SEC Provides Disclosure Guidance on SPAC IPO and Subsequent Business Combination Transactions

Kramer Levin Naftalis & Frankel LLP

On Dec. 22, 2020, the Staff of the Division of Corporation Finance (Staff) issued CF Disclosure Guidance: Topic 11 – Special Purpose Acquisition Companies to provide its views about certain disclosure considerations for special purpose acquisition companies (SPACs) in connection with their initial public offerings (IPOs) and subsequent business combination transactions.

SPAC IPO Disclosure Considerations

The guidance includes questions for SPACs to address, when relevant, in the IPO registration statement on the following topics of concern to the Staff:

Conflicts of interest. Disclosures should address fiduciary and contractual relationships that SPAC insiders may have with other entities (including other SPACs), securities ownership of SPAC insiders and any compensation arrangements that may create misaligned incentives.

Limited negotiating time frame. Disclosures should include the financial incentives of the SPAC insiders to complete a transaction, their influence over the approval of any transaction, the ability of the SPAC to amend its governing documents to facilitate a transaction, the ability to extend the timeline to complete a transaction, and any prior experience of SPAC insiders and their affiliates with successful or failed business combination transactions.

Role of underwriters. Disclosures should include any supplemental services to be provided by the underwriters, such as identifying targets, providing financial advice or acting as placement agent in a concurrent private placement, and any conflict of interest the underwriters may have, as well as the timing, conditionality and manner of the payment of compensation to the underwriters.

Economic terms of investments made by SPAC insiders. Relevant disclosures should include the securities ownership of SPAC insiders, any conflicts of interest arising from their securities ownership, compensation arrangements and relationships of SPAC insiders with affiliated entities.

Terms of SPAC issuances to its sponsor and others in private financings. Disclosures should address the terms of different classes of securities compared to the rights and terms of public securities offered in the IPO, whether the SPAC will seek additional funding and how the price and terms of any securities the SPAC may issue in private offerings could compare to the securities offered to the public in the IPO and whether the SPAC insiders may participate, or have an interest, in the financing, the terms of any forward purchase agreement, including whether it is irrevocable, and any potential dilutive impact on other shareholders.

Business Combination Disclosure Considerations

The guidance also highlights some disclosure considerations that may be relevant during business combination transactions:

Additional financing. Relevant disclosures should include whether additional financing is necessary to complete the business combination, how the terms of any financing may impact public shareholders, if financing includes the issuance of securities, the material terms of such securities, and whether SPAC insiders or their affiliates will participate in the financing. 

Potential conflicts of interest. Disclosures should include detailed information regarding the identification and evaluation of the combination transaction, detailed information regarding the consideration, the material factors considered by the board in its approval of the transaction, how the board evaluated the interests of the SPAC insiders, whether there are any conflicts of interest of the SPAC insiders and how the SPAC addressed these conflicts, any interest the SPAC insiders have in the target company, and the total percentage ownership interest the SPAC insiders may hold after the combination.

Underwriter considerations. Disclosures should include all fees that the underwriter of the IPO will receive upon completion of the business combination transaction, including any contingent fees, description of any supplemental services provided by the underwriters, affiliates’ compensation and any conflict of interest the underwriters may have.

The CF Disclosure Guidance: Topic 11 is available here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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