Tuesday, April 05. 2022
SEC Announces Rule Proposals to Improve Disclosure and Investor Protection Regarding Special Purpose Acquisition Companies, Shell Companies, and Projections
Investor Protection and Enhanced Disclosure
The US public securities markets have experienced an historic increase in the number of IPOs by SPACs over the past two years, which has raised investor protection concerns regarding several features of the SPAC framework and the growing use of shell companies as a means for private operating companies to become public companies. The rapid expansion of the SPAC market has also prompted speculation that some SPACs actually may be investment companies that would need to comply with requirements of the Investment Company Act.
Under the proposed rules, the following enhanced disclosures and additional investor protections would pertain to IPOs by SPACs and in de-SPAC transactions:
- increased transparency requirements regarding SPAC sponsors, conflicts of interest, and dilution
- further disclosures on de-SPAC transactions, including those regarding the fairness of the transactions to the SPAC investors
- updated description of “blank check company” to make unavailable the liability safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statements (including projections) in filings by SPACs and certain other blank check companies
- requirement that the private operating company would be a co-registrant when a SPAC files a registration statement on Form S-4 or Form F-4 for a de-SPAC transaction
- re-determination of smaller reporting company status within four days following the completion of a de-SPAC transaction
- a rule that considers underwriters in a SPAC IPO to be underwriters in a subsequent de-SPAC transaction when certain criteria are satisfied
Business Combination Transaction and Shell Companies
The proposed rules associated with business combination transactions involving shell companies (including SPACs) would:
- consider that a business combination transaction involving a reporting shell company and another non-shell entity constitutes a sale of securities to the shareholders of the reporting shell company for purposes of the Securities Act
- improve alignment of the required financial statements of private operating companies in transactions involving shell companies and those required in registration statements for IPOs
Presentation of Projections
The increase in SPAC IPOs also raised concerns about the use of projections, especially in regards to business combination transactions in which projections about private operating companies may lack reasonable basis.
The proposed amendments to 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
- aid investors in evaluating the dependability of the projections and determine if they have a reasonable basis
- add disclosure requirements to strengthen investors’ ability to evaluate the basis of projections when they are used in SPAC business combination transactions
Structured Data Format Requirements for Tagging
The SEC is also proposing to require SPACs to tag all information disclosed under Subpart 1600 of Regulation S-K in Inline XBRL in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual. The proposed requirements would make mandatory both detail tagging of the quantitative disclosures and block text tagging of the narrative disclosures that would be required under Subpart 1600. Inline XBRL tagging requirement of the Subpart 1600 disclosures would benefit investors and other parties by:
- making SPAC disclosures more readily available and accessible to investors and other market participants for aggregation, comparison, filtering, and other analysis (as compared to requiring a non-machine readable data language such as ASCII or HTML)
- enabling automated extraction and analysis of granular SPAC disclosures, allowing investors and other market participants to effectively perform large-scale analysis and comparison of SPAC disclosures throughout SPAC transactions and time periods (including information on sponsor compensation and material conflicts of interest)
SPACs Under the Investment Company Act
The proposed rule also would consider the status of SPACs as “investment companies” under the Investment Company Act. Should the proposal be adopted, a SPAC that is in compliance with the rule would not be required to register as an investment company under the Investment Company Act.
Under the proposed rules, a SPAC would be required to:
- seek to complete a de-SPAC transaction after which the surviving entity will be primarily engaged in the business of the target company
- maintain assets comprising only cash items, government securities, and certain money market funds
- enter into an agreement with a target company to engage in a de-SPAC transaction within 18 months after its IPO and complete its de-SPAC transaction within 24 months of the offering
Though a SPAC would not need to rely on the proposed rule, the requirements are designed to line up with the structures and practices that the SEC believes would differentiate a SPAC that may potentially raise serious questions about its status as an investment company from one that does not.
Interested parties may submit feedback on the the proposed rule during the comment period which is open for 30 days following publication in the Federal Register or May 31, 2022 (whichever date is later). For details on how to submit comments, refer to the Proposed Rules on sec.gov.