The commissioners of the SEC have proposed new rules and amendments that would require greater disclosures from special-purpose acquisition companies (SPACs). The proposed rules were made in reaction to concerns over the increased number of IPOs by SPACs in recent years and whether they circumvent investor protections and required disclosures in traditional IPOs.
The new rules would apply when SPACs engage in IPOs, requiring disclosures as to sponsor compensation, potential conflicts of interest, and dilution of shareholder interests, and when SPACs engage in business combination transactions with private operating companies (de-SPAC transactions), including disclosing the fairness of the transaction for investors and treating the transaction as an offer of securities under the Securities Act of 1933.
The new rules would also affect business combination transactions involving shell companies (finding that a combination between a reporting shell company and a non-shell company constitutes a sale of securities to the reporting shell company’s shareholders under the Securities Act of 1933, tightening financial statement requirements for private companies engaging in transactions with shell companies), address the use of projections of future financial performance in SEC filings (so that investors can better assess the reliability of projections), and create a safe harbor from having to register as an investment company under the Investment Company Act of 1940 for SPACs that comply with conditions relating to duration, asset composition, business purpose, and activities.
In a press release, SEC Chair Gary Gensler said that “functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO. Thus, 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.” In a similar statement, SEC Commissioner Caroline A. Crenshaw wrote that “the current SPAC boom highlighted a process with significant conflicts of interest and a host of misaligned incentives.”
In a dissent, SEC Commissioner Hester M. Peirce alleged that the “proposal does more than mandate disclosures that would enhance investor understanding. It imposes a set of substantive burdens that seems designed to damn, diminish, and discourage SPACs because we do not like them, rather than elucidate them so that investors can decide whether they like them. The typical SPAC would not meet the proposal’s parameters without significant changes to its operations, economics, and timeline.” In a subsequent statement on April 15, 2022, Commissioner Peirce claimed that the SEC had displayed “newfound hostility to SPAC capital formation.”
The public comment period for the proposed new rules will run through May 31, 2022, or 30 days following their publication in the Federal Register, whichever date is later, after which the SEC will vote on them. The SEC’s proposed new rules are here, the fact sheet regarding the proposal is here, and the press release is here.
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