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SEC Adopts Comprehensive SPAC Disclosure Rules

On January 24, 2024, the Securities and Exchange Commission (the “SEC”) adopted rules and regulations that increase disclosure obligations in initial public offerings (“IPOs”) by special purpose acquisition companies (“SPACs”) and in subsequent business combination transactions between SPACs and target companies (“de-SPAC transactions”). In general, the adopted rules bring SPAC and de-SPAC transactions substantially in-line with the requirements of traditional IPOs.

While the adopted rules encompass many of the proposed rules, the SEC did not include a proposal to impose blanket liability on underwriters of blank-check IPOs for inadequate disclosures in a potential merger. Instead, the SEC provided guidance indicating that whether a person is a statutory underwriter (and subject to the liability attached to that term) will be a facts and circumstances determination based on whether the person is selling for the issuer or participating in distributing securities of the combined company to the SPAC investors and the broader public.

Additionally, the rules:

  • require enhanced disclosure about SPAC sponsor compensation, conflicts of interest, the target company, and the effects of equity dilution on common shareholders.
  • remove the ability of SPACs to rely on the safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statements, similar to traditional IPOs.
  • require enhanced disclosure related to projections, including disclosure of all material bases of the projections and all material assumptions underlying the projections. Notably, part of the enhanced disclosure for projections will apply to all SEC filings.
  • require a target company, in some circumstances, to be a co-registrant when the SPAC files a registration statement on Form S-4 for a de-SPAC transaction, opening the door for the target company to be subject to the same liability under the Securities Act of 1933 as the SPAC.
  • deem business combination transactions involving a reporting shell company, such as a de-SPAC transaction, to be a sale of securities to the reporting shell company’s shareholders.
  • align financial statement requirements in de-SPAC transactions with traditional IPOs.

The adopted rules are summarized in the SEC’s Fact Sheet. The rules will become effective 125 days after publication in the Federal Register. 

Since the peak in 2021, which saw a total of 613 SPAC IPOs, the number of new SPACs plummeted with 86 completed in 2022 and just 31 in 2023. Given their limited life, typically 12-24 months, we are now seeing a market where the inventory for SPACs seeking business combinations has dwindled significantly. Over the same period, we also saw practitioners adopt the disclosure requirements embodied in the proposed rules from 2022. As a result, the new rules will likely change little about how SPACs are currently launched and how de-SPAC transactions are structured but will remove some ambiguities inherent in complying with proposed rules. We believe these factors, combined with a general improvement in equity markets resulting from macro trends, are creating potential demand for this vehicle in the market and we expect to see an uptick in SPAC activity in 2024. 

If you have any questions about the adopted rule, please contact a member of Harter Secrest & Emery’s Securities and Capital Markets group.

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