May 31, 2022, represents a substantial effort by the agency to impose significant controls on the SPAC market.

Jason T. Simon and Alex Linhardt also contributed to this article.

FOOTNOTES

1 “Statement on Proposal on Special Purpose Acquisition Companies (SPACs), Shell Companies, and Projections” (Mar. 30, 2022).

2 “Securities Class Action Filings: 2021 Year in Review,” Cornerstone Research (Feb. 2, 2022).

3 “Damning and Deeming: Dissenting Statement on Shell Companies, Projections, and SPACs Proposal” (March 30, 2022).

4 See, e.g., “A Sober Look at SPACs,” Harvard Law School Forum on Corporate Governance (Nov. 19, 2020).

5 “SPACs, IPOs, and Liability Risk Under the Securities Laws” (April 8, 2021).

6 Securities and Exchange Commission’s Proposed Rules for Special Purpose Acquisition Companies, Shell Companies, and Projections (Mar. 30, 2022), p. 250.


©2022 Greenberg Traurig, LLP. All rights reserved.
National Law Review, Volume XII, Number 122

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