On January 24, 2024, the Securities and Exchange Commission (“SEC”) adopted new rules to enhance disclosure and provide additional investor protections in IPOs by special purpose acquisition companies (or “SPACs”) and in subsequent business combination transactions between SPACs and target operating companies (“de-SPAC transactions”). The SEC’s five-member commission approved the new rules in a 3-2 vote, split on party lines.  Chairperson Gary Gensler and his fellow Democratic commissioners — Caroline Crenshaw and Jaime Lizárraga — voted in the majority, while Republican commissioners Hester Peirce and Mark Uyeda voted in the minority. The new rules seek to strengthen investor protections in SPAC IPOs and de-SPAC transactions to be on par with traditional IPOs.  As Commissioner Gensler noted in a public statement accompanying the vote, “[j]ust because a company uses an alternative method to go public does not mean that its investors are any less deserving of time-tested investor protections. IPOs are IPOs, and as Aristotle once said, ‘treat like cases alike.’”  In contrast, Commissioner Peirce asserted in her public statement that “the new rules will exacerbate a problem – the shrinking pool of public companies—by closing down one road into the public markets.” 

The new rules impact SPACs and de-SPAC transactions in a number of ways, including: 

• enhancing required disclosures about conflicts of interest, SPAC sponsors, dilution, prospectus summaries and other information that is important to investors in SPAC IPOs and de-SPAC transactions;
• requiring, in certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC and thus assume responsibility for the disclosures in the registration statement filed in connection with the de-SPAC transaction;
• enhanced projection disclosure to better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (“PSLRA”); and
• deeming any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders.

Background

SPAC IPOs and de-SPAC transactions are an alternate method for private companies to enter the public markets and may be considered to have potential advantages compared to traditional IPOs, including faster execution, pricing certainty and less rigorous disclosure requirements, including with respect to forward-looking statements and projections. Although the SPAC IPO market has experienced a recent cooldown with only 86 and 31 SPAC IPOs occurring in 2022 and 2023, respectively, compared to 248 and 613 SPAC IPOs in 2020 and 2021, respectively, many regulators and industry observers have expressed concerns regarding asymmetries between investor protections for a traditional IPO and SPAC transactions.

To address these concerns, the SEC has adopted new rules to enhance investor protection in SPAC IPOs and de-SPAC transactions, the most important of which are summarized below.

Enhanced Disclosure Requirements

The SEC has adopted Subpart 1600 of Regulation S-K to set forth specific disclosure requirements applicable to SPACs regarding, among other things, potential conflicts of interest, the SPAC sponsor and dilution and requires certain disclosures on the prospectus cover page and in the prospectus summary. It mandates additional requirements for de-SPAC transactions. In practice, the disclosure requirements codified under the new rules have already been in effect on a de facto basis, as the SEC has for quite some time asked SPAC registrants to make these disclosures during its review and comment process. 

Conflicts of Interest

The SEC has expressed concerns about material potential or actual conflicts that SPAC sponsors and others may have with the interests of shareholders in connection with SPAC transactions. In particular, potential conflicts of interest of SPAC sponsors and others may be particularly relevant for investors to the extent that they arise when a SPAC and its management are deciding whether to engage in a de-SPAC transaction.

Accordingly, to provide enhanced information to investors, new Item 1603(b) of Regulation S-K requires disclosure of any actual or potential material conflict of interest between (1) the SPAC sponsor or its affiliates; the SPAC’s officers, directors or promoters; and the target company’s officers or directors and (2) unaffiliated security holders of the SPAC. In addition, Item 1605(d) of Regulation S-K requires disclosure of any material interests in the de-SPAC transaction or any related financing transaction held by the SPAC sponsor and the SPAC’s officers and directors, including fiduciary or contractual obligations to other entities as well as any interest in, or affiliation with, the target company.

SPAC Sponsor 

New Item 1603(a) of Regulation S-K requires additional disclosure about the SPAC sponsor, its affiliates and promoters in a registration statement and schedules filed in connection with SPAC registered offerings and de-SPAC transactions, including disclosure of the following:

• the experience, material roles, and responsibilities of these parties, as well as any agreement, arrangement, or understanding (1) between the SPAC sponsor and the SPAC, its officers, directors, or affiliates, with respect to determining whether to proceed with a de-SPAC transaction and (2) regarding the redemption of outstanding securities;
• the control persons of the SPAC sponsor and any persons who have direct and indirect material interests in the SPAC sponsor;
• tabular disclosure of the material terms of any lock-up agreements with the SPAC sponsor and its affiliates; and
• the nature and amounts of all compensation that has or will be awarded to, earned by, or paid to the SPAC sponsor, its affiliates, and any promoters for all services rendered in all capacities to the SPAC and its affiliates; the amount of securities issued or to be issued to the same persons and the price paid or to be paid for such securities, including any circumstances or arrangements under which the ownership of these securities were or could be transferred; as well as the nature and amounts of any reimbursements to be paid to the SPAC sponsor, its affiliates, and any promoters upon the completion of a de-SPAC transaction.

The SEC intends these new disclosure requirements to provide a SPAC’s prospective investors and existing shareholders with detailed information relating to the SPAC sponsor that could be important in understanding and analyzing a SPAC, including how the rights and interests of the SPAC sponsor, its affiliates, and any promoters may differ from, or may conflict with, those of public shareholders.

Dilution

The SEC adopted several new rules that require additional information about SPAC dilution in connection with registered offerings by SPACs, including IPOs, and in connection with de-SPAC transactions. New Items 1602(a)(3), 1602(c) and 1604(a)(3) of Regulation S-K require the following:

• the amount of the compensation received by the SPAC sponsor, its affiliates and promoters, the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates and promoters and the price paid or to be paid for such securities, and whether this compensation and securities issuance may result in a material dilution of the purchasers’ equity interests;
• a description of each material potential source of future dilution following the registered offering by the special purpose acquisition company; and
• the amount of the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters in connection with the de-SPAC transaction or any related financing transaction and whether this compensation may result in a material dilution of the equity interests of non-redeeming shareholders who hold the securities until the de-SPAC transaction.

Prospectus Summary Disclosures

New Items 1602(a), 1602(b), 1604(a) and 1604(b) of Regulation S-K require the cover page and prospectus summary to highlight key disclosures concerning SPAC offerings and de-SPAC transactions in an easily readable and understandable form. Although the SEC noted that in current market practice many SPACs already disclose similar information on prospectus cover pages, the final rules will standardize this information across all registration statements filed by SPACs for IPOs and de-SPAC transactions.

In particular, Items 1602(b) and 1604(b) require the prospectus summary to include, among other things, disclosure about the conflicts of interest of target company officers and directors; how the SPAC will identify and evaluate potential business combination candidates and whether it will solicit shareholder approval for the de-SPAC transaction; the material terms of the securities being offered, including redemption rights, and whether the securities are the same class as those held by the SPAC sponsor and its affiliate; and the period of time in which the SPAC intends to consummate a de-SPAC transaction, among other things.

Additional Rules for de-SPAC Transactions

The new rules include additional changes for de-SPAC transactions, including: 

• disclosure regarding any determination by a board of directors or similar body as to whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, if required by law, and any outside report, opinion, or appraisal received that materially relates to the de-SPAC transaction (which shall also be furnished as an exhibit to the registration statement and schedules);
• a 20-calendar-day minimum dissemination period for prospectuses and proxy and information statements filed for de-SPAC transactions where consistent with local law (this change is due to certain amendments to the rules under the Securities Exchange Act of 1934 (the “Exchange Act”), rather than an amendment to Regulation S-K); and
• a re-determination of smaller reporting company status following the consummation of a de-SPAC transaction and requiring such re-determination to be reflected in filings beginning 45 days after the de-SPAC transaction’s consummation.

The new rules also require reasonably detailed discussion of the SPAC and the target company’s reasons for engaging in the de-SPAC transaction and the SPAC’s reasons for the structure and timing of the de-SPAC transaction and any related financing transactions (Item 1605(b)(3) of Regulation S-K); an explanation of any material differences in the rights of SPAC and target company security holders as compared with security holders of the combined company as a result of the de-SPAC transaction (Item 1605(b)(4)); and the federal income tax consequences of the de-SPAC transaction to the SPAC, the target company and their respective security holders (Item 1605(b)(6)).

Target Company as Co-Registrant

The rules more closely align the required disclosures and legal liabilities that may be incurred in de-SPAC transactions with those in traditional IPOs. For example, in certain situations, the rules require the target company to sign a registration statement filed by a SPAC (or another shell company) in connection with a de-SPAC transaction. These changes have the effect of making the target company a “co-registrant” such that the target company will be subject to liability under Section 11 of the Securities Act of 1933 (the “Securities Act”) for disclosures in that registration statement.

Under the previous rules, only the SPAC or holding company and its officers and board members were required to sign the registration statement for the de-SPAC transaction, but not the private operating company and its officers and directors, and consequently they could avoid liability as signatories to the registration statement, even though information about the target company is highly significant to investors.

Under the new rule, the target company along with its required officers and directors now will need to sign a registration statement for the de-SPAC transaction. As a result, these signatories will be liable under the Securities Act for material misstatements or omissions in the registration statement and may thereby be held accountable to investors for the accuracy of the disclosures in the registration statement that previously would have been signed only by the SPAC or a holding company and its officers and directors.

Forward-Looking Statements Safe Harbor & Projections Disclosure

PSLRA

The PSLRA provides a safe harbor for forward-looking statements under the Securities Act and the Exchange Act, under which a company is protected from liability for forward-looking statements in any private right of action under the Securities Act or Exchange Act when, among other conditions, the forward-looking statement is identified as such and is accompanied by meaningful cautionary statements. Under the PSLRA, the safe harbor is not available, however, when a forward-looking statement is made in connection with, among other things, an offering by a blank check company, an offering by an issuer of penny stock, or an IPO.

To reconcile the regulatory treatment of projections in business combinations involving certain blank check companies with that in traditional IPOs, the rules adopt a definition of “blank check company” under the PSLRA that make the safe harbor for forward-looking statements under the PSLRA unavailable for such blank check companies, including SPACs. The effect of this change is that forward-looking statements made in connection with de-SPAC transactions will be treated the same way as forward-looking statements made in traditional IPOs, in which the protections of the PSLRA are not available.

Financial Projections

To address its concerns regarding potential abuse of projections in de-SPAC transactions, the SEC has implemented new disclosure requirements related to projections, including disclosure of all material bases of the projections and all material assumptions underlying the projections. In addition, 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.

These amendments to Item 10(b) of Regulation S-K reflect the SEC’s updated views on projected performance measures and include a requirement that projections based on a non-GAAP financial measure should include a clear definition or explanation of the non-GAAP measure and a description of the GAAP financial measure to which it is most closely related.

Effectiveness of New Rules

The rules will take effect 125 days after publication in the Federal Register. In addition, registrants will have 490 days following publication in the Federal Register to comply with the structured data requirements set forth in the rules (which require tagging of information disclosed pursuant to new subpart 1600 of Regulation S-K in Inline XBRL).

This alert was written with assistance from Michael Rosenbloom, a law clerk in our Venture Technology and Emerging Growth Companies practice.