SEC proposes new and amended rules for SPACs

The proposed rules would require enhanced disclosures in filings relating to SPAC IPOs and the subsequent de-SPAC transaction. The same would be true for filings of shell companies that are not considered SPACs.

These proposed disclosure enhancements (required to be tagged in Inline XBRL format) would include:

• The nature and amounts of all compensation earned by the sponsor.
• The existence of material conflicts of interest of the sponsors and the SPAC’s officers and directors, including those conflicts that would influence an investor’s decision of whether or not to proceed with a de-SPAC transaction.
• Additional disclosure about the potential for dilution, including shareholder redemptions, sponsor compensation, underwriting fees, outstanding warrants and convertible securities and private investment in public equity (PIPE) financings.
• A statement from the SPAC as to whether the de-SPAC transaction is fair or unfair to its unaffiliated shareholders, as well as whether or not it has received an opinion on the fairness of the transaction. If an opinion has been received, it would be required to be provided.
• Additional background information about the transaction.

In an effort to align the existing rules and disclosure requirements governing de-SPAC transactions with those of a traditional IPO, the proposals would result in the following:

• The timing of nonfinancial disclosures of private operating companies provided earlier in the lifecycle to more closely align with the timing required in a traditional IPO registration statement.
• A private operating company being treated as a co-registrant to a Form S-4 or F-4 registration statement filed for the de-SPAC transaction.
• The requirement that the combination of a shell company with an operating company, including a de-SPAC transaction, would be deemed as a ‘sale’ under the Securities Act, resulting in alignment of disclosure and liability for the registrants and experts with that of a traditional IPO.
• The re-evaluation of the combined company’s status as a smaller reporting company determined as of a date within four days following the de-SPAC transaction and to be reflected in the first periodic report (Form 10-K or Form 10-Q) of the combined company.
• Potential reduction of the number of years required of the target company when it would qualify as an emerging growth company as if it were conducting its own IPO.
• Codification of existing staff guidance requiring financial statements of target private operating companies in a transaction involving a shell company to be audited by a public accounting firm registered with the PCAOB.

• Clarification that financial statements of a SPAC for periods prior to the de-SPAC transaction may be excluded once (1) the financial statements of the SPAC have been filed for all required periods through the merger date; and (2) the financial statements of the combined company include the period in which the merger was consummated.
• A party involved as an underwriter in the SPAC IPO would also be considered an underwriter in any subsequent de-SPAC transactions when certain conditions are met.

Financial projections are a common feature in both SPAC-related and traditional IPO filings. In an effort to drive greater transparency in the use of financial projections, the proposals would require the following:

• Eliminate the availability of the current forward-looking safe harbor provisions for SPAC-related filings.
• Distinguish projections that are based on historical results from those that are not.
• Provide equal or greater prominence of actual historical results relative to projections.
• Enhance transparency of the use of projections of non-GAAP measures, including an explanation of the non-GAAP measure, a description of the most closely-related GAAP measure, and why the non-GAAP measure was used instead of a GAAP measure.
• Identify and disclose material assumptions used to develop projections in de-SPAC transactions.
• A statement of whether the disclosed projections reflect the views of management as of the date of the filing in de-SPAC transactions.

The SEC proposed a safe harbor that is designed to permit a SPAC to avoid the need to determine its status under the Investment Company Act if it complies with certain conditions and disclosures, therefore avoiding the potential need to register as an investment company. In turn, the SPAC would have more certainty regarding its status under the Investment Company Act.

The conditions and disclosures include the following:

• Require that the nature of a SPAC’s assets consist solely of government securities, government money market funds and cash items.
• Limit the ability of the SPAC to engage in only one de-SPAC transaction. Transacting with multiple target companies in a single de-SPAC transaction would be permitted.
• Require the SPAC to be primarily engaged in completing the de-SPAC transaction within the prescribed timeframe.
• Require that the SPAC announce an agreement for a de-SPAC transaction on Form 8-K within 18 months and complete the transaction within 24 months of the effective date of its IPO.