Committee Hearing
On May 24, 2021, the U.S. House Committee on Financial Services held a hearing to assess the sufficiency of investor protections, transparency, and accountability in connection with non-traditional IPOs, such as de-SPAC transactions and direct listings. While speakers expressed varying views regarding existing inefficiencies in the traditional IPO market and whether or not there should be increased regulation, others noted that any regulatory regime should be fair and consistent, whether a company becomes public through a traditional IPO, a de-SPAC transaction, a direct listing, or other means. Hearings such as these, as well as proposed legislation, may lead the SEC to develop further regulatory changes. Our Public Policy team will continue to monitor congressional developments and proposed legislation and regulatory changes, including engaging directly with key members of Congress.
Potential Ramifications
If the draft legislation is adopted, the safe harbor under the PSLRA will no longer be available for forward-looking statements, including projections, to the extent such statements are included in documents (such as proxy statements) soliciting stockholder approval of de-SPAC transactions. This change may expose SPACs, private companies seeking to become public via a de-SPAC route, sponsors, and management and directors of both entities to increased liability and possibly increased D&O insurance costs. While it is possible some may consider not including projections if the legislation is adopted, since Netsmart, courts in Delaware have looked askance at companies seeking stockholder approval and not sharing projections upon which a board fundamentally relied in recommending a transaction to its stockholders. As a result, boards may face increased risk whether or not projections are included. SPACs, private companies seeking to become public via the de-SPAC route, sponsors, management, board members, financial advisors, and others involved in de-SPAC transactions will want to apply a robust due diligence and review process to any projections included in documents soliciting stockholder approval of de-SPAC transactions—a process that should include carefully drafting and reviewing accompanying disclosures and cautionary statements.