Hot Topic | January 2021

 

Insight

SEC provides disclosure considerations for SPACs

The SEC issued guidance on disclosure expectations for SPACs related to conflicts of interest.

The SEC Division of Corporation Finance has issued guidance focused on disclosure considerations for special purpose acquisition companies (SPACs) in connection with IPOs and subsequent business combination transactions. 

Applicability

  • Special purpose acquisition companies

Relevant dates

  • Effective immediately

Key impacts

The SEC Division of Corporate Finance issued Disclosure Guidance Topic No. 11 to special purpose acquisition companies in connection with their initial public offerings and subsequent business combinations.

The economic interests of the entity or management team that forms the SPAC (‘sponsors’) and the directors, officers and affiliates of a SPAC may differ from the economic interests of the public shareholders; this can lead to conflicts of interest. The SEC has expressed its expectations that SPACs consider and present clear disclosures regarding potential conflicts of interests to investors.

Disclosure Guidance Topic No. 11 – Special Purpose Acquisition Companies

The disclosure guidance provides the SEC staff views regarding the important conflict of interest guidance that may be relevant to investors.

The guidance provides a list of questions for SPACs to consider when evaluating disclosure obligations under the federal securities law related to conflicts of interest, potentially differing economic interests of the SPAC sponsors, directors, officers and affiliates and the interests of other shareholders and other compensation-related matters.

The SEC staff views provide the following considerations when preparing to conduct an IPO or present a business combination transaction to shareholders. 

Disclosure considerations – IPO

  • Relationships that the sponsors, directors and officers have with other entities which may be target acquirees of the SPAC.
  • Financial incentives of SPAC sponsors, directors and officers to complete a business combination and/or possible losses for failure to complete a business combination, including quantitative information to the extent practicable.
  • Amount of control that the sponsors, directors and officers have over approval of a business combination.
  • Ability for the SPAC to amend its governing documents to facilitate the completion of a business combination or extend the period of time it has to complete the transaction.
  • Deferral of compensation owed to underwriters of the SPAC IPO and any additional services to be provided by such party relating to the identification of a target acquiree (e.g. financial advisor, placement agent in a private offering, arranger of debt financing).
  • Economic terms of the investments made by SPAC sponsors, directors, officers and their affiliates, including security ownership, compensation arrangements or relationship with affiliated entities. 

Disclosure considerations – Business combinations

  • Terms of additional financing necessary to complete the business combination and how the terms may impact the public shareholders.
  • Approach taken to evaluate and decide to proceed with the identified transaction including how alternative targets may have been considered.
  • Material factors that the board of directors considered in approving the identified transaction and the price paid to acquire the target operating company.
  • Conflicts of interest of the sponsors, directors, officers and affiliates in presenting the opportunity to the SPAC, and how the SPAC addressed such matters.
  • Qualitative and quantitative information about the consideration that the sponsors, directors, officers and their affiliates will receive upon completion of the transaction and the retained ownership they will have in the combined entity.
  • Underwriting fees payable upon the completion of the business combination and the additional services the underwriter provided.

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