Proposed Rule2022-07189
Special Purpose Acquisition Companies, Shell Companies, and Projections
Primary source
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Published
May 13, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is proposing rules intended to enhance investor protections in initial public offerings by special purpose acquisition companies ("SPACs") and in subsequent business combination transactions between SPACs and private operating companies. Specifically, we are proposing specialized disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the fairness of these business combination transactions. The proposed new rules and amendments to certain rules and forms under the Securities Act of 1933 and the Securities Exchange Act of 1934 would address the application of disclosure, underwriter liability, and other provisions in the context of, and specifically address concerns associated with, business combination transactions involving SPACs as well as the scope of the Private Securities Litigation Reform Act of 1995. Further, we are proposing a rule that would deem any business combination transaction involving a reporting shell company, including a SPAC, to involve a sale of securities to the reporting shell company's shareholders and are proposing to amend a number of financial statement requirements applicable to transactions involving shell companies. In addition, we are proposing to update our guidance regarding the use of projections in Commission filings as well as to require additional disclosure regarding projections when used in connection with business combination transactions involving SPACs. Finally, we are proposing a new safe harbor under the Investment Company Act of 1940 that would provide that a SPAC that satisfies the conditions of the proposed rule would not be an investment company and therefore would not be subject to regulation under that Act.
Full Text
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<title>Federal Register, Volume 87 Issue 93 (Friday, May 13, 2022)</title>
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[Federal Register Volume 87, Number 93 (Friday, May 13, 2022)]
[Proposed Rules]
[Pages 29458-29574]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-07189]
[[Page 29457]]
Vol. 87
Friday,
No. 93
May 13, 2022
Part II
Securities and Exchange Commission
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17 CFR Parts 210, 229, 230, et al.
Special Purpose Acquisition Companies, Shell Companies, and
Projections; Proposed Rule
Federal Register / Vol. 87, No. 93 / Friday, May 13, 2022 / Proposed
Rules
[[Page 29458]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 230, 232, 239, 240, 249, and 270
[Release Nos. 33-11048; 34-94546; IC-34549; File No. S7-13-22]
RIN 3235-AM90
Special Purpose Acquisition Companies, Shell Companies, and
Projections
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing rules intended to enhance investor protections in initial
public offerings by special purpose acquisition companies (``SPACs'')
and in subsequent business combination transactions between SPACs and
private operating companies. Specifically, we are proposing specialized
disclosure requirements with respect to, among other things,
compensation paid to sponsors, conflicts of interest, dilution, and the
fairness of these business combination transactions. The proposed new
rules and amendments to certain rules and forms under the Securities
Act of 1933 and the Securities Exchange Act of 1934 would address the
application of disclosure, underwriter liability, and other provisions
in the context of, and specifically address concerns associated with,
business combination transactions involving SPACs as well as the scope
of the Private Securities Litigation Reform Act of 1995. Further, we
are proposing a rule that would deem any business combination
transaction involving a reporting shell company, including a SPAC, to
involve a sale of securities to the reporting shell company's
shareholders and are proposing to amend a number of financial statement
requirements applicable to transactions involving shell companies. In
addition, we are proposing to update our guidance regarding the use of
projections in Commission filings as well as to require additional
disclosure regarding projections when used in connection with business
combination transactions involving SPACs. Finally, we are proposing a
new safe harbor under the Investment Company Act of 1940 that would
provide that a SPAC that satisfies the conditions of the proposed rule
would not be an investment company and therefore would not be subject
to regulation under that Act.
DATES: Comments should be received on or before June 13, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/submitcomments.htm">https://www.sec.gov/rules/submitcomments.htm</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#8af8ffe6efa7e9e5e7e7efe4fef9caf9efe9a4ede5fc"><span class="__cf_email__" data-cfemail="b3c1c6dfd69ed0dcdeded6ddc7c0f3c0d6d09dd4dcc5">[email protected]</span></a>. Please include
File Number S7-13-22 on the subject line; or.
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-13-22. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's website (<a href="http://www.sec.gov/rules/proposed.shtml">http://www.sec.gov/rules/proposed.shtml</a>).
Comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
Operating conditions may limit access to the Commission's Public
Reference Room. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on our website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Charles Kwon, Office of Rulemaking,
Division of Corporation Finance, at (202) 551-3430; or with respect to
proposed Rules 140a and 145a under the Securities Act, Adam Turk,
Office of Chief Counsel, Division of Corporation Finance, at (202) 551-
3500; with respect to proposed Rule 15-01 of Regulation S-X, Ryan
Milne, Office of Chief Accountant, Division of Corporation Finance, at
(202) 551-3400; with respect to the proposed amendments relating to
projections disclosure and tender offer rules, Daniel Duchovny, Office
of Mergers & Acquisitions, Division of Corporation Finance, at (202)
551-3440; and with respect to proposed Rule 3a-10 under the Investment
Company Act, Rochelle Kauffman Plesset, Seth Davis, or Taylor Evenson,
Senior Counsels; Lisa Reid Ragen, Branch Chief; or Thoreau Bartmann,
Assistant Director, Chief Counsel's Office, Division of Investment
Management, at (202) 551-6825; U.S. Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment new 17 CFR 210.15-01 (Rule 15-01 of Regulation S-X), new 17 CFR
229.1601 through 229.1610 (subpart 1600 of Regulation S-K), new 17 CFR
230.140a (Securities Act Rule 140a), new 17 CFR 230.145a (Securities
Act Rule 145a), and new 17 CFR 270.3a-10 (Investment Company Act Rule
3a-10). We are also proposing for public comment amendments to:
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\1\ 15 U.S.C. 77a et seq.
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CFR citation (17
Commission reference CFR)
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Securities Act of 1933 (``Securities Act''): \1\
Rule 137......................................... 230.137
Rule 138......................................... 230.138
Rule 139......................................... 230.139
Rule 163A........................................ 230.163A
Rule 164......................................... 230.164
Rule 174......................................... 230.174
Rule 405......................................... 230.405
Rule 419......................................... 230.419
[[Page 29459]]
Rule 430B........................................ 230.430B
Rule 437a........................................ 230.437a
Form S-1......................................... 239.11
Form F-1......................................... 239.31
Form S-4......................................... 239.25
Form F-4......................................... 239.34
Securities Exchange Act of 1934 (``Exchange Act''):
\2\
Rule 12b-2....................................... 240.12b-2
Rule 14a-6....................................... 240.14a-6
Rule 14c-2....................................... 240.14c-2
Schedule 14A..................................... 240.14a-101
Schedule TO...................................... 240.14d-100
Form 20-F........................................ 249.220f
Form 8-K......................................... 249.308
Regulation S-K (17 CFR 229.10 through 229.1406):
Item 10.......................................... 229.10
Item 601......................................... 229.601
Regulation S-T (17 CFR 232.10 through 232.903):
Rule 405......................................... 232.405
Regulation S-X (17 CFR 210.1-01 through 210.13-02):
Rule 1-02........................................ 210.1-02
Rule 3-01........................................ 210.3-01
Rule 3-02........................................ 210.3-02
Rule 3-05........................................ 210.3-05
Rule 3-14........................................ 210.3-14
Rule 8-02........................................ 210.8-02
Rule 10-01....................................... 210.10-01
Rule 11-01....................................... 210.11-01
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Table of Contents
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\2\ 15 U.S.C. 78a et seq.
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I. Introduction
II. Proposed New Subpart 1600 of Regulation S-K
A. Definitions
B. Sponsors
C. Conflicts of Interest
D. Dilution
E. Prospectus Cover Page and Prospectus Summary Disclosure
1. Prospectus Cover Page
2. Prospectus Summary
F. Disclosure and Procedural Requirements in De-SPAC
Transactions
1. Background of and Reasons for the De-SPAC Transaction; Terms
and Effects
2. Fairness of the De-SPAC Transaction
3. Reports, Opinions, and Appraisals
4. Proposed Item 1608 of Regulation S-K
G. Structured Data Requirement
III. Aligning De-SPAC Transactions With Initial Public Offerings
A. Aligning Non-Financial Disclosures in De-SPAC Disclosure
Documents
B. Minimum Dissemination Period
C. Private Operating Company as Co-Registrant to Form S-4 and
Form F-4
D. Re-Determination of Smaller Reporting Company Status
E. PSLRA Safe Harbor
F. Underwriter Status and Liability in Securities Transactions
1. Participants in a Distribution as ``Underwriters''
2. The De-SPAC Transaction as a ``Distribution'' of the Combined
Company's Securities
3. Proposed Rule: SPAC IPO Underwriters are Underwriters in
Registered De-SPAC Transactions
IV. Business Combinations Involving Shell Companies
A. Shell Company Business Combinations and the Securities Act of
1933
1. Shell Company Business Combinations
2. Proposed Rule 145a
3. Excluded Transactions
B. Financial Statement Requirements in Business Combination
Transactions Involving Shell Companies
1. Number of Years of Financial Statements
2. Audit Requirements of Predecessor
3. Age of Financial Statements of the Predecessor
4. Acquisitions of Businesses by a Shell Company Registrant or
Its Predecessor That Are Not or Will Not Be the Predecessor
5. Financial Statements of a Shell Company Registrant After the
Combination With Predecessor
6. Other Amendments
V. Enhanced Projections Disclosure
A. Background
B. Rule Proposals
1. Item 10(b) of Regulation S-K
2. Item 1609 of Regulation S-K
VI. Proposed Safe Harbor Under the Investment Company Act
A. Background
1. Potential Status as an Investment Company
2. Rationale for the Safe Harbor
3. Boundaries of the Safe Harbor
B. Conditions
1. Nature and Management of SPAC Assets
2. SPAC Activities
3. Duration Limitations
VII. Additional Requests for Comment
VIII. General Request for Comments
IX. Economic Analysis
A. Broad Economic Considerations
B. Baseline and Affected Parties
1. SPAC Initial Public Offerings
2. De-SPAC Transactions
3. Blank Check Companies
4. Shell-Company Business Combinations
5. Projections Under Item 10(b) of Regulation S-K
6. Investment Company Act Safe Harbor
C. Benefits and Costs of the Proposed Rules
1. Disclosure-Related Proposals
2. Liability-Related Proposals
3. Shell-Company Related Proposals
4. Enhanced Projections Disclosure (Amendments to Item 10(b) of
Regulation S-K)
5. Investment Company Act Safe Harbor
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Reasonable Alternatives
1. Disclosure-Related Proposals
2. Liability-Related Proposals
3. Expanding Disclosure in Reporting Shell Company Business
Combinations
4. Enhanced Projections Disclosures
5. Investment Company Act Safe Harbor
F. Requests for Comment
X. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Estimates of the Effects of the Proposed New Rules and
Amendments on the Collections of Information
C. Incremental and Aggregate Burden and Cost Estimates
D. Request for Comment
XI. Small Business Regulatory Enforcement Fairness Act
XII. Initial Regulatory Flexibility Analysis and Certification
A. Reasons for, and Objectives of, the Proposed Action
[[Page 29460]]
B. Legal Basis
C. Regulatory Flexibility Act Certification
D. Small Entities Subject to the Proposed Rules and Amendments
E. Reporting, Recordkeeping, and Other Compliance Requirements
F. Duplicative, Overlapping or Conflicting Federal Rules
G. Significant Alternatives
Statutory Authority and Text of Proposed Rule and Form Amendments
I. Introduction
Special purpose acquisition companies first began to emerge in the
1990s as an alternative to blank check companies regulated pursuant to
Rule 419 under the Securities Act.\3\ In response to widespread fraud
and abuse in blank check offerings, Congress passed the Securities
Enforcement Remedies and Penny Stock Reform Act of 1990,\4\ which
required the Commission to adopt rules governing registration
statements filed by blank check companies offering penny stock.\5\ In
response, the Commission adopted comprehensive disclosure and other
requirements for blank check offerings in Rule 419.\6\ Following the
adoption of Rule 419, securities offerings by SPACs, which are not
subject to the rule's requirements but have many similar features,
began to appear, with the number of these offerings fluctuating over
the years.\7\ In the past two years, however, the U.S. securities
markets have experienced an unprecedented surge in the number of
initial public offerings by SPACs, with SPACs raising more than $83
billion in such offerings in 2020 and more than $160 billion in such
offerings in 2021.\8\ In 2020 and 2021, more than half of all initial
public offerings were conducted by SPACs.
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\3\ The term ``blank check company'' is defined in 17 CFR
230.419(a)(2) as a development stage company that has no specific
business plan or purpose or that has indicated that its business
plan is to engage in a merger or acquisition with an unidentified
company or companies, and that is issuing ``penny stock,'' as
defined in 17 CFR 240.3a51-1 (Exchange Act Rule 3a51-1).
\4\ Public Law 101-429, 104 Stat. 931 (Oct. 15, 1990).
\5\ Id. at sec. 508; Section 7(b) of the Securities Act.
\6\ Blank Check Offerings, Release No. 33-6932 (Apr. 13, 1992)
[57 FR 18037 (Apr. 28, 1992)]. Rule 419 requires a blank check
company to meet certain disclosure and investor protection
requirements in registered offerings of securities.
\7\ Between 2011 and 2021, the average number of initial public
offerings by SPACs registered under the Securities Act per year was
98, with the highest number of such offerings (613) in 2021 and the
lowest number of such offerings (9) in 2012. In 2008, both the New
York Stock Exchange and Nasdaq adopted rules to permit the listing
of SPACs on these exchanges for the first time. See, e.g., Release
No. 34-57785 (May 6, 2008) [73 FR 27597 (May 13, 2008)] and Release
No. 34-58228 (July 25, 2008) [73 FR 44794 (July 31, 2008)].
\8\ By comparison, SPACs raised a total of $13.6 billion in
initial public offerings in 2019 and a total of $10.8 billion in
initial public offerings in 2018. As used in this release, ``initial
public offering'' refers to a securities offering registered under
the Securities Act by an issuer that was not subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act
immediately prior to the registration.
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A SPAC is typically a shell company \9\ that is organized for the
purpose of merging with or acquiring one or more unidentified private
operating companies (a ``de-SPAC transaction'') within a certain time
frame (often two years) and that conducts a firm commitment
underwritten initial public offering of $5 million or more in units
consisting of redeemable shares and warrants.\10\ A SPAC is organized
and managed by its sponsor, which is usually compensated through an
amount equal to a percentage (often 25 percent) of the SPAC's initial
public offering proceeds (in the form of discounted shares and
warrants) to be received upon the completion of a de-SPAC
transaction.\11\ Although SPACs are not subject to the requirements of
Rule 419,\12\ they are typically structured to operate under similar,
though usually less stringent, conditions in order to attract investors
and to comply with exchange listing requirements.\13\
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\9\ The term ``shell company'' is defined in Securities Act Rule
405 and Exchange Act Rule 12b-2 as a registrant, other than an
asset-backed issuer, that has: (1) No or nominal operations; and (2)
either: (i) No or nominal assets; (ii) assets consisting solely of
cash and cash equivalents; or (iii) assets consisting of any amount
of cash and cash equivalents and nominal other assets.
\10\ The descriptions included in this release of common
features currently seen in SPACs and SPAC transaction structures are
based, in part, on reviews by the Commission staff of SPAC filings
with the Commission. The terms ``private operating company'' and
``target company'' are used interchangeably in this release, unless
otherwise indicated. We are proposing to define the term ``target
company'' for purposes of the requirements applicable to SPACs. See
infra Section II.A.
\11\ This sponsor compensation is often referred to as the
sponsor's ``promote'' or ``founder shares,'' which usually amounts
to around 20% of the total shares of a SPAC after its initial public
offering. The underwriting fees in a SPAC's initial public offering
are typically between 5% and 5.5% of the offering proceeds, of which
3.5% is also usually conditioned on the completion of the de-SPAC
transaction.
\12\ Issuers that raise more than $5 million in a firm
commitment underwritten initial public offering are excluded from
the definition of ``blank check company'' in Rule 419, and thus are
not subject to the requirements of the rule, because they are not
selling ``penny stock,'' as defined in Exchange Act Rule 3a51-1. The
definition of ``penny stock'' in Exchange Act Section 3(a)(51) and
Rule 3a51-1 encompasses any equity security except those excluded
under the rule, such as an NMS stock, as defined in 17 CFR
242.600(b)(55), that meets certain criteria; securities issued by a
registered investment company; and securities of an issuer that has
net tangible assets in excess of $2 million, or $5 million if the
issuer has been in continuous operation for less than three years,
or average revenue of at least $6 million for the last three years.
In 1993, the Commission issued guidance stating that issuers may
aggregate the proceeds of a firm commitment underwritten initial
public offering in order to exceed the $5 million net tangible
assets test in Rule 3a51-1(g)(1). See Penny Stock Definition for
Purposes of Blank Check Rule, Release No. 33-7024 (Oct. 25, 1993)
[58 FR 58099 (Oct. 29, 1993)]. SPACs often have provisions in their
governing instruments that prohibit them from being ``penny stock''
issuers. As used in this release, the term ``SPAC'' excludes those
issuers that are subject to Rule 419. In Dec. 2020, the Commission
received a rulemaking petition (``Rulemaking Petition'') requesting
that the Commission adopt rule amendments to permit SPACs to conduct
initial public offerings on a best-efforts basis without being
subject to Rule 419. See Rulemaking Petition from Loeb & Loeb LLP,
File No. 4-768 (Dec. 21, 2020), available at: <a href="https://www.sec.gov/rules/petitions/2020/petn4-768.pdf">https://www.sec.gov/rules/petitions/2020/petn4-768.pdf</a>. As of the date of this release,
we have not received any comment letters in response to the
Rulemaking Petition.
\13\ These conditions are generally market driven, and are
typically set forth in their governing instruments and/or
contractual arrangements, or are pursuant to the laws of the state
or country of organization or the listing standards of national
securities exchanges. See, e.g., NYSE Listed Company Manual Section
102.06 and Nasdaq Listing Rule IM-5101-2. For example, Section
102.06 of the NYSE Listed Company Manual requires, among other
things, that at least 90% of the initial public offering proceeds,
together with the proceeds of any other concurrent sales of equity
securities, be held in a trust account controlled by an independent
custodian until the consummation of a business combination with a
fair market value equal to at least 80% of the net assets held in
the trust, with the time period to consummate the de-SPAC
transaction not to exceed three years. In contrast, under Rule 419,
a blank check company must, among other things, complete a merger or
acquisition within 18 months after the effective date of its
registration statement and must place the offering proceeds and the
securities sold in the offering in an escrow or trust account until
the completion of the merger or acquisition, which precludes trading
in the blank check company's securities until after the merger or
acquisition is completed.
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Following its initial public offering, a SPAC generally places all
or substantially all of the offering proceeds into a trust or escrow
account,\14\ and the SPAC's shares and warrants are typically
registered under Section 12(b) of the Exchange Act and then begin
trading on a national securities exchange.\15\ If a SPAC does not
complete a de-SPAC transaction within the time frame specified in its
governing instruments, the SPAC may seek an extension of the time frame
from its shareholders or may dissolve and liquidate, with the sponsor
not earning the ``promote'' and the assets held in the trust or escrow
account returned on a pro rata basis to its shareholders.\16\
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\14\ The assets in the trust or escrow account are typically
invested in U.S. government securities and money market funds that
invest in U.S. government securities. See infra Section VI.
\15\ The shares and warrants usually begin trading as a unit,
with a unit frequently consisting of a common share and a fraction
of a warrant, and are traded separately after a certain period. The
warrants often become exercisable one year after the SPAC's initial
public offering or upon the completion of a de-SPAC transaction.
\16\ Exchange rules require a listed SPAC to complete a de-SPAC
transaction within a specified timeframe not to exceed 36 months
after its initial public offering. See, e.g., NYSE Listed Company
Manual Section 102.06.and Nasdaq Listing Rule IM-5101-2.
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[[Page 29461]]
If, on the other hand, a SPAC identifies a candidate for a business
combination transaction, the shareholders of the SPAC have the
opportunity to either: (1) Redeem their shares prior to the business
combination and receive a pro rata amount of the initial public
offering proceeds held in the trust or escrow account, or (2) remain a
shareholder of the company after the business combination.\17\ To
offset shareholder redemptions and to fund larger de-SPAC transactions,
SPACs often conduct additional private capital-raising transactions,
typically in the form of private investment in public equity (PIPE)
transactions.\18\ De-SPAC transactions often result in the former
SPAC's shareholders owning a minority interest in the post-business
combination company, with the former private operating company's
shareholders and PIPE investors owning a majority interest in the post-
business combination company following these transactions.\19\
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\17\ According to a study of SPAC initial public offerings
between 2010 and 2018, an average of 54.4% and a median of 57.1% of
shares issued in an initial public offering by a SPAC during this
period were redeemed prior to the completion of a de-SPAC
transaction. Usha R. Rodrigues and Michael Stegemoller, SPACs:
Insider IPOs (SSRN Working Paper, 2021). Another analysis found
that, between July 1, 2021 and Dec. 1, 2021, mean and median SPAC
redemption rates were 55% and 66%, respectively. Michael Klausner,
Michael Ohlrogge, and Emily Ruan, A Sober Look at SPACs, 39 Yale J.
on Regul. 228 (2022). See infra Section IX.C.1.a.4. for a discussion
of shareholder redemptions based on analysis by the Division of
Economic and Risk Analysis (DERA) of available data.
\18\ The parties to a de-SPAC transaction often negotiate a
minimum cash condition pursuant to which a SPAC must have a
specified minimum amount of cash at the closing of the de-SPAC
transaction, which could include funds in the trust or escrow
account, the proceeds from PIPE transactions, and other sources.
When a SPAC conducts a PIPE transaction in connection with a de-SPAC
transaction, the post-business combination company generally files a
Securities Act registration statement following the de-SPAC
transaction to register the resale of the securities purchased in
the PIPE transaction.
\19\ According to one study, of the 47 SPAC mergers that
occurred between Jan. 2019 and June 2020, SPAC shareholders,
including the sponsor, held a median of 35% of the merged company
after a de-SPAC transaction (of which the sponsor held a median of
12% of the merged company), with the remaining 65% of the merged
company held by other parties including the target company's
shareholders and PIPE investors. Klausner, Ohlrogge, and Ruan, supra
note 17.
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Shareholder approval is often required in de-SPAC transactions,
and, in such cases, a SPAC provides its shareholders with a proxy
statement on Schedule 14A, or an information statement on Schedule 14C
if it is not soliciting proxies from its shareholders.\20\ If a SPAC or
the target company is registering an offering of its securities (or the
securities of a new holding company) to be issued in the de-SPAC
transaction, then a registration statement on Form S-4 or F-4 would be
filed for the securities offering. If no registration statement or
proxy or information statement is required, then the SPAC disseminates
a tender offer statement (Schedule TO) for the redemption offer to its
security holders with information about the target company.\21\
Regardless of how the de-SPAC transaction is structured, the operations
of the private company are conducted by the post-business combination
company following the consummation of a de-SPAC transaction, with the
shareholders of the private company now owning shares in a publicly
listed company.
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\20\ 17 CFR 240.14a-2 (Exchange Act Rule 14a-2) and 17 CFR
240.14c-2 (Exchange Act Rule 14c-2).
\21\ The Commission has promulgated rules under the Exchange Act
setting forth filing, disclosure, and dissemination requirements in
connection with tender offers. See, e.g., Regulations 14D and 14E
and Exchange Act Rule 13e-4. When an issuer conducts a tender offer,
the issuer may be required to file and disseminate a Schedule TO
pursuant to Rule 13e-4. The redemption rights in a SPAC context
generally have indicia of being a tender offer, such as a limited
period of time for the SPAC security holders to request redemption
of their securities. The Commission staff, however, has not insisted
that SPACs comply with the tender offer rules when a SPAC files a
Schedule 14A or 14C in connection with the approval of a de-SPAC
transaction or an extension of the timeframe to complete a de-SPAC
transaction and conducts the solicitation in accordance with
Regulation 14A or 14C, as the federal proxy rules mandate
substantially similar disclosures and applicable procedural
protections as required by the tender offer rules. However, this
staff position does not apply when a SPAC does not file a Schedule
14A or 14C in connection with the de-SPAC transaction or an
extension. SPACs that do not file a Schedule 14A or 14C, such as
SPACs that are foreign private issuers, have generally filed and
disseminated Schedules TO for the redemptions of their securities
and complied with the procedural requirements of the tender offer
rules. In these circumstances, the staff has taken the position that
the Schedule TO should include the same financial and other
information as is required in Schedule 14A or 14C for a de-SPAC
transaction. See infra Section II.F.4 for a discussion of proposed
Item 1608 of Regulation S-K and Section IV.A. for a discussion of
proposed Rule 145a under the Securities Act, which would affect when
a SPAC may be required to file a Form S-4 or F-4 in connection with
a de-SPAC transaction.
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De-SPAC transactions can be viewed as a way for private operating
companies to become public reporting companies under the Exchange Act
and obtain a listing on a national securities exchange while avoiding
certain of the safeguards for investors and conventions of the typical
initial public offering process.\22\ From the perspective of the
shareholders and management of a private operating company, some of the
purported advantages of combining with a SPAC compared to conducting an
underwritten initial public offering could include: Greater pricing
certainty in merger negotiations; a relatively shorter time frame in
becoming a public company; and the perceived freedom to use projections
in connection with de-SPAC transactions, with reduced liability
exposure.\23\ De-SPAC transactions also offer private operating
companies an infusion of capital from the SPAC,\24\ as well as
potentially greater share liquidity for the post-business combination
company based on the existing trading market for the SPAC's
securities.\25\
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\22\ See infra note 119.
\23\ See, e.g., Klausner, Ohlrogge, and Ruan, supra note 17;
Rodrigues and Stegemoller, supra note 17; Minmo Gahng, Jay R.
Ritter, and Donghang Zhang, SPACs (SSRN Working Paper, 2021).
\24\ Typically, much of this cash comes from PIPE investors
around the time of the de-SPAC transaction and not from investors in
the SPAC's initial public offering. See, e.g., Klausner, Ohlrogge,
and Ruan, supra note 17.
\25\ However, one study found evidence of illiquidity in SPAC
shares, with relatively thin trading volume particularly during the
period before the announcement of a proposed de-SPAC transaction.
Rodrigues and Stegemoller, supra note 17.
---------------------------------------------------------------------------
Although the basic structure of SPACs has existed since the 1990s,
the recent surge in SPAC offerings and the increasing use of de-SPAC
transactions as a mechanism for private operating companies to access
the U.S. public securities markets have caused some market observers to
express concerns about various aspects of the SPAC structure.\26\ For
example, some commentators have raised concerns regarding the amount of
sponsor compensation and other costs and their dilutive effects on a
SPAC's shareholders.\27\ A number of commentators have also pointed to
the nature of the sponsor compensation (i.e., dependent on the
completion of a de-SPAC transaction) as a potential conflict of
interest in the SPAC structure
[[Page 29462]]
that could lead sponsors to enter into de-SPAC transactions that are
unfavorable to unaffiliated shareholders of the SPACs without
performing robust due diligence in connection with these transactions,
when the alternative is to liquidate the SPACs and return the initial
public offering proceeds to the shareholders.\28\ Other commentators
have criticized stock exchange listing rules under which SPAC
shareholders have voted in favor of proposed de-SPAC transactions while
still redeeming their shares prior to the closing of the
transactions.\29\ A number of studies have found that returns are
relatively poor for investors in companies following a de-SPAC
transaction.\30\
---------------------------------------------------------------------------
\26\ For example, in May 2021, the Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets of the House
Financial Services Committee held a hearing on ``Going Public:
SPACs, Direct Listings, Public Offerings, and the Need for Investor
Protections,'' which included testimony on, among other things,
misaligned incentives in the SPAC structure, disclosure issues with
respect to SPACs, and the use of projections in de-SPAC
transactions. A webcast of the hearing is available at: <a href="https://financialservices.house.gov/events/eventsingle.aspx?EventID=407753">https://financialservices.house.gov/events/eventsingle.aspx?EventID=407753</a>.
\27\ See Testimony of Stephen Deane, CFA Institute, before the
Investor Protection, Entrepreneurship, and Capital Markets
Subcommittee of the U.S. House Committee on Financial Services, May
24, 2021 (``Deane Testimony''), <a href="https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-deanes-20210524.pdf">https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-deanes-20210524.pdf</a>. See also
Amrith Ramkumar, SPAC Insiders Can Make Millions Even When the
Company They Take Public Struggles, The Wall Street Journal, Apr.
25, 2021.
\28\ See, e.g., Klausner, Ohlrogge, and Ruan, supra note 17;
Rodrigues and Stegemoller, supra note 17; Gahng, Ritter, and Zhang,
supra note 23; letter dated Feb. 16, 2021 from Americans for
Financial Reform and Consumer Federation of America to the House
Financial Services Committee (``AFR Letter''); Deane Testimony;
Testimony of Andrew Park, Americans for Financial Reform, before the
Investor Protection, Entrepreneurship, and Capital Markets
Subcommittee of the U.S. House Committee on Financial Services, May
24, 2021 (``Park Testimony''), <a href="https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-parka-20210524.pdf">https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-parka-20210524.pdf</a>.
\29\ See Mira Ganor, The Case for Non-Binary, Contingent,
Shareholder Action, 23 U. Pa. J. Bus. L. 390 (2021); Rodrigues and
Stegemoller, supra note 17. We note that exchange listing rules only
explicitly require that, when a shareholder vote on a business
combination is held, the public shareholders voting against a
business combination have a right to redeem shares. See, e.g.,
Nasdaq Listing Rule IM-5101-2 (stating, in part, that ``public
Shareholders voting against a 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'').
\30\ See, e.g., Lora Dimitrova, Perverse Incentives of Special
Purpose Acquisition Companies, the ``Poor Man's Private Equity
Funds,'' Journal of Accounting and Economics (2017); Johannes Kolb
and Tereza Tykvov[aacute], Going Public via Special Purpose
Acquisition Companies: Frogs Do Not Turn Into Princes, Journal of
Corporate Finance (2016); Klausner, Ohlrogge, and Ruan, supra note
17; Gahng, Ritter, and Zhang, supra note 23; Chen Lin, Fangzhou Lu,
Roni Michaely, and Shihua Qin, SPAC IPOs and Sponsor Network
Centrality (SSRN Working Paper, 2021). See also Testimony of Scott
Kupor, Andreessen Horowitz, before the Investor Protection,
Entrepreneurship, and Capital Markets Subcommittee of the U.S. House
Committee on Financial Services, May 24, 2021, <a href="https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-kupors-20210524.pdf">https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-kupors-20210524.pdf</a>; Alexander Osipovich and Dave Michaels,
Investors Flock to SPACs, Where Risks Lurk and Track Records Are
Poor, The Wall Street Journal, Nov. 13, 2020.
---------------------------------------------------------------------------
In addition, some commentators have expressed concerns regarding
the adequacy of the disclosures provided to investors in these
transactions in terms of explaining the potential benefits, risks and
effects for investors, as well as the potential benefits for the
sponsor and other affiliates of the SPAC.\31\ One of these commentators
also expressed the view that the disclosure about the private operating
company provided through the de-SPAC transaction process may be less
complete and less reliable than that provided by an issuer in a
traditional initial public offering.\32\ Other commentators have
criticized the use of projections in de-SPAC transactions that, in
their view, have appeared to be unreasonable, unfounded or potentially
misleading, particularly where the target company is an early stage
company with no or limited sales, products, and/or operations,\33\ as
well as the lack of a named underwriter in these transactions that
would typically perform traditional gatekeeping functions, such as due
diligence, and would be subject to liability under Section 11 of the
Securities Act for untrue statements of material facts or omissions of
material facts.\34\ In response to a number of these and other issues,
the Commission staff has provided guidance relating to SPACs on five
occasions since December 2020.\35\
---------------------------------------------------------------------------
\31\ See, e.g., AFR Letter; Testimony of Professor Usha R.
Rodrigues, University of Georgia School of Law, before the Investor
Protection, Entrepreneurship, and Capital Markets Subcommittee of
the U.S. House Committee on Financial Services, May 24, 2021
(``Rodrigues Testimony''), <a href="https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-rodriguesu-20210524.pdf">https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-rodriguesu-20210524.pdf</a>. A number
of recent SEC actions have highlighted disclosures about the private
operating company that are allegedly incomplete, inaccurate, and
materially misleading. See, e.g., In the Matter of Momentus, Inc.,
Stable Road Acquisition Corp., SRC-NI Holdings, LLC, and Brian
Kabot, Release No. 33-10955, 34-92391 (July 13, 2021); In the Matter
of Nikola Corp., Release No. 33-11018, 34-93838 (Dec. 21, 2021); SEC
v. Akazoo S.A., Case No. 1:20-cv-08101 (S.D.N.Y. filed Sept. 30,
2020); SEC v. Hurgin, et al., Case No. 1:19-cv-05705 (S.D.N.Y. filed
June 18, 2019).
\32\ See AFR Letter.
\33\ See, e.g., Michael Dambra, Omri Even-Tov, and Kimberlyn
George, Should SPAC Forecasts be Sacked? (SSRN Working Paper, 2022);
AFR Letter; Park Testimony; Rodrigues and Stegemoller, supra note
17. See also Heather Somerville and Eliot Brown, SPAC Startups Made
Lofty Promises. They Aren't Working Out., The Wall Street Journal,
Feb. 25, 2022.
\34\ See AFR Letter; Deane Testimony; Rodrigues Testimony. See
also John C. Coffee Jr., Gatekeeper Failure and Reform: The
Challenge of Fashioning Relevant Reforms, 84 B. U. L. Rev. 301
(2004) and John C. Coffee, Jr., Gatekeepers: The Professions and
Corporate Governance (2006).
\35\ See CF Disclosure Guidance: Topic No. 11--Special Purpose
Acquisition Companies (Division of Corporation Finance, Dec. 22,
2020); Staff Statement on Select Issues Pertaining to Special
Purpose Acquisition Companies (Division of Corporation Finance, Mar.
31, 2021); Public Statement on Financial Reporting and Auditing
Considerations of Companies Merging with SPACs (Office of Chief
Accountant, Mar. 31, 2021); Public Statement on SPACs, IPOs and
Liability Risk under the Securities Laws (Division of Corporation
Finance, Apr. 8, 2021); and Staff Statement on Accounting and
Reporting Considerations for Warrants Issued by Special Purpose
Acquisition Companies (``SPACs'') (Division of Corporation Finance
and Office of Chief Accountant, Apr. 12, 2021). This guidance and
other staff statements (including those cited herein) represent the
views of Commission staff and are not a rule, regulation, or
statement of the Commission. The Commission has neither approved nor
disapproved the content of these documents and, like all staff
statements, they have no legal force or effect, do not alter or
amend applicable law, and create no new or additional obligations
for any person.
---------------------------------------------------------------------------
In September 2021, the Commission's Investor Advisory Committee
\36\ issued preliminary recommendations regarding SPACs and expressed
concerns about whether sponsors and target companies have engaged in
regulatory arbitrage by using de-SPAC transactions as a path to the
public markets. In addition, the Investor Advisory Committee expressed
concerns about potential conflicts of interest between sponsors and
retail investors, and the effectiveness of the disclosures provided in
these transactions.\37\ Among other things, the Investor Advisory
Committee recommended that the Commission ``regulate SPACs more
intensely'' through an enhanced focus on and stricter enforcement of
existing disclosure rules in areas such the sponsor's role in a SPAC,
the process and risks in identifying and assessing target companies,
PIPE financing terms, and de-SPAC transaction due diligence, as well as
application of the Plain English disclosure rules.\38\ The Investor
Advisory Committee also recommended that the Commission prepare and
publish a report analyzing the parties involved in SPAC transactions at
[[Page 29463]]
various stages and the compensation and incentives of these parties.
---------------------------------------------------------------------------
\36\ The Investor Advisory Committee was established by Section
911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act''), Public Law 111-203, 124 Stat. 1376 (2010), to
advise and consult with the Commission on regulatory priorities,
issues, and initiatives.
\37\ See Recommendations of the Investor Advisory Committee
Regarding Special Purpose Acquisition Companies (Sept. 9, 2021)
(``IAC Recommendations''), available at: <a href="https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210909-spac-recommendation.pdf">https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210909-spac-recommendation.pdf</a>. The Dodd-Frank Act authorizes the Investor
Advisory Committee to submit findings and recommendations for review
and consideration by the Commission. The Commission then issues a
public statement assessing the finding or recommendation and
disclosing the Commission's intended action, if any, in regard to
the finding or recommendation. See Section 911(g) of the Dodd-Frank
Act.
\38\ 17 CFR 230.421(d) (Securities Act Rule 421(d)) requires
registrants to write the prospectus cover page, prospectus summary,
and risk factors sections of prospectuses using plain English
principles, including the use of short sentences; definite,
concrete, everyday language; active voice; tabular presentation of
complex information whenever possible; no legal or business jargon;
and no multiple negatives. Plain English Disclosure, Release No. 33-
7497 (Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)].
---------------------------------------------------------------------------
Also in September 2021, the Commission's Small Business Capital
Formation Advisory Committee \39\ held a panel discussion on initial
public offerings, direct listings, and SPACs.\40\ The panelists
expressed their views on a range of topics related to SPACs, including
the factors behind the significant growth of the SPAC market over the
past two years, the potential benefits of SPACs to the public markets,
the potential benefits of enhanced disclosure requirements applicable
to SPACs, and perceived issues surrounding the use of projections in
de-SPAC transactions. The panel discussion also addressed the costs
embedded in the SPAC structure and the dilutive effects of these costs
on non-redeeming shareholders, as well as the poor market-adjusted
returns of companies, on average, following de-SPAC transactions.\41\
---------------------------------------------------------------------------
\39\ The Small Business Capital Formation Advisory Committee was
established by Section 2 of the SEC Small Business Advocate Act of
2016, Public Law 114-284, 130 Stat. 1447 (2016), to provide advice
to the Commission on the Commission's rules, regulations, and
policies relating to (1) capital raising by emerging, privately held
small businesses and public companies with less than $250 million in
public market capitalization; (2) trading in their securities; and
(3) public reporting and corporate governance requirements
applicable to these companies.
\40\ The panelists were Isabelle Freidheim, Michael Klausner,
David Ni, and Phyllis Newhouse.
\41\ See Transcript of SEC Small Business Capital Formation
Advisory Committee (Sept. 27, 2021), available at: <a href="https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-092721.pdf">https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-092721.pdf</a>.
---------------------------------------------------------------------------
Having considered these and other perspectives on the SPAC market,
we are of the view that greater transparency and more robust investor
protections could assist investors in evaluating and making investment,
voting, and redemption decisions with respect to these transactions.
Accordingly, we are proposing new rules and rule amendments to enhance
existing disclosure requirements and investor protections in initial
public offerings by SPACs and in de-SPAC transactions. A number of the
rules and amendments we are proposing are intended to improve the
usefulness and clarity of the information provided to investors so that
they can make better informed decisions as to whether to purchase
securities in SPAC initial public offerings, to purchase or sell SPAC
securities in secondary trading markets, and in voting, investment and
redemption decisions in connection with de-SPAC transactions.
The proposed rules and amendments, if adopted, could help the SPAC
market function more efficiently by improving the relevance,
completeness, clarity, and comparability of the disclosures provided by
SPACs at the initial public offering and de-SPAC transaction stages,
and by providing important investor protections to strengthen investor
confidence in this market. In developing these proposals, we have
considered the recommendations and views discussed above, as well as
the Commission staff's experience in reviewing disclosures in SPAC
initial public offerings and de-SPAC transactions.
Specifically, we are proposing to add new Subpart 1600 of
Regulation S-K that would set forth specialized disclosure requirements
in connection with initial public offerings by SPACs and in connection
with de-SPAC transactions. In new Subpart 1600, we are proposing to,
among other things:
<bullet> Require additional disclosures about the sponsor of the
SPAC, potential conflicts of interest, and dilution;
<bullet> Require additional disclosures on de-SPAC transactions,
including a requirement that the SPAC state (1) whether it reasonably
believes that the de-SPAC transaction and any related financing
transaction are fair or unfair to investors, and (2) whether it has
received any outside report, opinion, or appraisal relating to the
fairness of the transaction; and
<bullet> Require certain disclosures on the prospectus cover page
and in the prospectus summary of registration statements filed in
connection with SPAC initial public offerings and de-SPAC transactions.
In addition, in view of the increasing number of private companies
using de-SPAC transactions to become publicly-traded reporting
companies, we are proposing amendments to provide procedural
protections and to align the disclosures provided, as well as the legal
obligations of companies, in de-SPAC transactions more closely with
those in traditional initial public offerings. Specifically, we are
proposing to:
<bullet> Amend the registration statement forms and schedules filed
in connection with de-SPAC transactions to require additional
disclosures about the private operating company;
<bullet> Require that disclosure documents in de-SPAC transactions
be disseminated to investors at least 20 calendar days in advance of a
shareholder meeting or the earliest date of action by consent, or the
maximum period for disseminating such disclosure documents permitted
under the laws of the jurisdiction of incorporation or organization if
such period is less than 20 calendar days;
<bullet> Deem a private operating company in a de-SPAC transaction
to be a co-registrant of a registration statement on Form S-4 or Form
F-4 when a SPAC files such a registration statement for a de-SPAC
transaction, such that the private operating company and its signing
persons would be subject to liability under Section 11 of the
Securities Act as signatories to the registration statement;
<bullet> Amend the definition of smaller reporting company to
require a re-determination of smaller reporting company status
following the consummation of a de-SPAC transaction; and
<bullet> Define ``blank check company'' to encompass SPACs and
certain other blank check companies for purposes of the Private
Securities Litigation Reform Act of 1995 (PSLRA) \42\ such that the
safe harbor for forward-looking statements under the PSLRA would not be
available to SPACs, including with respect to projections of target
companies seeking to access the public markets through a de-SPAC
transaction.
---------------------------------------------------------------------------
\42\ Public Law 104-67, 109 Stat. 737 (1995).
---------------------------------------------------------------------------
Underwriters play a critical role in the securities offering
process as gatekeepers to the public markets. In light of this
important role, we are proposing a new rule, Securities Act Rule 140a,
that would deem anyone who has acted as an underwriter of the
securities of a SPAC and takes steps to facilitate a de-SPAC
transaction, or any related financing transaction or otherwise
participates (directly or indirectly) in the de-SPAC transaction to be
engaged in a distribution and to be an underwriter in the de-SPAC
transaction. By affirming the underwriter status of SPAC IPO
underwriters in connection with de-SPAC transactions, the proposed rule
should better motivate SPAC underwriters to exercise the care necessary
to ensure the accuracy of the disclosure in these transactions by
affirming that they are subject to Section 11 liability for that
information.
In addition, private companies have historically used shell
companies with Exchange Act reporting obligations in various forms of
transactions, including SPACs, to become a public company without
undergoing a traditional initial public offering. In many cases, such
shell company shareholders may not receive a Securities Act
registration statement containing disclosures about the private company
that is entering the public market for the first time. Due to the
significant increase in the use of reporting shell company business
combination transactions as a means to
[[Page 29464]]
enter the U.S. capital markets, and in an effort to provide reporting
shell company shareholders with more consistent Securities Act
protections regardless of transaction structure, we are proposing to
add new Rule 145a that would deem any business combination of a
reporting shell company, involving another entity that is not a shell
company, to involve a sale of securities to the reporting shell
company's shareholders.\43\
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\43\ Throughout this release, we use ``shell company'' in lieu
of the phrase ``shell company, other than a business combination
related shell company.'' The term ``business combination related
shell company'' is defined in Securities Act Rule 405 and Exchange
Act Rule 12b-2 as a shell company that is: ``(1) Formed by an entity
that is not a shell company solely for the purpose of changing the
corporate domicile of that entity solely within the United States;
or (2) Formed by an entity that is not a shell company solely for
the purpose of completing a business combination transaction (as
defined in 17 CFR 230.165(f)) among one or more entities other than
the shell company, none of which is a shell company.'' For purposes
of proposed Rule 145a (see infra Section IV.A.), the term
``reporting shell company'' is defined as a company, other than an
asset-backed issuer as defined in Item 1101(b) of Regulation AB,
that has: (1) No or nominal operations; (2) either: (i) No or
nominal assets; (ii) assets consisting solely of cash and cash
equivalents; or (iii) assets consisting of any amount of cash and
cash equivalents and nominal other assets; and (3) an obligation to
file reports under Section 13 or Section 15(d) of the Exchange Act.
We similarly use ``reporting shell company'' in lieu of the phrase
``reporting shell company, other than a business combination related
shell company'' throughout this release.
---------------------------------------------------------------------------
Further, we are proposing new Article 15 of Regulation S-X, as well
as related amendments, to more closely align the financial statement
reporting requirements in business combinations involving a shell
company and a private operating company with those in traditional
initial public offerings. This is consistent with our view that the
manner in which a company goes public should not generally result in
substantially different financial statement disclosures being provided
to investors.
We are also proposing amendments intended to enhance the
reliability of projections disclosure in Commission filings, as well as
additional requirements when projections are disclosed in connection
with de-SPAC transactions. The proposed amendments to Item 10(b) of
Regulation S-K would address broader concerns regarding the use of
projections generally, while proposed Item 1609 of Regulation S-K would
address concerns specific to de-SPAC transactions.
Finally, as the SPAC market has grown dramatically in recent years,
some SPACs have sought to operate in novel ways that suggest a need for
SPACs and their sponsors to increase their focus on evaluating when a
SPAC could be an investment company and thus subject to the
requirements under the Investment Company Act of 1940 (``Investment
Company Act'').\44\ We are concerned that SPACs may fail to recognize
when their activities raise the investor protection concerns addressed
by the Investment Company Act. To assist SPACs in focusing on, and
appreciating, when they may be subject to investment company
regulation, we are proposing a new safe harbor under the Investment
Company Act. The proposed rule would provide a safe harbor from the
definition of ``investment company'' under Section 3(a)(1)(A) of the
Investment Company Act for SPACs that satisfy certain conditions that
limit a SPAC's duration, asset composition, business purpose and
activities.\45\
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\44\ 15 U.S.C. 80a-1 et seq.
\45\ See infra Section VI for a discussion of proposed Rule 3a-
10.
---------------------------------------------------------------------------
We welcome feedback and encourage interested parties to submit
comments on any or all aspects of the proposed new rules and
amendments. When commenting, it would be most helpful if you include
the reasoning behind your position or recommendation.
II. Proposed New Subpart 1600 of Regulation S-K
We are proposing to add new Subpart 1600 to Regulation S-K to set
forth specialized disclosure requirements applicable to SPACs regarding
the sponsor, potential conflicts of interest, and dilution, and to
require certain disclosures on the prospectus cover page and in the
prospectus summary.\46\ Proposed Subpart 1600 would also require
enhanced disclosure for de-SPAC transactions, including a fairness
determination requirement. We are proposing to amend a number of forms
and schedules used by SPACs for initial public offerings and de-SPAC
transactions to require the information set forth in proposed Subpart
1600.\47\ To the extent that the disclosure requirements in proposed
Subpart 1600 address the same subject matter as the existing disclosure
requirements of the forms or schedules, the requirements of proposed
Subpart 1600 would be controlling.\48\ The following table summarizes
the proposed items in Subpart 1600, as described more fully below: \49\
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\46\ The proposed requirements in new Subpart 1600 would, to an
extent, codify and standardize some of the disclosures already
commonly provided by SPACs.
\47\ See the proposed amendments to Forms S-1, F-1, S-4, and F-
4, and Schedules 14A and TO. While we are not proposing amendments
to Schedule 14C, the disclosure contemplated by proposed Subpart
1600 would be required in Schedule 14C pursuant to Item 1 of
Schedule 14C, which states that a Schedule 14C must include the
information called for by all of the items of Schedule 14A, with
limited exceptions, to the extent each item would be applicable to
any matter to be acted upon at a shareholder meeting if proxies were
to be solicited in connection with the meeting. If the securities to
be issued in a de-SPAC transaction are registered on a form other
than Form S-4 or F-4, such as Form S-1 or F-1, but would be
authorized to be registered on Form S-4 or F-4, the proposed
requirements of Form S-4 or F-4, as applicable, in regard to de-SPAC
transactions would apply in that context.
\48\ Proposed General Instruction L.1. to Form S-4; Proposed
General Instruction I.1. to Form F-4; Proposed Item 14(f)(1) to
Schedule 14A; Proposed General Instruction K to Schedule TO. We are
also proposing to re-designate existing General Instruction K to
Schedule TO as General Instruction L to the schedule.
\49\ The information in this table is not comprehensive and is
intended only to summarize the proposed items of Subpart 1600. This
table should be read together with the complete text of this
release.
----------------------------------------------------------------------------------------------------------------
Applicable forms and
Item Summary description Principal objective(s) schedules
----------------------------------------------------------------------------------------------------------------
Item 1601, Definitions............... Definitions for the Establish the scope of Forms S-1, F-1, S-4,
terms ``special the issuers and and F-4; Schedules
purpose acquisition transactions subject 14A, 14C, and TO.
company,'' ``de-SPAC to the requirements of
transaction,'' Subpart 1600.
``target company,''
and ``SPAC sponsor''.
Item 1602, Registered offerings by Require certain Enhance the clarity and Forms S-1 and F-1.
special purpose acquisition information on the readability of
companies. prospectus cover page prospectuses in SPAC
and in the prospectus initial public
summary of offerings and the
registration disclosures relating
statements for to dilution in these
offerings by SPACs prospectuses.
other than de-SPAC
transactions. Require
enhanced dilution
disclosure in these
registration
statements.
[[Page 29465]]
Item 1603, SPAC sponsor; conflicts of Require certain Provide investors with Forms S-1, F-1, S-4,
interest. disclosure regarding a more complete and F-4; Schedules
the sponsor and its understanding of the 14A, 14C and TO.
affiliates and any role of sponsors and
promoters of SPACs and their conflicts of
disclosure regarding interest.
conflicts of interest
between the sponsor or
its affiliates or
promoters and
unaffiliated security
holders.
Item 1604, De-SPAC transactions...... Require certain Enhance the clarity and Forms S-4 and F-4;
information on the readability of Schedules 14A, 14C,
prospectus cover page prospectuses in de- and TO.
and in the prospectus SPAC transactions and
summary of disclosures relating
registration to dilution in these
statements for de-SPAC prospectuses.
transactions. Require
enhanced dilution
disclosure in these
registration
statements.
Item 1605, Background of and reasons Require disclosure on Provide investors with Forms S-4 and F-4;
for the de-SPAC transaction; terms the background, a more complete Schedules 14A, 14C,
of the de-SPAC transaction; effects. material terms and understanding of the and TO.
effects of a proposed background of and
de-SPAC transaction. motivations behind a
proposed de-SPAC
transaction.
Item 1606, Fairness of the de-SPAC Require disclosure on Provide investors with Forms S-4 and F-4;
transaction and any related whether a SPAC additional information Schedules 14A, 14C,
financing transaction. reasonably believes regarding a proposed and TO.
that a de-SPAC de-SPAC transaction
transaction and any and address concerns
related financing regarding potential
transactions are fair conflicts of interest
or unfair to and misaligned
investors, as well as incentives.
a discussion of the
bases for this
reasonable belief.
Item 1607, Reports, opinions, Require disclosure on Provide investors with Forms S-4 and F-4;
appraisals and negotiations. whether a SPAC or its additional information Schedules 14A, 14C,
sponsor has received a underlying a fairness and TO.
report, opinion or determination by a
appraisal from an SPAC.
outside party
regarding the fairness
of a de-SPAC
transaction or any
related financing
transaction.
Item 1608, Tender offer filing Require additional Align the information Schedule TO.
obligations in de-SPAC transactions disclosures in a provided in such a
*. Schedule TO filed in Schedule TO with the
connection with a de- information provided
SPAC transaction. in other filings in
connection with a de-
SPAC transaction.
Item 1609, Financial projections in Require additional Provide investors with Forms S-4 and F-4;
de-SPAC transactions **. disclosures regarding additional information Schedules 14A, 14C,
financial projections regarding the use of and TO.
disclosed in a projections in
disclosure document connection with a de-
for a de-SPAC SPAC transaction.
transaction.
Item 1610, Structured data Require information Provide investors and Forms S-1, F-1, S-4,
requirement ***. disclosed pursuant to other market and F-4; Schedules
Subpart 1600 to be participants with 14A, 14C, and TO.
tagged in a information that is
structured, machine- more readily available
readable data language. and more easily
accessible for
aggregation,
comparison, filtering,
and other analysis.
----------------------------------------------------------------------------------------------------------------
Notes:
* Proposed Item 1608 is discussed in Section II.F.4.
** Proposed Item 1609 is discussed in Section V.B.2.
*** Proposed Item 1610 is discussed in Section II.G.
A. Definitions
For purposes of proposed new Subpart 1600, we are proposing Item
1601 to define the term ``special purpose acquisition company'' to mean
a company that has indicated that its business plan is to (1) register
a primary offering of securities that is not subject to the
requirements of Rule 419; \50\ (2) complete a de-SPAC transaction
within a specified time frame; and (3) return all remaining proceeds
from the registered offering and any concurrent offerings to its
shareholders if the company does not complete a de-SPAC transaction
within the specified time frame.\51\ While the proposed definition does
not include certain features common to SPACs, such as the listing of
the SPAC's securities on a national securities exchange \52\ or the
issuance of redeemable securities, the proposed definition incorporates
the key defining features of the issuers that in our view should be
subject to the disclosure and procedural requirements of Subpart 1600,
while remaining sufficiently broad to take into account potential
variations in the SPAC structure and the possibility that SPACs may
continue to evolve. In particular, the proposed definition would
encompass issuers that would otherwise be subject to Rule 419's
investor protection requirements but for the fact that the issuer is
not issuing ``penny
[[Page 29466]]
stock.'' \53\ At the same time, the proposed definition does not
include criteria such as listing on a national securities exchange,
certain requirements that are applicable to exchange-traded SPACs,\54\
or the issuance of redeemable securities, as these criteria would
result in an overly narrow definition by including transactional terms
that have not applied to every SPAC offering in the past or that could
change as the SPAC market continues to evolve.
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\50\ Blank check companies subject to Rule 419 must comply with
a comprehensive set of disclosure and investor protection
requirements under the rule and would not be subject to the
requirements applicable to SPACs under the proposed rules. See supra
notes 6 and 13.
\51\ Proposed Item 1601(b).
\52\ In this regard, we note that the securities of SPACs were
not listed on national securities exchanges until the 2000s.
\53\ See supra note 12.
\54\ See infra note 57.
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The term ``de-SPAC transaction'' would be defined as a business
combination such as a merger, consolidation, exchange of securities,
acquisition of assets, or similar transaction involving a SPAC and one
or more target companies (contemporaneously, in the case of more than
one target company).\55\ The term ``target company'' would be defined
as an operating company, business, or assets.\56\ As proposed, these
definitions are intentionally broad and, taken together, would
encompass more typical transactions such as the acquisition of one or
more private operating companies by a SPAC, as well as less common
transactions that may or may not be permitted under exchange listing
rules but for which the proposed enhanced disclosure and procedural
requirements described below may be appropriate because they raise the
same investor protection concerns.\57\
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\55\ Proposed Item 1601(a).
\56\ Proposed Item 1601(d).
\57\ The proposed definitions would apply to both exchange-
traded SPACs and SPACs traded in the over-the-counter market. Some
transactions encompassed by the proposed definitions may not be
permitted under exchange listing rules for SPACs, and nothing in
this release is intended to indicate that such transactions are or
should be permitted under the exchanges' SPACs listing rules or that
exchange listing requirements should not, at a minimum, apply to
SPACs seeking an exchange listing. 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.
Furthermore, Section 6(b)(5) of the Exchange Act requires exchange
listing rules be designed to prevent fraudulent and manipulative
acts and practices, promote just and equitable principles of trade,
and protect investors and the public interest. The Commission has
also stated that listing standards are of significant importance to
investors that may rely on the status an exchange listing ascribes
to a security. See, e.g., Release No. 34-57785 (May 6, 2008) [73 FR
27597, 27599 (May 13, 2008)] (SR-NYSE-2008-17) (order approving
initial and continued listing standards for NYSE exchange-listed
SPACs).
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The term ``SPAC sponsor'' would be defined as the entity and/or
person(s) primarily responsible for organizing, directing or managing
the business and affairs of a SPAC, other than in their capacities as
directors or officers of the SPAC as applicable.\58\ Although a sponsor
of a SPAC may perform a variety of functions within the SPAC's
structure, the proposed definition encompasses activities that, based
on the staff's experience reviewing SPAC filings and public commentary,
are commonly associated with sponsors of SPACs. We are proposing to
define this term broadly so that the appropriate entities or persons
are subject to the proposed enhanced disclosure requirements applicable
to the sponsors of a SPAC.\59\
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\58\ Proposed Item 1601(c). In regard to natural persons, we are
proposing to exclude from the scope of the definition of ``SPAC
sponsor'' the activities performed by natural persons in their
capacities as directors and/or officers of the SPAC to avoid overlap
with existing disclosure requirements relating to directors and
officers. See infra Section II.B. for a discussion of the activities
of a sponsor.
\59\ Proposed Item 1603.
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Request for Comment
1. Should we define the term ``special purpose acquisition
company'' as proposed? Does the proposed definition provide a workable
approach to determining which issuers would be subject to the
requirements of proposed Subpart 1600? Should we define this term
differently? If so, how? For example, are there certain other common
characteristics of SPACs that should be included in the definition,
such as redemption rights, exchange listing, the placing of initial
public offering proceeds in a trust or escrow account, and/or that the
de-SPAC transaction must meet a minimum fair market value (e.g., at
least 80%) of the value of the proceeds in the trust or escrow account?
Should we include a reference to ``shell company'' in the definition?
2. Should we define ``de-SPAC transaction'' as proposed? Should the
scope of the proposed definition instead be tied to de-SPAC
transactions that are permitted under exchange listing standards? \60\
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\60\ See supra notes 13 and 16.
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3. Should we define the term ``SPAC sponsor'' as proposed? Does the
proposed definition reflect those activities commonly associated with a
SPAC's sponsor? Would the proposed definition encompass persons or
entities that are not commonly considered to be sponsors of a SPAC? If
so, how should we revise the definition to avoid scoping in such
persons or entities? In regard to natural persons, should we exclude
from the scope of the definition the activities performed by natural
persons in their capacities as directors and/or officers of the SPAC,
as proposed?
4. Should we define the term ``target company'' as proposed? Is
this definition sufficiently clear? Would this definition, in
combination with the other proposed definitions, be overly broad and
encompass transactions that should not be treated as de-SPAC
transactions?
5. Are there other terms that we should define in proposed Subpart
1600? If so, which terms and how should we define them?
6. With respect to the proposed definition of ``special purpose
acquisition company,'' is it clear what ``has indicated that its
business plan'' is intended to convey? Should we require registrants to
affirmatively state in filings whether they are a special purpose
acquisition company? For example, should we amend Form S-1, Form F-1,
Form S-4, and/or Form F-4 to add to the registration statement cover
page of these forms a check box for issuers to indicate whether they
are special purpose acquisition companies? Should we also amend
Schedule 14A, Schedule 14C and Schedule TO to include this check box on
the cover pages of these schedules?
B. Sponsors
The sponsor's role is critical to the success of a SPAC. At the
earliest stage, the sponsor typically organizes and manages the SPAC,
including appointing the initial directors and officers of the SPAC,
and provides the initial capital for the SPAC's operations prior to its
initial public offering.\61\ In subsequent stages, among other things,
the sponsor may work with one or more investment banks in preparing for
the SPAC's initial public offering and may place the proceeds from the
offering into a trust or escrow account. Following the initial public
offering, the sponsor typically identifies potential candidates for a
business combination transaction, negotiates the transaction to acquire
the target private operating company and promotes the transaction to
the SPAC's shareholders. As discussed above, the value of the sponsor's
compensation is
[[Page 29467]]
usually contingent on the completion of a de-SPAC transaction.\62\
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\61\ See proposed Item 1601(c) for the proposed definition for
``SPAC sponsor.'' There is often an identity of interest between the
sponsor and the SPAC's officers and directors, in that the same
persons may work for both the sponsor and the SPAC in different
capacities. In many instances, SPACs will not hold a public election
for directors until the de-SPAC transaction or thereafter. Some
SPACs provide that only the founder shares may vote in director
elections until the de-SPAC transaction.
\62\ See text accompanying supra notes 14-16.
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In view of the central role of the sponsor in a SPAC's activities,
we are proposing Item 1603(a) to require additional disclosure about
the sponsor, its affiliates and any promoters \63\ of the SPAC in
registration statements and schedules filed in connection with SPAC
registered offerings and de-SPAC transactions, including disclosure on
the following:
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\63\ The term ``promoter'' is defined in Securities Act Rule 405
and Exchange Act Rule 12b-2.
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<bullet> The experience, material roles, and responsibilities of
these parties, as well as any agreement, arrangement or understanding
(1) between the sponsor and the SPAC, its executive officers, directors
or affiliates, in determining whether to proceed with a de-SPAC
transaction and (2) regarding the redemption of outstanding securities;
<bullet> The controlling persons of the sponsor and any persons who
have direct and indirect material interests in the sponsor, as well as
an organizational chart that shows the relationship between the SPAC,
the sponsor, and the sponsor's affiliates;
<bullet> Tabular disclosure of the material terms of any lock-up
agreements with the sponsor and its affiliates; and
<bullet> The nature and amounts of all compensation that has or
will be awarded to, earned by, or paid to the sponsor, its affiliates
and any promoters for all services rendered in all capacities to the
SPAC and its affiliates, as well as the nature and amounts of any
reimbursements to be paid to the sponsor, its affiliates and any
promoters upon the completion of a de-SPAC transaction.\64\
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\64\ This would include, for example, fees and reimbursements in
connection with lease, consulting, support services, and management
agreements with entities affiliated with the sponsor, as well as
reimbursements for out-of-pocket expenses incurred in performing due
diligence or in identifying potential business combination
candidates.
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Proposed Item 1603(a)'s disclosure requirements are intended to
provide a SPAC's prospective investors and existing shareholders with
detailed information relating to the sponsor that could be important in
understanding and analyzing a SPAC, including how the rights and
interests of the sponsor, its affiliates, and any promoters may differ
from, and may conflict with, those of public shareholders.\65\ Given
that a SPAC does not conduct an operating business, information about
the background and experience of the sponsor is often important in
assessing a SPAC's prospects for success and may be a relevant factor
in the market value of a SPAC's securities.\66\ To the extent that a
sponsor's activities and arrangements with a SPAC are carried out
through, or in conjunction with, the sponsor's affiliates and any
promoters of the SPAC, we are proposing to require corresponding
disclosure with respect to these affiliates and promoters. In addition,
enhanced disclosure on the sponsor's compensation and the sponsor's
agreements, arrangements, or understandings may be helpful to a SPAC's
prospective investors and existing shareholders in considering whether
to acquire or redeem the SPAC's securities, and in evaluating the
potential risks and merits of a proposed de-SPAC transaction because it
could highlight additional motivations for completing a de-SPAC
transaction.
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\65\ Proposed Item 1603(a) would operate in addition to existing
disclosure requirements that may be applicable to a SPAC's
arrangements with its sponsor such as Item 701 of Regulation S-K,
which requires disclosure about, among other things, the terms of
any private securities transactions between a SPAC and its sponsor
within the past three years, and Item 404 of Regulation S-K, which
requires disclosure about certain related party transactions.
\66\ See, e.g., Lin, Lu, Michaely, and Qin, supra note 30;
Andrea Pawliczek, A. Nicole Skinner, and Sarah L.C. Zechman, Signing
Blank Checks: The Roles of Reputation and Disclosure in the Face of
Limited Information (SSRN Working Paper, 2021).
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While proposed Item 1603 calls for detailed disclosure about the
sponsor, its experience and its rights and interests, we note that some
of this information is already being provided, to an extent, by SPACs.
Codifying and amplifying these existing disclosure practices would help
ensure that issuers provide consistent and comprehensive information
across transactions, so that investors can make more informed
investment, voting and redemption decisions.
Request for Comment
7. Should we require additional information regarding sponsors of
SPACs pursuant to Item 1603(a), as proposed? If so, should we also
require disclosure regarding the sponsor's affiliates and any promoters
of the SPAC, as proposed?
8. Should we require disclosure about the experience and material
roles and responsibilities of the sponsor, its affiliates and any
promoters of the SPAC in directing and managing the SPAC's activities,
as proposed? How would investors use this information?
9. Should we require more or less information about the sponsor's
compensation and reimbursements? Should we require this disclosure only
when the amounts exceed a de minimis threshold? If so, what should the
de minimis threshold be?
10. Should we require additional disclosure about the sponsor's
agreements, arrangements, or understandings in determining whether to
proceed with a de-SPAC transaction and regarding the redemption of
outstanding securities of the SPAC, as proposed?
11. Should we require disclosure about the controlling persons of
the sponsor and any persons who have direct and indirect material
interests in the sponsor, as proposed? Should we take a different
approach than requiring disclosure on persons with ``material
interests'' in the sponsor? Should we consider requiring additional
disclosure on the controlling persons of entities that own or control
the sponsor? Should we require an organizational chart that shows the
relationship among the SPAC, the sponsor, and the sponsor's affiliates,
as proposed? Would both narrative disclosure and an organizational
chart be helpful to investors?
12. Should we require disclosure of the material terms of any lock-
up agreements with the sponsor and its affiliates as proposed? Would
the proposed requirement to provide this disclosure in a tabular format
be helpful to investors? Should we instead require this disclosure in a
non-tabular format?
13. Is there additional information regarding sponsors that should
be disclosed? Should we require more or less information about the
sponsor depending on the size or other characteristics of a SPAC?
14. Should additional disclosure be required regarding affiliated
entities involved in the SPAC's operations?
C. Conflicts of Interest
Within a SPAC's structure, there may be a number of potential or
actual conflicts of interest between the sponsor and public investors
that could influence the actions of the SPAC. A notable example is the
potential conflict of interest stemming from the contingent nature of
the sponsor's compensation, whereby the sponsor and its affiliates have
significant financial incentives to pursue a business combination
transaction even though the transaction could result in lower returns
for public shareholders than liquidation of the SPAC or an alternative
transaction.\67\ Other conflicts of interest may arise when a sponsor
is a sponsor of multiple SPACs and
[[Page 29468]]
manages several different SPACs at the same time; when a sponsor and/or
its affiliates hold financial interests in, or have contractual
obligations to, other entities; or when a SPAC enters into a business
combination with a private operating company affiliated with the
sponsor, the SPAC, or the SPAC's founders, officers, or directors.
Further, a SPAC's officers often do not work full-time at the SPAC, may
work for both the sponsor and the SPAC, and/or may have
responsibilities at other companies, which may impact such officers'
ability to devote adequate time and attention to the activities of the
SPAC and may influence their decision to proceed with a particular de-
SPAC transaction. These potential conflicts of interest could be
particularly relevant for investors to the extent that they arise when
a SPAC and its sponsor are evaluating and deciding whether to recommend
a business combination transaction to shareholders, especially as the
SPAC nears the end of the period to complete such a transaction under,
e.g., its governing instruments or the proposed safe harbor under the
Investment Company Act,\68\ if adopted, and the sponsor may be under
pressure to find a target and complete the de-SPAC transaction on less
favorable terms or face losing the value of its securities in the SPAC.
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\67\ See, e.g., Usha Rodrigues and Mike Stegemoller, Exit,
Voice, and Reputation: The Evolution of SPACs, 37 Del. J. Corp. L.
849 (2013).
\68\ See infra Section VI.
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We are proposing Item 1603(b) to require disclosure of any actual
or potential material conflict of interest between (1) the sponsor or
its affiliates or the SPAC's officers, directors, or promoters, and (2)
unaffiliated security holders. This would include any conflict of
interest in determining whether to proceed with a de-SPAC transaction
and any conflict of interest arising from the manner in which a SPAC
compensates the sponsor or the SPAC's executive officers and directors,
or the manner in which the sponsor compensates its own executive
officers and directors. In addition, we are proposing Item 1603(c) to
require disclosure regarding the fiduciary duties each officer and
director of a SPAC owes to other companies. Such disclosure could allow
investors to assess whether and to what extent officers or directors
may have to navigate a conflict of interest consistent with their
obligations under the laws of the jurisdiction of incorporation or
organization, may be compelled to act in the interest of another
company or companies that compete with the SPAC for business
combination opportunities, or may have their attention divided such
that it may affect their decision-making with respect to the SPAC.
The proposed disclosure requirements would provide a SPAC's
shareholders and prospective investors with a more complete
understanding of any actual or potential material conflicts of interest
associated with the SPAC and the benefits that may be realized by the
sponsor and its affiliates and any promoters arising from these
conflicts of interest. Such disclosure could allow investors to more
accurately assess the potential risk associated with the conflicts of
interest in a SPAC. Further, disclosure about the fiduciary duties a
SPAC's officers and directors owe to other companies could allow the
SPAC's shareholders and prospective investors to better assess the
actions of these officers and directors in managing the SPAC's
activities and in determining to proceed with a proposed de-SPAC
transaction.
Request for Comment
15. Should we require disclosure with respect to material conflicts
of interest that may arise in connection with de-SPAC transactions, as
proposed? Should we include a materiality threshold, as proposed? Is it
clear what would constitute an actual or potential material conflict of
interest, or is further guidance or specification needed? For example,
are there other specific conflicts of interest that we should identify
in the rule?
16. Would the proposed disclosure requirements adequately inform
investors as to potential material conflicts of interest? Are there
approaches that could minimize potential boilerplate or duplicative
disclosure? Should we require that this disclosure be presented in a
tabular format?
17. Is there any additional information that we should require
regarding conflicts of interest? For example, should we also require a
description of any policies and procedures used or to be used to
minimize potential or actual conflicts of interest? Should we require
disclosure of how the board of directors assesses and manages such
conflicts, in particular where directors themselves have conflicts of
interest?
18. Should SPACs be required to provide additional disclosure
regarding material conflicts of interest in Exchange Act reports
following their initial public offerings? For example, should periodic
reports require that any changes in previously disclosed conflicts of
interest be reported? Should we require disclosure about material
conflicts of interest relating to both the SPAC and the identified
target company in the Form 8-K that is required to be filed in
connection with the announcement of a de-SPAC transaction?
19. Should we require disclosure about any fiduciary duties each
officer and director of a SPAC owes to other companies, as proposed?
How would investors use this information? Should we require additional
or different disclosure regarding these fiduciary duties? Would this
requirement potentially result in the disclosure of information that is
not relevant to SPAC investors? Should this disclosure requirement be
focused instead on material conflicts of interests arising from these
fiduciary duties to other companies? Should we require that this
disclosure be provided in a tabular format? Should we consider other
approaches to this disclosure?
D. Dilution
We are proposing Items 1602(a)(4), 1602(c) and 1604(c) to require
additional disclosure about the potential for dilution in (1)
registration statements filed by SPACs, including those for initial
public offerings, and (2) de-SPAC transactions. Proposed Item 1602(c)
would be applicable to all registered offerings by a SPAC other than a
de-SPAC transaction, while proposed Item 1604(c) would be applicable to
all de-SPAC transactions. We are also proposing Item 1602(a)(4) to
require simplified tabular dilution disclosure on the prospectus cover
page in registered offerings by a SPAC on Form S-1 or F-1 other than
for de-SPAC transactions.
There are a number of potential sources of dilution in a SPAC's
structure, including dilution resulting from shareholder redemptions,
sponsor compensation, underwriting fees, outstanding warrants and
convertible securities, and PIPE financings. This dilution may be
particularly pronounced for the shareholders of a SPAC who do not
redeem their shares prior to the consummation of the de-SPAC
transaction and who may not realize or appreciate that these costs are
disproportionately borne by the non-redeeming shareholders.\69\
According to one study, the median dilutive impact of sponsor
compensation, underwriting fees, warrants, and rights equaled 50.4% of
the cash raised in a SPAC initial public offering.\70\ Further, several
[[Page 29469]]
commentators have asserted that the complexity of the disclosures in
these transactions makes it difficult for investors to understand the
dilutive impact of sponsor compensation on the SPAC's non-redeeming
shareholders.\71\
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\69\ For example, the dilutive impact of underwriting fees
deferred until the completion of a de-SPAC transaction and the
number of shares received by the sponsor is not required to be
disclosed in a manner that takes into account the additional
dilution caused by redemptions.
\70\ Klausner, Ohlrogge, and Ruan, supra note 17.
\71\ See, e.g., AFR Letter; Klausner, Ohlrogge, and Ruan, supra
note 17; Michael Klausner, Michael Ohlrogge, and Harald Halbhuber,
SPAC Disclosure of Net Cash Per Share (SSRN Working Paper, 2022).
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In light of the potential for significant dilution embedded within
the typical SPAC structure, enhanced disclosure regarding dilution
could enable investors in a SPAC initial public offering and subsequent
purchasers of SPAC shares to better understand the potential impact
upon them of the various dilutive events that may occur over the
lifespan of the SPAC.\72\ We are therefore proposing to require
dilution disclosure in registration statements filed by SPACs other
than for de-SPAC transactions that would require a description of
material potential sources of future dilution following a SPAC's
initial public offering, as well as tabular disclosure of the amount of
potential future dilution from the public offering price that will be
absorbed by non-redeeming SPAC shareholders, to the extent
quantifiable.\73\ This proposed disclosure would be in addition to the
disclosure already required under Item 506 of Regulation S-K.\74\
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\72\ In this regard, we note that the initial purchasers in SPAC
initial public offerings often resell or redeem their shares prior
to the completion of the de-SPAC transaction. See, e.g., Benjamin
Mullin and Amrith Ramkumar, BuzzFeed Suffers Wave of SPAC Investor
Withdrawals Before Going Public, The Wall Street Journal, Dec. 2,
2021. See also supra note 17.
\73\ Proposed Item 1602(c).
\74\ Under Item 506, a company is required to provide disclosure
regarding dilution when (1) the company is not subject to the
reporting requirements of the Exchange Act and is registering an
offering of common equity securities where there is substantial
disparity between the public offering price and the effective cash
cost to officers, directors, promoters, and affiliated persons of
common equity acquired by them in transactions during the past five
years, or which they have the right to acquire; or (2) the company
is registering an offering of common equity securities and the
company has had losses in each of its last three fiscal years and
there is a material dilution of the purchasers' equity interest. In
the first instance, a company must provide a comparison of the
public contribution under the proposed public offering and the
effective cash contribution of such persons. In both instances, Item
506 requires disclosure of the net tangible book value per share
before and after the distribution; the amount of the increase in
such net tangible book value per share attributable to the cash
payments made by purchasers of the shares being offered; and the
amount of the immediate dilution from the public offering price
which will be absorbed by such purchasers.
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In addition, we are proposing to require simplified tabular
dilution disclosure incorporating a range of potential redemption
levels on the prospectus cover page of SPAC registration statements on
Forms S-1 and F-1.\75\ In providing disclosure pursuant to Item 506,
SPACs currently provide prospective investors with estimates of
dilution as a function of the difference between the initial public
offering price and the pro forma net tangible book value per share
after the offering. These estimates often include an assumption that
the maximum allowable number of shares eligible will be redeemed prior
to the de-SPAC transaction.\76\ While this information can be useful,
investors may benefit from a more detailed and prominent tabular
presentation of this dilution disclosure that shows various potential
levels of redemption, not just the upper bound on dilution attributable
to redemptions. We are therefore proposing to require that registration
statements on Form S-1 or Form F-1 filed by SPACs, including for an
initial public offering, include on the prospectus cover page a
simplified dilution table, in the following format, which would present
the reader with an estimate of the remaining pro forma net tangible
book value per share at quartile intervals up to the maximum redemption
threshold:
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\75\ Proposed Item 1602(a)(4).
\76\ In practice, redemption rates rarely reach this level.
Remaining Pro Forma Net Tangible Book Value per Share
----------------------------------------------------------------------------------------------------------------
25% of maximum 50% of maximum 75% of maximum
Offering price of __ redemption redemption redemption Maximum redemption
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
The proposed Item 1602(a)(4) dilution disclosure would be
calculated in a manner consistent with the methodologies and
assumptions more fully articulated in the disclosures provided pursuant
to Item 506 elsewhere in the prospectus. If the initial public offering
includes an overallotment option, the table would need to include
separate rows showing remaining pro forma net tangible book value per
share with the exercise and without the exercise of the over-allotment
option. We are also proposing to require that SPACs provide a cross-
reference to the more detailed dilution disclosure later in the
prospectus when providing this tabular disclosure on the prospectus
cover page.
In regard to de-SPAC transactions, investors could benefit from
clearer dilution disclosure that takes into account the unique
characteristics of the SPAC structure, including any terms negotiated
with the target private operating company, as well as the potential for
additional financing from PIPE investors. At the time of a de-SPAC
transaction, investors are making a decision as to whether to remain a
shareholder of the post-business combination company going forward.
Apart from the operating success of the post-business combination
company, dilution is likely to have a significant impact on the value
of a shareholder's continued investment in the company. We are
therefore proposing Item 1604(c) to require disclosure of each material
potential source of additional dilution that non-redeeming shareholders
may experience at different phases of the SPAC lifecycle by electing
not to redeem their shares in connection with the de-SPAC
transaction.\77\
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\77\ Depending on the circumstances, material potential sources
of additional disclosure may include dilution from sponsor
compensation, underwriting fees, outstanding warrants and
convertible securities, and financing transactions (including PIPE
transactions).
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For example, to the extent material, this disclosure would need to
explain that, when a SPAC's shareholders retain their warrants after
redeeming their shares prior to the de-SPAC transaction, the non-
redeeming shareholders and the post-business combination company may
face potential additional dilution. Proposed Item 1604(c)(1) would also
require a sensitivity analysis in a tabular format that shows the
amount of potential dilution under a range of reasonably likely
redemption levels and quantifies the increasing impact of dilution on
non-redeeming shareholders as redemptions increase. We are also
proposing to require disclosure of a description of the model, methods,
assumptions, estimates, and parameters
[[Page 29470]]
necessary to understand the sensitivity analysis disclosure.
Request for Comment
20. Should we require disclosure of material potential sources of
future dilution in registration statements filed by SPACs for initial
public offerings and in disclosure documents for de-SPAC transactions,
as proposed? How would investors benefit from this additional
disclosure? Should we require other information either in addition to,
or in lieu of, the proposed dilution disclosure, such as disclosure of
the cumulative amount of dilution that non-redeeming shareholders may
experience or the amount of net cash underlying each share at the time
of a de-SPAC transaction? If so, should we require that this disclosure
be presented in a tabular format? Should we provide additional
explanation on how to calculate the amount of dilution for purposes of
these disclosure requirements? Should we provide further guidance about
disclosures that SPACs should consider making to help non-affiliated
shareholders understand the potential for dilution and the consequences
of dilution for non-affiliated shareholders?
21. Should we also consider requiring enhanced dilution disclosure
in other Commission filings? If so, what additional information should
we require in this context? How would investors use this additional
dilution disclosure?
22. Should we require simplified tabular disclosure regarding
dilution on the prospectus cover page of a Form S-1 or Form F-1, as
proposed? Should we require additional or less information, or
alternative information, in the tabular disclosure? For example, would
a tabular presentation of cash remaining per non-redeemed share in lieu
of a tabular presentation of remaining pro forma net tangible book
value per share be useful to investors? Should we consider adding a
similar requirement to provide simplified tabular disclosure (1) in the
prospectus summary of a Form S-1 or F-1 or (2) on the prospectus cover
page and/or in the prospectus summary of a Form S-4 or Form F-4 for a
de-SPAC transaction? If so, what information should be included in such
tabular disclosure? Are there other ways to present the potential for
dilution to investors in a more accessible format?
23. Should we require, in disclosure documents for de-SPAC
transactions, a sensitivity analysis in a tabular format, as proposed?
Should we consider additional or alternative approaches to this
disclosure requirement?
24. Are there any significant challenges in providing the proposed
enhanced dilution disclosure at the initial public offering stage or at
the de-SPAC transaction stage?
25. Should we consider additional amendments that would highlight
or simplify dilution disclosure so that it is more clear and accessible
for investors?
E. Prospectus Cover Page and Prospectus Summary Disclosure
In response to concerns raised about the complexity of disclosures
in Securities Act registration statements filed by SPACs for initial
public offerings and for de-SPAC transactions,\78\ we are proposing
Item 1602 to require that certain information be included on the
prospectus cover page and in the prospectus summary using plain English
principles.\79\ Given the unique nature of SPAC offerings and the
potential risks they present to investors, investors could benefit from
requiring the issuer to highlight certain disclosures on the cover page
and in the prospectus summary, in a form that can be more easily read
and understood.
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\78\ See, e.g., IAC Recommendations, supra note 37 (expressing
concerns ``relating to the effectiveness of disclosure about the
risks, economics and mechanics of SPACs as a result of the
complexity of these transactions and the staggered nature of the
disclosure process''); Rodrigues Testimony; Klausner, Ohlrogge, and
Ruan, supra note 17.
\79\ See Securities Act Rule 421(d). See supra note 38.
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1. Prospectus Cover Page
Item 501(b) of Regulation S-K sets forth disclosure requirements
for the outside front cover page of prospectuses, such as the name of
the registrant, title and amount of securities being offered, and the
offering price of the securities. In regard to registered offerings
(including initial public offerings) by SPACs other than de-SPAC
transactions, we are proposing Item 1602(a) to require information on
the prospectus cover page in plain English about, among other things,
the time frame for the SPAC to consummate a de-SPAC transaction,
redemptions, sponsor compensation, dilution (including simplified
tabular disclosure), and conflicts of interest. In regard to de-SPAC
transactions, we are proposing Item 1604(a) to require that SPACs
include information on the prospectus cover page in plain English
about, among other things, the fairness of the de-SPAC transaction,
material financing transactions, sponsor compensation and dilution, and
conflicts of interest.
Investors should benefit from having these significant aspects of
SPAC offerings and de-SPAC transactions disclosed prominently on the
prospectus cover page in plain English,\80\ in addition to the
information otherwise required under Item 501 of Regulation S-K.
Although most SPACs already provide much of the proposed information on
prospectus cover pages, the proposed rules would standardize this
information across all registration statements filed by SPACs for
initial public offerings and for de-SPAC transactions.
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\80\ Id.
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2. Prospectus Summary
Item 503 of Regulation S-K requires a brief summary of the
information in the prospectus where the length or complexity of the
prospectus makes a summary useful. While the information that should be
included in a prospectus summary will depend on the particular offering
and issuer, a prospectus summary should provide disclosure in clear
language of the most significant aspects of the transaction being
registered.\81\ In light of the often complex disclosure in
registration statements filed by SPACs, a requirement that SPACs
present certain information in the prospectus summary in plain English
should help investors more easily to identify and assess those aspects
of the transaction that are likely to be important in their investment,
voting, and redemption decisions.\82\
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\81\ See Instruction to Item 503(a) and 17 CFR 230.421(b)
(Securities Act Rule 421(b)).
\82\ In the context of asset-backed offerings, the Commission
previously specified that certain information be included on the
prospectus cover page and in the prospectus summary. See Items 1102
and 1103 of Regulation S-K. Asset-Backed Securities, Release No. 33-
8518 (Dec. 22, 2004) [70 FR 1506 (Jan. 7, 2005)]. See also Item 3 of
Form S-4 and Item 3 of Form F-4 (specifying that certain information
be included in the prospectus summary).
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In regard to registered offerings other than de-SPAC transactions,
we are proposing Item 1602(b) to require that SPACs include the
following information in the prospectus summary in plain English:
<bullet> The process by which a potential business combination
candidate will be identified and evaluated;
<bullet> Whether shareholder approval is required for the de-SPAC
transaction;
<bullet> The material terms of the trust or escrow account,
including the amount of gross offering proceeds that will be placed in
the trust;
<bullet> The material terms of the securities being offered,
including redemption rights;
<bullet> Whether the securities being offered are the same class as
those held by the sponsor and its affiliates;
<bullet> The length of the time period during which the SPAC
intends to
[[Page 29471]]
consummate a de-SPAC transaction, and its plans if it does not do so,
including, whether and how the time period may be extended, the
consequences to the sponsor of not completing an extension of this time
period, and whether shareholders will have voting or redemption rights
with respect to an extension of time to consummate a de-SPAC
transaction;
<bullet> Any plans to seek additional financing and how such
additional financing might impact shareholders;
<bullet> Tabular disclosure of sponsor compensation and the extent
to which material dilution may result from such compensation; and
<bullet> Material conflicts of interest.
Based on the Commission staff's experience in reviewing
registration statements filed by SPACs, we believe these topics are
among those that investors are likely to find most important when
considering an investment in the SPAC prior to the identification of a
potential business combination candidate.
In regard to registered de-SPAC transactions, we are proposing Item
1604(b) to require that registrants include the following information
in the prospectus summary in plain English:
<bullet> The background and material terms of the de-SPAC
transaction;
<bullet> The fairness of the de-SPAC transaction;
<bullet> Material conflicts of interest;
<bullet> Tabular disclosure on sponsor compensation and dilution;
<bullet> Financing transactions in connection with de-SPAC
transactions; and
<bullet> Redemption rights.
Based on the Commission staff's experience in reviewing
registration statements for de-SPAC transactions, we believe investors
would find this information, in particular those topics that illuminate
potential conflicts of interest and the overall fairness of the
proposed transaction, important when making an investment decision at
the de-SPAC transaction stage.
Request for Comment
26. Would requiring certain information in regard to SPAC offerings
on the prospectus cover page and in the prospectus summary make it
easier for investors to review and understand the disclosures in these
registration statements? Are there other ways we could make these
registration statements easier for investors to understand?
27. Should we require the proposed cover page disclosures for SPAC
initial public offerings and de-SPAC transactions? Is there other
information that we should require to be included on the cover page,
either in addition to, or in lieu of, the information proposed to be
required? Conversely, are there any proposed additional cover page
disclosures that we should not adopt?
28. Should we require the inclusion of the proposed specified
information in the prospectus summary? Is there other information that
we should require to be included in the prospectus summary?
29. Is the subset of the disclosure under proposed Item 1605 that
we are proposing to require to be more prominently presented on the
prospectus cover page and in the prospectus summary via proposed Items
1604(a) and (b) the most informative or otherwise important information
for purposes of the prospectus cover page and the prospectus summary?
Should any additional disclosure provided pursuant to proposed Item
1605 be added to or replace an existing element of the information
proposed to be required on the prospectus cover page or in the
prospectus summary?
30. Are there other changes we should consider in regard to the
prospectus cover page and prospectus summary? For example, should we
impose any additional formatting requirements, such as the use of
tables or bullet points, for certain information in the prospectus
summary? Would such formatting requirements improve the clarity of this
disclosure?
F. Disclosure and Procedural Requirements in De-SPAC Transactions
We are proposing specialized disclosure and procedural requirements
in de-SPAC transactions so that investors can better understand and
evaluate the merits of a prospective de-SPAC transaction.\83\ The
proposed rules would require: (1) Additional disclosures on the
background of and reasons for the transaction; (2) a statement from the
SPAC as to whether it reasonably believes that the de-SPAC transaction
and any related financing transaction are fair or unfair to
unaffiliated security holders; (3) disclosure on any outside report,
opinion, or appraisal relating to the fairness of the transaction; and
(4) additional information in a Schedule TO filed in connection with a
de-SPAC transaction, as well as clarify the need to comply with the
procedural requirements of the tender offer rules when filing such a
Schedule TO.\84\
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\83\ As discussed above, a SPAC is required to provide its
shareholders with a proxy statement on Schedule 14A if shareholder
approval is required in a de-SPAC transaction. If a SPAC is
registering an offering of its shares to be issued in the de-SPAC
transaction, the SPAC generally files a registration statement on
Form S-4 or F-4. Alternatively, if shareholder approval is required
but the SPAC is not soliciting proxies from its shareholders, the
SPAC is required to provide an information statement on Schedule
14C. Otherwise, if no registration statement, proxy statement or
information statement is required, the SPAC must disseminate a
Schedule TO (tender offer statement) to its shareholders. See
Section IV.A. for a discussion of proposed Rule 145a, which would
affect when a SPAC may be required to file a Form S-4 or F-4 in
connection with a de-SPAC transaction.
\84\ In addition, we are proposing new rules applicable to
business combinations involving shell companies more generally,
which would include de-SPAC transactions. See infra Section IV.
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1. Background of and Reasons for the De-SPAC Transaction; Terms and
Effects
In order to provide investors with a more complete understanding of
the de-SPAC transaction, we are proposing Item 1605 of Regulation S-K
which would require disclosure of the background, material terms, and
effects of the de-SPAC transaction, including:
<bullet> A summary of the background of the de-SPAC transaction,
including, but not limited to, a description of any contacts,
negotiations, or transactions that have occurred concerning the de-SPAC
transaction; \85\
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\85\ For example, this disclosure could encompass whether any
portion of the underwriting fees in connection with a SPAC's initial
public offering is contingent upon the SPAC's completion of a de-
SPAC transaction and whether the underwriter in the SPAC's initial
public offering has provided additional services to the SPAC
following the initial public offering, such as locating potential
target companies, providing financial advisory services, acting as a
placement agent for PIPE transactions, and/or arranging debt
financing. For a discussion of the role of the underwriter in
connection with a de-SPAC transaction, see infra Section III.F.
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<bullet> A brief description of any related financing transaction,
including any payments from the sponsor to investors in connection with
the financing transaction;
<bullet> The reasons for engaging in the particular de-SPAC
transaction and for the structure and timing of the de-SPAC transaction
and any related financing transaction;
<bullet> An explanation of any material differences in the rights
of security holders of the post-business combination company as a
result of the de-SPAC transaction; \86\ and
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\86\ This proposed disclosure requirement is intended to address
situations where the shares of a SPAC are being exchanged for shares
of a new holding company or the target company in a de-SPAC
transaction.
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<bullet> Disclosure regarding the accounting treatment and the
federal income tax consequences of the de-SPAC transaction, if
material.\87\
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\87\ Proposed Items 1605(a) and (b). This disclosure would be
required in any Form S-4 or F-4 or Schedule 14A, 14C, or TO filed in
connection with a de-SPAC transaction. We note that registrants are
already subject to similar disclosure requirements in Schedules 14A
and 14C and in Forms S-4 and F-4. These proposed disclosure
requirements are intended to complement these existing requirements
by setting forth specialized disclosure requirements that are
specific to de-SPAC transactions.
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[[Page 29472]]
These disclosure requirements are modeled, in part, on Item
1004(a)(2) and Item 1013(b) of Regulation M-A \88\ and are intended to
provide investors with, among other things, an enhanced basis upon
which to evaluate a SPAC's reasons for proposing a de-SPAC transaction
and for choosing a particular structure and financing for the
transaction, through a specialized disclosure rule tailored to SPACs
that would address disclosure issues more specific to de-SPAC
transactions. These proposed requirements would also help promote
consistent disclosure, which would allow for greater comparability of
these disclosures across de-SPAC transactions. As proposed, Item
1605(b) would require a reasonably detailed discussion of the reasons
for, and the structure and timing of, a proposed de-SPAC transaction,
which could include a discussion of the key events and activities in
identifying the target private operating company and in negotiating the
terms of the merger or acquisition, as well as the material factors
considered by a SPAC's board of directors in approving the terms of the
proposed de-SPAC transaction and in recommending shareholder approval
of the transaction.
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\88\ 17 CFR 229.1000 through 229.1016. Regulation M-A is a
subpart (the 1000 series) of Regulation S-K. Item 1004(a)(2) sets
forth disclosure requirements regarding the material terms of
mergers or similar transactions, and Item 1013(b) requires
disclosure of alternative means considered by the subject company or
affiliate in the context of a going-private transaction. In our
view, these rules are appropriate models for the proposed
specialized disclosure requirements for de-SPAC transactions, in
that Item 1004(a)(2) sets forth disclosure requirements for mergers
generally and the same potential for self-interested transactions
exists in de-SPAC transactions as in going-private transactions.
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In addition, we are proposing Item 1605(c) to require disclosure of
the effects of the de-SPAC transaction and any related financing
transaction on the SPAC and its affiliates, the sponsor and its
affiliates, the private operating company and its affiliates, and
unaffiliated security holders of the SPAC. Such disclosure could allow
investors to better assess whether the transactions have been
structured in a manner that would benefit one of these parties in
particular or that would be to the detriment of other parties. As
proposed, the disclosure must provide a reasonably detailed discussion
of both the benefits and detriments to non-redeeming shareholders of
the de-SPAC transaction and any related financing transaction, with
such benefits and detriments quantified to the extent practicable.\89\
For example, if the sponsor's interests and returns may differ from
those of public investors in regard to a prospective de-SPAC
transaction, the disclosure should describe and quantify, to the extent
practicable, dollar amounts or prospective returns the sponsor and its
affiliates stand to gain or lose that are dependent on the completion
of the transaction.
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\89\ Proposed Item 1605(c).
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We are also proposing Item 1605(d) to require disclosure of the
SPAC's sponsors', officers' and directors' material interests in the
de-SPAC transaction or any related financing transaction, including any
fiduciary or contractual obligations to other entities and any interest
in, or affiliation with, the private operating company that is the
target of the de-SPAC transaction. This proposed disclosure requirement
is intended to address, among other things, the concern that a sponsor
may be proposing a de-SPAC transaction that will produce benefits or
detriments that are not fully disclosed to investors.\90\
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\90\ See, e.g., IAC Recommendations, supra note 37 (stating that
``there may be financial arrangements that constitute conflicts of
interest that are not fully disclosed or understood by investors'');
Rodrigues and Stegemoller, supra note 17; Klausner, Ohlrogge, and
Ruan, supra note 17; Deane Testimony.
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Under Item 403 of Regulation S-K, SPACs currently provide tabular
disclosure regarding the beneficial ownership of its equity or voting
securities, as applicable, by management and beneficial owners of more
than 5% of a class of voting securities.\91\ The proposed disclosure
requirement in Item 1605(d) would be broader than Item 403, and would
require disclosure of any material interests that the sponsor and the
SPAC's officers and directors have in a de-SPAC transaction or any
related financing transaction, including fiduciary or contractual
obligations to other entities as well as any interest in, or
affiliation with, the target company. The proposed disclosure
requirement would also encompass material interests that are non-
pecuniary in nature that may nevertheless affect the decision to
proceed with a prospective de-SPAC transaction or related financing
transaction. In the context of a de-SPAC transaction, this disclosure
could help investors, when making an investment, voting or redemption
decision with respect to the de-SPAC transaction, to assess whether, on
balance, the benefits of the de-SPAC transaction justify the
detriments, and particularly whether the sponsor is motivated to
complete a de-SPAC transaction by interests not held by all investors.
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\91\ Under Item 403, beneficial ownership is determined in
accordance with 17 CFR 240.13d-3(d)(1) (Exchange Act Rule 13d-
3(d)(1)), pursuant to which a person is generally deemed to be the
beneficial owner of securities that the person has the right to
acquire within 60 days.
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Proposed Item 1605(e) would require disclosure of whether or not
security holders are entitled to any redemption or appraisal rights,
and if so, a summary of the redemption or appraisal rights.\92\ Under
the proposed rules, SPACs would be required to disclose, among other
things, whether shareholders may redeem their shares regardless of
whether they vote in favor of or against a proposed de-SPAC
transaction, or abstain from voting, and whether shareholders have the
right to redeem their securities at the time of any extension of the
time period to complete a de-SPAC transaction. If there are no
redemption or appraisal rights available for security holders who
object to the de-SPAC transaction, the proposed rules would require
disclosure of any other rights that may be available to security
holders under the law of the jurisdiction of organization. These
disclosures would help investors better assess the impact of any
redemption or appraisal rights on a proposed de-SPAC transaction,
including whether the existence of such rights might lead some
investors to redeem their securities after voting in favor of a de-SPAC
transaction.\93\
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\92\ This proposed disclosure requirement would build upon, and
be in addition to, the existing disclosure requirement in Item 202
of Regulation S-K (Description of registrant's securities). Under
Item 202, SPACs are currently required to disclose the redemption
provisions of their capital stock being registered, such as whether
redemptions would be required under certain circumstances at the
SPAC's option, e.g., whether a SPAC may require the redemption of
warrants held by public shareholders for nominal consideration if
the underlying shares trade above a certain threshold price.
\93\ One commentator has observed that SPAC shareholders may
vote in favor of a proposed de-SPAC transaction while redeeming
their shares prior to the closing of the transaction, such that the
vote is decoupled from any economic interest in the post-business
combination company. Rodrigues and Stegemoller, supra note 17. See
also supra note 29.
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Request for Comment
31. Would the proposed disclosure requirements provide investors
with important information regarding the background of and reasons for
a de-SPAC transaction? Is there any additional information about the
background of and reasons for the de-SPAC transaction that we should
require to be disclosed? Are there any additional or alternative
requirements that we should consider to further
[[Page 29473]]
improve the disclosures about de-SPAC transactions?
32. Should we adopt the proposed disclosure requirements with
respect to the effects of the de-SPAC transaction and any related
financing transaction, as proposed? Should we require additional or
alternative disclosure regarding the effects of the de-SPAC transaction
and any related financing transaction?
33. Should we require disclosure with respect to material interests
in a prospective de-SPAC transaction or any related financing
transaction held by the sponsor and the SPAC's officers and directors,
as proposed? Should we require additional or alternative disclosure
regarding the interests of these parties in the de-SPAC transaction?
34. Should we require disclosure regarding whether or not security
holders are entitled to any redemption or appraisal rights and a
summary of any such rights, as proposed? Is there additional or
alternative disclosure about redemption or appraisal rights that we
should require?
35. Would the disclosure requirements in proposed Item 1605 result
in duplicative disclosures? If so, are there alternative approaches
that we should consider to avoid this result?
2. Fairness of the De-SPAC Transaction
To address concerns regarding potential conflicts of interest and
misaligned incentives in connection with the decision to proceed with a
de-SPAC transaction and to assist investors in assessing the fairness
of a particular de-SPAC transaction to unaffiliated investors,\94\ we
are proposing Item 1606(a) to require a statement from a SPAC as to
whether it reasonably believes that the de-SPAC transaction and any
related financing transaction are fair or unfair to the SPAC's
unaffiliated security holders, as well as a discussion of the bases for
this statement.\95\ We are proposing to require that this statement
encompass both the de-SPAC transaction and any related financing
transaction so that the fairness determination would require
consideration of the combined effects of both transactions, which are
often dependent on each other, on unaffiliated security holders. As
proposed, a SPAC would be required to include this statement in any
Forms S-4 and F-4 or Schedules 14A, 14C, and TO filed in connection
with a de-SPAC transaction.\96\ Proposed Item 1606(a) would also
require disclosure on whether any director voted against, or abstained
from voting on, approval of the de-SPAC transaction or any related
financing transaction, and if so, identification of the director and,
if known after making a reasonable inquiry, the reasons for the vote
against the transaction or abstention.
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\94\ See supra note 28. See also Michael Klausner and Michael
Ohlrogge, SPAC Governance: In Need of Judicial Review (SSRN Working
Paper, 2021).
\95\ In this regard, we are proposing an instruction to Item
1606 that a ``statement that the special purpose acquisition company
has no reasonable belief as to the fairness or unfairness of the de-
SPAC transaction or any related financing transaction to
unaffiliated security holders will not be considered sufficient
disclosure in response to [Item 1606(a)].'' As proposed, a SPAC
would not be required to disclose that a de-SPAC transaction and any
related financing transaction are fair but rather would be required
to state its reasonable belief as to the fairness or unfairness of
the transaction as well as the bases for this statement.
\96\ We have modeled certain of the proposed requirements in
Item 1606 and Item 1607 (see infra Section II.F.3.), on the
disclosures required in going-private transactions subject to 17 CFR
240.13e-3 (Exchange Act Rule 13e-3). See Items 1014 and 1015 of
Regulation M-A. In our view, the disclosure requirements in Rule
13e-3 provide an appropriate model for the proposed requirements
with respect to de-SPAC transactions, in that the conflicts of
interests and misaligned incentives inherent in going-private
transactions are similar to those often present in de-SPAC
transactions.
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Under proposed Item 1606(b), a SPAC would be required to discuss in
reasonable detail the material factors upon which a reasonable belief
regarding the fairness of a de-SPAC transaction and any related
financing transaction is based and, to the extent practicable, the
weight assigned to each factor. These factors would include but not be
limited to: The valuation of the private operating company; the
consideration of any financial projections; any report, opinion, or
appraisal obtained from a third party; and the dilutive effects of the
de-SPAC transaction and any related financing transaction on non-
redeeming shareholders. Together, these proposed disclosures are
intended to help investors assess the reasonableness of the SPAC's
stated belief about the fairness of the transaction.
To provide additional context for understanding the process by
which a SPAC determined to proceed with a de-SPAC transaction, we are
proposing Items 1606(c), (d), and (e), which would require disclosure
on whether:
<bullet> The de-SPAC transaction or any related financing
transaction is structured so that approval of at least a majority of
unaffiliated security holders is required;
<bullet> A majority of directors who are not employees of the SPAC
has retained an unaffiliated representative to act solely on behalf of
unaffiliated security holders for purposes of negotiating the terms of
the de-SPAC transaction or any related financing transaction and/or
preparing a report concerning the fairness of the de-SPAC transaction
or any related financing transaction; and
<bullet> The de-SPAC transaction or any related financing
transaction was approved by a majority of the directors of the SPAC who
are not employees of the SPAC.
Request for Comment
36. Should we adopt Item 1606 as proposed?
37. Should we require a statement from the SPAC as to whether it
reasonably believes that the de-SPAC transaction and any related
financing transaction are fair or unfair to unaffiliated security
holders, as proposed? Should the scope of the fairness determination
include both the de-SPAC transaction and any related financing
transaction, as proposed? Should the fairness determination be as to
the SPAC's security holders as a whole, rather than to the SPAC's
unaffiliated security holders? The factors enumerated in proposed Item
1606(b) in determining fairness include, but are not limited to, the
valuation of the target company, the consideration of any financial
projections, any report, opinion, or appraisal described in Item 1607
of Regulation S-K, and the dilutive effects described in Item 1604(c)
of Regulation S-K. Is there any additional or alternative information
that should be disclosed in connection with the SPAC's fairness
determination?
38. Should we include an instruction to Item 1606 that a statement
that the SPAC has no reasonable belief as to the fairness or unfairness
of the de-SPAC transaction or any related financing transaction to
unaffiliated security holders will not be considered sufficient
disclosure in response to Item 1606(a), as proposed?
39. What are the potential benefits and costs of the statement that
would be required by proposed Item 1606(a)? Would the costs of
complying with this disclosure requirement discourage SPAC initial
public offerings or discourage private operating companies from
pursuing business combinations with SPACs?
40. Should we require registrants to disclose whether any director
voted against, or abstained from voting on, the approval of a de-SPAC
transaction or any related financing transaction, as well as the
reasons for such vote or abstention, as proposed? Are there additional
or alternative disclosures that we should require in this regard?
41. Should we require registrants to discuss in reasonable detail
the material factors and, to the extent practicable, the weight
assigned to each factor
[[Page 29474]]
underlying the fairness determination, as proposed? Are there
additional or alternative factors that should be specified in the
proposed rule to enhance an investor's understanding of the fairness
determination?
42. How would investors use disclosure about whether the approval
of at least a majority of unaffiliated security holders is required and
whether the de-SPAC transaction or any related financing transaction
was approved by a majority of non-employee directors of the SPAC? How
would investors use disclosure about whether a representative has been
retained to represent the investors in the negotiations of the de-SPAC
transaction?
3. Reports, Opinions, and Appraisals
In addition, we are proposing Item 1607 to require disclosure about
certain reports, opinions, or appraisals from outside parties.\97\
Proposed Item 1607(a) would require disclosure about whether or not the
SPAC or its sponsor has received any report, opinion, or appraisal
obtained from an outside party relating to the consideration or the
fairness of the consideration to be offered to security holders or the
fairness of the de-SPAC transaction or any related financing
transaction to the SPAC, the sponsor or security holders who are not
affiliates.\98\ This requirement would provide additional transparency
about whether a SPAC's board of directors and/or its sponsor have
access to information underlying a fairness determination that
shareholders could find useful in making voting, investment, and
redemption decisions in connection with the de-SPAC transaction.\99\
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\97\ As noted above, we have modeled the proposed requirements
in Item 1607 on the disclosures required in going-private
transactions subject to Exchange Act Rule 13e-3. See Item 1015 of
Regulation M-A.
\98\ Though currently not a routine practice in de-SPAC
transactions, SPACs often obtain fairness opinions in connection
with de-SPAC transactions involving an affiliated private operating
company.
\99\ For example, the proposed rule would require a SPAC to
disclose whether or not the SPAC or its sponsor has received a
fairness opinion or valuation report from a financial advisor.
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To assist investors in considering the usefulness and reliability
of any outside party report, opinion or appraisal described in response
to proposed Item 1607(a), as well as any negotiation or report by an
unaffiliated representative acting solely on behalf of unaffiliated
security holders described in response to proposed Item 1606(d),
proposed Item 1607(b) would require disclosure of:
<bullet> The identity, qualifications, and method of selection of
the outside party and/or unaffiliated representative;
<bullet> Any material relationship between (1) the outside party,
its affiliates, and/or unaffiliated representative, and (2) the SPAC,
its sponsor and/or their affiliates, that existed during the past two
years or is mutually understood to be contemplated and any compensation
received or to be received as a result of the relationship; \100\
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\100\ For example, this disclosure could include whether the
compensation for a financial advisor's fairness opinion is
conditioned on the completion of the de-SPAC transaction or whether
the amount of compensation due the financial advisor may include a
bonus or may be increased depending on the ultimate financial terms
of the de-SPAC transaction.
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<bullet> Whether the SPAC or the sponsor determined the amount of
consideration to be paid to the private operating company or its
security holders, or the valuation of the private operating company, or
whether the outside party recommended the amount of consideration to be
paid or the valuation of the private operating company; and
<bullet> A summary concerning the negotiation, report, opinion or
appraisal, which would be required to include a description of the
procedures followed; the findings and recommendations; the bases for
and methods of arriving at such findings and recommendations;
instructions received from the SPAC or its sponsor; and any limitation
imposed by the SPAC or its sponsor on the scope of the investigation.
Finally, proposed Item 1607(c) would require all such reports,
opinions or appraisals to be filed as exhibits to the Form S-4, Form F-
4, and Schedule TO for the de-SPAC transaction or included in the
Schedule 14A or 14C for the transaction, as applicable.
Request for Comment
43. Should we require disclosure regarding reports, opinions, or
appraisals from an outside party, as proposed? Is there any additional
or alternative information that we should require with respect to these
reports, opinions, or appraisals? Is there any proposed information
that should not be required?
44. Should we require that the reports, opinions or appraisals be
filed as exhibits to the Form S-4, Form F-4, or Schedule TO for the de-
SPAC transaction or included in the Schedule 14A or Schedule 14C for
the transaction, as proposed? Should we require instead that such
reports, opinions, or appraisals be made available for inspection and
copying upon written request? Should we require the filing of board
books and other written materials presented to the board in connection
with the reports, opinions, or appraisals, as is the case with going-
private transactions? Are there other means by which investors should
be able to access such report, opinion, or appraisal, such as posting
on a website?
45. As proposed, filers would be required to include a summary of
the report, opinion, or appraisal and file such report, opinion, or
appraisal as an exhibit to the filing. Would investors benefit from
having both the summary and the actual report, opinion, or appraisal
disclosed, or would one or the other item of disclosure be sufficient?
4. Proposed Item 1608 of Regulation S-K
We are proposing Item 1608 of Regulation S-K to codify a staff
position that a Schedule TO filed in connection with a de-SPAC
transaction should contain substantially the same information about a
target private operating company that is required under the proxy rules
and that a SPAC must comply with the procedural requirements of the
tender offer rules when conducting the transaction for which the
Schedule TO is filed, such as a redemption of the SPAC securities.
Redemption rights offered by a SPAC to its security holders in
connection with the de-SPAC transaction or an extension of the
timeframe to complete a de-SPAC transaction generally have indicia of
being a tender offer, but the Commission staff has not objected if a
SPAC does not comply with the tender offer rules when the SPAC files a
Schedule 14A or 14C in connection with a de-SPAC transaction or an
extension and complies with Regulation 14A or 14C, because the federal
proxy rules would generally mandate substantially similar disclosures
and applicable procedural protections as required by the tender offer
rules.\101\ Proposed Item 1608, if adopted, would not affect the
availability of this staff position for those SPACs that file Schedule
14A or 14C for their de-SPAC transactions or extensions. SPACs that are
unable to avail themselves of this position and file a Schedule TO
(such as foreign private issuers \102\), however, would be subject
[[Page 29475]]
to the requirements of proposed Item 1608 of Regulation S-K, which
would codify the staff's view regarding the information required to be
included in a Schedule TO filed for a SPAC redemption and clarify the
need to comply with the procedural requirements of the tender offer
rules.\103\
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\101\ See supra note 21.
\102\ ``Foreign private issuer'' is defined in Securities Act
Rule 405 and Exchange Act Rule 3b-4(c). A foreign private issuer is
any foreign issuer other than a foreign government, except for an
issuer that (1) has more than 50% of its outstanding voting
securities held of record by U.S. residents and (2) any of the
following: (i) A majority of its officers and directors are citizens
or residents of the United States, (ii) more than 50 percent of its
assets are located in the United States, or (iii) its business is
principally administered in the United States.
\103\ The staff has historically expressed the view that the
same information about the target company that would be required in
a Schedule 14A should be included in such a Schedule TO, in view of
the requirements of Item 11 of Schedule TO and Item 1011(c) of
Regulation M-A and the importance of this information in making a
redemption decision. Item 11 of Schedule TO states ``Furnish the
information required by Item 1011(a) and (c) of Regulation M-A.''
Item 1011(c) of Regulation M-A states ``Furnish such additional
material information, if any, as may be necessary to make the
required statements, in light of the circumstances under which they
are made, not materially misleading.''
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Proposed Item 1608 would require a SPAC that files a Schedule TO
pursuant to Exchange Act Rule 13e-4(c)(2) for any redemption of
securities offered in connection with a de-SPAC transaction to include
disclosures required by specified provisions of Forms S-4 and F-4, and
Schedule 14A, as applicable. Proposed Item 1608 would specify and
standardize the information required in a Schedule TO that is filed in
connection with a de-SPAC transaction so that it is consistent with the
information required by the proposed amendments to Forms S-4 and F-4
and Schedule 14A. As a result, SPAC shareholders who are not solicited
for their votes to approve a de-SPAC transaction (in a solicitation
subject to Regulation 14A) would nevertheless receive the same
information about the target private operating company that could be
material to their redemption decisions.\104\ Proposed Item 1608 would
clarify that SPACs that file a Schedule TO for a redemption also must
comply with the procedural requirements of Rule 13e-4 and Regulation
14E (such as the requirement to keep the redemption period open for at
least 20 business days). This proposed codification would eliminate any
potential ambiguity as to the SPAC's obligation to provide the tender
offer rules' procedural protections to the SPAC security holders who
are considering whether to redeem their securities.
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\104\ Proposed Item 1608 would also be consistent with exchange
listing rules regarding the use of Schedule TO in de-SPAC
transactions. See, e.g., Nasdaq Listing Rule IM-5101-2(e) and NYSE
Listed Company Manual Section 102.06(c).
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Request for Comment
46. Should we adopt Item 1608 as proposed?
47. Is there any additional or alternative information that we
should require in proposed Item 1608 when a Schedule TO is filed in
connection with a de-SPAC transaction?
48. Are there any requirements of Rule 13e-4 and Regulation 14E
that should not apply to SPACs that file a Schedule TO for the
redemption of the SPAC securities?
49. Are there any other provisions of Rule 13e-4 or Regulation 14E
that should be amended to ensure that SPAC security holders are
provided with the information material to their decision on whether to
redeem their SPAC securities or to address other issues arising from
the SPAC redemption process? For example, should we amend Exchange Act
Rule 14e-5, which generally prohibits a bidder or its affiliates from
making purchases outside of a tender offer, to permit a sponsor's
purchases of SPAC securities outside of the redemption offer as long as
certain conditions are satisfied (such as requiring disclosures of the
sponsor's purchases and limiting the purchase price to no more than the
price offered through the redemption offer), e.g., in a manner
consistent with the Division of Corporation Finance's Tender Offers and
Schedules Compliance and Disclosure Interpretation 166.01 (Mar. 22,
2022)? \105\
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\105\ This staff interpretation is available at: <a href="https://www.sec.gov/divisions/corpfin/guidance/cdi-tender-offers-and-schedules.htm">https://www.sec.gov/divisions/corpfin/guidance/cdi-tender-offers-and-schedules.htm</a>.
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50. As noted above, the staff has taken the position that a SPAC
filing a Schedule 14A or 14C in connection with a de-SPAC transaction
or an extension of the time frame to complete a de-SPAC transaction
would not need to file a Schedule TO or otherwise comply with the
tender offer rules, including the procedural requirements of the tender
offer rules, such as the all-holders requirement. Should we codify this
position? Should we reconsider this position?
G. Structured Data Requirement
We are proposing to require SPACs to tag all information disclosed
pursuant to Subpart 1600 of Regulation S-K in a structured, machine-
readable data language. Specifically, we are proposing to require SPACs
to tag the disclosures required under Subpart 1600 in Inline XBRL in
accordance with Rule 405 of Regulation S-T and the EDGAR Filer
Manual.\106\ The proposed requirements would include detail tagging of
the quantitative disclosures and block text tagging of the narrative
disclosures that would be required under Subpart 1600.
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\106\ This tagging requirement would be implemented by including
a cross-reference to Rule 405 of Regulation S-T in Subpart 1600 of
Regulation S-K, and by revising 17 CFR 232.405(b) of Regulation S-T
to include the proposed SPAC-related disclosures. A corresponding
Note and Instruction would also be added to Schedules 14A and TO,
respectively. Pursuant to Rule 301 of Regulation S-T, the EDGAR
Filer Manual is incorporated by reference into the Commission's
rules. In conjunction with the EDGAR Filer Manual, Regulation S-T
governs the electronic submission of documents filed with the
Commission. Rule 405 of Regulation S-T specifically governs the
scope and manner of disclosure tagging requirements for operating
companies and investment companies, including the requirement in 17
CFR 232.405(a)(3) to use Inline XBRL as the specific structured data
language to use for tagging the disclosures.
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In 2009, the Commission adopted rules requiring operating companies
to submit the information from the financial statements (including
footnotes and schedules thereto) included in certain registration
statements and periodic and current reports in a structured, machine-
readable data language using eXtensible Business Reporting Language
(``XBRL'').\107\ In 2018, the Commission adopted modifications to these
requirements by requiring issuers to use Inline XBRL, which is both
machine-readable and human-readable, to reduce the time and effort
associated with preparing XBRL filings and improve the quality and
usability of XBRL data for investors.\108\
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\107\ Interactive Data to Improve Financial Reporting, Release
No. 33-9002 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)] (``2009
Financial Statement Information Adopting Release'') (requiring
submission of an Interactive Data File to the Commission in exhibits
to such reports). See also Interactive Data to Improve Financial
Reporting, Release No. 33-9002A (Apr. 1, 2009) [74 FR 15666 (Apr. 7,
2009)].
\108\ Inline XBRL Filing of Tagged Data, Release No. 33-10514
(June 28, 2018) [83 FR 40846, 40847 (Aug. 16, 2018)]. Inline XBRL
allows filers to embed XBRL data directly into an HTML document,
eliminating the need to tag a copy of the information in a separate
XBRL exhibit. Id. at 40851.
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Requiring Inline XBRL tagging of the Subpart 1600 disclosures would
benefit investors by making SPAC disclosures more readily available and
easily accessible to investors and other market participants for
aggregation, comparison, filtering, and other analysis, as compared to
requiring a non-machine readable data language such as ASCII or HTML.
This would enable automated extraction and analysis of granular SPAC
disclosures, allowing investors and other market participants to more
efficiently perform large-scale analysis and comparison of SPAC
disclosures across SPAC transactions and time periods, including
information on sponsor compensation and material conflicts of interest.
At the same time, we do not expect the incremental compliance burden
associated with tagging the additional information to be unduly
burdensome, because SPACs subject to the proposed
[[Page 29476]]
tagging requirements would be subject to similar Inline XBRL
requirements in other Commission filings.\109\ However, because issuers
(including SPACs) are not required to tag any filings until after they
have filed a periodic report on Form 10-Q, 20-F, or 40-F, the proposed
tagging requirement for disclosures in SPAC IPO registration statements
would accelerate the tagging obligations (and related compliance
burdens) of SPACs compared to those of other filers.\110\ Enhancing the
usability of the SPAC initial public offering disclosures through a
tagging requirement is of particular importance given the unique nature
of SPAC offerings and the potential risks they present to investors.
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\109\ Id.
\110\ See 17 CFR 229.601(b)(101)(i)(A).
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Request for Comment
51. Should we require SPACs to tag the disclosures required by
Subpart 1600 of Regulation S-K, as proposed? Are there any changes we
should make to ensure accurate and consistent tagging? If so, what
changes should we make?
52. Should we modify the scope of the Subpart 1600 disclosures
required to be tagged? For example, should we require tagging of
quantitative disclosures only? Should we limit the tagging requirement
to only those disclosures required in de-SPAC transactions?
53. Where an item in Subpart 1600 requests that a registrant
provide a tabular presentation without specifying a particular format
for the table, or data points to include in the table, such as the
proposed disclosure related to SPAC sponsor compensation, dilution of
unaffiliated shareholders, and the related sensitivity analysis, should
we instead require specific elements in the tabular presentation? If we
do not propose a specific tabular presentation or required elements,
would detail tagging provide useful data for investors and other market
participants?
54. Should we require SPACs to use a different structured data
language to tag the Subpart 1600 disclosures? If so, what structured
data language should we require, and why?
55. We have not proposed exemptions or different requirements from
the proposed structured data requirement for foreign private issuers,
smaller reporting companies,\111\ or emerging growth companies.\112\
Should we exempt or provide different requirements from some or all of
the proposed structured data requirements for these or other classes of
registrants?
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\111\ See infra Section III.D.
\112\ Section 101(a) of the JOBS Act amended Section 2(a) of the
Securities Act [15 U.S.C. 77b(a)] and Section 3(a) of the Exchange
Act [15 U.S.C. 78c(a)] to define an ``emerging growth company'' as
an issuer with less than $1 billion in total annual gross revenues
during its most recently completed fiscal year, as such amount is
indexed for inflation every five years by the Commission. If an
issuer qualifies as an EGC on the first day of its fiscal year, it
maintains that status until the earliest of (1) the last day of the
fiscal year of the issuer during which it has total annual gross
revenues of $1.07 billion or more; (2) the last day of its fiscal
year following the fifth anniversary of the first sale of its common
equity securities pursuant to an effective registration statement;
(3) the date on which the issuer has, during the previous three-year
period, issued more than $1 billion in nonconvertible debt; or (4)
the date on which the issuer is deemed to be a ``large accelerated
filer'' (as defined in Exchange Act Rule 12b-2). See Section
2(a)(19) of the Securities Act [15 U.S.C. 77b(a)(19)]; Section
3(a)(80) of the Exchange Act [15 U.S.C. 78c(a)(80)]; and Inflation
Adjustments and Other Technical Amendments under Titles I and II of
the JOBS Act, Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545
(Apr. 12, 2017)].
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III. Aligning De-SPAC Transactions With Initial Public Offerings
As discussed above, private operating companies have increasingly
turned to de-SPAC transactions as a means of accessing public
securities markets and becoming public reporting companies. As the
SPACs that were part of the unprecedented growth in the SPAC market in
2020 and 2021 continue to identify target private operating companies
and consummate de-SPAC transactions, it is likely that a significant
proportion of companies in the coming years that enter the U.S. public
securities markets will do so through de-SPAC transactions.
A private operating company's path to the public markets through a
de-SPAC transaction usually commences when a SPAC begins considering it
as a potential business combination candidate. After agreeing to the
terms of the business combination, the SPAC typically files a Form 8-K
announcing the transaction that includes limited information on the
material terms of the business combination agreement.\113\ This
announcement is usually followed by a disclosure document (a Securities
Act registration statement, proxy statement, or information statement)
filed by the SPAC that includes more extensive information about the
private operating company.\114\ SPACs use a variety of legal structures
to effect de-SPAC transactions, and the particular transaction
structure and the consideration used can affect (1) the Commission
filings required for the transaction,\115\ (2) which entity will have a
continuing Exchange Act reporting obligation following the
transaction,\116\ and (3) the disclosures provided in connection with
the transaction.\117\
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\113\ A SPAC is required to file a Form 8-K that provides
certain disclosures regarding the business combination agreement if
the agreement is a material definitive agreement not made in the
ordinary course of business. See Item 1.01 of Form 8-K.
\114\ The disclosure document may be a Form S-4 or F-4, Schedule
14A or Schedule TO, depending on, among other things, whether
shareholder approval is required and whether the SPAC is registering
an offering of shares to be issued in the transaction.
\115\ SPACs may use cash, securities, or a combination of both
to acquire a target company in a de-SPAC transaction, and the form
of consideration is a factor in determining whether a registration
statement, proxy or information statement, or tender offer statement
is required to be filed in connection with a de-SPAC transaction.
Additionally, the SPAC, the target company or a new holding company
may issue securities in a de-SPAC transaction, which may necessitate
the filing of a registration statement on Form S-4 or F-4 for the
transaction.
\116\ For example, when a holding company is formed to acquire
both the private operating company and the SPAC, and the holding
company files a registration statement for the de-SPAC transaction,
generally the holding company would continue as the registrant with
the Exchange Act reporting obligation following the transaction. In
these situations, the private operating company would be the holding
company's predecessor, as the term is used in Regulation S-X, with
respect to the financial statements and possibly the accounting
acquirer under generally accepted accounting principles as used in
the United States (``U.S. GAAP''), with the equity ownership
percentage in the combined company held by the former owners of the
private operating company and the degree to which former management
of the private operating company continues with the combined company
among the factors that could impact the accounting acquirer
determination under U.S. GAAP. Under the proposed amendments to
Regulation S-X, the SPAC would be an acquired business. See infra
Section IV.B.
\117\ The disclosures required in connection with a de-SPAC
transaction are determined by the applicable disclosure form (Form
S-4 or F-4, Schedule 14A or 14C, or Schedule TO) and which entity is
filing the form. Under the proposed amendments, companies would not
be subject to the same disclosure requirements in every de-SPAC
transaction structure. For example, if the SPAC is a domestic
registrant and a new holding company is a foreign issuer, and the
private operating company meets the criteria to be a foreign private
issuer, the holding company (the company filing the de-SPAC
transaction filing) would also qualify as a foreign private issuer.
Foreign private issuer status would permit the foreign holding
company to file a Form F-4 for the de-SPAC transaction and apply the
foreign private issuer disclosure regime. In contrast, if a de-SPAC
transaction is structured so that (1) a domestic SPAC is the company
issuing securities as the acquiring entity of the foreign private
operating company, (2) there is no foreign holding company, and (3)
the SPAC makes the de-SPAC transaction filing, the registrant would
continue to be a domestic issuer and follow domestic reporting rules
until the next determination date for foreign private issuer status.
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After the completion of the de-SPAC transaction, the post-business
combination company is required to file a Form 8-K within four business
days that includes even more information about the private operating
company that is equivalent to the information that a new reporting
company would be required to provide when filing a Form
[[Page 29477]]
10 under the Exchange Act.\118\ The result is that investors may
receive disclosures about the future public company that differ from,
or are not provided in the same manner as, the information disclosed in
a Form S-1 or F-1 filed in connection with a traditional initial public
offering. Additionally, some of the investor protections afforded in a
traditional initial public offering are not available or are more
attenuated when a private operating company becomes a public company
through a de-SPAC transaction.\119\
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\118\ Form 10 is the long-form registration statement to
register a class of securities under Section 12(b) or 12(g) of the
Exchange Act. See Items 2.01(f), 5.01(a)(8), and 9.01(c) of Form 8-
K. By the time the Form 8-K with Form 10 information is filed, the
securities of the post-business combination company have often
already begun trading on a national securities exchange with a new
ticker symbol, in that the securities of the SPAC generally trade on
an exchange until the consummation of the de-SPAC transaction, after
which the securities of the post-business combination company
generally commence trading on the following business day.
\119\ For example, a private company engaged in a traditional
initial public offering is generally more limited in its ability to
make communications about its offering prior to the filing of a
Securities Act registrations statement on Form S-1 than companies
engaged in a business combination transaction that will be
registered on Form S-4 or F-4. De-SPAC transactions also often lack
named underwriters that perform due diligence and other traditional
gatekeeping functions, and it may be more difficult for investors to
trace their purchases to the registered de-SPAC transaction for
purposes of establishing a Section 11 claim for material
misstatements or omissions in de-SPAC disclosure documents.
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In light of the increasingly common reliance on de-SPAC
transactions as a vehicle for private operating companies to access the
U.S. public securities markets, we are proposing a number of new rules
and amendments to existing rules to align more closely the treatment of
private operating companies entering the public markets through de-SPAC
transactions with that of companies conducting traditional initial
public offerings. In our view, a private operating company's method of
becoming a public company should not negatively impact investor
protection. Accordingly, the proposed new rules and amendments are
intended to provide investors with disclosures and liability
protections comparable to those that would be present if the private
operating company were to conduct a traditional firm commitment initial
public offering.
These proposed new rules and amendments would (1) more closely
align the non-financial statement disclosure requirements with respect
to the private operating company in disclosure documents for a de-SPAC
transaction with the disclosure required in a Form S-1 or F-1 for an
initial public offering; \120\ (2) require a minimum dissemination
period for disclosure documents in de-SPAC transactions; (3) treat the
private operating company as a co-registrant of the Form S-4 or Form F-
4 for a de-SPAC transaction when a SPAC is filing the registration
statement; (4) require a re-determination of smaller reporting company
status following the consummation of a de-SPAC transaction; (5) amend
the definition of ``blank check company'' for PSLRA purposes such that
the safe harbor for forward-looking information would not apply to
projections in filings by SPACs and certain other blank check companies
that are not penny stock issuers; and (6) provide, in a Commission
rule, that underwriters in a SPAC initial public offering are deemed to
be underwriters in a subsequent de-SPAC transaction under certain
circumstances.
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\120\ We are also proposing to more closely align the financial
statement disclosure requirements with respect to the private
operating company in any business combination involving a shell
company with the disclosure required in a Form S-1 for an initial
public offering, which would encompass de-SPAC transactions. See
infra Section IV.B.
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A. Aligning Non-Financial Disclosures in De-SPAC Disclosure Documents
In regard to non-financial statement disclosures, we are proposing
that, if the target company in a de-SPAC transaction is not subject to
the reporting requirements of Section 13(a) or 15(d) of the Exchange
Act, disclosure with respect to such company pursuant to the following
items in Regulation S-K would be required in the registration statement
or schedule filed in connection with the de-SPAC transaction: (1) Item
101 (description of business); (2) Item 102 (description of property);
(3) Item 103 (legal proceedings); (4) Item 304 (changes in and
disagreements with accountants on accounting and financial disclosure);
(5) Item 403 (security ownership of certain beneficial owners and
management, assuming the completion of the de-SPAC transaction and any
related financing transaction); \121\ and (6) Item 701 (recent sales of
unregistered securities).\122\ If the private operating company is a
foreign private issuer,\123\ the proposed rules would include the
option of providing disclosure relating to the private operating
company in accordance with Items 3.C, 4, 6.E, 7.A, 8.A.7, and 9.E of
Form 20-F, consistent with disclosure that could be provided by these
entities in an initial public offering.\124\
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\121\ We note that Item 18(a)(5) of Form S-4 currently requires
disclosure pursuant to Item 403 regarding the target company and a
SPAC's principal shareholders, through Item 6 of Schedule 14A, in a
Form S-4 that includes a proxy seeking shareholder approval of the
de-SPAC transaction.
\122\ Proposed General Instruction L.2. to Form S-4; Proposed
General Instruction I.2. to Form F-4; Proposed Item 14(f) of
Schedule 14A; Proposed General Instruction K to Schedule TO. We note
that disclosure pursuant to Item 303 (management's discussion and
analysis of financial condition and results of operations) of
Regulation S-K is already required with respect to a non-reporting
target company in Forms S-4 and F-4 and in Schedules 14A and 14C for
a de-SPAC transaction. As proposed, disclosure pursuant to Item 701
of Regulation S-K would be required in Part I (information required
in the prospectus) of Form S-4 and Form F-4, whereas in Form S-1,
the Item 701 disclosure requirement appears under Part II
(information not required in prospectus) of the form.
\123\ See supra note 102.
\124\ Disclosure requirements for foreign private issuers differ
from domestic registrants, including the absence of quarterly
reporting requirements, the use of different forms with different
disclosure provisions, and an ability to present financial
statements in accordance with IFRS instead of U.S. GAAP. In
addition, foreign private issuers are not required to file current
reports on Form 8-K using the Form 8-K disclosure criteria; rather,
they can furnish current reports on Form 6-K applying the disclosure
requirements of that Form. See Foreign Issuer Reporting
Enhancements, Release 33-8959 (Sep. 23, 2008) [73 FR 58300 (Oct. 6,
2008)].
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The proposed additional information is already required to be
included in a Form 8-K due within four business days of the completion
of the de-SPAC transaction, such that registrants currently should
already be preparing this information in anticipation of this Form 8-K
filing in connection with a de-SPAC transaction.\125\ Aligning the
disclosure requirements in de-SPAC transactions in this manner with
those in initial public offerings would mandate that this additional
information about the private operating company be provided to
shareholders before they make voting, investment, or redemption
decisions in connection with the proposed transactions.\126\ As
proposed, this information would also be available to investors prior
to the inception of trading of the post-business
[[Page 29478]]
combination company's securities on a national securities exchange,
rather than being required in a Form 8-K due within four business days
of the completion of the de-SPAC transaction. Further, if this
disclosure is included in a Form S-4 or Form F-4, any material
misstatements or omissions contained therein would subject the issuers
and other parties to liability under Sections 11 and 12 of the
Securities Act, which would align with the protections afforded to
investors under the Securities Act for disclosures provided in a Form
S-1 or F-1 for an initial public offering.
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\125\ This Form 8-K is required to include the same information
that would be required for a newly reporting company when filing a
Form 10 under the Exchange Act. See Items 2.01(f), 5.01(a)(8), and
9.01(c) of Form 8-K. In this regard, we note that these items of
Form 8-K each provide that if any disclosure required by these items
has been previously reported, the registrant may identify the filing
in which that disclosure is included instead of including that
disclosure in the Form 8-K.
\126\ In this regard, we note that many, but not all, Forms S-4
and F-4 and Schedules 14A and 14C that are filed in connection with
de-SPAC transactions contain information about the target company as
proposed. The proposed amendments, if adopted, would require that
this information be provided in all de-SPAC transactions subject to
the specialized disclosure requirements in Subpart 1600.
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Request for Comment
56. Should we require additional information regarding the private
operating company in disclosure documents filed in connection with a
de-SPAC transaction, as proposed? Would these additional disclosures
provide investors with a better understanding of the private operating
company's operations and related risks? Should we require more or less
disclosure regarding the private operating company in the registration
statements or schedules filed in connection with de-SPAC transactions?
57. What are the benefits of providing this information earlier to
investors when they are making voting, investment, and redemption
decisions in connection with a de-SPAC transaction or at or before the
commencement of trading in the post-business combination company's
securities on a securities exchange? Would it be unduly burdensome to
provide this additional information regarding the private operating
company at this earlier point in time?
58. Should a private operating company that would qualify as a
foreign private issuer have the option of providing disclosure in
accordance with certain items of Form 20-F, as proposed?
59. Should we require additional or less information in proposed
Item 1608 and Schedule TO when a SPAC files a Schedule TO in connection
with a de-SPAC transaction? For example, should we require disclosure
regarding management's discussion and analysis of financial condition
and results of operations (Item 303 of Regulation S-K) pursuant to Item
1608 or Schedule TO?
60. Should the proposed disclosure requirements with respect to the
private operating company be scaled to take into account the size,
nature, or certain characteristics of the company?
B. Minimum Dissemination Period
In addition to the need for enhanced disclosure in de-SPAC
transactions, we recognize the importance of ensuring that SPAC
shareholders have adequate time to analyze the information presented in
these transactions. There is currently no federally mandated period in
business combination transactions to provide security holders with a
minimum amount of time to consider proxy statement or other
disclosures.\127\ In view of the unique circumstances surrounding de-
SPAC transactions, we are proposing to amend Exchange Act Rules 14a-6
and 14c-2, as well as to add instructions to Forms S-4 and F-4,\128\ to
require that prospectuses and proxy and information statements filed in
connection with de-SPAC transactions be distributed to shareholders at
least 20 calendar days in advance of a shareholder meeting or the
earliest date of action by consent, or the maximum period for
disseminating such disclosure documents permitted under the applicable
laws of the SPAC's jurisdiction of incorporation or organization if
such period is less than 20 calendar days.\129\ As stated above, SPACs
are organized for the purpose of completing a de-SPAC transaction
within a certain time frame, and as a SPAC approaches the end of this
period, there is less time available for a SPAC to find a candidate for
a business combination transaction, prepare and file the appropriate
de-SPAC disclosure documents with the Commission, disseminate such
documents to its shareholders, receive the requisite shareholder
approval when applicable, and consummate the de-SPAC transaction.
Although the laws of a SPAC's jurisdiction of incorporation or
organization may require the SPAC to send a notice to its shareholders
at least a specified number of days before the shareholder meeting to
approve a proposed business combination transaction, such notices are
generally limited to information regarding the time, place, and purpose
of the meeting, along with a copy or summary of the business
combination agreement.\130\ They do not generally require a minimum
period of time for dissemination of any other information about the
transaction (including any proxy statements or other materials required
by the federal securities laws) to shareholders.\131\ Similarly, such
requirements do not exist in exchange listing standards.\132\ Without a
minimum period for dissemination of prospectuses, proxy statements, and
other materials before a shareholder meeting (or action by consent), a
SPAC and its sponsor may have incentives to provide prospectuses or
proxy or information statements for a de-SPAC transaction to the SPAC's
security holders within an abbreviated time frame, leaving the security
holders with relatively little time to review what are often complex
disclosure documents for these transactions.
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\127\ In Form S-4 and Form F-4, however, there is a minimum 20-
business day period requirement in sending a prospectus to security
holders prior to a security holder meeting that is applicable when a
registrant incorporates by reference information about the
registrant or the company being acquired into the form. General
Instruction A.2 of Form S-4 and General Instruction A.2 of Form F-4.
\128\ Proposed General Instruction L.3. to Form S-4; Proposed
General Instruction I.3. to Form F-4.
\129\ The proposed amendments would be applicable to Forms S-4
and F-4 and Schedules 14A and 14C. We are not proposing to amend the
20 business day period when a Schedule TO is filed in connection
with a de-SPAC transaction. See supra Section II.F.4.
\130\ See, e.g., DEL. CODE ANN. tit. 8, sec. 251(c) (2022)
(stating, in part, that ``[d]ue notice of the time, place and
purpose of the meeting shall be given to each holder of stock,
whether voting or nonvoting, of the corporation at the stockholder's
address as it appears on the records of the corporation, at least 20
days prior to the date of the meeting [to vote on an agreement of
merger or consolidation]'').
\131\ See R. Franklin Balotti, et al., Delaware Law of
Corporations and Business Organizations, Sec. 9.16 (4th ed. 2022 &
Supp. 2022) (``[t]he only statutory requirements for the notice of
the meeting are that it state the time, place and purpose of the
meeting and that the notice contain a copy of the merger agreement
or a summary of the agreement . . . [i]n practice, of course, many
such meetings will be governed by the federal proxy rules, which
require that a full proxy statement be submitted to the
stockholders.'').
\132\ Although both the NYSE and Nasdaq generally require that
listed companies solicit proxies and provide proxy statements for
all shareholder meetings, neither requires a minimum number of days
between when proxy materials are provided to shareholders and when
the meeting is held. Instead, for example, NYSE Listed Company
Manual Section 402.03 simply ``recommends that a minimum of 30 days
be allowed between the record and meeting dates so as to give ample
time for the solicitation of proxies.''
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We are proposing a minimum 20-calendar day dissemination period for
prospectuses and proxy and information statements that, in our view,
would provide an important investor protection.\133\ We recognize that
SPACs are often required under their governing
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instruments and applicable exchange listing rules to complete de-SPAC
transactions within a certain time frame and that relying on the safe
harbor we are proposing under the Investment Company Act would also
limit the time frame in which to announce and complete a de-SPAC
transaction.\134\ Nevertheless, given the complexity of the SPAC
structure, the conflicts of interest that are often present in this
structure and the effects of dilution on non-redeeming shareholders,
the proposed 20-calendar day period would establish a minimum time
period for shareholders to review prospectuses and proxy and
information statements in de-SPAC transactions (subject to the carve-
out discussed below),\135\ so that they have sufficient time to
consider the disclosures and to make more informed voting, investment
and redemption decisions.\136\ In the event that the laws of a SPAC's
jurisdiction of incorporation or organization have a provision
applicable to the dissemination of prospectuses and proxy and
information statements required under the federal securities laws, we
are proposing to include a provision that would require a registrant to
satisfy the maximum dissemination period permitted under the applicable
law of such jurisdiction when this period is less than 20 calendar days
to avoid conflicting with such a requirement.\137\
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\133\ The proposed 20-calendar day period is the same length of
time as the 20-day advance disclosure period in 17 CFR 13e-3(f)(1)
(Exchange Act Rule 13e-3(f)(1)). In adopting a 20-day advance
disclosure requirement for dissemination of documents in connection
with going private transactions, the Commission stated this
requirement was intended to provide reasonable assurance that the
information required to be disclosed to security holders would be
disseminated sufficiently far in advance of the transactions to
permit security holders to make ``an unhurried and informed''
decision. Going Private Transactions by Public Companies or Their
Affiliates, Release No. 33-6100 (Aug. 2, 1979) [44 FR 46736 (Aug. 8,
1979)].
\134\ See infra Section VI.B.3.
\135\ When a registrant incorporates by reference information
about the registrant or the company being acquired in the Form S-4
or F-4 for a de-SPAC transaction, the 20-business day period in Form
S-4 and Form F-4, which we are not proposing to amend, would
continue to be applicable. General Instruction A.2 of Form S-4 and
General Instruction A.2 of Form F-4.
\136\ The proposed minimum dissemination period is intended to
apply to the dissemination of certain Commission filings in
connection with de-SPAC transactions and is not intended to impact
any requirements of the jurisdiction of incorporation or
organization regarding the notice of an annual or special meeting,
such as Section 251(c) of the Delaware General Corporation Law.
\137\ For example, if the jurisdiction has no minimum
dissemination period and does not have a maximum dissemination
period, the minimum 20-day period, as proposed, would apply. If the
jurisdiction has a minimum dissemination period of less than 20 days
(e.g., 10 days) and does not have a maximum dissemination period,
the minimum 20-day period, as proposed, would apply. If the
jurisdiction has a minimum dissemination period of less than 20 days
(e.g., 10 days) and a maximum dissemination period of less than 20
days (e.g., 15 days), the maximum dissemination period under the
jurisdiction would apply. If the jurisdiction has no minimum
dissemination period and a maximum dissemination period of less than
20 days (e.g., 15 days), the maximum dissemination period under the
jurisdiction would apply.
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Request for Comment
61. Should we require a minimum dissemination period for
prospectuses and proxy or information statements in de-SPAC
transactions as proposed? Is a 20-day period necessary or appropriate
to enable shareholders to review and consider these disclosure
documents relating to a de-SPAC transaction? Should this 20 calendar
day period be longer or shorter? Should the minimum dissemination
period be based on business days (e.g., 20 business days) instead of
calendar days as proposed?
62. Would there be timing concerns on the part of SPACs in meeting
the proposed minimum 20-day dissemination period? Should we include an
exception for the applicable laws of the SPAC's jurisdiction of
incorporation or organization, as proposed? Should we include other
exceptions to the proposed minimum 20-day dissemination period?
63. Would additional guidance be helpful in determining how to
apply this proposed requirement?
64. Are there additional or alternative requirements we should
adopt in connection with the dissemination of disclosure documents in a
de-SPAC transaction?
C. Private Operating Company as Co-Registrant to Form S-4 and Form F-4
Under Section 6(a) of the Securities Act, each ``issuer'' must sign
a Securities Act registration statement.\138\ The Securities Act
broadly defines the term ``issuer'' to include every person who issues
or proposes to issue any securities.\139\ Currently, when a SPAC offers
and sells its securities in a registered de-SPAC transaction, only the
SPAC, its principal executive officer or officers, its principal
financial officer, its controller or principal accounting officer, and
at least a majority of its board of directors (or persons performing
similar functions) are required to sign the registration statement for
the transaction. In these situations, the private operating company,
for which the de-SPAC transaction effectively serves as its initial
public offering, and its officers and directors do not sign the
registration statement that contains disclosure about the private
operating company's business and financial results and thereby may
avoid liability as signatories to the registration statement under
Section 11 of the Securities Act, unlike if the private operating
company had conducted a traditional initial public offering registered
on Form S-1 or Form F-1.\140\
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\138\ In addition, Section 6(a) requires the issuer's principal
executive officer or officers, principal financial officer,
comptroller or principal accounting officer, and the majority of its
board of directors or persons performing similar functions (or, if
there is no board of directors or persons performing similar
functions, by the majority of the persons or board having the power
of management of the issuer) to sign a registration statement. When
the issuer is a foreign entity, the registration statement must also
be signed by the issuer's duly authorized representative in the
United States.
\139\ Section 2(a)(4) of the Securities Act.
\140\ Even when not liable under Section 11, the private
operating company and its affiliates, however, may be subject to
enforcement actions by the Commission, including those under
Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule
10b-5, as well as potential liability under 17 CFR 240.10b-5
(Exchange Act Rule 10b-5) in private rights of action. See, e.g., In
the Matter of Momentus, Inc., et al., Release No. 34-92391 (July 13,
2021) (settled proceeding charging privately held company with
violations of Section 17(a) of the Securities Act and Section 10(b)
of the Exchange Act and Rule 10b-5 for, among other things,
allegedly materially false statements and omissions in the
registration statement/proxy statement filed in connection with a
business combination with a publicly traded SPAC).
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We are proposing to amend Form S-4 and Form F-4 to require that the
SPAC and the target company be treated as co-registrants when these
registration statements are filed by the SPAC in connection with a de-
SPAC transaction.\141\ In view of the protections that the Securities
Act provides to investors in a traditional initial public offering, it
is appropriate in our view to interpret Section 6(a) to encompass the
target company, in addition to the SPAC, as an issuer for purposes of
Section 6(a) and the signature requirements of Form S-4 or Form F-4.
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\141\ Proposed General Instruction L.4. to Form S-4; Proposed
General Instruction I.4. to Form F-4. Section 6(a) of the Securities
Act uses the term ``issuer,'' but Securities Act registration
statement forms use the term ``registrant.'' The term ``registrant''
is defined in Rule 405 as ``the issuer of the securities for which
the registration statement is filed.'' As a co-registrant of the
Form S-4 or Form F-4, the private operating company would have an
Exchange Act reporting obligation pursuant to Section 15(d) of the
Exchange Act following the effectiveness of the registration
statement.
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A de-SPAC transaction marks the introduction of the private
operating company to the U.S. public securities markets, and investors
look to the business and prospects of the private operating company in
evaluating an investment in the combined company.\142\ Accordingly, it
is the private operating company that, in substance, issues or proposes
to issue its securities, as securities of the newly combined public
company.\143\ While
[[Page 29480]]
similar policy considerations can arise in other business combination
contexts, given the substantial increase in the number of SPAC
transactions in recent years, the number of shareholders typically
impacted by such transactions, and concerns that are unique to the SPAC
structure, we are concerned that a narrow approach to registrant status
in de-SPAC transactions could undermine the statutory liability scheme
that Congress applied to initial public offerings of securities.
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\142\ That is, the operations of the private company constitute
the business and the basis for the financial and other disclosures
of the newly combined public company following a de-SPAC
transaction.
\143\ The legislative history of the broad definition of the
term ``issuer'' in the Securities Act suggests that the
identification of the ``issuer'' of a security should be based on
the economic reality of a transaction to ensure that, in service of
the disclosure purpose of the Act, the person(s) that have access to
the information relevant to investors are responsible as an
``issuer'' for providing such information. See, e.g., H.R. REP. 73-
85, 12 (``Special provisions govern the definition of `issuer' in
connection with security issues of an unusual character. . . . [For
example, in the case of an investment trust], although the actual
issuer is the trustee, the depositor is the person responsible for
the flotation of the issue. Consequently, information relative to
the depositor and to the basic securities is what chiefly concerns
the investor--information respecting the assets and liabilities of
the trust rather than of the trustee.'').
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We are proposing to amend the signature instructions to Form S-4
and F-4 to state that, if a SPAC is offering its securities in a de-
SPAC transaction that is registered on the form, the term
``registrant'' for purposes of the signature requirements of the form
would mean the SPAC and the target company.\144\ This requirement would
make the additional signatories to the form, including the principal
executive officer, principal financial officer, controller/principal
accounting officer, and a majority of the board of directors or persons
performing similar functions of the target company, liable (subject to
a due diligence defense for all parties other than the SPAC and the
target company), for any material misstatements or omissions in the
Form S-4 or Form F-4 and would thereby mitigate the risk that the
target company's directors and management would not be held accountable
to investors for the accuracy of the disclosures in the registration
statement due to the absence of the deterrent threat of liability under
Section 11.\145\ Moreover, this proposed requirement could improve the
reliability of the disclosure provided to investors in connection with
de-SPAC transactions by creating strong incentives for such additional
signing persons to review more closely the disclosure about the target
company in these registration statements and to conduct more searching
due diligence in connection with de-SPAC transactions and related
registration statements.
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\144\ The Commission has previously specified who constitutes
the ``registrant'' for purposes of signing a Securities Act
registration statement in certain contexts. For example, an
instruction in Forms S-4 and F-4 requires two or more existing
corporations to be deemed co-registrants when they will be parties
to a consolidation and the securities to be offered are those of a
corporation not yet in existence at the time of filing. See
Instruction 3 to the signature page for Form S-4 and Form F-4 (``If
the securities to be offered are those of a corporation not yet in
existence at the time the registration statement is filed which will
be a party to a consolidation involving two or more existing
corporations, then each such existing corporation shall be deemed a
registrant and shall be so designated on the cover page of this
Form, and the registration statement shall be signed by each such
existing corporation and by the officers and directors of each such
existing corporation as if each such existing corporation were the
registrant.'').
\145\ In this regard, we note that the target company's
directors and executive officers are the parties most similarly
situated to the directors and officers of a private company
conducting a traditional initial public offering, in terms of their
knowledge of, and background in, the company going public through a
de-SPAC transaction.
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Request for Comment
65. Should we amend Form S-4 and Form F-4, as proposed, to require
that the SPAC and the private operating company be treated as co-
registrants when the registration statement is filed by the SPAC in
connection with a de-SPAC transaction?
66. Would amending Form S-4 and Form F-4 in this manner improve the
disclosure provided in connection with de-SPAC transactions that are
registered on these forms?
67. Should the proposed amendment to Form S-4 and Form F-4 be
extended to apply to all business combination transactions where a
shell company, other than a business combination related shell company,
is the acquirer?
68. Should the sponsor of a SPAC also be required to sign a Form S-
4 or Form F-4 filed in connection with a de-SPAC transaction, as well
as a Form S-1 or Form F-1 filed for a SPAC's initial public offering,
in view of, among other things, the sponsor's control over the SPAC and
the sponsor's role in preparing these registr
[…truncated; see source link]Indexed from Federal Register on May 13, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.