– The SEC has implemented new rules for IPOs and business combinations of SPACs, including more disclosure requirements and guidance on liability exposures.
– Underwriters in a SPAC IPO are not held liable for subsequent business combinations, but anyone involved in a SPAC’s business combination may still be hit with the underwriter tag and associated liability. The SEC did not adopt a safe harbor for SPACs under the Investment Company Act, potentially impacting the registration status of SPACs.
The SEC, in all its wisdom, has finally decided to lay down the law on IPOs and business combinations of SPACs. And let me tell you folks, their final rules document is a real page-turner – all 581 pages of it. The main takeaway? More disclosure requirements, guidance on liability exposures and a few curveballs to keep us on our toes.
One of the proposed shockers was that underwriters in a SPAC IPO could be held liable for subsequent business combinations. But the SEC, perhaps after a few sleepless nights, decided not to establish this liability. A sigh of relief, right? Not exactly. They’ve decided that even if they didn’t buy and resell the securities, anyone involved in a SPAC’s business combination may still be hit with the underwriter tag and the associated liability. It’s as clear as mud, but I wager it’ll have financial advisors reassessing their risk tolerance quicker than you can say ‘regulatory compliance.’
Then there’s the issue of SPACs in relation to the Investment Company Act. The SEC, playing hardball, decided not to adopt a safe harbor for SPACs. This means that whether a SPAC should be registered as an investment company depends on the nitty-gritty of each case. The SEC did throw us a bone, listing activities that would heavily imply a SPAC should be registered as an investment company. The lack of safe harbor hasn’t rocked the SPAC market boat yet, but it’s a space worth watching.
Target companies in a SPAC’s business combination now get to wear the issuer hat and have to sign any Securities Act registration statement filed in connection with the business combination. What’s that mean? More liability, more paperwork, more headaches. It also means target companies have to dance to the tune of the Exchange Act’s periodic reporting requirements until they call time on them.
The final rules also put a spotlight on the treatment of projections and the availability of the PSLRA safe harbor for SPACs. In simple terms, they’ve made the PSLRA safe harbor a no-go zone for SPACs by adding new definitions of “blank check company”. Additionally, there’s a new requirement for enhanced disclosure for projections in SPAC business combinations. Essentially, if you’re a target company or a financial advisor, expect to be doing a lot more homework.
The SEC, in a last-minute plot twist, scrapped the proposed requirement for SPACs to state their opinion on whether their business combination is fair or unfair to unaffiliated security holders. Instead, SPACs must now disclose determinations made by their board of directors on the advisability and best interests of the business combination. This change could be a boon for SPAC boards, and we could see more offshore SPACs popping up as a consequence.
Finally, the SEC has decided that smaller reporting company (SRC) status needs to be re-determined post-SPAC business combination. SRCs are eligible for scaled-down disclosure requirements, but now they’ll have to re-evaluate their status before making their first SEC filing following a business combination. It’s yet another hoop to jump through, but hey, that’s business in the big leagues.