Notice2022-05369
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Disapproving a Proposed Rule Change To Modify Nasdaq IM-5101-2 To Permit an Acquisition Company To Contribute a Portion of Its Deposit Account to Another Entity in a Spin-Off or Similar Corporate Transaction
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 15, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 50 (Tuesday, March 15, 2022)</title>
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[Federal Register Volume 87, Number 50 (Tuesday, March 15, 2022)]
[Notices]
[Pages 14592-14596]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-05369]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94389; File No. SR-NASDAQ-2021-054]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Disapproving a Proposed Rule Change To Modify Nasdaq IM-5101-2 To
Permit an Acquisition Company To Contribute a Portion of Its Deposit
Account to Another Entity in a Spin-Off or Similar Corporate
Transaction
March 9, 2022.
I. Introduction
On June 24, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to modify Nasdaq IM-5101-2 to
permit an acquisition company to contribute a portion of the amount
held in its deposit account to a deposit account of a new acquisition
company in a spin-off or similar corporate transaction. The proposed
rule change was published for comment in the Federal Register on July
13, 2021.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 92344 (July 7,
2021), 86 FR 36841 (``Notice''). Comments received on the proposal
are available on the Commission's website at: <a href="https://www.sec.gov/comments/sr-nasdaq-2021-054/srnasdaq2021054.htm">https://www.sec.gov/comments/sr-nasdaq-2021-054/srnasdaq2021054.htm</a>.
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On August 25, 2021, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to determine whether to disapprove the proposed rule
change.\5\ On September 30, 2021, the Commission instituted proceedings
under Section 19(b)(2)(B) of the Act \6\ to determine whether to
approve or disapprove the proposed rule change.\7\ On January 3, 2022,
the Commission extended the period for consideration of the proposed
rule change to March 10, 2022.\8\
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 92751, 86 FR 48780
(August 31, 2021). The Commission designated October 11, 2021 as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to approve or disapprove,
the proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 93219, 86 FR 55664
(October 6, 2021) (``OIP'').
\8\ See Securities Exchange Act Release No. 93891, 87 FR 998
(January 7, 2022).
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[[Page 14593]]
This order disapproves the proposed rule change because, as
discussed below, the Exchange has not met its burden under the Act and
the Commission's Rules of Practice to demonstrate that its proposal is
consistent with the requirements of Exchange Act Section 6(b)(5), and,
in particular, the requirements that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and to
protect investors and the public interest, and not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.\9\
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\9\ 15 U.S.C. 78f(b)(5).
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II. Description of the Proposed Rule Change
Generally, the Exchange will not permit the initial or continued
listing of a company that has no specific business plan or that has
indicated that its business plan is to engage in a merger or
acquisition with an unidentified company or companies.\10\ However, the
Exchange currently will permit the listing of a company whose business
plan is to complete an initial public offering (``IPO'') and engage in
a merger or acquisition with one or more unidentified companies within
a specific period of time (``Acquisition Company'' or ``SPAC''), if the
company meets all applicable initial listing requirements, as well as
certain conditions described in Nasdaq IM-5101-2.\11\ Among other
things, Nasdaq IM-5101-2 requires that at least 90% of the gross
proceeds from the IPO and any concurrent sale by the Acquisition
Company of equity securities must be deposited in a trust account
maintained by an independent trustee, an escrow account maintained by
an insured depository institution, or in a separate bank account
established by a registered broker or dealer (collectively, a ``deposit
account'').\12\ In addition, Nasdaq IM-5101-2 requires that within 36
months of the effectiveness of its IPO registration statement, or such
shorter period that the Acquisition Company specifies in its
registration statement, the Acquisition Company must complete one or
more business combinations having an aggregate fair market value of at
least 80% of the value of the deposit account (excluding any deferred
underwriters fees and taxes payable on the income earned on the deposit
account) at the time of the agreement to enter into the initial
combination.\13\ Nasdaq IM-5101-2 further requires each business
combination to be approved by a majority of the Acquisition Company's
independent directors.\14\ If the Acquisition Company holds a
shareholder vote on a business combination, the business combination
must be approved by a majority of the shares of common stock voting at
the meeting and public shareholders voting against the business
combination must have the right to convert their shares of common stock
into a pro rata share of the aggregate amount then in the deposit
account (net of taxes payable and amounts distributed to management for
working capital purposes) if the business combination is approved and
consummated.\15\ If a shareholder vote on a business combination is not
held, the Acquisition Company must provide all shareholders with the
opportunity to redeem all their shares for cash equal to their pro rata
share of the aggregate amount then in the deposit account (net of taxes
payable and amounts distributed to management for working capital
purposes), pursuant to Rule 13e-4 and Regulation 14E under the Act,
which regulate issuer tender offers.\16\
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\10\ See Nasdaq IM-5101-2.
\11\ See id.
\12\ See Nasdaq IM-5101-2(a).
\13\ See Nasdaq IM-5101-2(b).
\14\ See Nasdaq IM-5101-2(c).
\15\ See Nasdaq IM-5101-2(d).
\16\ See Nasdaq IM-5101-2(e).
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The Exchange now proposes to modify Nasdaq IM-5101-2 to allow a
SPAC listed under that rule to contribute a portion of its deposit
account to a deposit account of a new entity in a spin-off or similar
corporate transaction (``SpinCo SPAC''). According to the Exchange,
when a SPAC conducts its IPO, it raises the amount of capital that it
estimates will be necessary to finance a subsequent business
combination with its ultimate target; however, the Exchange believes
that because a SPAC cannot identify or select a specific target at the
time of its IPO, often the amount raised is not optimal for the needs
of a specific target.\17\ The Exchange states that it is proposing to
modify Nasdaq IM-5101-2 to permit what it believes is a more efficient
structure whereby a SPAC can raise in its IPO the maximum amount of
capital it anticipates it may need for a business combination
transaction and then ``rightsize'' itself by contributing any amounts
not needed to a SpinCo SPAC, which would be subject to the provisions
of Nasdaq IM-5101-2, in the same manner as the original SPAC, and spun
off to the original SPAC's shareholders.\18\
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\17\ See Notice, supra note 3, at 36841. The Exchange further
states that ``[t]his has resulted in the inefficient, current
practice of SPAC sponsors creating multiple SPACs of different sizes
at the same time, with the intention to use the SPAC that is closest
in size to the amount a particular target needs.'' Id.
\18\ See id. The 36-month period to complete a business
combination under Nasdaq IM-5101-2 would, however, be calculated for
each SpinCo SPAC based on the date of the original SPAC's effective
registration statement.
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Specifically, proposed Nasdaq IM-5101-2(f) would provide that a
SPAC will be permitted to contribute a portion of the amount held in
the deposit account to a deposit account of another entity (the
``Contribution'') in a spin-off or similar corporate transaction,
subject to the following conditions:
(i) The requirements set forth in Nasdaq IM-5101-2(d) and (e)
that shareholders of a SPAC must have the right to convert or redeem
their shares of common stock into a pro rata share of the aggregate
amount in the deposit account (net of taxes payable and amounts
distributed to management for working capital purposes) at the times
specified in such paragraphs may be based on the amounts in the
deposit account of the SPAC at such times after having been reduced
by the Contribution provided that, in connection with the
Contribution, the SPAC's public shareholders shall have had the
right, through one or more corporate transactions, to redeem a
portion of their shares of common stock (or, if units were sold in
the SPAC's IPO, units) for their pro rata portion of the amount of
the Contribution in lieu of being entitled to receive shares or
units in the SpinCo SPAC;
(ii) the public shareholders of the SPAC receive shares or units
of the SpinCo SPAC on a pro rata basis, except to the extent they
have elected to redeem a portion of their shares of the SPAC in lieu
of being entitled to receive shares or units in the SpinCo SPAC;
(iii) the amount distributed to the SpinCo SPAC will remain in a
deposit account for the benefit of the shareholders of the SpinCo
SPAC in the same manner as described in Nasdaq IM-5101-2(a);
(iv) the SpinCo SPAC meets all applicable initial listing
requirements, as well as the conditions described in Nasdaq IM-5101-
2(a) through (e); it being understood that, following such spin-off
or similar corporate transaction: (A) For purposes of Nasdaq IM-
5101-2(b) the 80% described therein shall,\19\ in the case of the
SPAC, be calculated based on the aggregate amount remaining in the
deposit account of the SPAC at the time of the agreement to enter
into the initial combination after the Contribution to the SpinCo
SPAC, and, in the case of the SpinCo SPAC, be calculated based on
the aggregate amount in its deposit account at the time of its
agreement to enter into its initial combination,\20\ and (B) for
purposes of
[[Page 14594]]
Nasdaq IM-5101-2(d) and (e),\21\ the right to convert and
opportunity to redeem shares of common stock on a pro rata basis,
respectively, shall, in the case of the SPAC, be deemed to apply to
the aggregate amount remaining in the deposit account of the SPAC
after the contribution to the SpinCo SPAC, and, in the case of the
SpinCo SPAC, be deemed to apply to the aggregate amount in its
deposit account;
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\19\ See supra note 13 and accompanying text, for a description
of the requirements of Nasdaq IM-5101-2(b).
\20\ As the Exchange states, this amount would be calculated
after giving effect to the SpinCo SPAC's contribution to a
subsequent SpinCo SPAC, if any. See Notice, supra note 3, at 36842.
\21\ See supra notes 15-16 and accompanying text, for a
description of the requirements of Nasdaq IM-5101-2(d) and (e).
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(v) in the case of the SpinCo SPAC, and any additional entities
spun off from the SpinCo SPAC, each of which will also be considered
a SpinCo SPAC, the 36-month period described in Nasdaq IM-5101-2(b)
(or such shorter period that the original SPAC specifies in its
registration statement) will be calculated based on the date of
effectiveness of the SPAC's IPO registration statement; and
(vi) in the aggregate, through one or more opportunities by the
SPAC and one or more SpinCo SPACs, public shareholders will have the
ability to convert or redeem shares, or receive amounts upon
liquidation, for the full amount of the deposit account established
by the SPAC as described in Nasdaq IM-5101-2(a) (excluding any
deferred underwriters fees and taxes payable on the income earned on
the deposit account).\22\
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\22\ Proposed Nasdaq IM-5101-2(f) provides that the conditions
set forth in the proposed rule would similarly apply to successive
spin-offs or similar corporate transactions, ``mutatis mutandis.''
The Exchange states that, under the proposal, it expects that the
new structure will be implemented in the following manner. If a listed
SPAC (the ``Original SPAC'') determines that it will not need all the
cash in its deposit account for its initial business combination, the
Original SPAC will designate the excess cash for a new deposit account
of a SpinCo SPAC (the ``SpinCo Deposit Account,'' and the amount
retained in the deposit account of the Original SPAC, the ``Retained
SPAC Deposit Account'').\23\ The Exchange states that the amount
designated for the SpinCo Deposit Account must continue to be held for
the benefit of the shareholders of the Original SPAC until the
completion of the spin-off transaction and, following the spin-off of
the SpinCo SPAC to the Original SPAC's shareholders, the SpinCo Deposit
Account would be subject to the same requirements as the deposit
account of the Original SPAC.\24\
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\23\ See Notice, supra note 3, at 36841-42.
\24\ See id. at 36842.
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According to the Exchange, the SpinCo SPAC would file a
registration statement under the Securities Act of 1933 for purposes of
effecting the spin-off of the SpinCo SPAC and, prior to the
effectiveness of the registration statement, the Original SPAC would
provide its public shareholders through one or more corporate
transactions with the opportunity to redeem a pro rata amount of their
holdings equal to the amount of the SpinCo Deposit Account divided by
the per share amount in the Original SPAC's deposit account (the
``redemption price'').\25\ The Exchange further states that, after
completing the tender offer for the redemption and the effectiveness of
the SpinCo SPAC's registration statement, the Original SPAC would
contribute the SpinCo Deposit Account to a deposit account held by the
SpinCo SPAC in exchange for shares or units of the SpinCo SPAC, which
the Original SPAC would then distribute to its public shareholders on a
pro rata basis through one or more corporate transactions pursuant to
the SpinCo SPAC's effective registration statement.\26\
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\25\ See id. According to the Exchange, the redemption could
occur, for example, through a partial cash tender offer for shares
of the Original SPAC pursuant to Rule 13e-4 and Regulation 14E of
the Act, and the redemption may be of a separate class of shares
distributed to unitholders of the Original SPAC for the purpose of
facilitating the redemption. See id. at 36842 n.4.
\26\ See id. at 36842.
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According to the Exchange, the Original SPAC would then continue to
operate as a SPAC until it completes its business combination and would
offer redemption rights to its public shareholders in connection with
that business combination in the same manner as a traditional SPAC,
while the SpinCo SPAC would operate in the same manner as a traditional
SPAC, except that it could effect a subsequent spin-off prior to its
business combination like the Original SPAC.\27\ The Exchange states
that if SpinCo SPAC does not elect to effect a spin-off, it would
proceed to complete an initial business combination and offer
redemption rights in connection therewith like a traditional SPAC.\28\
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\27\ See id. The proposed rule would provide that, for purposes
of Nasdaq IM-5101-2(b), the Original SPAC must complete one or more
business combinations with an aggregate fair market value of at
least 80% of the aggregate amount remaining in the Retained SPAC
Deposit Account, after the contribution to the SpinCo SPAC, at the
time of its agreement to enter into its initial combination. Nasdaq
further states that, similarly, a SpinCo SPAC must complete one or
more business combinations with an aggregate fair market value of at
least 80% of the aggregate amount remaining in the SpinCo Deposit
Account at the time of its agreement to enter into its initial
combination after giving effect to its contribution to any
subsequent SpinCo SPAC.
\28\ See id.
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The Commission received comments broadly supporting the proposed
rule change. Specifically, one commenter stated that the proposed rule
change would introduce a ``more efficient, cost-effective[,] and
flexible'' structure than provided for by the current SPAC listing
rules, ``while continuing to offer significant and appropriate
protections to SPAC investors.'' \29\ This commenter further argued
that shareholders' ability under the proposed rule change to redeem
their investment in connection with each specific business combination
by the Original SPAC or a SpinCo SPAC would both increase flexibility
and investors' ability to understand the companies that a SPAC plans to
acquire and the risks associated with each such target company.\30\
Another commenter similarly argued that the proposed rule change would
permit a more efficient SPAC structure while ``maintaining all of the
investor protections'' in the current SPAC listing rules.\31\
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\29\ See letter from Kellen Carter, ARK Investment Management
LLC, to Vanessa Countryman, Secretary, Commission, dated August 2,
2021, at 1-2.
\30\ See id. at 2.
\31\ See letter from White & Case LLP to Vanessa Countryman,
Secretary, Commission, dated August 3, 2021, at 1.
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III. Discussion and Commission Findings
The Commission must consider whether the Exchange's proposal is
consistent with the Act, including Section 6(b)(5), which requires,
among other things, that the rules of a national securities exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to protect investors
and the public interest, and not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.\32\
Under the Commission's Rules of Practice, the ``burden to demonstrate
that a proposed rule change is consistent with the Exchange Act and the
rules and regulations issued thereunder . . . is on the self-regulatory
organization that proposed the rule change.'' \33\
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\32\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act.
\33\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\34\ and any failure of a
self-regulatory organization to provide this information may result in
the Commission not having a sufficient basis to make an affirmative
finding that a proposed rule
[[Page 14595]]
change is consistent with the Act and the applicable rules and
regulations.\35\ Moreover, ``unquestioning reliance'' on a self-
regulatory organization's representations in a proposed rule change is
not sufficient to justify Commission approval of a proposed rule
change.\36\
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\34\ See id.
\35\ See id.
\36\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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The Commission has consistently recognized the importance of
national securities exchange listing standards. Among other things,
such listing standards help ensure that exchange-listed companies will
have sufficient public float, investor base, and trading interest to
provide the depth and liquidity necessary to promote fair and orderly
markets.\37\ With respect to SPACs, Nasdaq's current listing standards
provide important investor protections,\38\ including that at least 90%
of the SPAC's IPO proceeds be held in a deposit account; \39\ that
within 36 months of the effectiveness of its IPO registration statement
(or such shorter time period specified in the registration statement)
the SPAC complete one or more business combinations having an aggregate
fair market value of at least 80% of the value of the deposit account;
\40\ and that public shareholders have a right to redeem their pro rata
share of the full amount of the deposit account prior to any proposed
business combination.\41\
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\37\ The Commission has stated in approving national securities
exchange listing requirements that the development and enforcement
of adequate standards governing the listing of securities on an
exchange is an activity of critical importance to the financial
markets and the investing public. In addition, once a security has
been approved for initial listing, maintenance criteria allow an
exchange to monitor the status and trading characteristics of that
issue to ensure that it continues to meet the exchange's standards
for market depth and liquidity so that fair and orderly markets can
be maintained. See, e.g., Securities Exchange Act Release Nos. 91947
(May 19, 2021), 86 FR 28169, 28172 n.47 (May 25, 2021) (SR-NASDAQ-
2020-057) (``Nasdaq 2021 Order''); 90768 (December 22, 2020), 85 FR
85807, 85811 n.55 (December 29, 2020) (SR-NYSE-2019-67) (``NYSE 2020
Order''); 82627 (February 2, 2018), 83 FR 5650, 5653 n.53 (February
8, 2018) (SR-NYSE-2017-30) (``NYSE 2018 Order''); 81856 (October 11,
2017), 82 FR 48296, 48298 (October 17, 2017) (SR-NYSE-2017-31);
81079 (July 5, 2017), 82 FR 32022, 32023 (July 11, 2017) (SR-NYSE-
2017-11). The Commission has stated that adequate listing standards,
by promoting fair and orderly markets, are consistent with Section
6(b)(5) of the Exchange Act, in that they are, among other things,
designed to prevent fraudulent and manipulative acts and practices,
promote just and equitable principles of trade, and protect
investors and the public interest. See, e.g., Nasdaq 2021 Order, 86
FR at 28172 n.47; NYSE 2020 Order, 85 FR at 85811 n.55; NYSE 2018
Order, 83 FR at 5653 n.53; Securities Exchange Act Release Nos.
87648 (December 3, 2019), 84 FR 67308, 67314 n.42 (December 9, 2019)
(SR-NASDAQ-2019-059); 88716 (April 21, 2020), 85 FR 23393, 23395
n.22 (April 27, 2020) (SR-NASDAQ-2020-001).
\38\ See Securities Exchange Act Release No. 58228 (July 25,
2008), 73 FR 44794, 44796 (July 31, 2008) (Order Granting Approval
to Proposed Rule Change, as modified by Amendment No. 1, to Adopt
Additional Initial Listing Standards to list Securities of Special
Purpose Acquisition Companies) (NASDAQ-2008-013) (``2008 Order'').
\39\ See Nasdaq IM-5101-2(a).
\40\ See Nasdaq IM-5101-2(b).
\41\ See Nasdaq IM-5101-2(d). See also supra notes 12-16 and
accompanying text.
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As discussed above, Nasdaq now proposes to amend its listing
standards to allow the SPAC to contribute a portion of the funds held
in its deposit account to the deposit account of a new SpinCo SPAC,
rather than use those funds for a business combination with the
Original SPAC. While Nasdaq would provide shareholders in the original
SPAC redemption rights with respect to the funds contributed to the
SpinCo SPAC, such rights would not extend to the funds retained by the
Original SPAC. Instead, shareholders would be required to make a
separate, later redemption decision with respect to the remaining funds
in the Original SPAC's deposit account in connection with its business
combination, once one is identified. Because Nasdaq proposes to permit
successive SpinCo SPACs, shareholders could be required to evaluate
multiple potential spin-offs and business combinations, and engage in
multiple redemption processes if they desire to redeem their pro rata
share of the full amount originally deposited in the SPAC's deposit
account.
In support of its proposal, Nasdaq acknowledges this difference,
but states its belief that it ``does not adversely affect shareholders
because the shareholders will still have the opportunity to redeem for
the entire pro rata share of the trust account prior to completion of
the business combination,'' although ``the redemption right may be
effected through two decisions.'' \42\
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\42\ See Notice, supra note 3, at 36843. Nasdaq also states that
the proposal would provide public shareholders an additional, early
redemption opportunity with respect to a portion of their holdings,
before the time they would be able to do so in a traditional SPAC,
and that public shareholders would maintain the ability to redeem
the portion of their investment attributable to each specific
acquisition after reviewing all disclosure with respect to that
acquisition. See id. at 36842. Nasdaq further states that all other
protections provided under IM-5101-2 would continue to apply, with
adjustments only to reflect the potential for a spin-off of a new
SPAC that is subject to all of the requirements of IM-5101-2, and
any SpinCo SPAC would be required to satisfy all applicable initial
listing requirements, like any other SPAC listing on Nasdaq. See id.
at 36842-43. Nasdaq argues that the proposal would provide
shareholders the opportunity to invest with a SPAC sponsor without
spreading that investment across the sponsor's multiple SPACs. See
id. at 36842.
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Current SPAC listing standards provide important protections for
investors in SPACs, where the business plan is to engage in mergers or
acquisitions with unidentified companies. As discussed above, Nasdaq's
current SPAC listing standards require that SPAC IPO proceeds be held
in a deposit account to be used for business combination purposes, and
provide shareholders an efficient mechanism to redeem their entire pro
rata share of those proceeds in a single transaction. This permits
investors who do not support a business combination or otherwise lose
faith in the abilities of the SPAC sponsors to fully redeem their pro
rata share of the proceeds when a business combination is first
presented to them. Under the Exchange's proposal, shareholders would
lose this ability, and instead would have to wait until business
combinations are presented by all successive SpinCo SPACs to fully
redeem their pro rata share of the proceeds. By proposing to permit
funds in the deposit account to be used to create new SPACs and to
require shareholders to engage in a series of redemption processes in
order to fully redeem their pro rata share of the funds originally
deposited in the trust account, the efficiency of shareholder
redemption rights and the effectiveness of the investor protections
they were designed to provide could be undermined.
Further, by proposing to permit successive SpinCo SPACs,
shareholders could be required to make assessments of a series of
proposed business combinations of varying sizes as a result of their
investment in the Original SPAC, rather than doing so once. As
discussed above, SPACs are subject to heightened listing standards
because of the special risks presented by an investment in a company
where the business plan is to engage in a merger or acquisition of an
unidentified company, and to ensure that appropriate investor
protections are in place.\43\ By
[[Page 14596]]
increasing the number of decisions with respect to unidentified
companies that SPAC investors would be required to make, and determine
whether or not to exercise redemption rights, the Exchange's proposal
could add considerable complexity to the structure and business
combination strategies of SPACs, and exacerbate the investor protection
concerns presented by companies where the business plan is to combine
with another company that is unidentified at the time of
investment.\44\
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\43\ In approving Nasdaq's original listing standards for SPACs,
the Commission found that the investor protection requirements in
IM-5101-2, including that at least 90% of the IPO proceeds and any
concurrent sale be placed in a deposit account and that the public
shareholders have conversion rights based on their share of the
proceeds in that deposit account, provide additional safeguards for
investors who invest in SPAC securities, and will help ensure that
public shareholders who disagree with management's decision with
respect to a business combination have adequate remedies. See 2008
Order, supra note 38, at 44796. The Commission further stated that
those safeguards should help to ensure that SPACs that list
securities on Nasdaq will have taken certain additional steps to
address investor protection and other matters and that the rules
provided baseline investor protections. See id. at 44796-97. The
Commission has subsequently stated that ``[b]ecause of their unique
structure, and the fact that at the outset investors will not know
the ultimate business of the company similar to a blank check
company, the Commission approved Nasdaq listing standards for SPACs
that were similar in some respects to the investor protection
measures contained in Rule 419 under the Securities Act of 1933.''
Securities Exchange Act Release No. 63607 (December 23, 2010), 75 FR
82420, 82422 (December 30, 2010) (order approving SR-NASDAQ-2010-
137).
\44\ See supra note 43 (describing how Nasdaq's listing
standards for SPACs are designed to address additional investor
protection concerns presented by SPAC issuers given their unique
structure). See also Securities Exchange Act Release No. 57785 (May
6, 2008), 73 FR 27597, 27599 (May 13, 2008) (SR-NYSE-2008-17)
(approving listing standards for SPACs on NYSE and stating that
SPACs are ``essentially shell companies'' and that the additional
investor protection criteria on NYSE, which are comparable to those
in IM-5101-2, ``should further the ability of investors to protect
and monitor their investment pending a [b]usiness [c]ombination'').
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Nasdaq has not addressed these risks or how its proposal is
consistent with Section 6(b)(5) of the Exchange Act in light of them,
other than to state that shareholders will not be adversely affected
because they still have the right to redeem their full pro rata share
of the deposit account through more than one transaction.\45\ Based on
the above, the Commission cannot find that the proposal is consistent
with the requirement under Section 6(b)(5) of the Act that the proposal
be designed, among other things, to protect investors and the public
interest.
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\45\ See Notice, supra note 3, at 36843; proposed IM-5101-
2(f)(vi).
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As stated above, under the Commission's Rules of Practice, the
``burden to demonstrate that a proposed rule change is consistent with
the Exchange Act and the rules and regulations issued thereunder . . .
is on the self-regulatory organization that proposed the rule change.''
\46\ For the foregoing reasons, the Exchange has not met its burden to
demonstrate that its proposal is consistent with the Exchange Act. In
particular, the Exchange has not adequately demonstrated that its
proposal to allow a SPAC to contribute a portion of the amount held in
its deposit account to the deposit account of a new SpinCo SPAC is
consistent with investor protection, the public interest, and other
relevant provisions of Section 6(b)(5) of the Exchange Act.
Accordingly, for the reasons set forth above, the Commission must
disapprove the proposed rule change because the Exchange has not met
its burden to demonstrate that the proposal is consistent with Section
6(b)(5) of the Exchange Act.\47\
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\46\ 17 CFR 201.700(b)(3).
\47\ In disapproving this proposed rule change, the Commission
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f). As
described above, two commenters expressed their belief that the
proposal would result in a more efficient SPAC structure and use of
capital. See supra notes 29-31 and accompanying text. For the
reasons discussed throughout, however, the Commission is
disapproving the proposed rule change because it does not find that
the proposed rule change is consistent with the Exchange Act.
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IV. Conclusion
The Commission does not find, pursuant to Section 19(b)(2) of the
Exchange Act,\48\ that the proposed rule change is consistent with the
Exchange Act and the rules and regulations thereunder applicable to a
national securities exchange, and in particular, Section 6(b)(5) of the
Exchange Act.
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\48\ 15 U.S.C. 78s(b)(2).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\49\ that the proposed rule change (SR-NASDAQ-2021-054)
be, and hereby is, disapproved.
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\49\ Id.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05369 Filed 3-14-22; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on March 15, 2022.
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