SEC Adopts Final Rules On SPACs, Shell Companies And Projections

The Securities and Exchange Commission (SEC) recently adopted final rules (available here; also see the fact sheet and press release) representing significant changes to special purpose acquisition companies (SPACs), shell companies and the disclosure of projections. These rules aim to enhance disclosures, protect investors and align the regulatory framework for SPACs with traditional IPOs. The following summarizes the key aspects of these rules.

1. Enhanced Disclosures: The final rules require SPACs to provide detailed disclosures in their initial public offerings (IPOs) and de-SPAC transactions. These detailed disclosure requirements include comprehensive information about SPAC sponsors, their affiliates and promoters, including their experience organizing SPACs, compensatory arrangements and any potential conflicts of interest. In addition, expanded disclosure will be required related to the target company and to any potential circumstances that may result in dilution to an investor. These enhanced disclosures should provide investors with a clearer understanding of a SPAC's structure, risks and potential benefits.
2. Liability: The final rules require, in certain situations, the target company in a de-SPAC transaction to be a co-registrant with the SPAC and assume responsibility for the disclosures in the de-SPAC registration statement. This requirement will subject the target company's directors and officers to potential Section 11 liability for material misstatements or omissions under the Securities Act of 1933, as amended (Securities Act).
3. Shell Company Business Combinations: The final rules introduce Rule 145a, which deems any business combination involving a reporting shell company (including a SPAC) and another entity that is not a shell company as a sale of securities under the Securities Act. This means that such transactions will require Securities Act registration, unless an exemption is available. Additionally, the rules revise the financial statement requirements for transactions involving shell companies and private operating companies, aligning them with those applicable to traditional IPOs. These changes aim to enhance transparency and protect investors in shell company business combinations.
4. Enhanced Projections Disclosure for SPACs and all SEC Filers: The final rules include amendments to the definition of "blank check company" to make the liability safe harbor in the Private Securities Litigation Reform Act of 1995 (PSLRA) for forward-looking statements, such as projections, unavailable in filings by SPACs and certain other blank check companies. The rules also require heightened disclosure related to projections, including information about the material bases of the projections and material assumptions underlying the projections. The final rules also update and expand guidance on the use of projections in all SEC filings. These changes are intended to provide investors with more transparency and enable them to make informed investment decisions.

In addition to the above final rules, the SEC published an interpretation of the status of SPACs as "investment companies" under the Investment Company Act of 1940. While the SEC stated that no one specific duration period is the sole determinant of the "investment company" for a SPAC, the duration of a SPAC that has assets and income that is substantially composed of securities (even government securities) and operates without completing a de-SPAC transaction with a target company is an indicator that the SPAC is an investment company. A SPAC that operates beyond 12 or 18 months without a business combination "may be an investment company and these concerns increase as the departure from these timelines lengthens." Accordingly, a SPAC that that has failed to enter into an agreement with a target company beyond those deadlines "should reassess its status and analyze whether it has become an investment company."

The final rules will become effective 125 days after publication in the Federal Register. Market participants, including SPAC sponsors, investors and advisors, should familiarize themselves with these rules to ensure compliance and navigate the evolving regulatory landscape effectively.

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