SEC Proposed Rule Release 33-11048: Special Purpose Acquisition Companies, Shell Companies, and Projections

On March 30, 2022, the U.S. Securities and Exchange Commission (SEC) proposed a series of rules and amendments that would align the disclosure and liability regimes for companies going public through a combination with a special purpose acquisition company (SPAC) to traditional initial public offerings (IPOs). While the release confirms the regulatory changes that we anticipated and partially answers some of the questions we raised in our client alert following the April 2021 statement by John Coates, then-Acting Director of the SEC’s Division of Corporation Finance, uncertainty regarding how these changes will manifest themselves in practice remain. What is clear is that the changes, if adopted, will further chill the market for SPAC IPOs and de-SPAC transactions, which has already seen significant cooling from its 2020 and 2021 highs.

There is a lot to unpack with the release, but below is a summary of the effect of some of the SEC’s proposed changes:

• Liability Regime:
  • for SPAC shareholders—a de-SPAC would be treated as a sale of securities to a SPAC’s shareholders, and thus SPAC shareholders would have the benefit of Section 11 of the Securities Act of 1933 (Securities Act);
  • for SPAC underwriters—a SPAC IPO underwriter that takes steps to facilitate or otherwise participates (directly or indirectly) in a subsequent de-SPAC transaction or any related financing transaction would be a statutory underwriter for purposes of the de-SPAC transaction;
  • for targets and their directors and officers—the target company, as well as its directors and certain officers, would become subject to Section 11 liability as signatories of the registration statement with respect to the transaction; and
  • unavailability of safe harbor for forward-looking statements—forward-looking statements in de-SPAC transactions, including projections, would no longer be covered by the Private Securities Litigation Reform Act (PSLRA) safe harbor.
• Disclosure Regime: a number of changes to disclosure requirements for SPAC IPOs and de-SPAC transactions, including a requirement for the SPAC to disclose whether the SPAC reasonably believes that the de-SPAC and any related financing transaction are fair or unfair to unaffiliated SPAC security holders.
• Other: a safe harbor under the Investment Company Act of 1940 for SPACs.

Here are the proposed changes in greater detail:

Proposed Changes to Liability Regime for De-SPAC Transactions

Section 11 Liability of the Target Company and Its Directors and Officers

Section 11 of the Securities Act imposes liability if any part of a registration statement, when effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading. This liability attaches to the “registrant” as well as its directors and executive officers who sign the registration statement. Currently, when a SPAC files a registration statement to register the issuance of shares in a de-SPAC, the “registrant” is the SPAC, and only the SPAC’s directors and executive officers are required to sign the registration statement. Because it is not the “registrant” in the filing, the target company, as well as its officers and directors, are not required to sign the registration statement, and as a result may avoid liability as signatories under Section 11.

In the proposed rules release, the SEC notes that it is “concerned that [such] a narrow approach to registrant status in [de-SPACs] could undermine the statutory liability scheme that Congress applied to initial public offerings of securities.” In response to this concern, the SEC is proposing to amend the signature instructions to Form S-4 and F-4 to state that, if a SPAC is offering its securities in a de-SPAC, the “registrant” for purpose of the signature requirements would be the SPAC and the target company. As a result of signing the registration statement, the target company and its officers and directors would be subject to Section 11 liability.

Officers and directors of registrants are entitled to a “due diligence” defense to liability under Section 11 of the Securities Act if they can establish, after reasonable investigation, that they had reasonable grounds to believe and did believe, at the time the registration statement became effective, that there were no material misstatements in the registration statement and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading. In the context of traditional IPOs, this always includes obtaining “comfort letters” from the company’s accountants regarding the registrant’s financial statements and negative assurance letters (also known as 10b-5 letters) from law firms indicating that the registration statement does not contain any material misstatements or omissions. While well-advised participants in de-SPAC transactions undertake due diligence to ensure the accuracy and completeness of disclosures, comfort letters and negative assurance letters are not the norm. This will likely change if the SEC adopts these proposals, further increasing the time and expense associated with a de-SPAC transaction and the fees that financial and other advisors charge the registrants as compensation for the enhanced risk.

The SEC has not addressed fully who will have the benefit of the protections of Section 11. Since the applicable registration statement registers the offer and sale of SPAC securities to the target company shareholders, presumably the target shareholders do. While it seems uncontroversial that the target shareholders would have a claim for a material misstatement or omission regarding disclosures regarding the SPAC or the terms of the combination, it would be strange if they also had a claim under Section 11 regarding a material misstatement or omission in the disclosures related to the target company. The target shareholders already made the decision to invest in the target operating company, and it would be akin to a pre-IPO investor in a traditional IPO having a Section 11 claim with respect to shares sold to others. In addition, on one level, the target company's shareholders may actually have benefitted from any misstatement or omission, which raises an interesting question of what would be their damages or other remedies.

In addition, if the placement agent for the private investments in public equity (PIPE) that typically accompany de-SPACs is deemed an underwriter in the context of de-SPAC transactions, does that mean that PIPE investors get the benefit of Section 11? In connection with the PIPE, securities are sold to sophisticated investors who acknowledge the transaction is not being registered with the SEC, have the opportunity to conduct diligence directly with the management of the target operating company, and make their investment decision prior to the announcement of the de-SPAC transaction (almost always without the benefit of extensive disclosure documents, since those are usually prepared later in the transaction process).

Underwriter Liability for SPAC IPO Underwriters in De-SPACs, and Lack of Clarity on Which Other Parties May Be Deemed Underwriters

Underwriters play a key role as intermediaries between an issuer and the investing public, and they have been traditionally considered “gatekeepers” in the securities markets. Consistent with such role, underwriters may be subject to liability for misstatements or omissions made in connection with an offering of securities, including under Sections 11 and 12(a)(2) of the Securities Act.

The SEC is proposing to introduce a new Rule 140a to “clarify” that a person who has acted as an underwriter in the SPAC IPO and takes steps to facilitate the de-SPAC or any related financing transaction, or otherwise participates (directly or indirectly) in the de-SPAC, will be deemed to be an underwriter. The release suggests that the SEC would consider a party to be participating in the de-SPAC if it receives compensation in connection with the de-SPAC, acts as financial advisor, assists in identifying potential target companies, negotiates merger terms or finds investors for and negotiates the terms of a PIPE.

Like officers and directors that sign a registration statement, underwriters are entitled to a “due diligence” defense. The SEC’s proposed “clarifications” will likely result in transaction participants who may be deemed an underwriter taking additional steps such as obtaining “comfort letters” from the target company’s accountants and negative assurance letters from law firms involved in the de-SPAC transaction. Such innovations, if widely adopted, would likely further increase the time and expense associated with a de-SPAC transaction as described above.

Although proposed Rule 140a would only address the underwriter status of parties who also acted as traditional IPO underwriters, the SEC notes in the rules release that:

“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]

Accordingly, the SEC is requesting comment on whether proposed Rule 140a should be revised to expressly include or exclude additional parties that are involved in a de-SPAC. If PIPE investors were deemed to be statutory underwriters in connection with the de-SPAC transaction, it may have a profound effect on investors’ willingness to participate in PIPEs and brokers’ willingness to facilitate resales by PIPE investors (and thus liquidity of PIPE shares) following closing of the de-SPAC transaction.

De-SPAC Transactions Will Be Deemed to Involve a Sale of Securities to SPAC Shareholders

The Staff was clear that under the proposed regime, a business combination transaction between a shell company and a non-shell company would be treated as a sale of securities to a reporting shell company’s shareholders, and thus SPAC shareholders would have the benefit of Section 11. What is less clear is how a Section 11 claim by SPAC shareholders would play out in practice. Holders of SPAC shares have the right to cause the SPAC to redeem their shares at the SPAC IPO price if they do not like the proposed business combination. Would a Section 11 claim for a de-SPAC transaction only be available to an investor who elected not to have his or her shares redeemed (under the theory that but for the material misstatement or omission, the investor would have submitted shares for redemption)? Would it be possible for a holder of SPAC shares who did have his or her shares redeemed bring a Section 11 claim when the company outperforms expectations following a de-SPAC, with creative plaintiff lawyers claiming that there was nondisclosure of positive news, but for which the investor would have held onto to his or her shares?

Unavailability of the PSLRA Safe Harbor

The PSLRA provides a safe harbor for forward-looking statements under the Securities Act and the Exchange Act of 1934, such that liability for such statements will be limited when, among other things, the forward-looking statement is properly identified and accompanied by meaningful cautionary statements. Prior to the April 2021 statement from then-Acting Director Coates, most practitioners would express the view that the PSLRA safe harbor applies to statements made in connection with de-SPACs, particularly those relating to projections prepared by target companies and considered by SPAC directors when approving the transaction.

Given the concerns the SEC raised regarding the care with which such projections are prepared, the least surprising part of the proposal was to change the definition to clarify that the PSLRA is unavailable in any de-SPAC transaction. In particular, the SEC expressed concern in the context of target companies with no history of operations to support their projections. It also noted that parties to a de-SPAC often have conflicts of interest that may not incentivize accurate projections. For example, a SPAC and its sponsor may have an incentive to use optimistic projections to garner shareholder support for the deal, and management of the private operating company may have a similar incentive to justify a higher price for the company.

In its requests for comment, the SEC seemed to acknowledge that rules that would make disclosure of projections riskier to market participants, or otherwise more onerous, may “affect the ability of SPACs or target companies to comply with their obligations” under applicable state or foreign law. For example, while under Delaware law there is no per se duty to disclose financial projections to shareholders in connection with a merger or acquisition, the Delaware Court of Chancery has in the past required disclosure of management’s projections, especially if those projections formed the basis of a fairness opinion. In addition, as discussed below, the SEC is also proposing to require disclosure of fairness opinions by outside parties, which often take into account projections. Removing the PSLRA safe harbor for a de-SPAC would place parties in a difficult position, as they consider potential liability for such statements while seeking to comply with the SEC’s own rules and with fiduciary duties or other obligations under applicable state laws.

To address its concerns with the use of projections, the SEC also proposed: 1) an amendment to Item 10(b) of Regulation S-K, which would apply to all filings in which projections are used and 2) new Item 1609 of Regulation S-K, which would require additional disclosure regarding projections in de-SPACs only.

Amendment to Item 10(b) of Regulation S-K

The SEC proposed to amend Item 10(b) of Regulation S-K to state that:

• 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 the GAAP measure. However, no reconciliation to a GAAP measure would be required; and
• the rule applies to any projections of future economic performance of persons other than the registrant that are included in the registrant’s filings, such as the target company in a business combination transaction.

New Item 1609 of Regulation S-K

New Item 1609 of Regulation S-K would require the following disclosure in the registration statement on Form S-4 or F-4 or the proxy statement approving the de-SPAC:

• the purpose for which any projections disclosed in the filing were prepared, and the party that prepared them;
• all material bases of, and material assumptions underlying, disclosed projections, and any factors that may materially affect 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; and
• whether the disclosed projections still reflect the view of the board or management of the SPAC or target company, as applicable, as of the date of the filing, and if not, a discussion of the purpose of disclosing the projections and reasons for any continued reliance by the management or board on the projections.

Proposed Changes to Disclosure Regime

For both SPAC IPOs and de-SPACs, the SEC’s proposed rules are intended to address what the SEC views either as insufficient or exceedingly complex disclosure. Below is a summary of the proposed rules and amendments that address the SEC’s core areas of concern:

Enhanced Disclosures Regarding the De-SPAC and Any Financing Transactions and the Target Company

Although many of the proposed disclosure requirements are largely consistent with current market practice, the SEC has proposed the following, which would add to the disclosure currently seen in most de-SPACs.

• Whether the SPAC reasonably believes that the de-SPAC and any related financing transaction are fair or unfair to unaffiliated SPAC security holders, including a disclosure of the material factors upon which the belief is based and, to the extent practicable, the weight assigned to each factor. The factors must include the valuation of the target company, the consideration of any financial projections, and any fairness opinion (as discussed below). The proposed rules would deem insufficient a statement that the SPAC has no reasonable belief as to the fairness of the transactions.
• Whether or not the SPAC or SPAC sponsor received a fairness opinion from an outside party and, if such an opinion was obtained, a summary of any such opinion, which would need to be attached as an exhibit to the filing. The discussion should state whether the SPAC or sponsor or the outside party recommended the amount of consideration to be paid to or the valuation of the target company. The disclosure would also need to include the method of selecting the outside party and material relationships with the SPAC, sponsor, and their respective affiliates. Because such fairness opinions typically rely on management projections as a basis for the opinion, and because applicable state law may encourage (if not always require) disclosure to shareholders of any projections used in a fairness opinion, obtaining and filing a copy of a fairness opinion increases pressure on the registrant to include projections in its filings. At the same time, as discussed above, the SEC is proposing to exclude de-SPAC transactions from the PSLRA safe harbor for forward-looking statements.
• A sensitivity analysis of potential dilution to non-redeeming shareholders, including tables showing potential dilution by reasonably likely potential redemption levels, and within each level quantifying the dilutive effect on non-redeeming shareholders of sources of dilution. Each redemption level should also include the valuation at or above which the potential dilution results in the amount of non-redeeming shareholders’ interest per share being at least the IPO price.
• Whether any director voted against, or abstained from voting on, the approval of the de-SPAC or any related financing transaction, including the identity of the director and the reasons for the vote or abstention.
• Whether or not a majority of non-employee directors of the SPAC approved the de-SPAC and any related financing transaction and retained an unaffiliated representative to act solely on behalf of unaffiliated security holders to negotiate the terms and prepare a report on the fairness of such transactions.
• Whether or not the de-SPAC and any financing transaction are structured so that approval of at least a majority of unaffiliated holders is required.
• The effects, quantified to the extent practicable, of the de-SPAC and any related financing transaction on (i) the SPAC, the sponsor, the target company, and each of their respective affiliates, and (ii) unaffiliated SPAC security holders.
• The terms and amounts of the compensation received or to be received by the sponsor and its affiliates in connection with the de-SPAC or any related financing transaction, including whether that compensation has resulted or may result in a material dilution of the equity interests of unaffiliated security holders of the SPAC.
• Enhanced disclosure of the target company to align more closely with disclosures in the IPO context.
• Enhanced disclosure regarding projections of the target company’s financial performance (see “Amendment to Item 10(b) of Regulation S-K” and “New Item 1609 of Regulation S-K” under “Unavailability of the PSLRA Safe Harbor” above.)

Enhanced Disclosures Regarding the Sponsor and Potential and Actual Conflicts of Interest

The SEC’s proposed rules also require the disclosure of the following in connection with SPAC IPOs and de-SPACs:

• Information regarding the SPAC sponsor, including controlling person and any agreement, arrangement or understanding with unaffiliated security holders of the SPAC regarding the redemption of outstanding securities.
• Information regarding the SPAC sponsor, its affiliates and promoters, including arrangements and understandings in determining whether to proceed with a de-SPAC.
• Lock-up agreements entered into by the SPAC Sponsor and its affiliates, including exceptions and terms that would result in earlier expiration.
• Any actual or potential material conflict of interest between the SPAC sponsor, its affiliates or the SPAC’s officers, directors, or promoters and unaffiliated security holders, including material conflicts of interest in determining whether to proceed with a de-SPAC and those resulting from the manner of compensation to the SPAC sponsor, executive officers, and directors of the SPAC or compensation of the executive officers or directors of the SPAC sponsor.
• Fiduciary duties of each officer and director of the SPAC to other companies to which they have fiduciary duties.

Enhanced Disclosures in SPAC IPOs to Clarify Risks Resulting from SPAC Structure

The proposed rules release emphasized the SEC’s concern that the complexity of SPACs and de-SPACs may prevent investors from understanding key features and risks of the transaction, in particular, with respect to dilutive effects on a SPAC’s shareholders. To address this concern, the SEC is proposing simplified disclosure in prominent places of the registration statement and prospectus.

Proposed Changes to Financial Statement Requirements

The SEC is proposing a new Article 15 of Regulation S-X and related amendments to align more closely the required financial statements of private operating companies in connection with business combination transactions involving shell companies with the financial statements required in registration statements on Form S-1 or F-1 for an IPO. The SEC is thereby seeking to reduce asymmetries between financial statement disclosures in business combination transactions involving shell companies and traditional IPOs by codifying parameters that currently exist as staff guidance for transactions involving shell companies.

Number of Years of Financial Statements

A registration statement on Form S-4 and F-4 and a proxy or information statement may include two (rather than three) years of financial statements of the private operating target company when the target company would be an emerging growth company (EGC) if it were conducting an IPO of common equity securities, and the registrant is an EGC that has not yet filed or been required to file its first annual report, even if the target would not be a smaller reporting company. Proposed Rule 15-01(b) would delete the second prong, i.e., by removing the test of whether the registrant shell company has filed its first annual report. Proposed Rule 15-01(b) of Regulation S-X would not change the first prong; i.e., if the private operating company exceeds both the smaller reporting company and EGC revenue thresholds, the SEC would continue to require three years of statements of comprehensive income in the registration statement.

Audit Requirements of Predecessor

Forms S-4 and F-4 currently provide that, for an acquisition by a registrant that is not a shell company:

• the target operating company financial statements may be audited in accordance with U.S. Generally Accepted Auditing Standards;
• the financial statements of the most recent fiscal year are required to be audited only to the extent practicable; and
• financial statements before the latest fiscal year need not be audited if they were not previously audited.

Since the financial statements of a target private operating company become those of the registrant upon consummation of a transactions involving a shell company, SEC staff have advised registrants that they expect the financial statements of the target private operating company to be audited to the same extent as a registrant in an IPO. For business combination transactions involving a shell company, Proposed Rule 15-01(a) of Regulation S-X would align the level of audit assurance required for the target private operating company with the audit requirements for an IPO and current SPAC market practice.

Age of Financial Statements of the Predecessor

For business combination transactions involving a shell company, SEC rules currently require registrants to file financial statements of the private operating target company that would be required in an annual report. Such financial statement requirements do not have the same age limitations as apply to an issuer filing in the context of an initial registration statement. Proposed Rule 15-01(c) of Regulation S-X would provide that the age of financial statements for a private operating target company that would be the predecessor to a shell company in a registration statement or proxy statement would be based on whether the private operating target company would qualify as a smaller reporting company if it were filing its own initial registration statement.

Acquisitions of Businesses by a Shell Company Registrant or Its Predecessor That Are Not or Will Not Be the Predecessor

SEC rules currently require an issuer to include in a registration statement or proxy/information statement the financial statements of a business “acquired or probable of being acquired” by the private operating target company only when omission of those financial statements would render the target company’s financial statements substantially incomplete or misleading. To clarify when the SEC would require the inclusion of such financial statements, the SEC proposed new Rule 15-01(d) of Regulation S-X to require application of Rules 3-05 or 8-04 (or Rule 3-14 as it relates to a real estate operation), the Regulation S-X provisions related to financial statements of an acquired business, to acquisitions of businesses by a shell company registrant, or its predecessor, that are not or will not be the predecessor to the registrant.

The SEC is also proposing amendments related to the significance tests in Rule 1-02(w) of Regulation S-X that determine when registrants must include financial statements of an acquired business. Rule 1-02(w) currently requires the financial information of the registrant, which may be a shell company, to be used as the denominator for the significant subsidiary tests. This does not address the scenario when there is both a shell company registrant and target private operating company that is or will be its predecessor. Because a shell company by definition has no more than nominal activity, the application of such tests results in limited to no sliding scale for business acquisitions, including those made by the private operating company that will be the predecessor to the shell company, because every acquisition would be significant and thus require financial statements. Such application may limit the ability to recognize which acquisitions have a greater effect on the predecessor than others. The SEC is proposing to amend Rule 1-02(w) of Regulation S-X to require issuers to calculate the significance of the acquired business using as the denominator the private operating company’s—instead of the shell company’s—financial information.

Financial Statements of a Shell Company Registrant After the Combination with Predecessor

In a de-SPAC, once the registrant’s financial statements include the period in which the de-SPAC was consummated for any filing, the SPAC’s financial statements would generally no longer be relevant or meaningful to an investor. The SEC Proposed Rule 15-01(e) would allow a registrant to omit the financial statements of a shell company, including a SPAC, for periods prior to the acquisition, once the registrant has filed the shell company’s financial statements for all required periods through the acquisition date, and the registrant’s own financial statements include the period in which the acquisition was consummated. Naturally, registrants must continue to provide all material information as may be necessary to make required statements, in light of the circumstances under which they were made, not misleading. Therefore, if there is information included in or about the historical SPAC financial statements that would be material to an investor, a registrant would still be required to provide such information in the registration statement.

Other Amendments

The SEC proposes to amend Rule 11-01(d) of Regulation S-X to state that a SPAC is a business for purposes of that rule. While Rule 11-01(d) states that an entity is presumed to be a business, consideration of the continuity of the SPAC’s operations prior to and after the de-SPAC may lead some parties to conclude that the SPAC is not a business under the rule. Nonetheless, given the significant equity transactions generally undertaken by a SPAC, the SEC believes a SPAC’s financial statements could be material to an investor, particularly when they underpin adjustments to pro forma financial information in a transaction when an operating company is the legal acquirer of a SPAC. As a result of the proposed rule, an issuer that is a surviving operating company rather than the SPAC may be required to file the SPAC’s financial statements in a resale registration statement on Form S-1.

Item 2.01(f) of Form 8-K currently requires a shell company registrant to file, after an acquisition, the information that would be required if the registrant were filing a general form for the registration of securities on Form 10. The SEC proposes to revise this Item to refer to “acquired business,” rather than “registrant,” to clarify that the information provided relates to the acquired business and for periods prior to consummation of the acquisition and not the shell company registrant.

To codify existing financial reporting practices, the SEC is proposing amendments to Rules 3-01, 8-02, and 10-01(a)(1) of Regulation S-X to refer specifically to financial statements of predecessors consistent with the provision regarding income statements.

Other Proposals

Minimum Dissemination Period of Shareholder Materials

Currently, no federal law establishes that a prospectus, proxy statement or other materials relating to a meeting of an entity’s security holders must be disseminated by a certain date prior to that meeting. In the proposed rule release, the SEC expressed a concern that, without a minimum dissemination period, a SPAC and its sponsor may be incentivized to provide such documents closer to the meeting date, leaving security holders with relatively little time to review what are often complex disclosure documents for these transactions.

To ensure that SPAC shareholders have sufficient time to consider the information presented in connection with de-SPACs, the SEC is proposing a 20-calendar-day minimum dissemination period in de-SPACs. However, if the proposed minimum dissemination period exceeds the maximum dissemination period of the SPAC’s jurisdiction of incorporation, the SEC’s proposed requirement would not apply.

Proposed Safe Harbor Under the Investment Company Act of 1940

The SEC also proposed Rule 3a-10 to amend the definition of “investment company” under the Investment Company Act of 1940 (1940 Act) to create a safe harbor exemption for SPACs that satisfy certain criteria. Some SPACs may meet the definition of “investment company” under the 1940 Act because SPACs often invest an overwhelming majority of their assets in securities, typically for at least one year. The proposed safe harbor would limit the operations in which SPACs may engage, while drawing a clearer line between SPACs and investment companies.

Under the proposed Rule 3a-10, a SPAC would be excluded from the definition of “investment company” under the 1940 Act if it satisfies the following criteria:

• Assets. The SPAC’s assets must solely consist of Government securities¹, Government money market funds², and cash. Additionally, any SPAC that would seek exemption under the proposed safe harbor may not (i) acquire any other type of asset prior to the completion of a de-SPAC or (ii) acquire or dispose of any asset for the primary purpose of recognizing gains, or decreasing losses, from changes in the market value of the asset.
• Completion of a de-SPAC. Under the proposed rule, a SPAC seeking to use the safe harbor must seek to complete a single de-SPAC, after which the surviving company must (i) be primarily engaged in the business of the target company and (ii) have securities listed for trading on an exchange. Additionally, within 18 months after the effective date of its initial registration statement, a SPAC must file a Form 8-K disclosing an agreement to engage in a de-SPAC with at least one target company. Finally, a SPAC seeking the safe harbor must complete the de-SPAC within 24 months after the effective date of its initial registration statement.
• Primary Engagement. A SPAC seeking exemption under the proposed rule must not hold itself out as being a vehicle for investing, reinvesting, or trading in securities. Instead, a SPAC must be “primarily engaged” in seeking to complete a single de-SPAC.

Conclusion

Given the SEC’s well-known skepticism for certain SPAC market practices, advisors have long expected the SEC to pursue robust SPAC-focused rulemaking of the type proposed in this release. The proposed rules and amendments discussed above are likely to have a significant dampening effect on the rate of new SPAC IPOs, as well as the consummation of de-SPAC business combinations, particularly during the public comment period as these proposed rules receive significant scrutiny and the final rules take shape.

^[1]As defined in Section 2(a)(16) of the 1940 Act. (15 U.S.C. 80a-2(a)(16)).

^[2]As defined in Rule 2a-7(a)(14) under the 1940 Act. (17 CFR 270.2a-7).