The Situation: In response to the unprecedented surge in SPAC activity in 2020 and the first quarter of 2021, the SEC made a number of public statements expressing concern about various aspects of SPACs and suggesting that increased regulatory oversight might be appropriate. The SEC then included SPACs on its list of areas for proposed rulemaking in June 2021, and also announced enforcement actions against individuals involved in two relatively high-profile de-SPAC transactions.
The Result: On March 30, 2022, the SEC proposed new rules to "enhance disclosure and investor protection" in SPAC IPOs and de-SPAC transactions The proposed rules, if adopted, would, among other things: (i) require SPAC participants to make additional public disclosures, including regarding potential conflicts of interest, dilution, and the fairness of any proposed business combination; (ii) potentially expose certain SPAC participants to an increased risk of liability under the federal securities laws; (iii) remove the safe harbor for forward-looking statements that many SPACs have relied upon to include financial projections in their de-SPAC disclosures; and (iv) create a safe harbor that would exempt SPACs from registering as investment companies if certain criteria are satisfied.
Looking Ahead: The SEC's proposed rules are designed to treat de-SPAC transactions more like traditional IPOs from a regulatory perspective, and to provide investors in SPACs with many of the same protections available to investors in companies that go public through more traditional means. By increasing the risk of liability for SPAC participants, the new rules could chill SPAC activity, and in that way reduce the ability (or willingness) of some private companies to access the public capital markets in this way.
In 2020 and the first quarter of 2021, the use of special purpose acquisition companies ("SPACs") as a means of taking companies public grew exponentially. SPAC IPOs raised a total of more than $160 billion in that five quarter period, compared to less than $25 billion in 2018 and 2019 combined. This surge, together with the sub-par performance of many of the companies that went public in recent years through business combinations with SPACs, increasingly drew the interest of the U.S. Securities and Exchange Commission ("SEC"), and resulted in the SEC making numerous public statements in 2021 about the need for increased regulation in the space. The SEC also brought high-profile enforcement actions against participants in two de-SPAC transactions. This increased level of SEC scrutiny likely contributed to the decline in SPAC activity in the second half of 2021, as market participants waited for the regulatory landscape to become more clear.