SEC Adopts Rules for Comprehensive Regulation of SPACs

The SEC adopted rules to impose a comprehensive regulatory scheme on special purpose acquisition companies ("SPACs") and their subsequent de-SPAC transactions with the stated purpose of aligning the regulation of SPACs more closely with more traditional initial public offerings ("IPOs").

The rules apply to entities involved in, or affected by, SPAC initial public offerings and de-SPAC transactions, and detail the obligations at various stages of the SPAC processes to ensure comprehensive investor information and oversight. The SEC also provided guidance for SPACs to consider when analyzing their status under the Investment Company Act of 1940.

As previously covered, the SEC proposed the rules in March of 2022 and received numerous comments.

The new rules, among other things, require:

  • disclosures about SPAC sponsor compensation, conflicts of interest and sources of dilution to inform potential investors;
  • the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company) and assume responsibility for the disclosures in the registration statement filed for the de-SPAC transaction, which increased the potential liability for persons involved in a SPAC business combination;
  • identification of "any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders"; and
  • close alignment of the "regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA)" to include amended requirements for financial statements as to transactions involving shell companies.

The rules are effective 125 days after publication in the Federal Register. "Compliance with the structured data requirements (which require tagging of information disclosed pursuant to new subpart 1600 of Regulation S-K in Inline XBRL) will be required 490 days after publication of the final rules in the Federal Register."

Statements of Support

Chair Gary Gensler emphasized the need for parity in protections between SPACs and traditional IPOs. He stated that, "[t]aken together, these steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions."

Commissioner Caroline A. Crenshaw stated that the new rule ensures that we do not "sacrifice the mechanisms, incentives, and protections that have been developed for nearly a century, because to do so would be to undermine the capital markets that have fueled past American successes – and will continue to fuel the next century of success."

Commissioner Jaime Lizárraga said that the new rule addressed the informational disparities and structural complexities that disadvantage investors in SPAC transactions compared to traditional IPOs. He said "today's reforms increase transparency and market efficiency and empower investors to make more informed investment and voting decisions."

Statements of Dissent

Commissioner Hester M. Peirce argued that "[t]he Commission has failed to identify a problem in need of a regulatory solution. To the contrary, the rule will exacerbate a problem—the shrinking pool of public companies—by closing down one road into the public markets." Among many objections, she said the new rules (i) concern issues the market was already correcting; (ii) introduce unnecessary costs; (iii) further the SEC's tendency to venture into merit-based regulation; (iv) impose excessive restrictions on SPACs, particularly in projections and disclosures; (v) adversely impact small companies' access to public markets; and (vi) introduce legal concerns regarding changes to the Private Securities Litigation Reform Act. She had advocated for a more tailored approach to SPAC regulations and improvements to the traditional IPO process over the current rule.

Commissioner Mark T. Uyeda criticized the new rules for imposing excessively burdensome regulations on SPACs, potentially stifling their formation and limiting public market opportunities. He said that "[i]n order to achieve this desired outcome, the Commission seeks to impose crushingly burdensome regulations on SPACs as a form of merit regulation in disguise."

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