On January 24, 2024, the U.S. Securities and Exchange Commission (the “SEC”) adopted new rules and guidance affecting initial public offerings (“IPOs”) of special purpose acquisition companies (“SPACs”) and business combinations between SPACs and private company targets (“de-SPAC transactions”). The rules will become effective 125 days after publication in the Federal Register. Below, we provide some background regarding SPACs and de-SPAC transactions, offer a summary of the SEC’s final rules, and provide some brief takeaways and practical considerations surrounding the new rules.

BACKGROUND ON SPACs AND THE PURPOSE OF THE RULES

SPACs are public shell companies¹ organized and managed by a sponsor (i.e., the entity responsible for organizing, directing, and managing the SPAC) for the purpose of merging with or acquiring one or more unidentified private operating companies (commonly known as “de-SPAC transactions”) within a limited time frame. A de-SPAC transaction is a hybrid between a traditional IPO and an M&A transaction. While structured as an M&A transaction, a de-SPAC transaction is functionally equivalent to the private company target’s IPO because the results of the transaction are the same: the target company becomes a publicly traded reporting company that has access to cash proceeds previously raised in the SPAC IPO.

Since SPACs have no business operations apart from identifying and consummating a de-SPAC transaction, and the particulars of the business combination are not known at the IPO stage, the disclosures required in a SPAC’s registration statement typically have focused more on the SPAC’s sponsors. Additionally, at the de-SPAC transaction phase, investors might not receive the same information about the private company target that they would have otherwise received in a more traditional registration statement because a filing for an M&A transaction has different disclosure requirements than an IPO registration statement. The above has resulted in a perception that SPAC IPOs and de-SPAC transactions could be used to bring private company targets public while avoiding certain disclosure requirements typical in the traditional IPO process.

The SEC’s newly adopted rules attempt to remedy this by enhancing the disclosure requirements and providing guidance on the responsible use of projections with respect to SPACs, SPAC IPOs, blank check companies, and de-SPAC transactions. Broadly speaking, the final rules:

• Require additional disclosures about SPAC sponsor compensation, conflicts of interest, dilution, the target company, and other information that is important to investors in SPAC IPOs and de-SPAC transactions.
• Require, in certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company) and thus assume responsibility for the disclosures in the registration statement filed in connection with the de-SPAC transaction.
• Deem 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.
• Better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA).

We break down some of these new requirements in more detail below.

ENHANCING DISCLOSURE REQUIREMENTS, GENERALLY

New Item 1603 of Regulation S-K will require, among other things, additional disclosures applicable to SPACS regarding the SPAC sponsor (as well as the sponsor’s affiliates and promoters), conflicts of interest, and dilution. Such disclosures will be expected in filings related to both SPAC IPOs and de-SPAC transactions. The new rules also amend several forms and schedules used by SPACs for IPOs and de-SPAC transactions to require the information set forth in Subpart 1600 and introduce additional requirements for disclosures that must be included on the cover page of the transaction’s prospectus or proxy statement.

SPAC Sponsors

New Item 1603(a) requires additional disclosures about SPAC sponsors, their affiliates, and promoters, including the following:

• The experience, material roles, and responsibilities of these parties, as well as any agreement, arrangement, or understanding (1) between the SPAC sponsor and the SPAC, its executive officers, directors, or affiliates, with respect to determining whether to proceed with a de-SPAC transaction and (2) between the SPAC sponsor and unaffiliated security holders of the SPAC regarding the redemption of outstanding securities.
• The controlling persons of the SPAC sponsor and any persons who have direct and indirect material interests in the SPAC sponsor.
• The transfers of SPAC securities by the SPAC sponsor and others.
• Tabular disclosure of the material terms of any lock-up agreements with the SPAC sponsor and its affiliates.
• The nature and amounts of all compensation that has or will be awarded to, earned by, or paid to the SPAC sponsor, its affiliates, and any promoters for all services rendered in all capacities to the SPAC and its affiliates, as well as the nature and amounts of any reimbursements to be paid to the SPAC sponsor, its affiliates, and any promoters upon the completion of a de-SPAC transaction.

Conflicts of Interest

New Item 1603(b) requires disclosure of material potential or actual conflicts of interest between SPAC sponsors and others, including the target company’s officers and directors involved in a de-SPAC transaction. The rules contemplate, among other things, the possibility that potential conflicts could arise from the nature of a SPAC sponsor’s compensation or security ownership, or SPAC sponsors and their affiliates sponsoring multiple SPACs.

Dilution

New Item 1602(c) requires disclosure of the potential for dilution in connection with SPAC offerings and de-SPAC transactions. With respect to the latter, causes of dilution might include shareholder redemptions, sponsor compensation, underwriting fees, warrants, convertible securities, and PIPE financings.

Cover Page Disclosures

The new rules require that much of the above be disclosed in plain English on a SPAC’s IPO cover page, including (i) the time frame for the SPAC to consummate a de-SPAC transaction, (ii) redemptions, (iii) SPAC sponsor compensation, (iv) dilution, and (v) conflicts of interest.

Additionally, in de-SPAC transactions, new Item 1604(b) requires that SPACs include the following on the cover page of the prospectus and proxy statement, in plain English:

• The background and material terms of the de-SPAC transaction.
• Whether the SPAC reasonably believes that the de-SPAC transaction is fair or unfair to unaffiliated security holders, the bases for such belief, and whether the SPAC or SPAC sponsor has received any report, opinion, or appraisal from an outside party concerning the fairness of the transaction.
• Any material actual or potential conflicts of interest between the SPAC sponsor or its affiliates or promoters and unaffiliated security holders in connection with the de-SPAC transaction.
• In a tabular format, the terms and amounts of compensation received or to be received by the SPAC sponsor and its affiliates in connection with the de-SPAC transaction or any related financing transaction, and whether that compensation has resulted or may result in a material dilution of the equity interests of unaffiliated security holders of the special purpose acquisition company.
• The material terms of any material financing transactions that have occurred or will occur in connection with consummation of the de-SPAC transaction, the anticipated use of proceeds from these financing transactions and the dilutive impact, if any, of these financing transactions on non-redeeming shareholders.
• The rights of security holders to redeem the outstanding securities of the SPAC and the potential impact of redemptions on non-redeeming shareholders.

ENHANCING DISCLOSURE REQUIREMENTS FOR DE-SPAC TRANSACTIONS

The Background of the De-SPAC Transaction

New Item 1605 requires disclosure of the background and reasons for, as well as the terms and effects of, a de-SPAC transaction. Such disclosures include:

• A summary of the background of the de-SPAC transaction, including, but not limited to, a description of any contacts, negotiations or transactions relating to the de-SPAC transaction.
• A brief description of any related financing transaction, including any payments from the SPAC sponsor to investors in connection with the financing transaction.
• The reasons for engaging in the particular de-SPAC transaction, including the private company target’s reasons for engagement, as well as the motivations behind the chosen structure and timing of the de-SPAC transaction and any related financing transaction.
• An explanation of any material differences in the rights of security holders of the post-business combination company.
• Disclosure regarding the accounting treatment and the federal income tax consequences of the de-SPAC transaction to the SPAC.

The SPAC Board’s Determination Regarding the De-SPAC Transaction

Under new Item 1606(a), if the jurisdiction in which the SPAC is organized requires a SPAC board to determine whether a de-SPAC transaction is both advisable and in the shareholders’ best interests, then such determination must be disclosed. Related, any reports, opinions, and appraisals received by the SPAC or its sponsors from an outside party or unaffiliated representative related to the board’s determination as to the de-SPAC transaction must also be disclosed.

ALIGNING DE-SPAC DISCLOSURES WITH THOSE REQUIRED IN TRADITIONAL IPOs

Target companies that are not subject to the reporting requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 will be expected to make certain non-financial disclosures typical in a traditional IPO, including: (i) Item 101 (description of business); (ii) Item 102 (description of property); (iii) Item 103 (legal proceedings); (iv) Item 304 (changes in and disagreements with accountants on accounting and financial disclosure); (v) Item 403 (security ownership of certain beneficial owners and management, assuming completion of the de-SPAC transaction and any related financing transaction); and (vi) Item 701 (recent sales of unregistered securities).

The SPAC’s proxy statement must be distributed to its shareholders 20 calendar days (or the maximum number of days permissible by the SPAC’s jurisdiction) prior to the date on which the shareholder action is to be taken in connection with the de-SPAC transaction. Additionally, the SEC is amending Forms S-4 and F-4 to provide that a target company in a registered de-SPAC transaction is a co-registrant. Following the consummation of a de-SPAC transaction, a surviving corporation to which such an analysis is applicable must make a redetermination of Small Reporting Company (“SRC”) status following a de-SPAC transaction.

Notably, the new rules also amend the definition of “blank check company” to include SPACs in the Private Securities Litigation Reform Act, which renders unavailable a safe harbor for forward-looking statements. This is consistent with traditional IPOs, wherein a forward-looking-statement safe harbor is also unavailable.

BUSINESS COMBINATIONS INVOLVING SHELL COMPANIES

Shell Company Business Combinations and the Securities Act

To help ensure that investors receive Securities Act protections in business combinations involving shell companies (including de-SPAC transactions), the Commission adopted Rule 145a, which provides that any direct or indirect business combination of a reporting shell company involving another entity that is not a shell company, is deemed to involve a “sale” within the meaning of Section 2(a)(3) of the Securities Act of 1933. Rule 145a will apply to any reporting shell company that has assumed the appearance of having more than “nominal” assets or operations. However, the final rule will not have any impact on traditional business combination transactions between operating businesses, including transactions structured as traditional reverse mergers and traditional business combination transactions that make use of only business combination related shells. In addition, Rule 145a is not intended to change the treatment of any transaction, whether or not involving a shell company, under state or other federal laws, including, but not limited to, state corporate law and the Internal Revenue Code. Finally, because it is premised upon the change in the nature of a security when a reporting shell company changes its status to an operating company, Rule 145a specifically does not apply to a transaction where a reporting shell company combines with another shell company.

Financial Statement Requirements in Business Combination Transactions Involving Shell Companies

The new rules also amend SEC forms and rules to more closely align the financial statement reporting requirements in business combinations involving a shell company registrant and a public company target with those in traditional IPOs, including:

• Requiring a private company target acquired by a shell company to have its financial statements independently audited in accordance with the Public Company Accounting Oversight Board (PCAOB) standards.
• Aligning the number of fiscal years required to be included in the financial statements for a business that will be the predecessor(s) in a shell company business combination with the financial statements required to be included in a Securities Act registration statement for an IPO of equity securities.
• Requiring that the financial statements of a business that will be the predecessor to a shell company comply with Rule 3-12 of Regulation S-X in determining the age of the financial statements of the predecessor business in the registration statement or proxy statement of the registrant.
• Disclose the historical financial statements of acquisitions executed by the target company prior to its business combination with a public shell company.

ENHANCED PROJECTIONS DISCLOSURE

The final rules amend current Item 10(b), which gives management the option to present in SEC filings its good faith assessment of a registrant’s future performance (including the reasonable basis for such an assessment), to state the following:

• Any projected measures that are not based on historical financial results or operational history should be clearly distinguished from projected measures that are based on historical financial results or operational history.
• It generally would be misleading to present projections that are based on historical financial results or operational history without presenting such historical measure or operational history with equal or greater prominence.
• The presentation of projections that include a non-GAAP financial measure should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it is most closely related, and an explanation why the non-GAAP financial measure was used instead of a GAAP measure.

Additionally, with regards to de-SPAC transactions, under new Item 1609, a SPAC is required to disclose:

• With respect to any projections disclosed in the filing, the purpose for which the projections were prepared and the party that prepared the projections.
• All material bases of the disclosed projections, all material assumptions underlying the projections, and any factors that may impact such assumptions (including a discussion of any material growth rates or discount multiples used in preparing the projections, and the reasons for selecting such growth rates or discount multiples).
• Whether the disclosed projections reflect the view of the board or management of the SPAC or target company, as applicable, as of the date of the filing; if not, then a statement regarding the purpose of disclosing the projections and the reasons for any continued reliance by management or the board on the projections.

TAKEAWAYS AND PRACTICE NOTES

With these newly adopted rules, the SEC intends to reduce or eliminate differences in the regulatory treatment of de-SPAC transactions compared to traditional IPOs. However, many commentators are concerned that such rules ignore nuances pertaining to companies that begin life as SPACs or emerge following de-SPAC transactions. Moreover, some commentators have questioned the Constitutional authority the SEC has to adopt these rules. (Notably, some speculate that such challenges from high-profile stakeholders dissuaded the SEC from adopting one of its more consequential proposed rules, which would have “clarif[ied]” that any underwriter engaged in a SPAC IPO would automatically be considered an underwriter for subsequent de-SPAC transactions.) At any rate, the rules will likely be subject to court challenges.

Still, companies should be aware of the rules and take effective steps to act in accordance with them. We provide some key takeaways and practical guidance below.

Projections

By including projections in the list of factors that must be disclosed when a board considers them in making its “best interests” determination, it is more likely they be included in de-SPAC registration statements. As such, companies should be especially mindful that the SEC has removed the PSLRA’s safe harbor from de-SPAC transactions, which previously protected companies like SPACs from litigation arising from projections. This aspect of the final rules may face a court challenge.

Co-Registrant Status

The SEC states its view that the target company involved in a de-SPAC transaction is “an issuer of securities under Section 2(a)(4) of the Securities Act”. Importantly, being a co-registrant may subject the target company (to the extent that it became a reporting company by virtue of being a co-registrant in a de-SPAC transaction that may not have been consummated) to Exchange Act periodic reporting obligations under Section 15(d) of the Exchange Act.

Applicability to Companies Previously Engaged in SPAC-related Transactions

It is uncertain what practical impact these rules will have on ongoing transactions, some which may have already made filings with the SEC. At minimum, companies should be aware of the kinds of analytical questions the SEC will bring to review of filings related to such transactions.

¹A shell company is a company with no or nominal operations plus no or nominal assets and/or assets consisting solely of cash or cash equivalents. See 17 CFR 240.12b-2.