Defining Issues | February 2024

Insight

SEC finalizes SPAC rules

The SEC adopted rules and guidance relating to SPACs, target companies in a de-SPAC transaction, and shell companies.

The SEC’s new rules and amendments impact all stages of a special purpose acquisition company (SPAC) lifecycle and expand disclosures related to SPAC IPOs and de-SPAC transactions to align the requirements and investor protections with traditional IPOs. 

The rules require enhanced disclosures about SPAC sponsor compensation, conflicts of interest, dilution, and other important information for investors. The rules also include disclosure requirements and guidance related to financial projections in SEC filings, and provide guidance to analyze filer status under the Investment Company Act of 1940. 

Applicability

Release Nos. 33-11265; 34-99418; IC-35096; File No. S7-13-22

  • SPACs, private operating companies entering into business combinations with SPACs, shell companies, and other SEC registrants using projections

Relevant dates

  • Final rules are effective on July 1, 2024. Inline XBRL tagging is required for the enhanced disclosures beginning June 30, 2025.

Key impacts

The SEC issued a  Fact Sheet summarizing the key provisions of the final rules.

Enhanced disclosures about sponsors, conflicts, dilution and fairness

The final rules require enhanced disclosures (required to be tagged in lnline XBRL format) in SEC filings relating to a SPAC IPO and the subsequent de-SPAC transaction.  

These disclosure enhancements include, among others:

  • The nature and amounts of all compensation earned by the sponsor.
  • The existence of (or potential for) material conflicts of interest of the sponsors and the SPAC’s officers and directors, including those conflicts that would influence an investor’s decision to proceed with a de-SPAC transaction.
  • Additional disclosure about the potential for dilution, including shareholder redemptions, SPAC sponsor compensation, underwriting fees, warrants, convertible securities and private investment in public equity (PIPE) financings. 
  • Disclosure as to whether the de-SPAC transaction is fair or unfair to its unaffiliated shareholders as mandated by the jurisdiction of the SPAC. If a SPAC has received an opinion on the fairness of the transaction, it is required to be provided.

Alignment of de-SPAC transactions with IPOs

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

  • The timing of nonfinancial disclosures of private operating companies are provided earlier in the lifecycle to more closely align with the timing required in a traditional IPO registration statement.
  • A private operating company is deemed an issuer and thus treated as a co-registrant to a registration statement filed by a SPAC or another shell company for a de-SPAC transaction.
  • The re-determination of the combined company’s status as a smaller reporting company must be made prior to the time it makes its first SEC filing and any change in status is reflected in its filings, beginning 45 days after consummation of the de-SPAC transaction.
  • Codification of existing staff guidance requiring financial statements of a target private operating company deemed to be the predecessor in a transaction involving a shell company to be audited by a public accounting firm registered with the PCAOB. Additionally, an audit in accordance with PCAOB auditing standards is required since the target company is a co-registrant.
  • Clarification of financial statement requirements, including those of the SPAC for periods prior to the de-SPAC transaction, the number of years of financial statements required when the SPAC and private operating company qualify as EGCs, staleness rules applicable to the financial statements, and the requirements to provide financial statements of acquired businesses by the predecessor in the de-SPAC transaction. 

The requirement of new Rule 145a is that the combination of a shell company and 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.

Use of projections

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 rules, among others: 

  • Eliminate the availability of the current forward-looking safe harbor provisions by adopting a definition of ‘blank check company’ under the Private Securities Litigation Reform Act (PSLRA), which includes SPACs in the definition. 
  • Distinguish projections based on historical results or operational history from those that are not. 
  • Require historical results and operational history be presented with equal or greater prominence as a projection based on that information.
  • Require enhanced disclosures about the purpose of the projections, the use of non-GAAP measures, and the assumptions used to develop the projections.   
  • Require a statement on whether the disclosed projections reflect the views of management of the SPAC or target company as of the date of the filing in de-SPAC transactions. 

The rules also update and expand guidance on the use of projections in SEC filings. 

Determination of a SPAC as an investment company

The SEC did not adopt the proposed safe harbor rule that would have allowed a SPAC to avoid determining its status under the Investment Company Act of 1940 (1940 Act) if it complied with certain conditions and disclosures. Instead, the SEC provided its views on facts and circumstances when a SPAC may meet the definition of an investment company under the 1940 Act. 


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