On January 24, 2024, the SEC adopted rules and guidance to impose a variety of new requirements on SPACs. The effective date of the rules is 125 days after publication in the Federal Register, an unpredictable process that can take several weeks (except for the rules relating to Inline XBRL requirements for SPACs, which take effect 490 days after publication).

In a remarkable departure from the March 2022 proposal, the SEC abandoned its attempt to adopt proposed Rule 140a to “clarify” that any SPAC IPO underwriter would automatically have underwriter liability for the separate de-SPAC transaction if such a person merely “takes steps to facilitate the de-SPAC transaction.” Instead, the SEC decided against attempting categorical and automatic underwriter liability in response to “the comments received on proposed Rule 140a.” Those comments included an extensive comment letter submitted by SIFMA, which argued that the proposed rule exceeded the SEC’s authority and was unlawful under the Administrative Procedure Act.

Here are the highlights of the new rules and guidance:

• Detailed Disclosure of Sponsor Interests, Conflicts, and Transaction Features. Disclosures (ultimately in Inline XBRL format) will be required in both SPAC IPOs and subsequent de-SPAC filings, including:
  • detailed disclosures regarding SPAC sponsors and promoters, conflicts of interest, and dilution;
  • additional disclosures regarding de-SPAC transactions, including with respect to the background of the transaction and whether the transaction is advisable and in the best interests of the SPAC and its investors (when that determination is required by the laws of the SPAC’s jurisdiction of incorporation); and
  • disclosures regarding the operating company target (OpCo) that currently are filed on a Form 8-K following consummation of the de-SPAC transaction.
• Elimination of PSLRA Safe Harbor for Projections. The safe harbor in the Private Securities Litigation Reform Act of 1995 (PSLRA) for projections and other forward-looking statements will be unavailable for filings by SPACs and other blank check companies, with the intention of placing this type of disclosure in de-SPAC transactions on an equal footing with comparable disclosure in traditional IPOs. In some federal circuits, the “bespeaks caution” doctrine could in some circumstances provide protection similar to that of the PSLRA.
• OpCo as Co-Registrant. OpCo will be required to be a co-registrant when a SPAC files a registration statement on Form S-4 or Form F-4 for a de-SPAC transaction. This is already the case with certain de-SPAC transaction structures, but the change means that all registered de-SPAC transactions will subject OpCo, and its officers and directors, to Sections 11 and 12 liability.
• Proposed Rule 140a Abandoned; SEC “Guidance” on Underwriter Status in de-SPAC Transactions. As noted above, the SEC abandoned proposed Rule 140a. Instead, the SEC gave its views (in the form of “guidance”) on underwriter status in de-SPAC transactions. The guidance emphasizes that a de-SPAC transaction is a distribution of securities, and that there would be an underwriter present “where someone is selling for the issuer or participating in the distribution of securities in the combined company to the SPAC’s investors and the broader public” even if that person is not named as an underwriter. Importantly, the SEC emphasized that the guidance does not apply to traditional M&A transactions (business combinations that do not involve a de-SPAC).
• De-SPAC Transaction Deemed to be Sale of Securities to SPAC Shareholders. Under new Rule 145a, the de-SPAC transaction will be deemed to be a sale by OpCo of securities to SPAC’s shareholders for purposes of the Securities Act. As a result, the de-SPAC will fall within the application of Rule 145 regardless of whether the transaction takes the form of a classic de-SPAC (in which SPAC acquires OpCo) or OpCo purchases the SPAC, and the transaction will require Securities Act registration unless an exemption from registration is available.
• Re-Determination of Smaller Reporting Company (SRC) Status. Because they have little revenue, many SPACs qualify as SRCs prior to the de-SPAC transaction and are able to take advantage of disclosure accommodations afforded to SRCs. Under existing rules that test SRC status only once per year, some SPACs have been able to stay in SRC status for several months after the de-SPAC. Under the new rules, a post-de-SPAC public company will be required to re-determine its status as an SRC within four business days following the consummation of the de-SPAC transaction and reflect that re-determined status in any filing made 45 days after consummation of the de-SPAC, which may include an amendment to the super 8-K. However, there is no re-determination with respect to qualification as a large accelerated or an accelerated filer, an emerging growth company, or a foreign private issuer (although there is special guidance relating to FPIs noted below).
• FPIs. A domestic SPAC that is the registrant in a de-SPAC transaction with an FPI OpCo must file on Form S-4 (not F-4), and the financial statements of the FPI OpCo must be presented in US GAAP. The combined company will be deemed to be a domestic company in that circumstance. Use of a Form F-4 would be permitted if the SPAC registrant qualifies as an FPI as of a date within 30 days of filing the de-SPAC transaction, OpCo is an FPI, and the combined company is expected to be an FPI at the time of consummation of the de-SPAC.
• New Financial Statement Requirements. Under new Article 15 of Regulation S-X:
  • OpCo financial statements will need to be audited under PCAOB standards;
  • two years (not three years) of OpCo financial statements will be required if both SPAC and OpCo qualify as EGCs, regardless of whether SPAC has filed an annual report;
  • the requirements for financial statement staleness will be the same as if OpCo were filing an initial Securities Act registration statement (and in the case of an SRC, would be based on whether OpCo would qualify as an SRC in its own right);
  • in cases where OpCo is deemed to be the predecessor entity and has pending or completed acquisitions of other businesses, S-X Rule 3-05 and S-X Rule 3-14 (S-X Rule 8-04 in the case of SRCs) will apply to the requirements for inclusion of target financial statements in the de-SPAC Form S-4/F-4. To the extent financial statements of acquired businesses are permitted to be omitted (for example, for probable transactions below the 50% significance level), they will be required to be filed in a subsequent Form 8-K; and
  • the post-de-SPAC public company will be no longer be required to file historic financial statements of the SPAC for periods prior to the de-SPAC transaction once the combined entity has filed its first periodic report that includes post business-combination financial statements of the combined entity. For example, a Securities Act registration statement filed prior to the first Form 10-Q of the combined entity would require historic SPAC financial statements, whereas no such financials would be required after the Form 10-Q is filed. 
• Increased Disclosure Regarding Projections. New requirements governing projections include:
  • amendments to the SEC’s guidance in S-K Item 10(b) state that any projections that are not based on historical financial results or operational history must be “clearly distinguished” from projections that are based on historical financial results or operational history. Projections based on historical financial results or operational history must give equal or greater prominence to the historical measures or operational history. 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; and
  • new S-K Item 1609 will require additional disclosures regarding projections in the specific context of de-SPAC transactions, including disclosure of who prepared the projections and why, material underlying assumptions, material factors that could cause the assumptions to change and whether the projections still reflect the views of the board or management of the SPAC or OpCo as of the date of the filing relating to the de-SPAC.
• Status of SPACs under the Investment Company Act of 1940 (Company Act). The SEC withdrew proposed Company Act Rule 3a-10, which would have provided a safe harbor from the definition of investment company under the Company Act. Instead, the SEC provided its views on facts and circumstances that are relevant to whether a SPAC meets the definition of an investment company. For example, a SPAC that holds its assets in US Government securities, money market funds, and cash items prior to a de-SPAC transaction (as opposed to holding those assets when its primary business purposes is to achieve investment return), and that does not propose to hold “investment securities,” will likely not be deemed to be an investment company.