March 30, 2022

SEC Proposes New Regulation on SPACs

Steven Lofchie Commentary by Steven Lofchie

The SEC proposed new rules to "address the application of disclosure, underwriter liability . . . and concerns associated with, business combination transactions involving special purpose acquisition companies." The proposal would (i) increase disclosure and (ii) more closely align the financial statements of private operating companies merging with SPACs with those required in registration statements for IPOs.

In particular, the proposed rules would require additional disclosure as to:

  • SPAC compensation, conflicts of interests and sources of dilution;

  • the business combination transactions between SPACs and private operating companies; and
  • projections made by SPACs and their target companies.

The proposed rule "would deem any business combination transaction involving a reporting shell company, including a SPAC, to involve a sale of securities to the reporting shell company’s shareholders." The proposal would also amend requirements for financial statements as to transactions involving shell companies.

Further, the proposed rules would create a new safe harbor under the Investment Company Act of 1940 that would "provide that a SPAC that satisfies the conditions of the proposed rule would not be an investment company and therefore would not be subject to regulation under that Act."

As a result of the above, the proposed rules would materially increase the potential liability for persons involved in a SPAC business combination, particularly any individuals signing the registration statement.

Commissioner Statements

SEC Chair Gary Gensler supported the rules, stating that, "if adopted, [they] would strengthen disclosure, marketing standards, and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings (IPOs)." He highlighted that the proposals would eliminate the safe-harbor for SPACs found in the Private Securities Litigation Reform Act with regard to projections of target companies.

SEC Commissioner Allison Herren Lee supported the rules noting the proliferation of SPACs over the past two years. She stated that "[the] package of amendments [are] designed to promote transparency and accountability in the SPAC market." She also stated: "It's not clear to me whether SPACs that meet the conditions of the proposed safe harbor should nevertheless be exempted from the investor protections of the Investment Company Act."

SEC Commissioner Hester M. Peirce opposed the proposal. She stated: "The proposal, rather than simply mandating sensible disclosures around SPACs and de-SPACs, something I would have supported — seems designed to stop SPACs in their tracks." She asserted that the proposed rules were intended to “damn, diminish, and discourage SPACs because [the SEC does] not like them, rather than elucidate them so that investors can decide whether they like them.” Ms. Peirce also emphasized that the average SPAC would not be able to meet the rules requirements without significantly changing its operations, economics and timeline. She questioned the premise that the rules assume, namely, that the traditional IPO process works without any problems, which, she said, is not the case.


Commissioner Gensler often quotes the maxim, as he did in the statement accompanying this rule proposal, that 'like cases should be treated alike.' That there should be a reasonable equality of similar products and activities is a good general principle, but it is an insufficient principle if it is not tied to some evaluation of those regulations. This is not to say that some further regulation of SPACs might not be reasonable. But it would also be reasonable, and necessary, at least to consider the possibility that the burdens imposed on traditional IPOs discourage capital raising in that manner.

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