In March 2022, the Securities and Exchange Commission (SEC) proposed sweeping new rules to regulate the disclosures and liabilities associated special purpose acquisition companies (SPACs). The proposing release is available here. The proposals were aimed at enhancing disclosures and liabilities in connection with SPAC IPOs as well as the subsequent business combinations (De-SPAC Transactions) between SPACs and private operating companies.
Proposed Rule 140a
From a securities lawyer’s perspective, one of the most controversial aspects of the proposals relates to the SEC’s proposed rule 140a related to underwriter liability in De-SPAC Transactions. In particular, the SEC is proposing a new rule, Securities Act Rule 140a, that would deem anyone who has acted as an underwriter of the securities in a SPAC IPO and takes steps to facilitate a de-SPAC transaction or any related financing transaction (e.g., the PIPE financing) or otherwise participates (directly or indirectly) in the de-SPAC transaction to be engaged in a distribution and to be an underwriter in the de-SPAC transaction.
The proposing release describes this new rule as “clarifying the underwriter status of SPAC IPO underwriters in connection with de-SPAC transactions,” and that the new rule should “motivate them to exercise the care necessary to help ensure the accuracy of the disclosures in these transactions by affirming that they are subject to Section 11 liability for registered De-SPAC transactions.” As phrasing the new rule as a “clarification,” the SEC is effectively saying that it currently views these participants as underwriters in the de-SPAC transaction, even if the SPAC IPO closed 18 months ago.
Moreover, the SEC is not just limiting its interpretation of statutory underwriters to traditional IPO underwriters, which are the investment banks underwriting the firm commitment offering, but also including other parties involved in the De-SPAC Transaction. Page 96 of the proposing release states:
“We note that proposed Rule 140a addresses the underwriter status of only the SPAC IPO underwriter in the context of a de-SPAC transaction. In addition, we have discussed above some of the activities that are sufficient to establish that the SPAC IPO underwriter is participating in the distribution of target company securities. This discussion, however, is not intended to provide an exhaustive assessment of underwriter status in the SPAC context, and neither is it intended to limit the definition of underwriter for purposes of Section 2(a)(11) of the Securities Act. Federal courts and the Commission may find that other parties involved in securities distributions, including other parties that perform activities necessary to the successful completion of de-SPAC transactions, are ‘statutory underwriters’ within the definition of underwriter in Section 2(a)(11). For example, financial advisors, PIPE investors, or other advisors, depending on the circumstances, may be deemed statutory underwriters in connection with a de-SPAC transaction if they are purchasing from an issuer ‘with a view to’ distribution, are selling ‘for an issuer,’ and/or are ‘participating” in a distribution.’” (emphasis added)
As a result of proposed rule 140a and the surrounding text in the proposing release, advisory participants in the SPAC/de-SPAC markets have grown concerned with the higher litigation exposure, with this Bloomberg article noting that some banks are refusing to underwrite new SPACs. This article reports, “The proposal is causing investment banks such as Goldman Sachs, Bank of America, and Citigroup, which underwrite securities offerings, to rethink their SPAC business. Those underwriters are balking at the prospect of their potential liability—already significant—being extended beyond a SPAC’s initial IPO to subsequent financings conducted by a SPAC, including the de-SPAC merger, even if their later involvement was minimal.”
SEC Comments
With this background, I found interesting two recent comment letter exchanges where the comments and surrounding disclosure confirms this negative impact on the current SPAC market. In the first comment exchange, the SEC Staff observed that the target’s lead financial advisor (Citigroup) resigned from its role as lead financial advisor and waived any of its rights to fees and reimbursement of expenses. For example, the below risk factor was included in the S-4 registration statement for the De-SPAC Transaction.
Citigroup, lead financial advisor to FaZe, was to be compensated in connection with the Business Combination. Citigroup resigned, waived such compensation and disclaimed any responsibility for this proxy statement/prospectus.
On May 20, 2022, FaZe received a letter from Citigroup, lead financial advisor to FaZe, resigning from its role as lead financial advisor to FaZe, waiving any of its entitlement to the payment of any fees and reimbursement of expenses and disclaiming any responsibility for this proxy statement/prospectus (the “Termination Letter”). Citigroup’s fee was agreed between FaZe and Citigroup in an engagement letter signed by the parties on July 12, 2021 (the “Engagement Letter”), and the payment was conditioned upon closing of the Business Combination. FaZe’s other financial advisors, Klein Group and EM (each as defined below), remain in their roles in connection with the Business Combination. In its Termination Letter, Citigroup did not give FaZe any reasons for its resignation and waiver of its fee after doing all of the work to earn its fees. There is no dispute among any of FaZe, Citigroup, or BRPM with respect to Citigroup’s financial advisory services or its resignation. It is the understanding of both BRPM and FaZe that the SEC has received similar resignation letters from Citigroup and other investment banks in connection with other business combination transactions involving special purpose acquisition companies. Citigroup did not communicate to FaZe or BRPM the reasons leading to its resignation resulting in forfeiture of its fees after doing all of the work to earn its fees.
Citigroup was not responsible for the preparation of any disclosure that is included in this proxy statement/prospectus, or any materials underlying such disclosure, but assisted FaZe management with industry data and other industry and business information. As with all members of the transaction working group, Citigroup received drafts of the Registration Statement of which this proxy statement/prospectus forms a part. Additionally, Citigroup was not responsible for the preparation of any materials reviewed by the BRPM Board or management or materials related to the PIPE Investment, but assisted FaZe management with market data, comparable company analysis and other relevant information to help build the FaZe Forecasts, using the estimates, assumptions and input provided by, and at the direction of, FaZe management, and supported the preparation of the PIPE presentation, at the direction of FaZe management. In each case, FaZe management considered Citigroup’s input based on its expertise and experience in the industry, but FaZe management conducted its own independent analysis and made its own conclusions in connection with the aforementioned materials, and prepared and was fully responsible for the current disclosure in this proxy statement/prospectus. None of Citigroup or any of its affiliates has informed FaZe or BRPM or, to the knowledge of FaZe or BRPM, the PIPE Investors, that it has withdrawn its association with these materials; however, in its Termination Letter, Citigroup has disclaimed responsibility for any portion of this proxy statement/prospectus.
Because Citigroup’s financial advisory services on the Business Combination were complete, and Citigroup was not expected to play a role in the Closing, neither FaZe nor BRPM believes that Citigroup’s resignation will impact the consummation of the Business Combination, and FaZe has not hired, and does not expect to hire, another financial advisor (in addition to Klein Group and EM) in connection with the Business Combination. Nonetheless, it is possible that Citigroup’s resignation may adversely affect market perception of the Business Combination generally. If market perception of the Business Combination is negatively impacted, an increased number of stockholders may vote against the proposed Business Combination or seek to redeem their Public Shares for cash, which could potentially impact BRPM’s ability to consummate the Business Combination. At the request of the staff of the Division of Corporation Finance of the SEC, FaZe requested that Citigroup provide a letter stating whether it agrees with the statements made in this proxy statement/prospectus related to its resignation, but FaZe has not received a response from Citigroup as of the date of this proxy statement/prospectus. Accordingly, Citigroup’s failure to respond should not be interpreted to mean that Citigroup agrees with the current disclosure and no inference can be drawn to this effect. You are cautioned not to rely on the fact that Citigroup was involved with any aspect of the Business Combination.
In the comment letter exchange, the SEC sought information about Citigroup’s involvement in the preparation of any disclosure included in the registration statement or material underlying disclosure in the registration statement, along with more disclosure about the consideration the board gave to the information and discussions with Citigroup in light of its subsequent resignation and refusal to be associate with the transaction, among other comments.
The relevant SEC staff comments and company responses are repeated below:
- Please tell us whether Citigroup or any of its affiliates was involved in the preparation of any disclosure that is included in the registration statement, or material underlying disclosure in the registration statement, including but not limited to the disclosure beginning on page 133 regarding the summary of the financial analyses or the projected financial information of FaZe beginning on page 136. If Citigroup or any of its affiliates was involved in preparing this disclosure, please revise the risk factor on page 90 to describe their role in connection with the preparation of the registration statement and the valuation of FaZe and that they disclaim any liability in connection with such disclosure included in the registration statement.
Response: The Company respectfully informs the Staff that Citigroup and its affiliates were not responsible for the preparation of any disclosure that is included in the Registration Statement, or any materials underlying such disclosure. As financial advisor to FaZe, Citigroup assisted FaZe management by providing industry and market data, comparable company analysis and other information to help build out the FaZe Forecasts, using the estimates, assumptions, and input provided by FaZe management, and supported the preparation of the PIPE presentation at the direction of FaZe management. Citigroup did not prepare a valuation analysis of FaZe or an opinion in connection with the Business Combination. Citigroup was not responsible for the FaZe Forecasts. In response to the Staff’s comment, as Annex A-1 to this letter the Company is providing risk factor disclosure proposed to be included on page 90 of the Registration Statement.
- Please disclose whether Citigroup or any of its affiliates assisted in the preparation or review of any materials reviewed by the BRPM board of directors or management as part of their services to FaZe and whether Citigroup or any of its affiliates has withdrawn its association with those materials and notified BRPM of such disassociation. With respect to the PIPE presentation referenced on page 128, as well as any other materials reviewed by PIPE investors, please also disclose the role of Citigroup and its affiliates and discuss whether Citigroup or any of its affiliates has withdrawn its association with those materials and notified BRPM and the PIPE Investors of such disassociation.
Response: The Company respectfully informs the Staff that Citigroup and its affiliates were not responsible for the preparation of any disclosure made by FaZe to BRPM management or the BRPM Board. The BRPM Board did not receive any financial or valuation analyses conducted or prepared by Citigroup. The Company further respectfully informs the Staff that Citigroup’s former engagement was as financial advisor to FaZe and not as placement agent for the PIPE. Citigroup was not responsible for the materials provided to the PIPE Investors. To the knowledge of BRPM management and upon inquiry with the Placement Agent, Citigroup had no communications with the PIPE Investors.
- Please disclose what consideration the board gave to the information and discussions with Citigroup in light of its subsequent resignation and refusal to be associated with the transaction.
Response: The Company respectfully informs the Staff that there were no discussions between BRPM and Citigroup regarding its resignation other than Citigroup informing BRPM management of its decision to file the 11(b)(1) letter with the SEC. BRPM management did not consider Citigroup’s resignation to be material to the Business Combination and Citigroup’s resignation did not impact the BRPM Board’s analysis of, or its continued support of, the Business Combination. In response to the Staff’s comment, as Annex A-1 to this letter the Company is providing disclosure proposed to be included on page 132 of the Registration Statement.
- Please provide us with any correspondence between Citigroup or any of its affiliates and FaZe relating to Citigroup’s resignation other than the Termination Letter, as well as any correspondence relating to the PIPE Investment between BRPM, potential PIPE Investors and/or Citigroup or any of its affiliates. Please contact the staff member associated with the review of this filing to discuss how to submit the materials to us for our review.
Response: The Company respectfully informs the Staff that there was no correspondence between Citigroup or any of its affiliates and FaZe relating to Citigroup’s resignation other than the Termination Letter. As indicated in the Company’s response to Comment No. 7, the Company further respectfully informs the Staff that Citigroup’s former engagement was as financial advisor to FaZe and not as placement agent for the PIPE. To the knowledge of BRPM management and upon inquiry with the Placement Agent, Citigroup had no communications with the PIPE Investors.
- Please provide us with the engagement letter between FaZe and Citigroup, as well as any other documentation associated with this transaction. Please disclose any ongoing obligations of the Company pursuant to the engagement letter and any other document that will survive the termination of the engagement, such as indemnification provisions, and discuss the impacts of those obligations on the Company in the registration statement.
Response: In response to the Staff’s comment, the Company has submitted the engagement letter between FaZe and Citigroup to the Staff via kiteworks secure file transfer and the Company is providing as Annex A-1 to this letter disclosure proposed to be included on page 90 of the Registration Statement.
- Please provide us with a letter from Citigroup stating whether they agree with the statements made in your prospectus related to their resignation and, if not, stating the respects in which they do not agree. Please revise your disclosure accordingly to reflect that you have discussed the disclosure with Citigroup, and that they either agree or do not agree with the conclusions and the risks associated with such outcome. If Citigroup does not respond, please revise your disclosure to indicate that you have asked and not received a response and include disclosure about such fact and the risks to investors, including that there cannot be any inference drawn that Citigroup agrees with the disclosure in the prospectus and that investors should not put any reliance on the fact that Citigroup was involved with any aspect of the transaction. Additionally, please indicate that you will not speculate about the reasons Citigroup withdrew from its role as financial advisor and forfeited its fee after doing substantially all the work to earn its fee.
Response: The Company respectfully informs the Staff that FaZe requested a letter from Citigroup stating whether it agrees with the statements made in the proxy statement/prospectus related to their resignation and, if not, stating the respects in which they do not agree, and has not received a response. As requested by the Staff, the Company is providing as Annex A-1 to this letter disclosure proposed to be included on page 90 of the Registration Statement disclosing that FaZe has not received a response from Citigroup to its request for such letter and that, accordingly, no inference should be drawn that Citigroup agrees with the disclosure regarding its resignation. Further, in response to the Staff’s comment, the Company undertakes that it will not speculate in the Registration Statement or make any public statements about the reasons why Citigroup withdrew from its role as financial advisor and forfeited its fee after doing all of the work to earn its fee.
- Please revise your disclosure to highlight for investors that Citigroup’s withdrawal indicates that it does not want to be associated with the disclosure or underlying business analysis related to the transaction. In addition, your disclosure should caution investors that they should not place any reliance on the fact that Citigroup has been previously involved with the transaction.
Response: The Company respectfully advises the Staff that, while Citigroup has disclaimed responsibility for the disclosure included in the proxy statement/prospectus, Citigroup has not informed the Company or FaZe that it does not wish to be associated with the disclosure or underlying business analysis related to the Business Combination. As requested by the Staff, the Company is providing as Annex A-1 to this letter disclosure proposed to be included on page 90 of the Registration Statement disclosing that Citigroup has disclaimed any responsibility for the disclosures made in the proxy statement/prospectus and cautioning investors not to rely on the fact that Citigroup was involved with any aspect of the Business Combination.
In the next SEC comment letter exchange, the SEC Staff acknowledges the press reports that certain firms are ending their involvement in SPAC business combination transactions. Specifically, the SEC Staff comments as follows:
Amendment No. 3 to Registration Statement on Form S-4 filed June 27, 2022
General
Comment 1: We note that Brookline Capital Markets was engaged by BCAC to act as financial advisor in connection with the business combination. We note also that Wedbush Securities Inc. was engaged by Apexigen to act as financial advisor in connection with the business combination. We note also that BCAC engaged Wedbush and Brookline Capital Markets to act as the exclusive lead placement agent and co-placement agent respectively for the PIPE investment, but Wedbush subsequently terminated its engagement as the exclusive lead placement agent. We note press reports that certain firms are ending their involvement in SPAC business combination transactions. Please tell us, with a view to disclosure, whether you have received notice from any of your or Apexigen’s financial advisor(s) about it ceasing involvement in your transaction and how that may impact your deal.
Response: In response to the Staff’s comment, the Company confirms that it has not received notice from either its or Apexigen’s financial advisors regarding any intent to cease involvement in the business combination transaction.
ABA Federal Regulation of Securities Committee Comment on Proposed Rule 140a
As a final thought on this topic, I note that in June the American Bar Association’s (ABA) Federal Regulation of Securities Committee, of which I am the current chair, filed a comment letter with the SEC related to the proposed SPAC rules, including proposed Rule 140a. The drafting committee was co-chaired by Anna Pinedo and Gonzalo Go, and included contributions from more than 50 securities practitioners. Because of the significance of this rule to the statutory underwriter framework, I have repeated below the comment letter’s summary comments concerning proposed Rule 140a. I encourage you to read the full letter for a thoughtful analysis of the entire proposed rules.
“Imposing underwriting liability in De-SPAC Transactions. We oppose proposed Rule 140a and respectfully request the Commission to clarify its overly broad and unsupported interpretation in the Proposing Release relating to the entities that may be considered to be statutory underwriters. The Commission’s desire to identify additional ‘gatekeepers’ in connection with a De-SPAC Transaction is not supported by Section 2(a)(11) of the Securities Act. In its effort to justify its proposed amendments, the Commission advances an overly expansive view of the activities and connections that give rise to statutory underwriting liability. The Commission does this in order to identify an underwriter in a De-SPAC Transaction where, in fact, there is none. We believe the Proposing Release’s concept of statutory underwriters in the context of a De-SPAC Transaction is flawed, is at odds with interpretations of existing law and disregards longstanding and accepted market practice. The interpretive position and proposed Rule 140a inappropriately stretch the concept of ‘distribution’ in the definition of ‘underwriter.’ The SPAC IPO and De-SPAC Transaction are two completely separate transactions and should not be conflated. Not every De-SPAC Transaction involves a ‘distribution’ of securities.
Proposed Rule 140a would impose underwriting liability on a number of De-SPAC Transaction financial intermediaries without sufficient participation in the ‘distribution’ of securities. It mischaracterizes basic securities law principles to find a gatekeeper, when there already are numerous parties with rigorous responsibilities in connection with the SPAC IPO and the De-SPAC Transaction. It fails to consider that the required level of ‘participation’ to be a statutory underwriter in a DeSPAC Transaction should only be the activities that are ‘related to the actual distribution of securities’ and not those that merely facilitate the participation of others in a securities offering. Proposed Rule 140a purports to be retroactive, creating uncertainty as to what level of participation that has already occurred or that can be undertaken in transactions underway results in underwriter status. Because the Commission’s statements in the Proposing Release are characterized as an interpretation of its current views, even though the language of proposed Rule 140a is more narrowly (but still broadly) written, the mere issuance of the Proposing Release has resulted in such uncertainty and market concern that there has been a chilling effect on legitimate capital formation transactions. If the Commission nevertheless decides to identify an ‘underwriter’ in a De-SPAC Transaction, the Commission should do so only on the following basis: (i) any rule should be prospective only, with a suitable transition period, (ii) the rule should clearly define the nature and level of participation that is necessary for a SPAC IPO underwriter to be considered an ‘underwriter’ in the De-SPAC Transaction, (iii) that participation should be limited to parties who, in fact, are in a position to perform the necessary diligence, (iv) the rule should define the scope of the ‘distribution’ to which underwriter status relates, and (v) the disclosures to which underwriter responsibility relates should align with those in a traditional IPO, such as by excluding from the Merger Registration Statement merger-related disclosures like Background of the Merger and projections.”
