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SEC Proposes New Rules and Amendments on SPACs, Shell Companies, and Projections
Practical Law Legal Update w-035-0462 (Approx. 5 pages)
SEC Proposes New Rules and Amendments on SPACs, Shell Companies, and Projections
by Practical Law Corporate & Securities
| Published on 30 Mar 2022 • USA (National/Federal) |
The SEC proposed new and amended rules to enhance disclosures and investor protections regarding special purpose acquisition companies, shell companies, and projections.
Update: On October 7, 2022, the SEC reopened the comment periods for several rulemaking releases due to a technical error that resulted in the SEC not receiving comments submitted through its online form between June 2021 and August 2022. The SEC's below proposed rule was one of the affected releases. The reopened comment period will remain open for 14 days after the reopening release is published in the Federal Register. For more information, see Legal Update, SEC Reopens Comment Periods for Several Proposed Rules.
On March 30, 2022, the SEC proposed new and amended rules and forms to enhance disclosures and investor protections regarding special purpose acquisition companies (SPACs), shell companies, and projections. Specifically, the SEC's proposed rules and amendments would:
- Require additional disclosures and provide additional investor protections in initial public offerings (IPOs) by SPACs and business combination transactions between SPACs and private operating companies (de-SPAC transactions).
- Address the treatment under the Securities Act of 1933, as amended (Securities Act), of business combination transactions involving a reporting shell company and amend the applicable financial statement requirements.
- Address issues as to the reliability of projections made by SPACs and their target companies, including the safe harbor under the Private Securities Litigation Reform Act of 1995 for forward-looking statements, and provide additional guidance on the use of such projections in SEC filings and business combination transactions.
- Focus attention on the status of SPACs under the Investment Company Act of 1940, as amended (ICA), and the regulation of SPACs under the ICA.
Comments will be due 30 days after publication of the proposing release in the Federal Register or May 31, 2022, whichever is later. A summary of the proposed new rules and rule and form amendments is below.
Additional Disclosures and Investor Protections
The SEC's proposal would require specialized disclosures related to SPAC IPOs and de-SPAC transactions, including:
- Enhanced disclosures related to SPAC sponsors, including the compensation they would receive, conflicts of interest, and sources of dilution.
- Additional disclosures related to de-SPAC transactions, including on the fairness of the transactions to SPAC investors.
The SEC's proposal would provide additional investor protections by:
- Requiring that smaller reporting company status be re-determined within four (4) days after the consummation of a de-SPAC transaction.
- Amending the definition of "blank check company" to make the liability safe harbor for forward-looking statements such as projections under the Private Securities Litigation Reform Act of 1995 unavailable in filings by SPACs and certain other blank check companies.
- Under certain conditions, deeming the underwriters in a SPAC IPO to be underwriters in a subsequent de-SPAC transaction.
For more information on de-SPAC transactions, see Article, Understanding De-SPAC Transactions.
For more information on Form S-4 or F-4 and business combinations, see Practice Note, Registration Statement: Form S-4 and Business Combinations.
Business Combinations Involving Shell Companies
The SEC proposed rules applicable to business combination transactions involving shell companies, including SPACs, that would:
- Include a rule that would deem a business combination transaction involving a reporting shell company and another entity that is not a shell company to constitute a sale of securities to the reporting shell company's shareholders for purposes of the Securities Act.
- Align the applicable financial statements of private operating companies in transactions involving shell companies with those required in registration statements for IPOs.
Projections in SEC Filings
The SEC's proposal to amend Item 10(b) of Regulation S-K would expand and update the SEC's guidance on the presentation of projections of future economic performance in SEC filings. The proposed additional disclosure requirements would allow investors to better assess the basis of projections when they are used in SPAC business combination transactions.
SPACs Under the Investment Company Act
The SEC's proposed rule would address the status of SPACs as investment companies under the ICA. The proposal would provide that a SPAC that satisfies the conditions of the proposed rule would not be required to register as an investment company under the ICA. The conditions would, among other things, require the SPAC to:
- Maintain assets consisting only of:
- cash items;
- government securities; and
- certain money market funds.
- Seek to complete a business combination transaction after which the surviving entity will be primarily engaged in the business of the target company.
- Enter into a business combination transaction agreement with a target company within 18 months after the IPO, and complete the transaction within 24 months after the IPO.
Although compliance by a SPAC with the proposed rule on investment company status would not be mandatory, the conditions "align with the structures and practices" that the SEC says it "preliminarily believes would distinguish a SPAC that is likely to raise serious questions as to its status as an investment company from one that does not."