Rule2024-01853
Special Purpose Acquisition Companies, Shell Companies, and Projections
Primary source
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Published
February 26, 2024
Effective
July 1, 2024
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission") is adopting rules intended to enhance investor protections in initial public offerings by special purpose acquisition companies (commonly known as SPACs) and in subsequent business combination transactions between SPACs and private operating companies (commonly known as de- SPAC transactions). Specifically, we are adopting disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the determination, if any, of the board of directors (or similar governing body) of a SPAC regarding whether a de-SPAC transaction is advisable and in the best interests of the SPAC and its security holders. We are adopting rules that require a minimum dissemination period for the distribution of security holder communication materials in connection with de-SPAC transactions. We are adopting rules that require the re-determination of smaller reporting company ("SRC") status in connection with de- SPAC transactions. We are also adopting rules that address the scope of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Further, we are adopting a rule that would deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company's shareholders and are adopting amendments to a number of financial statement requirements applicable to transactions involving shell companies. In addition, we are providing guidance on the status of potential underwriters in de-SPAC transactions and adopting updates to our guidance regarding the use of projections in Commission filings as well as requiring additional disclosure regarding projections when used in connection with business combination transactions involving SPACs. Finally, we are providing guidance for SPACs to consider when analyzing their status under the Investment Company Act of 1940.
Full Text
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<title>Federal Register, Volume 89 Issue 38 (Monday, February 26, 2024)</title>
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[Federal Register Volume 89, Number 38 (Monday, February 26, 2024)]
[Rules and Regulations]
[Pages 14158-14327]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-01853]
[[Page 14157]]
Vol. 89
Monday,
No. 38
February 26, 2024
Part II
Securities and Exchange Commission
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17 CFR Parts 210, 229, 230, 232, 239, 240, and 249
Special Purpose Acquisition Companies, Shell Companies, and
Projections; Final Rule
Federal Register / Vol. 89 , No. 38 / Monday, February 26, 2024 /
Rules and Regulations
[[Page 14158]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 230, 232, 239, 240, and 249
[Release Nos. 33-11265; 34-99418; IC-35096; File No. S7-13-22]
RIN 3235-AM90
Special Purpose Acquisition Companies, Shell Companies, and
Projections
AGENCY: Securities and Exchange Commission.
ACTION: Final rules; guidance.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting rules intended to enhance investor protections in initial
public offerings by special purpose acquisition companies (commonly
known as SPACs) and in subsequent business combination transactions
between SPACs and private operating companies (commonly known as de-
SPAC transactions). Specifically, we are adopting disclosure
requirements with respect to, among other things, compensation paid to
sponsors, conflicts of interest, dilution, and the determination, if
any, of the board of directors (or similar governing body) of a SPAC
regarding whether a de-SPAC transaction is advisable and in the best
interests of the SPAC and its security holders. We are adopting rules
that require a minimum dissemination period for the distribution of
security holder communication materials in connection with de-SPAC
transactions. We are adopting rules that require the re-determination
of smaller reporting company (``SRC'') status in connection with de-
SPAC transactions. We are also adopting rules that address the scope of
the safe harbor for forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Further, we are adopting a
rule that would deem any business combination transaction involving a
reporting shell company, including a SPAC, to be a sale of securities
to the reporting shell company's shareholders and are adopting
amendments to a number of financial statement requirements applicable
to transactions involving shell companies. In addition, we are
providing guidance on the status of potential underwriters in de-SPAC
transactions and adopting updates to our guidance regarding the use of
projections in Commission filings as well as requiring additional
disclosure regarding projections when used in connection with business
combination transactions involving SPACs. Finally, we are providing
guidance for SPACs to consider when analyzing their status under the
Investment Company Act of 1940.
DATES: Effective date: The final rules are effective on July 1, 2024.
Compliance date: The compliance date for the final rules, other
than 17 CFR 229.1610, is July 1, 2024. The compliance date for 17 CFR
229.1610 is June 30, 2025.
FOR FURTHER INFORMATION CONTACT: Mark Saltzburg, Office of Rulemaking,
Division of Corporation Finance, at (202) 551-3430; with respect to 17
CFR 230.145a (Rule 145a under the Securities Act of 1933), the Office
of Chief Counsel, Division of Corporation Finance, at (202) 551-3500;
with respect to 17 CFR 210.15-01 (Rule 15-01 of Regulation S-X), Ryan
Milne, Office of Chief Accountant, Division of Corporation Finance, at
(202) 551-3400; with respect to 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 guidance under the Investment Company Act of 1940,
Rochelle Kauffman Plesset, Seth Davis, or Taylor Evenson, Senior
Counsels; or Lisa Reid Ragen, Branch Chief, 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 adopting new 17 CFR
210.15-01, new 17 CFR 229.1601 through 229.1610 (Item 1600 series of
Regulation S-K), and new 17 CFR 230.145a. We are also adopting
amendments to:
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Commission reference CFR citation (17 CFR)
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Securities Act of 1933
Rule 405.............................. Sec. 230.405.
Form S-1.............................. Sec. 239.11.
Form F-1.............................. Sec. 239.31.
Form S-4.............................. Sec. 239.25.
Form F-4.............................. Sec. 239.34.
Securities Exchange Act of 1934
Rule 12b-2............................ Sec. 240.12b-2.
Rule 14a-6............................ Sec. 240.14a-6.
Rule 14c-2............................ Sec. 240.14c-2.
Schedule 14A.......................... Sec. 240.14a-101.
Schedule TO........................... Sec. 240.14d-100.
Form 20-F............................. Sec. 249.220f.
Form 8-K.............................. Sec. 249.308.
Regulation S-K............................ Sec. Sec. 229.10 through
229.1406.
Item 10............................... Sec. 229.10.
Item 601.............................. Sec. 229.601.
Regulation S-T............................ Sec. Sec. 232.10 through
232.903.
Rule 405.............................. Sec. 232.405.
Regulation S-X............................ Sec. Sec. 210.1-01
through 210.13-02.
Rule 1-02............................. Sec. 210.1-02.
Rule 3-01............................. Sec. 210.3-01.
Rule 3-05............................. Sec. 210.3-05.
Rule 3-14............................. Sec. 210.3-14.
Rule 8-02............................. Sec. 210.8-02.
Rule 10-01............................ Sec. 210.10-01.
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Table of Contents
I. Introduction
II. New Subpart 1600 of Regulation S-K
A. Definitions
1. Proposed Definition: ``De-SPAC Transaction''
2. Comments: Definition of ``De-SPAC Transaction''
3. Final Definition: ``De-SPAC Transaction''
4. Proposed Definition: ``Special Purpose Acquisition Company
(SPAC)''
5. Comments: Definition of ``Special Purpose Acquisition Company
(SPAC)''
6. Final Definition: ``Special Purpose Acquisition Company
(SPAC)''
7. Proposed Definition: ``SPAC Sponsor''
8. Comments: Definition of ``SPAC Sponsor''
9. Final Definition: ``SPAC Sponsor''
10. Proposed Definition: ``Target Company''
11. Comments: Definition of ``Target Company''
12. Final Definition: ``Target Company''
B. Sponsors
1. Proposed Rules
2. Comments
3. Final Rules
C. Conflicts of Interest
1. Proposed Rules
2. Comments
3. Final Rules
D. Dilution
1. Proposed Rules
2. Comments
3. Final Rules
E. Prospectus Cover Page and Prospectus Summary Disclosure
1. Proposed Rules
2. Comments
3. Final Rules
F. De-SPAC Transactions: Background, Reasons, Terms, and Effects
1. Proposed Item 1605
2. Comments: Item 1605
3. Final Item 1605
G. Board Determination About the De-SPAC Transaction; Reports,
Opinions, Appraisals, and Negotiations
1. Proposed Item 1606(a)
2. Comments: Item 1606(a)
3. Final Item 1606(a)
4. Proposed Item 1606(b)
5. Comments: Item 1606(b)
6. Final Item 1606(b)
7. Proposed Items 1606(c) Through (e)
8. Comments: Items 1606(c) Through (e)
9. Final Items 1606(c) Through (e)
10. Proposed Item 1607
11. Comments: Item 1607
12. Final Item 1607
H. Tender Offer Filing Obligations
1. Proposed Item 1608
2. Comments: Item 1608
3. Final Item 1608
[[Page 14159]]
I. Structured Data Requirement
1. Proposed Item 1610
2. Comments
3. Final Item 1610 and Tagging Compliance Date
III. Disclosures and Liability in De-SPAC Transactions
A. Non-Financial Disclosures in De-SPAC Disclosure Documents
1. Proposed Rules
2. Comments
3. Final Rules
B. Minimum Dissemination Period
1. Proposed Rules
2. Comments
3. Final Rules
C. Private Operating Company as Co-Registrant
1. Proposed Rules
2. Comments
3. Final Rules
D. Re-Determination of Smaller Reporting Company (SRC) Status
1. Proposed Rules
2. Comments
3. Final Rules and Guidance
E. PSLRA Safe Harbor
1. Proposed Rules
2. Comments
3. Final Rules
F. Underwriter Status and Liability in Securities Transactions
1. Proposed Rule
2. Comments
3. Declining To Adopt Proposed Rule 140a; Commission Guidance on
Underwriter Status in De-SPAC Transactions
IV. Business Combinations Involving Shell Companies
A. Shell Company Business Combinations and the Securities Act of
1933
1. Proposed Rule
2. Comments
3. Final Rule
B. Financial Statement Requirements in Business Combination
Transactions Involving Shell Companies
1. Proposed Rule 15-01(a), Rule 1-02(d), and Form Instructions:
Audit Requirements
2. Comments: Rule 15-01(a), Rule 1-02(d), and Form Instructions:
Audit Requirements
3. Final Rule 15-01(a), Rule 1-02(d), and Form Instructions:
Audit Requirements
4. Proposed Rule 15-01(b): Number of Years of Financial
Statements
5. Comments: Rule 15-01(b): Number of Years of Financial
Statements
6. Final Rule 15-01(b): Number of Years of Financial Statements
7. Proposed Rule 15-01(c): Age of Financial Statements
8. Comments: Rule 15-01(c): Age of Financial Statements
9. Final Rule 15-01(c): Age of Financial Statements
10. Proposed Rules: 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-
14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by
a Predecessor
11. Comments: Rules 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-
14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by
a Predecessor
12. Final Rules 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-
14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by
a Predecessor
13. Proposed Rule 15-01(e): Financial Statements of a Shell
Company Registrant After the Combination With Predecessor
14. Comments: Rule 15-01(e): Financial Statements of a Shell
Company Registrant After the Combination With Predecessor
15. Final Rule 15-01(e): Financial Statements of a Shell Company
Registrant After the Combination With Predecessor
16. Proposed Rule 11-01(d)
17. Comments: Rule 11-01(d)
18. Decline to Adopt Rule 11-01(d)
19. Proposed Item 2.01(f) of Form 8-K
20. Comments: Item 2.01(f) of Form 8-K
21. Final Item 2.01(f) of Form 8-K
22. Proposed Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of
Predecessors
23. Comments: Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of
Predecessors
24. Final Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of
Predecessors
25. Other Shell Company Matters
V. Enhanced Projections Disclosure
A. Proposed Items 10(b) and 1609 of Regulation S-K
1. Proposed Rules
2. Comments
3. Final Rules
VI. The Status of SPACs Under the Investment Company Act
A. Background
B. SPAC Activities
1. The Nature of SPAC Assets and Income
2. Management Activities
3. Duration
4. Holding Out
5. Merging With an Investment Company
C. Conclusion
VII. Other Matters
VIII. Economic Analysis
A. Baseline and Affected Parties
1. SPAC Initial Public Offerings
2. De-SPAC Transactions
3. Blank Check Companies
4. Shell Company Business Combinations
B. Benefits and Costs of the Adopted Rules
1. Disclosure-Related Rules
2. Liability-Related Rules
3. Shell Company-Related Rules
4. Enhanced Projections Disclosure (Amendments to Item 10(b) of
Regulation S-K)
C. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
D. Reasonable Alternatives
1. Disclosure-Related Rules
2. PSLRA Safe Harbor Guidance
3. Expanding Disclosure in Reporting Shell Company Business
Combinations
4. Enhanced Projections Disclosure
IX. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Estimates of the Effects of the Final Rules on the
Collections of Information
C. Incremental and Aggregate Burden and Cost Estimates
1. Current Inventory Update To Reflect $600 Per Hour Rather Than
$400 Per Hour Outside Professional Costs Rate
2. PRA Burden and Cost Estimates Resulting From the Final Rules
X. Final Regulatory Flexibility Analysis
A. Need for, and Objectives of, the Final Rules
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Rules
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Duplicative, Overlapping or Conflicting Federal Rules
F. Agency Action To Minimize Effect on Small Entities
Statutory Authority
[[Page 14160]]
I. Introduction
Special purpose acquisition companies, or SPACs, first began to
emerge in the 1990s as an alternative to blank check companies after
blank check companies began to be regulated more strictly pursuant to
17 CFR 230.419 (``Rule 419'' \1\ under the Securities Act of 1933
(``Securities Act'')),\2\ a rule the Commission adopted following the
enactment of the Securities Enforcement Remedies and Penny Stock Reform
Act of 1990 (``Penny Stock Reform Act'').\3\ SPACs are shell companies
\4\ organized and managed by a sponsor for the purpose of merging with
or acquiring one or more unidentified private operating companies,
commonly known as a de-SPAC transaction, within a certain time
frame.\5\ The de-SPAC transaction is a hybrid transaction that contains
elements of both an initial public offering (``IPO'') and a merger and
acquisition (``M&A'') transaction.\6\ While structured as an M&A
transaction, the de-SPAC transaction also is the functional equivalent
of the private target company's IPO, because it results in the target
company becoming part of a combined company that is a reporting company
and provides the private target company with access to cash proceeds
that the SPAC had previously raised from the public. As part of this
process, the shareholders of the SPAC go from owning shares in a shell
company to owning shares in a combined company that conducts the
business of the private target. As a result, the de-SPAC transaction
implicates disclosure and liability concerns associated with both IPOs
and M&A transactions. Additionally, parties involved in the SPAC
process, such as the SPAC sponsor, may have incentives to consummate a
de-SPAC transaction that are not present in a traditional IPO or M&A
transaction. Further, as discussed in the Proposing Release,\7\ the
shareholders and management of a private operating company may believe
there to be certain advantages of combining with a SPAC compared with
conducting an underwritten IPO.
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\1\ The regulation at 17 CFR 230.419(a)(2) defines the term
``blank check company'' 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 (``Rule 3a51-1'' under the
Securities Exchange Act of 1934).
\2\ 15 U.S.C. 77a et seq.
\3\ Public Law 101-429, 104 Stat. 931 (Oct. 15, 1990). See Blank
Check Offerings, Release No. 33-6932 (Apr. 13, 1992) [57 FR 18037
(Apr. 28, 1992)]. A SPAC is not a ``blank check company'' because,
given that it raises more than $5 million in a firm commitment
underwritten initial public offering, it is not selling ``penny
stock.'' See Penny Stock Definition for Purposes of Blank Check
Rule, Release No. 33-7024 (Oct. 25, 1993) [58 FR 58099 (Oct. 29,
1993)]. To that end, SPACs often have provisions in their governing
instruments that prohibit them from being ``penny stock'' issuers.
\4\ 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.
\5\ The descriptions included in this release of common features
and fees currently seen in SPACs and SPAC transaction structures are
based, in part, on reviews by the Commission staff of SPAC filings
with the Commission. Based on review by the Commission staff of SPAC
filings, in the majority of transactions, SPACs typically combine
with private operating companies. In some cases, however, SPACs may
combine with other public companies. See, e.g., Bailey Lipschultz,
Re-SPACs Gain Steam as Arrival Finds New Sponsor, Bloomberg News
(Apr. 10, 2023), available at <a href="https://news.bloomberglaw.com/mergers-and-acquisitions/re-spacs-gain-steam-as-arrival-shares-sink-new-sponsor-steps-up">https://news.bloomberglaw.com/mergers-and-acquisitions/re-spacs-gain-steam-as-arrival-shares-sink-new-sponsor-steps-up</a>.
\6\ We use the terms ``initial public offering'' or ``IPO'' to
refer 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 Securities Exchange Act of 1934
immediately prior to the registration.
\7\ Special Purpose Acquisition Companies, Shell Companies, and
Projections, Release No. 33-11048 (Mar. 30, 2022) [87 FR 29458 (May
13, 2022)] (``Proposing Release''), at 29461, nn.22-25 and
accompanying text. See infra section VIII.A.1.ii.
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To have the necessary context for the concerns unique to SPACs and
de-SPAC transactions, it is critical to understand the structure and
lifecycle of a SPAC. Once formed, a SPAC will conduct its IPO in the
form of a firm commitment underwritten IPO of $5 million or more in
units consisting of redeemable shares and of warrants. The underwriting
fees for a SPAC IPO typically approximate 5% to 5.5% of the offering
proceeds, and a significant portion of those fees (around 3% of the IPO
proceeds) are conditioned on the completion of a de-SPAC
transaction.\8\ The SPAC sponsor is usually compensated through a
``promote'' or ``founder's shares''--i.e., discounted SPAC shares
received prior to the SPAC's IPO that generally only have value if a
de-SPAC transaction occurs.\9\
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\8\ See infra section VIII.A.1.iii.
\9\ The sponsor's compensation usually amounts to around 20% of
the total shares of a SPAC after its IPO.
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Following its IPO, a SPAC places all or substantially all of the
IPO proceeds into a trust or escrow account. The SPAC typically
registers its shares and warrants under section 12(b) of the Securities
Exchange Act of 1934 (``Exchange Act'') \10\ and lists the units
(typically consisting of a common share and a fraction of a warrant)
for trading on a national securities exchange.\11\
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\10\ 15 U.S.C. 78a et seq.
\11\ 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 at a price that is higher (often
$11.50) than the IPO price for common shares (which is often $10)
upon the later of the passage of a certain time period following the
SPAC's IPO (often one year) or a certain time period following the
completion of a de-SPAC transaction (often 30 days). Many warrants
have limitations on their potential upside as a result of the right
of the issuer to call the warrant under certain conditions, which
commonly include a condition that the underlying common stock have
traded at or above a certain price (often $18) for a specified
period of time. The redemption price in those call situations can
vary based on the specific warrant agreement provisions, so
investors commonly pay close attention to those pricing provisions.
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Next, the SPAC seeks to identify a target company for a de-SPAC
transaction within the time frame specified in its governing
documents.\12\ If the SPAC does not complete a de-SPAC transaction
within that time frame, it may seek an extension (often requiring
approval from its shareholders) or dissolve and liquidate.\13\ If the
SPAC enters into a business combination agreement with a target
company, the SPAC files a Form 8-K (or Form 6-K if the SPAC is a
foreign private issuer (``FPI'') that reports on Form 20-F) \14\
announcing the transaction that includes certain information on the
material terms of the business combination agreement.\15\ The parties
structure the de-SPAC transaction in different forms that may have tax
or other regulatory advantages.\16\ Prior to the closing of the de-SPAC
transaction, the shareholders of the SPAC typically have the
[[Page 14161]]
opportunity to either: (1) require the SPAC to redeem their shares
prior to the de-SPAC transaction \17\ and receive a pro rata share of
the amount in the IPO proceeds and related assets subject to the trust
or escrow arrangements (including interest thereon and commonly less
amounts released to pay income and franchise taxes), or (2) remain a
shareholder of the surviving company after the business
combination.\18\ To offset shareholder redemptions or 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.\19\
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\12\ The governing documents often provide for a time frame of
24 months, but it can be as long as 36 months. Exchange listing
rules generally require a SPAC to complete a business combination
within three years (or such shorter period specified in its
registration statement or applicable governing documents). See,
e.g., NYSE Listed Company Manual Section 102.06 and Nasdaq Listing
Rule IM-5101-2.
\13\ SPAC shareholders typically also have a redemption right in
connection with any votes to extend the duration of the SPAC.
\14\ See definition of ``foreign private issuer,'' infra note
442.
\15\ 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.
\16\ Three examples of common de-SPAC transaction structures
are: (i) the SPAC is the surviving company in a merger and the
target company merges into the SPAC, (ii) the target company is the
surviving company in a merger and the SPAC merges into the target
company, and (iii) a new holding company is created and the SPAC and
target company merge into that new holding company. The holding
company structure referred to in (iii) above includes ``double-
dummy'' structure transactions.
\17\ Until they become exercisable, warrants issued by the SPAC
do not typically provide a right to require the redemption of the
warrant by any party.
\18\ De-SPAC transactions often result in the former SPAC
shareholders owning a minority interest in the combined company.
According to one study of the 47 de-SPAC transactions that occurred
between Jan. 2019 and June 2020, SPAC shareholders, including the
SPAC sponsor, held a median of 35% of the combined company after a
de-SPAC transaction and the sponsor alone held a median of 12% of
the combined company. Michael Klausner, Michael Ohlrogge & Emily
Ruan, A Sober Look at SPACs, 39 Yale J. Reg., 228, 239-240 (2022).
\19\ 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.
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Regardless of its form, a de-SPAC transaction often is accompanied
by the need to attain shareholder approval for certain items (e.g.,
amendments to the governing documents of the SPAC, or authorization of
additional securities for issuance), and, in such cases, a SPAC
provides its shareholders with a proxy statement on Schedule 14A or an
information statement on Schedule 14C.\20\ If the SPAC, the target
company, or a holding company \21\ must register the offer and sale of
its securities to be issued in the de-SPAC transaction, the entity
typically files a registration statement on Form S-4 or F-4 to do
so.\22\ If no registration statement or proxy or information statement
is required, the SPAC may disseminate a tender offer statement (i.e., a
Schedule TO) for the redemption offer to its security holders with
information about the target company.\23\
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\20\ 17 CFR 240.14a-2; Exchange Act Rule 14c-2. The regulation
at 17 CFR 240.3a12-3(b) provides an exemption from the proxy and
information statement rules for FPIs, providing that ``[s]ecurities
registered by a foreign private issuer, as defined in Rule 3b-4. .
., shall be exempt from sections 14(a), 14(b), 14(c), 14(f) and 16
of the Act.''
\21\ In certain de-SPAC structures, a holding company is formed
to acquire both the private operating company and the SPAC.
\22\ As noted above, SPACs currently 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, (2) the entity that
will have a continuing Exchange Act reporting obligation following
the transaction, and (3) the disclosures provided in connection with
the transaction.
\23\ The Commission has promulgated rules under the Exchange Act
setting forth filing, disclosure, and dissemination requirements in
connection with tender offers. See, e.g., 17 CFR 240.14d-1 through
240.14d-103, 17 CFR 240.14e-1 through 240.14e-8 (``Regulation 14E''
under the Exchange Act), and 17 CFR 240.13e-4 (``Rule 13e-4'' under
the Exchange Act). When an issuer conducts a tender offer, the
issuer may be required to file and disseminate a Schedule TO
pursuant to Rule 13e-4. Because the redemption rights in a SPAC
context generally have indicia of a tender offer, such as a limited
period of time for the SPAC security holders to request redemption
of their securities, SPACs will generally file a Schedule TO in
circumstances where, in connection with a de-SPAC transaction, the
parties are neither soliciting votes or consents nor registering the
offer or sale of securities. The Commission staff has not objected
if a SPAC does not comply with the tender offer rules when the SPAC
files a required 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 17 CFR 240.14a-1 through 240.14b-2 (``Regulation
14A'' under the Exchange Act) or 240.14c-1 through 240.14c-101
(``Regulation 14C'' under the Exchange Act), 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 to a SPAC that does not
file a required Schedule 14A or 14C in connection with the de-SPAC
transaction or an extension. In these circumstances, SPACs have
generally filed and disseminated Schedules TO, and 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.H for a
discussion of 17 CFR 229.1608 (``Item 1608'' of Regulation S-K) that
we are adopting in this release and section IV.A for a discussion of
Rule 145a under the Securities Act that we are adopting in this
release, which will affect when a SPAC may be required to file a
registration statement in connection with a de-SPAC transaction. For
exchange-listed SPACs, exchange rules may require a SPAC to file
tender offer documents with the Commission in some circumstances.
See, e.g., Nasdaq Listing Rule IM-5101-2; NYSE Listed Company Manual
Section 102.06. The staff position discussed in this footnote and
any other staff guidance or statements referenced in this release,
including staff legal bulletins, staff compliance and disclosure
interpretations, and the Division of Corporation Finance's Financial
Reporting Manual (``FRM''), 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 views reflected
in these staff positions or the content of these staff statements
and, like all staff positions or 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.
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Finally, after the completion of the de-SPAC transaction, the
combined company must file a Form 8-K within four business days that
includes information about the target company equivalent to the
information that a new reporting company would be required to provide
when filing a Form 10 under the Exchange Act.\24\
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\24\ 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. If the
shell company is an FPI then a Form 20-F should be filed no later
than four business days after the consummation of the acquisition
that includes all of the information for the target company that
Form 20-F requires for registration of securities. By the time the
Form 8-K with Form 10 information is filed, the securities of the
combined company have often already begun trading on a national
securities exchange with a new ticker symbol because the securities
of the SPAC generally trade on an exchange until the consummation of
the de-SPAC transaction and the securities of the combined company
generally commence trading on the following business day.
---------------------------------------------------------------------------
In recent years, the U.S. securities market experienced a
significant increase in the number of SPAC IPOs, as shown in Table 1
\25\ below.
---------------------------------------------------------------------------
\25\ Estimates of SPAC IPO and IPO data in Table 1 are based on
SPAC Analytics, SPAC and US IPO Activity, available at <a href="https://www.spacanalytics.com">https://www.spacanalytics.com</a>. Estimates of de-SPAC transactions in Table 1
are based on data from Dealogic for SPACs registered with the
Commission and where year is based on M&A Completion Date.
Table 1--Number of SPAC IPOs in the U.S. Securities Market From 2012-2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Offerings
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPAC IPOs............................................... 9 10 12 20 13 34 46 59 248 613 86 31
IPOs (including SPAC IPOs).............................. 147 220 258 173 111 189 225 213 450 968 118 72
Percentage from SPACs................................... 6% 5% 5% 12% 12% 18% 20% 28% 55% 63% 73% 43%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Proceeds (in billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPAC IPOs............................................... 0.5 1.4 1.8 3.9 3.5 10.0 10.8 13.6 83.4 162.5 13.4 3.8
IPOs (including SPAC IPOs).............................. 50.1 70.8 93.0 39.2 25.8 50.3 63.9 72.2 179.4 334.7 22.9 25.1
[[Page 14162]]
Percentage from SPACs................................... 1% 2% 2% 10% 14% 20% 17% 19% 46% 49% 59% 15%
Number of Completed De-SPAC Transactions................ 6 11 5 10 9 13 23 28 64 199 101 89
--------------------------------------------------------------------------------------------------------------------------------------------------------
As shown above in Table 1, SPAC IPOs represent a significant share
of the U.S. IPO market in recent years. While we recognize that, like
overall IPO activity, the SPAC IPO market has declined recently, SPAC
IPOs nonetheless constituted over half of all U.S. IPOs respectively in
2020, 2021, and 2022, and constituted 43% of all U.S. IPOs in 2023.\26\
The number of de-SPAC transactions has also been significant relative
to the number of non-SPAC U.S. IPOs.
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
A similar trend has occurred when considering total proceeds for
SPAC IPOs as a percentage of total proceeds raised in all U.S. IPOs
over this period. SPAC IPO proceeds represented 46%, 49%, and 59% of
total proceeds raised in all U.S. IPOs respectively in 2020, 2021, and
2022. This percentage declined to 15% in 2023.\27\
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\27\ Id.
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During the years of increase in SPAC IPOs, many market observers
raised concerns about various aspects of the SPAC structure and the
hybrid nature of the de-SPAC transaction.\28\ Among other things,
commentators expressed concerns about SPAC sponsor compensation and
other costs that can have a dilutive effect on a SPAC's
shareholders,\29\ potential conflicts of interest in the SPAC structure
and de-SPAC transactions (e.g., the SPAC sponsors' compensation being
contingent on the completion of the de-SPAC transaction could lead
sponsors to enter into de-SPAC transactions that are unfavorable to
unaffiliated shareholders),\30\ and SPAC governing documents and stock
exchange listing rules under which SPAC shareholders can vote in favor
of a proposed de-SPAC transaction yet redeem their shares prior to the
closing of the transaction.\31\
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\28\ 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>.
In addition, as discussed in the Proposing Release, the Commission's
Investor Advisory Committee issued recommendations and expressed
certain concerns regarding SPACs. See Proposing Release, supra note
7, at 29462, nn.36-38 and accompanying text.
\29\ 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, Wall St. J. (Apr. 25, 2021).
\30\ See, e.g., Klausner, Ohlrogge & Ruan, supra note 18; Usha
Rodrigues & Michael A. Stegemoller, Redeeming SPACs (2021), U. of
Ga. Sch. of L. Legal Stud. Res. Paper No. 2021-09, available at
<a href="https://ssrn.com/abstract=3906196">https://ssrn.com/abstract=3906196</a> or <a href="http://dx.doi.org/10.2139/ssrn.3906196">http://dx.doi.org/10.2139/ssrn.3906196</a> (in the Proposing Release, a working paper of this
article was cited as Usha R. Rodrigues and Michael Stegemoller,
SPACs: Insider IPOs (SSRN Working Paper, 2021), with the short form
citation ``Rodrigues and Stegemoller''); Minmo Gahng, Jay R. Ritter
& Donghang Zhang, SPACs, 36 The Rev. of Financial Stu. 3463 (2023),
available at <a href="https://doi.org/10.1093/rfs/hhad019">https://doi.org/10.1093/rfs/hhad019</a>; 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>.
\31\ See Mira Ganor, The Case for Non-Binary, Contingent,
Shareholder Action, 23 U. Pa. J. Bus. L. 390 (2021); Rodrigues &
Stegemoller, supra note 30. 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''). In April 2022, the Commission's Investor Advocate
issued a recommendation to the NYSE and Nasdaq that their respective
listing standards should prohibit consummation of a business
combination when public SPAC shareholders exercise their conversion
rights for a majority of the shares. See Memorandum, dated April 21,
2022, from Rick A. Fleming, Investor Advocate, U.S. Securities and
Exchange Commission, to Adena T. Friedman, President & Chief
Executive Officer, and John Zecca, EVP & Global Chief Legal and
Regulatory Officer, Nasdaq, Inc., available at <a href="https://www.sec.gov/about/offices/investorad/recommendation-of-the-investor-advocate-nasdaq-spac-listing-standards-042122.pdf">https://www.sec.gov/about/offices/investorad/recommendation-of-the-investor-advocate-nasdaq-spac-listing-standards-042122.pdf</a>; and Memorandum, dated
April 21, 2022, from Rick A. Fleming, Investor Advocate, U.S.
Securities and Exchange Commission, to Lynn Martin, President, and
Jaime L. Klima, Chief Regulatory Officer, The NYSE Group, Inc.,
available at <a href="https://www.sec.gov/about/offices/investorad/recommendation-of-the-investor-advocate-nyse-spac-listing-standards-042122.pdf">https://www.sec.gov/about/offices/investorad/recommendation-of-the-investor-advocate-nyse-spac-listing-standards-042122.pdf</a>.
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Some commentators have expressed concerns regarding the adequacy of
the disclosures provided to investors in SPAC IPOs and de-SPAC
transactions \32\ in terms of explaining the potential risks and
effects for investors related to these transactions and the potential
benefits for the SPAC sponsor and other affiliates of the SPAC.\33\ For
example, even though the de-SPAC transaction essentially serves as the
IPO of the target company in the form of an M&A transaction, investors
may not receive the same information about the target company as they
would in a registration statement for a traditional IPO, because a
filing for an M&A transaction has different disclosure
requirements.\34\
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\32\ Throughout this release, when we discuss ``SPAC
transactions,'' we are referencing both SPAC IPOs and de-SPAC
transactions.
\33\ 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 Commission actions have highlighted disclosures about the
private operating company that are allegedly materially misleading,
among other things. 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) (settled
order); In the Matter of Nikola Corp., Release No. 33-11018, 34-
93838 (Dec. 21, 2021) (settled order); SEC v. Akazoo S.A., Case No.
1:20-cv-e08101 (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).
\34\ For example, a traditional IPO requires a more
comprehensive description of the business of a prospective
registrant than is required of a private target operating company in
an M&A transaction. Compare Item 11(a) of Form S-1, with Item
17(b)(1) of Form S-4, and Item 14(b)(3) of Schedule 14A.
Additionally, a description of property and material legal
proceedings is required for a prospective registrant in a
traditional IPO, but these disclosure requirements do not apply to a
private target operating company in an M&A transaction. See Item
11(b)-(c) of Form S-1.
---------------------------------------------------------------------------
There are also additional disclosure and liability concerns that
stem from the hybrid nature of the de-SPAC transaction. For example,
some 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 and have expressed concern that some SPACs have taken
the
[[Page 14163]]
position that the Private Securities Litigation Reform Act of 1995
(``PSLRA'') \35\ safe harbor applies to forward-looking statements made
by SPACs in connection with de-SPAC transactions.\36\ The target
company also is often not required to sign a registration statement
filed for a de-SPAC transaction (except in transaction structures where
the target company survives the de-SPAC transaction) and, by extension,
would not take on section 11 liability even though, similar to a
traditional IPO, reliable information about the business of the target
company is critical to investors when deciding whether to approve the
transaction and to invest in the combined company through their
redemption decision. Finally, commentators have noted that, unlike a
traditional IPO, a registered de-SPAC transaction lacks a named
underwriter that would typically perform traditional gatekeeping
functions, such as due diligence on the target company, and would be
subject to liability under section 11 of the Securities Act for the
registration statement.\37\
---------------------------------------------------------------------------
\35\ Public Law 104-67, 109 Stat. 737 (1995).
\36\ See, e.g., Michael Dambra, Omri Even-Tov & Kimberlyn
George, Should SPAC Forecasts Be Sacked? (SSRN Working Paper, 2022),
available at <a href="https://www.utah-wac.org/2022/Papers/even-tov_UWAC.pdf">https://www.utah-wac.org/2022/Papers/even-tov_UWAC.pdf</a>;
AFR Letter; Park Testimony; Rodrigues & Stegemoller, supra note 30;
see also Heather Somerville & Eliot Brown, SPAC Startups Made Lofty
Promises. They Aren't Working Out., Wall St. J., Feb. 25, 2022.
\37\ See AFR Letter; Deane Testimony; Rodrigues Testimony. For a
general discussion of the role of gatekeepers in securities markets,
see also John C. Coffee Jr., Gatekeeper Failure and Reform: The
Challenge of Fashioning Relevant Reforms, 84 B. U. L. Rev. 301
(2004); John C. Coffee, Jr., Gatekeepers: The Professions and
Corporate Governance (2006).
---------------------------------------------------------------------------
In response to a number of these and other concerns, the Commission
staff provided guidance relating to SPACs on five occasions between
December 2020 and April 2021.\38\ Then, in March 2022, the Commission
proposed new rules and rule amendments to enhance existing disclosure
requirements and investor protections in SPAC IPOs and in de-SPAC
transactions.\39\ On July 13, 2022, the U.S. Securities and Exchange
Commission Small Business Capital Formation Advisory Committee (``Small
Business Capital Formation Advisory Committee'') issued recommendations
related to this proposal.\40\
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\38\ 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); 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).
\39\ In this release, unless otherwise indicated, comment
letters cited refer to comment letters received in response to the
Proposing Release, and are available at <a href="https://www.sec.gov/comments/s7-13-22/s71322.htm">https://www.sec.gov/comments/s7-13-22/s71322.htm</a>. On March 30, 2022, the Commission
published the Proposing Release on its website. The comment period
for the Proposing Release was open for 30 days from publication in
the Federal Register and ended on June 13, 2022. Four commenters
stated that the comment period was inadequate and/or recommended
extending the comment period. See letters from Christopher
Iacovella, Chief Executive Officer, American Securities Association
(June 7, 2022) (``American Securities Association''); Jennifer
Schulp, Director of Financial Regulation Studies, Center for
Monetary and Financial Alternatives, Cato Institute (June 13, 2022)
(``Cato Institute''); Bobby Franklin, President & CEO, National
Venture Capital Association (June 13, 2022); Rod Miller, Chair,
Securities Regulation Committee, New York City Bar Association (June
13, 2022) (``NYC Bar''). In Oct. 2022, the Commission reopened the
comment period for the Proposing Release and other rulemakings
because certain comments on the Proposing Release and other
rulemakings were potentially affected by a technological error in
the Commission's internet comment form. See Resubmission of Comments
and Reopening of Comment Periods for Several Rulemaking Releases Due
to a Technological Error in Receiving Certain Comments, Release No.
33-11117 (Oct. 7, 2022) [87 FR 63016 (Oct. 18, 2022)] (``Reopening
Release''). The Reopening Release was published on the Commission's
website on Oct. 7, 2022, and in the Federal Register on Oct. 18,
2022, and the reopened comment period ended on Nov. 1, 2022. We have
considered all comments received since Mar. 30, 2022, and do not
believe an additional extension of the comment period is necessary.
\40\ The Small Business Capital Formation Advisory Committee
recommendations on the Proposing Release are available at <a href="https://www.sec.gov/spotlight/sbcfac/sbcfac-spac-recommendation-050622.pdf">https://www.sec.gov/spotlight/sbcfac/sbcfac-spac-recommendation-050622.pdf</a>.
The Small Business Capital Formation Advisory Committee made the
following five recommendations, in summary: (1) SPACs should remain
a viable path for companies to pursue as a means of getting access
to public market capital and the committee is concerned the proposed
rules, as written, might render SPACs unusable as an alternative to
IPOs, (2) the committee is generally supportive of improving
disclosures for SPACs, particularly in the period of time between
the announcement of the merger and the closing of the de-SPAC
transaction, (3) the Commission should clearly identify which
participants would have underwriter liability and participants
should be held accountable to the same extent they would be in
traditional IPOs, (4) projections in de-SPAC transactions should be
covered by the liability safe harbor provisions of the PSLRA,
because management projections are an important part of the
rationale for companies in determining whether to engage in a merger
with a SPAC and they are necessary when financial intermediaries
provide fairness opinions related to de-SPAC transactions, and (5)
the Commission should expand or eliminate the 18-month and 24-month
timelines provided in the Investment Company Act safe harbor for
SPACs, because the requirement to engage in a de-SPAC transaction
within 18 months after a SPAC IPO and complete a de-SPAC transaction
within 24 months could incentivize SPAC sponsors to engage in
riskier acquisitions to complete the merger process within
artificially short periods. With respect to the Small Business
Capital Formation Advisory Committee's first recommendation--that
SPACs remain a viable path to access public market capital--we do
not believe the final rules will vitiate this access or render SPACs
unusable as an alternative to IPOs. On the contrary, we believe the
final rules will support the SPAC market by enhancing SPAC
disclosures and enhancing investor protection in ways that help
investor decision-making and increase investor confidence that they
have the necessary information to invest in the SPAC market. With
respect to the Small Business Capital Formation Advisory Committee's
second recommendation--supporting improved disclosures for SPACs,
particularly in the period of time between the announcement of the
merger and the closing of the de-SPAC transaction--we believe the
final rules collectively will enhance such disclosure. We address
the other specific recommendations of the Small Business Capital
Formation Advisory Committee in the specific sections of this
release related to those recommendations.
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While we recognize that the number of SPAC IPOs has declined since
2021, the investor protection concerns regarding SPACs and the hybrid
nature of the de-SPAC transaction identified in the Proposing Release
do not depend on market fluctuations. In addition, as noted above,
notwithstanding the recent decline, SPAC transactions have become a
much larger part of the U.S. securities markets over the last decade
and could continue to grow as macroeconomic and other factors change.
Accordingly, after considering comments received on the proposal, we
are adopting final rules that will provide for greater transparency and
more robust investor protections in SPAC IPOs and de-SPAC transactions.
The final rules will enhance the completeness, usefulness, and
comparability of the disclosures provided by SPACs and target companies
at the SPAC IPO and de-SPAC transaction stages and will provide other
important protections for investors in this market, all of which may
promote market efficiency. Further, given that the de-SPAC transaction
essentially is an IPO of the target company in the form of an M&A
transaction, the final rules also will ensure that investors receive
similar information about the target company and similar protections as
in a traditional IPO in connection with the de-SPAC transaction. The
final rules also will provide investors with information about, and
protections with respect to, the M&A elements of de-SPAC transactions,
particularly regarding the transaction approval process and conflicts
of interest.
To these ends, we are adopting new subpart 229.1600 of 17 CFR part
229 (``subpart 1600'' of Regulation S-K) that sets forth specialized
disclosure requirements for SPAC IPOs and de-SPAC transactions. New
subpart 1600 contains provisions that, among other things:
[[Page 14164]]
<bullet> Require additional disclosures about the SPAC sponsor,
potential conflicts of interest, and dilution;
<bullet> Require certain disclosures on the prospectus outside
front cover page and in the prospectus summary of registration
statements filed in connection with SPAC IPOs and de-SPAC transactions;
and
<bullet> Require additional disclosures regarding de-SPAC
transactions, including (1) if the law of the jurisdiction in which the
SPAC is organized requires its board of directors (or similar governing
body) to determine whether the de-SPAC transaction is advisable and in
the best interests of the SPAC and its shareholders, or otherwise make
any comparable determination, disclosure of that determination, and (2)
if the SPAC or SPAC sponsor has received any outside report, opinion,
or appraisal materially relating to the de-SPAC transaction, certain
disclosures concerning the report, opinion, or appraisal.
In addition, we are adopting amendments to provide procedural
protections and to align the disclosures provided to investors, as well
as the legal obligations of companies, in de-SPAC transactions more
closely with those in traditional IPOs. Specifically, we are adopting
final rules that:
<bullet> Amend the registration statement forms and schedules filed
in connection with de-SPAC transactions to require additional
disclosures about the target company;
<bullet> Provide that a target company in a registered de-SPAC
transaction is a co-registrant on the registration statement used for
the de-SPAC transaction such that the target company will be subject to
liability under section 11 of the Securities Act;
<bullet> Make the PSLRA safe harbor unavailable to SPACs (including
with respect to projections of target companies seeking to access the
public markets through a de-SPAC transaction), by defining ``blank
check company'' to encompass SPACs (and other companies that would be
blank check companies but for the fact that they do not sell penny
stock); and
<bullet> Require re-determination of SRC status following a de-SPAC
transaction.
We also are providing guidance regarding potential underwriter status
under section 2(a)(11) of the Securities Act in de-SPAC transactions.
In addition, to provide reporting shell company shareholders,
including SPAC shareholders, with more consistent Securities Act
liability protections regardless of transaction structure, we are
adopting new Rule 145a that specifies that any business combination of
a reporting shell company, other than a business combination related
shell company, involving another entity that is not a shell company
involves a sale of securities to the reporting shell company's
shareholders.\41\ We are also adopting new 17 CFR 210.15-01 (``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 target company with those
in traditional IPOs.
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\41\ Throughout this release, for readability, 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. 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.
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With respect to effectiveness and compliance with the final rules,
in response to commenters,\42\ we have set an extended effective date
for the new rules (i.e., July 1, 2024, which is 125 days after the date
of publication of this release in the Federal Register). This extended
period before the final rules are effective will provide sufficient
time for an initial public filing to be made under the existing rules
for any transactions that are currently pending or planned. Any filings
made on or after the effective date must comply with the final rules.
---------------------------------------------------------------------------
\42\ Some commenters indicated that some or all of the new rules
should not apply to existing SPACs and/or should apply only
prospectively. See, e.g., letters from American Securities
Association; Cato Institute; Freshfields Bruckhaus Deringer US LLP
(June 13, 2022) (``Freshfields''); Don Nguyen (Apr. 20, 2022);
Nicholas Wilson (June 9, 2022).
---------------------------------------------------------------------------
We are also issuing guidance regarding the status of SPACs under
the Investment Company Act of 1940 (``Investment Company Act'').\43\ We
have decided not to adopt proposed 17 CFR 270.3a-10 (``Rule 3a-10''
under the Investment Company Act) which would have provided a safe
harbor from the definition of investment company under section
3(a)(1)(A) to SPACs that complied with the rule's conditions. Whether a
SPAC is an investment company as defined in the Investment Company Act
is a question of facts and circumstances. Given the individualized
nature of this analysis, and because, depending on the facts and
circumstances, a SPAC could be an investment company at any stage of
its operations such that a specific duration limitation may not be
appropriate, we have decided not to adopt proposed Rule 3a-10. We are,
however, providing guidance as to the type of activities that would
likely raise serious questions about a SPAC's status as an investment
company under the Investment Company Act.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 80a-1 et seq.
---------------------------------------------------------------------------
II. New Subpart 1600 of Regulation S-K
The Commission is adopting final rules to add new subpart 1600 to
Regulation S-K. The new subpart sets forth disclosure requirements
applicable to SPACs regarding, among other things, the sponsor,
potential conflicts of interest, and dilution and requires certain
disclosures on the prospectus cover page and in the prospectus
summary.\44\ The Commission is also adopting final rules to amend a
number of forms and schedules used by SPACs for IPOs and de-SPAC
transactions to require the information set forth in subpart 1600.\45\
To the extent that the disclosure requirements in subpart 1600 address
the same subject matter as the existing disclosure requirements of the
forms or schedules, the requirements of subpart 1600 are
controlling.\46\
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\44\ The requirements in new subpart 1600 will codify and
standardize some of the disclosures already commonly provided by
SPACs.
\45\ See the amendments to Forms S-1, F-1, S-4, F-4 and 8-K and
Schedules 14A and TO. While the Commission did not propose
amendments to Schedule 14C, the disclosure required by subpart 1600
will 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 the requirements of Form S-4 or F-4 that
the Commission is adopting, as applicable, in regard to de-SPAC
transactions would apply in that context. Also, in both Form S-4 and
Form F-4, we made technical changes from the proposal to clarify
that the new Regulation S-K Item 1600 series of disclosures should
be located in the prospectus part of these forms. As a result Form
S-4 provides: ``If securities to be registered on this Form will be
issued in a de-SPAC transaction, as defined in Item 1601(a) of
Regulation S-K (17 CFR 229.1601(a)), then the disclosure provisions
of Items 1603 through 1607 and 1609 of Regulation S-K (17 CFR
229.1603 through 229.1607 and 229.1609) apply in addition to the
provisions of this Form and disclosure thereunder must be provided
in the prospectus, and the structured data provisions of Item 1610
of Regulation S-K (17 CFR 229.1610) apply to those disclosures.'' We
made similar changes to Form F-4. For purposes of consistency across
forms and schedules, we made similar changes as well to Schedule 14A
and Schedule TO, although there is no requirement in these forms to
locate the disclosure in the prospectus portion of these schedules.
In both Schedule 14A and Schedule TO, we made technical changes from
the proposal to clarify that Item 1604(a) does not apply since these
disclosure documents do not include an outside front cover page
similar to a prospectus and Item 1604(b) disclosure should be
included in the front part of the disclosure document instead of the
prospectus summary referred to in Item 1604(b).
\46\ General Instruction L.1. to Form S-4; General Instruction
I.1. to Form F-4; Item 14(f)(1) to Schedule 14A; General Instruction
L to Schedule TO.
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[[Page 14165]]
A. Definitions
1. Proposed Definition: ``De-SPAC Transaction''
The Commission proposed to define the term ``de-SPAC transaction''
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).\47\
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\47\ Proposed Item 1601(a).
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2. Comments: Definition of ``De-SPAC Transaction''
One commenter recommended we add the term ``reorganization'' to the
non-exhaustive list of transactions set out in the proposed definition
of de-SPAC transaction.\48\
---------------------------------------------------------------------------
\48\ Letter from Jay Knight, Chair of the Committee on Federal
Regulation of Securities of the Section of Business Law of the
American Bar Association (June 17, 2022) (``ABA'').
---------------------------------------------------------------------------
One commenter recommended the definition of de-SPAC transaction
refer to ``initial business combination'' not ``business combination.''
\49\ Another commenter recommended the definition be named ``initial
business combination'' instead of ``de-SPAC transaction.'' \50\
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\49\ Letter from ABA.
\50\ Letter from Kirkland & Ellis LLP (June 15, 2022)
(``Kirkland & Ellis'').
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In response to a request for comment,\51\ one commenter said there
was no need to tie the definition of de-SPAC transaction to
transactions that are permitted under exchange listing standards,
particularly if the definition of SPAC includes non-listed shell
companies.\52\
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\51\ Proposing Release, supra note 7, at 29466 (request for
comment number 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?'').
\52\ Letter from Vinson & Elkins (June 13, 2022) (``Vinson &
Elkins'').
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3. Final Definition: ``De-SPAC Transaction''
After considering the comments received, we are adopting the
definition of de-SPAC transaction as proposed with a modification
discussed below.\53\ Under the final rules, the term de-SPAC
transaction means a business combination, such as a merger,
consolidation, exchange of securities, acquisition of assets,
reorganization, or similar transaction, involving a special purpose
acquisition company and one or more target companies
(contemporaneously, in the case of more than one target company).
---------------------------------------------------------------------------
\53\ Item 1601(a) of Regulation S-K.
---------------------------------------------------------------------------
We agree with one commenter's recommendation \54\ to add the term
``reorganization'' to the non-exhaustive list of transactions set out
in the definition of de-SPAC transaction. It is our understanding some
transactions commonly considered to be de-SPAC transactions may be
considered reorganizations. Hence, we have added the suggested term to
the final definition.
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\54\ Letter from ABA.
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A few commenters suggested the definition of de-SPAC transaction
should use the phrase ``initial business combination.'' \55\ We
recognize the phrase ``initial business combination'' may be used
interchangeably with ``business combination'' or ``de-SPAC
transaction'' in the marketplace today, but we believe the simpler
proposed term ``business combination'' used in the body of the de-SPAC
transaction definition will be clearer to market participants. One of
these commenters suggested the term ``initial business combination''
should be used because ``[s]ubsequent acquisitions by the former SPAC
after Closing should not be considered a De-SPAC Transaction.'' \56\ We
note that a company that is no longer a SPAC would not be subject to
the disclosure items in subpart 1600 of Regulation S-K.\57\
---------------------------------------------------------------------------
\55\ Letters from ABA, Kirkland & Ellis.
\56\ Letter from ABA.
\57\ See also infra note 94 and accompanying text concerning
SPAC status after a de-SPAC transaction.
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We agree with the commenter who said there was no need to tie the
definition of de-SPAC transaction to transactions that are permitted
under exchange listing standards, particularly if the definition of
SPAC includes non-listed shell companies.\58\ A narrower definition may
inappropriately exclude transactions that should be included, such as
those involving over-the-counter-traded SPACs. We continue to believe,
as indicated in the Proposing Release,\59\ that the definition of de-
SPAC transaction should include less common transactions that may or
may not be permitted under exchange listing rules but for which the
enhanced disclosure and procedural requirements in the final rules may
be appropriate because they raise the same investor protection
concerns.\60\
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\58\ Letter from Vinson & Elkins.
\59\ Proposing Release, supra note 7, at 29466.
\60\ In adopting this definition of de-SPAC transaction, we do
not intend to indicate that such transactions are or should be
permitted under the exchanges' SPAC listing rules or that exchange
listing requirements should not apply to SPACs seeking an exchange
listing.
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4. Proposed Definition: ``Special Purpose Acquisition Company (SPAC)''
The Commission proposed Item 1601 to define the term ``special
purpose acquisition company (SPAC)'' 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; \61\
(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.\62\
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\61\ Blank check companies subject to Rule 419 must comply with
a comprehensive set of disclosure and investor protection
requirements under the rule and were not proposed to be subject to
the requirements applicable to SPACs under the proposed rules.
\62\ Proposed Item 1601(b).
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5. Comments: Definition of ``Special Purpose Acquisition Company
(SPAC)''
One commenter indicated they saw no need for a definition of the
term ``SPAC,'' as the commenter saw ``no reason why the Proposed Rules
should not apply to all shell companies, other than business
combination shell companies, inclusive of blank check companies'' and
also indicated the proposed definitions of ``SPAC'' and ``de-SPAC
transaction'' were circular, stating, ``The proposed definition of `de-
SPAC transaction' should be revised to eliminate the reference to `a
special purpose acquisition company' in order to eliminate
circularity.'' \63\
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\63\ Letter from Vinson & Elkins (noting that ``as proposed, a
special purpose acquisition company has a business plan to complete
a de-SPAC transaction, and a de-SPAC transaction involves a special
purpose acquisition company.'').
---------------------------------------------------------------------------
A few commenters did not support including the requirement that a
SPAC ``return all remaining proceeds from the registered offering and
any concurrent offerings to its shareholders'' in the proposed SPAC
definition.\64\ One of these commenters said this aspect of the
definition is ``unnecessary and should be eliminated or revised to only
refer to the plan to return proceeds from the registered offering''
because ``SPACs often hold a modest amount of working capital outside
of their trust accounts that they use to fund operating expenses.''
\65\ According to the commenter, ``[i]f a shell company had such cash
remaining at the point when the public shareholders exercise their
redemption rights, it would be inappropriate to exclude such shell
company from the [p]roposed [r]ules
[[Page 14166]]
based solely on retaining such cash.'' \66\ Another commenter
recommended that we change this aspect of the definition to use the
phrase ``redeem the equity securities issued in the registered offering
if the company does not complete a de-SPAC transaction within the
specified time frame.'' \67\
---------------------------------------------------------------------------
\64\ Letters from ABA, Vinson & Elkins.
\65\ Letter from Vinson & Elkins.
\66\ Id.
\67\ Letter from ABA.
---------------------------------------------------------------------------
One commenter recommended we narrow the definition of SPAC to only
``a blank check company as defined in Sec. 230.419(a)(2).'' \68\
Another commenter, who opposed defining ``SPAC,'' noted that the
proposed definition ``is not limited to companies listed on a national
securities exchange'' and ``would include shell companies traded in
over-the-counter markets, which are not what would generally be
considered to be `SPACs.' '' \69\ That commenter noted that a ``logical
distinction could be drawn based on exchange listing, rather than on
whether the offering is by a blank check company and therefor subject
to Rule 419.'' \70\ The same commenter recommended that, if we adopt a
new definition, we clarify that a company ``ceases to be a SPAC for
purposes of the rules after consummation of a de-SPAC transaction.''
\71\
---------------------------------------------------------------------------
\68\ Letter from ABA.
\69\ Letter from Vinson & Elkins.
\70\ Id.
\71\ Id.
---------------------------------------------------------------------------
In response to requests for comment,\72\ one commenter said that
``it is clear what entities are SPACs, without the need for additional
boxes to check.'' \73\
---------------------------------------------------------------------------
\72\ Proposing Release, supra note 7, at 29466 (request for
comment number 6) (``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?'').
\73\ Letter from Vinson & Elkins.
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6. Final Definition: ``Special Purpose Acquisition Company (SPAC)''
After considering the comments received, we are adopting the
definition of special purpose acquisition company (or SPAC) as
proposed, with certain modifications discussed below.\74\ Under the
final rules, the term special purpose acquisition company (SPAC) means
a company that has: (1) indicated that its business plan is to: (i)
conduct a primary offering of securities that is not subject to the
requirements of Sec. 230.419 (Rule 419 under the Securities Act); (ii)
complete a business combination, such as a merger, consolidation,
exchange of securities, acquisition of assets, reorganization, or
similar transaction, with one or more target companies within a
specified time frame; and (iii) return proceeds from the offering and
any concurrent offering (if such offering or concurrent offering
intends to raise proceeds) to its security holders if the company does
not complete a business combination, such as a merger, consolidation,
exchange of securities, acquisition of assets, reorganization, or
similar transaction, with one or more target companies within the
specified time frame; or (2) represented that it pursues or will pursue
a special purpose acquisition company strategy.
---------------------------------------------------------------------------
\74\ Item 1601(b) of Regulation S-K.
---------------------------------------------------------------------------
One commenter did not see a need for a new defined term ``SPAC,''
\75\ because, in the commenter's view, enhanced disclosures should
apply to all shell companies (other than business combination shell
companies) and not only to those companies defined as SPACs.\76\
Several of the rules being adopted in this release will enhance
disclosures for investors in non-SPAC shell companies.\77\ However, the
proposed individual disclosure items in the Item 1600 series of
Regulation S-K were largely tailored to SPAC transactions. For the
reasons we discuss in this release below in connection with the
specific rules we are adopting, we believe it is appropriate at this
time to apply enhanced disclosure in connection with companies meeting
the definition of SPAC. However, we will continue to consider whether
enhanced disclosure in other shell company transactions, such as
reverse mergers with public shell companies, would be appropriate or
necessary in the future.\78\
---------------------------------------------------------------------------
\75\ Letter from Vinson & Elkins. See supra note 63 and
accompanying text.
\76\ Letter from Vinson & Elkins.
\77\ See Rule 145a and definitions of ``blank check company'' in
Securities Act Rule 405 and Exchange Act Rule 12b-2.
\78\ According to data provided by The Deal during the years
when it tracked this data, the number of reverse mergers not
involving SPACs was as follows by year: (a) 48 in 2017, (b) 48 in
2018, (c) 28 in 2019, and (d) 17 in 2020. The Deal staff indicated
to the Commission staff they stopped tracking the data after 2020
because of the small number of reverse mergers.
---------------------------------------------------------------------------
This commenter further observed there was circularity in the
proposed definitions of ``SPAC'' and ``de-SPAC transaction.'' \79\ We
agree the final rules should eliminate this circularity. Although the
commenter made the suggestion to revise the definition of ``de-SPAC
transaction'' rather than addressing the issue by revising the
definition of ``SPAC,'' we believe it would be clearer to avoid
circularity by revising the definition of ``SPAC.'' We have replaced
the term ``de-SPAC transaction'' in the definition of ``SPAC'' with
``business combination, such as a merger, consolidation, exchange of
securities, acquisition of assets, reorganization, or similar
transaction, with one or more target companies.''
---------------------------------------------------------------------------
\79\ Letter from Vinson & Elkins. See supra note 63 and
accompanying text.
---------------------------------------------------------------------------
Several comments focused on the aspect of the proposed SPAC
definition regarding the return of proceeds and suggested that special
purpose acquisition companies may not return ``all remaining
proceeds.'' \80\ We agree with commenters that the proposed term
``return all remaining proceeds'' could inappropriately exclude
companies that take some portion of cash out of trust for anticipated
expenses and therefore do not return ``all'' proceeds at the time of
redemption.\81\ To avoid excluding such companies, we have revised the
definition to use the term ``return proceeds'' instead of ``return all
remaining proceeds.'' We have also added a parenthetical reference
``(if such offering or concurrent offering intends to raise proceeds)''
that qualifies the term ``offering and any concurrent offering'' to
account for the fact there may be some SPAC offerings that do not raise
proceeds.
---------------------------------------------------------------------------
\80\ Letters from ABA, Vinson & Elkins. See supra notes 64, 65,
and 66 and accompanying text.
\81\ See, e.g., letters from ABA (``In addition, SPACs are
permitted to withdraw interest to pay income and franchise taxes,
and, upon liquidation, pay certain liquidation costs. . . .'');
Goodwin Procter LLP (June 14, 2022) (``Goodwin'') (``SPACs are
permitted to withdraw interest to pay income and franchise taxes
and, upon liquidation, pay certain liquidation costs. . . .'');
White & Case LLP (June 17, 2022) (``White & Case'') (``In addition,
SPACs are permitted to withdraw interest to pay income and franchise
taxes, and, upon liquidation, pay certain liquidation costs, which
would reduce overall returns.'').
---------------------------------------------------------------------------
We do not believe it is necessary to revise the definition to refer
only to the plan to return proceeds from the primary offering, rather
than the primary offering and any concurrent offering. We understand
SPACs typically place proceeds of concurrent offerings in trust and
return these proceeds if the SPAC does not complete a de-SPAC
transaction within the specified time frame.\82\
---------------------------------------------------------------------------
\82\ See NYSE Listed Company Manual Section 102.06 and Nasdaq
Listing Rule IM-5101-2 (providing for the placement of concurrent
offering proceeds in trust).
---------------------------------------------------------------------------
We are not adopting the recommendation that we should replace the
terms related to the return of proceeds with alternative terms related
to the redemption of equity securities. We continue to believe, as the
Commission indicated in the Proposing Release, that the definition
should not include certain criteria, including the issuance of
redeemable securities, that
[[Page 14167]]
could 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.\83\
---------------------------------------------------------------------------
\83\ Proposing Release, supra note 7, at 29466.
---------------------------------------------------------------------------
One commenter recommended we narrow the definition of SPAC to only
``a blank check company as defined in Sec. 230.419(a)(2).'' \84\ The
Rule 419 definition of ``blank check company'' includes a requirement
that the company is issuing penny stock.\85\ The proposed definition of
SPAC reflects the fact that special purpose acquisition company
structures often are designed to avoid issuing penny stock but continue
to pose disclosure and other investor protection concerns.\86\ Special
purpose acquisition companies frequently do not issue penny stock and,
therefore, would not meet the definition in Sec. 230.419(a)(2). Thus,
the inclusion of the suggested criterion would inappropriately exclude
many or all special purpose acquisition companies from the SPAC
definition.
---------------------------------------------------------------------------
\84\ Letter from ABA.
\85\ See supra notes 1 and 61 (discussion of Securities Act Rule
419). As discussed in section III.E infra, in the final rules, we
are not amending the definition of ``blank check company'' in Rule
419 as proposed but are adopting a definition of ``blank check
company'' in Securities Act Rule 405 that is exclusively for
purposes of the safe harbor created by the PSLRA for forward-looking
statements.
\86\ Proposing Release, supra note 7, at 29465.
---------------------------------------------------------------------------
Another commenter indicated the SPAC definition should draw a
distinction based on exchange listing, which would exclude shell
companies traded in over-the-counter markets. In the commenter's view,
shell companies traded in over-the-counter markets are not generally
considered to be SPACs.\87\ While companies commonly considered to be
SPACs often list on a national securities exchange, we do not believe
the SPAC definition should be limited to such listed entities. While
carving out companies traded over-the-counter might leave out only a
few (or zero) companies today, prevailing structures may further evolve
over time just as they have evolved over time in the past,\88\ and we
believe investors in those over-the-counter companies engaged in the
same kinds of business as exchange-traded companies should have the
same investor protections provided by the rules we are adopting.\89\
---------------------------------------------------------------------------
\87\ Letter from Vinson & Elkins.
\88\ See, e.g., Table 2 in section VIII (Economic Analysis)
(statistics on over-the-counter SPACs for over a three-decade
period).
\89\ Prior to exchange rule changes permitting listing, shells
commonly referred to as SPACs were not exchange-listed. See
Securities Exchange Act Release Nos. 58228 (July 25, 2008) [73 FR
44794 (July 31, 2008)] (Order Granting Approval to Proposed Rule
Change, as modified by Amendment No. 1, to Adopt Additional Initial
Listing Standards to list Securities of Special Purpose Acquisition
Companies) (NASDAQ-2008-013); 57785 (May 6, 2008) [73 FR 27597 (May
13, 2008)] (Order Approving Proposed Rule Change to Adopt New
Initial and Continued Listing Standards to List Securities of
Special Purpose Acquisition Companies) (SR-NYSE-2008-17). According
to data from SPACInsider, in the years 2020 through 2022, there were
zero SPAC IPOs in the over-the-counter market (i.e., that were not
listed on an exchange in connection with the IPO).
---------------------------------------------------------------------------
Furthermore, we are adding a new clause to the definition that
provides that the term special purpose acquisition company also
includes a company that has represented it pursues or will pursue a
special purpose acquisition company strategy.\90\ In the Proposing
Release, the Commission asked if the proposed definition provides a
workable approach to determining which issuers would be subject to the
requirements of proposed subpart 1600.\91\ In addition, the Commission
asked whether there were any potential opportunities for regulatory
arbitrage in shell company or SPAC transactions that the Commission
should consider addressing.\92\ After further consideration of these
regulatory arbitrage concerns, we have revised the final rule to
include new paragraph (b)(2) to Item 1601 concerning pursuit of a
special purpose acquisition company strategy. Variations on common SPAC
structures could cause some companies to fall technically outside one
of the three prongs of paragraph (1) of the final SPAC definition. When
companies make representations they pursue or will pursue a special
purpose acquisition company strategy, they may be indistinguishable to
investors from companies that meet the other components of the
definition. As a result, we believe investors in such companies should
benefit from the enhanced disclosures applicable to SPACs. Therefore,
even where a company technically does not meet one of the three prongs
in paragraph (1) of the final definition of SPAC, if it represents,
directly or indirectly, that it pursues or will pursue a SPAC strategy,
then pursuant to paragraph (2) of the final definition of SPAC, the
company would meet the definition of a SPAC.
---------------------------------------------------------------------------
\90\ As a result of this change, the three prongs contained in
the proposed definition (that had paragraph numbers (1), (2), and
(3)) will be renumbered as paragraphs (1)(i), (ii), and (iii) and
the clause regarding pursuit of a SPAC strategy will be numbered as
paragraph (2). We have also added a parenthetical reference to the
acronym ``(SPAC)'' in the body of the definition in the final rule
as well as in the name of the defined term ``special purpose
acquisition company (SPAC)'' to add incremental clarity that the
acronym also refers to the defined term.
\91\ Proposing Release, supra note 7, at 29466 (request for
comment number 1).
\92\ Proposing Release, supra note 7, at 29490 (request for
comment number 102).
---------------------------------------------------------------------------
Similarly, to avoid the risk that certain varieties of SPACs may
fall outside the definition because of minor technical distinctions
from the prongs of the definition, we have changed the proposed term
``register a primary offering'' to ``conduct a primary offering'' to
account for evolving SPAC structures that may not conduct a registered
offering. We do not believe it would be appropriate for companies in
de-SPAC transactions to avoid the disclosure (or any other)
requirements of these final rules only because the initial SPAC
transaction was not registered. As noted in the Proposing Release,\93\
we intend this definition to be sufficiently broad to take into account
potential variations in the SPAC structure and the possibility that
SPACs may continue to evolve. This adjustment to the definition will
ensure that appropriate disclosures are provided at the de-SPAC stage
regardless of the structure of the initial SPAC transaction. In the
final definition, we have also made a corresponding revision to change
the proposed term ``registered offering'' to ``offering.''
---------------------------------------------------------------------------
\93\ Proposing Release, supra note 7, at 29465.
---------------------------------------------------------------------------
One commenter recommended we clarify that a company ceases to be a
SPAC upon consummation of a de-SPAC transaction.\94\ For the avoidance
of doubt, we are providing guidance that, if a company that meets the
SPAC definition has completed a de-SPAC transaction or, in the case of
one or more target companies, contemporaneous de-SPAC transactions,
then the company no longer meets the definition of a SPAC and that such
companies are not required to comply with the enhanced disclosures
under Regulation S-K applicable to SPACs in registration statements
they file in later periods after the completion of such de-SPAC
transactions.
---------------------------------------------------------------------------
\94\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
We are not requiring a check box on form cover pages indicating
SPAC status as the enhanced disclosure provided by registrants pursuant
to the Item 1600 series of Regulation S-K will make clear the
registrant is a SPAC.\95\
---------------------------------------------------------------------------
\95\ See also section III.C (discussing co-registration on Forms
S-4 and F-4 and the requirement to identify the target company as a
registrant on the registration statement cover page).
---------------------------------------------------------------------------
7. Proposed Definition: ``SPAC Sponsor''
The Commission proposed to define the term ``SPAC sponsor'' as the
entity and/or person(s) primarily responsible
[[Page 14168]]
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.\96\
---------------------------------------------------------------------------
\96\ Proposed Item 1601(c).
---------------------------------------------------------------------------
8. Comments: Definition of ``SPAC Sponsor''
One commenter said the proposal ``should be revised to eliminate
the need for a defined term `SPAC sponsor' '' and, ``[i]nstead, the
rules should require disclosure regarding the SPAC's directors,
officers and affiliates.'' \97\ This commenter also said ``the
definition's exclusion of directors and officers in their capacities as
such would result in there being no `sponsor' for many SPACs.'' This
commenter also said the proposal ``blur[red] the lines between the
roles and responsibilities of the SPAC sponsor and that of the SPAC
board and officers.''
---------------------------------------------------------------------------
\97\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
Another commenter recommended an alternative definition of ``SPAC
sponsor'': ``the entity and/or person(s) that (1) own all or a portion
of the privately placed common equity securities of the special purpose
acquisition company and (2) are primarily responsible for directing and
managing the business and affairs of a special purpose acquisition
company other than in their capacities as (i) directors or officers of
the special purpose acquisition company or (ii) third-party service
providers to the special purpose acquisition company, as applicable.''
\98\ The commenter said that ``the `SPAC sponsor' should be the entity
or persons who have both ownership of [s]ponsor shares and
responsibility for directing and managing the SPAC.'' The commenter
said that their suggested definition will ``identify the entity or
persons that are currently identified as [s]ponsors in registration
statements for the SPAC.'' \99\
---------------------------------------------------------------------------
\98\ Letter from ABA.
\99\ Letter from ABA.
---------------------------------------------------------------------------
9. Final Definition: ``SPAC Sponsor''
After considering the comments received, we are adopting the
definition of SPAC sponsor as proposed with certain modifications
discussed below.\100\ Under the final rules, the term SPAC sponsor
means any entity and/or person primarily responsible for organizing,
directing, or managing the business and affairs of a special purpose
acquisition company, excluding, if an entity is a SPAC sponsor,
officers and directors of the special purpose acquisition company who
are not affiliates of any such entity that is a SPAC sponsor.
---------------------------------------------------------------------------
\100\ Item 1601(c) of Regulation S-K.
---------------------------------------------------------------------------
The definition is designed to be sufficiently broad that
appropriate entities or persons will be subject to the enhanced
disclosure requirements applicable to SPAC sponsors.\101\ Although a
sponsor of a SPAC may perform a variety of functions within the SPAC's
structure, we intend for the SPAC sponsor definition to encompass
activities that, based on the staff's experience reviewing SPAC filings
and public commentary, are commonly understood to be sponsors of SPACs
or with persons referred to as sponsors in current registration
statements.
---------------------------------------------------------------------------
\101\ See, e.g., Item 1603 (regarding SPAC sponsors).
---------------------------------------------------------------------------
We do not believe it would provide investors with adequate
information to tie the SPAC sponsor definition to persons with
particular titles, because the definition and corresponding disclosure
requirements are intended to capture all parties who perform certain
activities that result in such parties having key substantive influence
over the SPAC. The suggestion to replace ``SPAC sponsor'' with
``directors, officers, and affiliates of the SPAC'' would require
disclosure from directors and officers not commonly considered to be
sponsors today and, as indicated by the Commission in the Proposing
Release, would overlap unnecessarily with current required disclosure
concerning directors and officers.\102\ Also, ``directors, officers,
and affiliates of the SPAC'' may not include external management
companies and their principals that should be included in the
definition on the basis of their activities. While State law may
provide that directors manage the business and affairs of a corporation
and may not provide that any one director has any more authority than
any other director,\103\ the phrase ``primarily responsible'' in the
definition of SPAC sponsor is not limited to solely directors or solely
directors and officers. Other persons, such as third-party management
companies and their affiliates, frequently are primarily responsible
for the organization, direction, or management of the business and
affairs of SPACs today and would be SPAC sponsors under the definition
we are adopting.
---------------------------------------------------------------------------
\102\ See Proposing Release, supra note 7, at 29466, n.58 (``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.'').
\103\ See, e.g., DGCL Section 141(a) (``The business and affairs
of every corporation organized under this chapter shall be managed
by or under the direction of a board of directors, except as may be
otherwise provided in this chapter or in its certificate of
incorporation.'').
---------------------------------------------------------------------------
One commenter recommended an alternative definition of SPAC sponsor
that featured, among other things, carve-outs from that alternative
definition for directors and officers of the SPAC and for third-party
service providers.\104\ This commenter also suggested that the proposed
definition's exclusion of directors and officers in their capacities as
such would result in a null set of SPAC sponsors.\105\ Having
considered this comment, we have made changes to the final definition.
We are not adopting the proposed term ``other than in their capacities
as directors or officers,'' because it could be unclear under the
proposed definition whether any action taken on behalf of the SPAC by a
director or officer of a SPAC is ``other than in that person's capacity
as an officer or director.'' As the commenter noted, this could result
in no such persons being considered SPAC sponsors. To address such
potential ambiguities, in the final rule, we have changed the term
``other than in their capacities as directors or officers of the
special purpose acquisition company as applicable'' to ``excluding, if
an entity is a SPAC sponsor, officers and directors of the special
purpose acquisition company who are not affiliates of any such entity
that is a SPAC sponsor.'' Based on the staff's experience, we
understand that a SPAC sponsor entity is typically involved in the
SPAC. However, if the SPAC sponsor is not an entity, then we want to
make sure the appropriate persons are captured within the SPAC sponsor
definition. An officer or director of the SPAC that is an affiliate of
an entity that is a SPAC sponsor would also be a SPAC sponsor under the
final definition. For example, in the case of a hypothetical SPAC where
a third-party management company is a SPAC sponsor and a person is a
director of both the SPAC and this third-party management company, then
this person would also be a SPAC sponsor.
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\104\ Letter from ABA. See supra note 98 and accompanying text.
\105\ Id.
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We are not adopting the suggestion to exclude ``third-party service
providers'' from the definition of SPAC sponsor.\106\ As discussed
above, some third-party service providers will be ``SPAC sponsors''
under the definition where they are ``primarily responsible for
organizing, directing, or managing the business and affairs'' of the
SPAC. Other
[[Page 14169]]
third-party service providers, however, will not fall within the
definition of SPAC sponsor where they are not ``primarily responsible''
for organizing, directing, or managing the business and affairs of a
SPAC. For example, external legal counsel that only assists in the
formation of a SPAC by drafting its certificate of incorporation and
bylaws on behalf of a client would not be ``primarily responsible'' for
``organizing . . . the business and affairs of a SPAC.'' \107\ Other
third-party service providers may perform similar administrative or
ministerial activities for a SPAC or provide outside legal or
accounting advice neither of which would cause them to be ``primarily
responsible'' for organizing, directing, or managing the business and
affairs of the SPAC and thus they would not be SPAC sponsors.
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\106\ Letter from ABA. See supra note 98 and accompanying text.
\107\ Item 1601(c).
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10. Proposed Definition: ``Target Company''
The Commission proposed to define the term ``target company'' as an
operating company, business, or assets.\108\
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\108\ Proposed Item 1601(d).
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11. Comments: Definition of ``Target Company''
One commenter asserted that ``the concept of `assets' being a
`target company' yields anomalous results under certain proposed rules
(such as requiring assets to sign a registration statement) and the
concept of a `business' may be vague (as a business may be a product
line, rather than an entity that could sign a registration
statement).'' \109\ Another commenter suggested ``deleting the term
`assets' from the definition or clarifying that a target company
includes assets where the acquisition of such assets is intended to
constitute the SPAC's initial business combination.'' \110\
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\109\ Letter from Vinson & Elkins.
\110\ Letter from Freshfields (``We believe there are
circumstances where a SPAC may acquire some assets (such as cash)
but would not yet have completed its acquisition of a target
company.'').
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12. Final Definition: ``Target Company''
After considering the comments received, we are adopting the
definition of target company as proposed.\111\ Under the final rules,
the term target company means an operating company, business or assets.
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\111\ Item 1601(d) of Regulation S-K.
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To address commenters' concerns about the use of the terms
``assets'' and ``business'' in the definition of target company,\112\
we have revised certain registration statement form instructions, as
discussed in more detail below.\113\ We believe these changes address
the commenters' concerns. Therefore, we do not believe it is necessary
to make changes to the proposed definition of ``target company.'' In
addition, although an asset purchase transaction may be a different
form of transaction for the purposes of other legal requirements,
including State law, we do not believe a SPAC combination with a target
company taking the form of an asset purchase should be excluded from
the definition of de-SPAC transaction merely for this reason.
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\112\ Letters from Freshfields, Vinson & Elkins. See supra notes
65 and 66 and accompanying text.
\113\ See infra section III.C.
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B. Sponsors
1. Proposed Rules
The Commission proposed Item 1603(a) to require additional
disclosure about the SPAC sponsor, its affiliates, and promoters \114\
in registration statements and schedules filed in connection with SPAC
registered offerings and de-SPAC transactions,\115\ including
disclosure of the following:
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\114\ The term ``promoter'' is defined in Securities Act Rule
405 and Exchange Act Rule 12b-2.
\115\ See (a) proposed General Instruction VIII to Form S-1, (b)
proposed General Instruction I.1 to Form S-4, (c) proposed General
Instruction VII to Form F-1, (d) proposed General Instruction I.1 to
Form F-4. (e) proposed Item 14(f)(1) of Schedule 14A, and (f)
proposed General Instruction K to Schedule TO.
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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 SPAC sponsor and the SPAC, its executive officers,
directors, or affiliates, with respect to determining whether to
proceed with a de-SPAC transaction and (2) between the SPAC sponsor and
unaffiliated security holders of the SPAC regarding the redemption of
outstanding securities;
<bullet> The controlling persons of the SPAC sponsor and any
persons who have direct and indirect material interests in the SPAC
sponsor and the nature and amount of their interests, as well as an
organizational chart that shows the relationship between the SPAC, the
SPAC sponsor, and the SPAC sponsor's affiliates;
<bullet> Tabular disclosure of the material terms of any lock-up
agreements with the SPAC 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 SPAC 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 SPAC sponsor, its
affiliates, and any promoters upon the completion of a de-SPAC
transaction.\116\
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\116\ In the Proposing Release, the Commission stated that 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. Proposing
Release, supra note 7, at 29467, n.64.
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2. Comments
Broadly categorized, commenters on proposed Item 1603(a) or
generally on the types of SPAC sponsor issues covered by proposed Item
1603(a) focused on six areas: (1) general comments that expressed
support for the proposals, (2) promoter requirements, (3) compensation,
(4) transfers of SPAC ownership, (5) interests in the SPAC sponsor and
the organizational chart requirement, and (6) agreements.
i. General Comments
A number of commenters generally supported the proposed enhanced
disclosure requirements regarding SPAC sponsors.\117\ Commenters cited
a number of benefits to investors as the reasons for their support,
including the following five benefits: (a) placing investors in a
better position to evaluate the merits of SPAC and de-SPAC
transactions,\118\ (b) illuminating financial incentives of SPAC
sponsors that may affect de-SPAC transaction outcomes,\119\ (c)
providing compensation information that may promote more informed
investment decisions,\120\ (d) providing SPAC
[[Page 14170]]
sponsor ownership interest information that may affect investor ability
to vote on de-SPAC transactions,\121\ and (e) providing information
about SPAC sponsor experience that may help investors assess the SPAC
sponsor's ability to find a target company.\122\
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\117\ Letters from ABA; Stephen W. Hall, Legal Director and
Securities Specialist, and Scott Farnin, Legal Counsel, Better
Markets (June 13, 2022) (``Better Markets); Michael Ryan, Chief
Executive Officer, Bullet Point Network, LP (June 13, 2022)
(``Bullet Point Network''); Charles Pieper (May 13, 2022) (``Charles
Pieper''); John L. Thornton, Co-Chair, Hal S. Scott, President, and
R. Glenn Hubbard, Committee on Capital Markets Regulation (June 13,
2022) (``Committee on Capital Markets Regulation''); Paul Andrews,
Managing Director, Research, Advocacy and Standards, CFA Institute
(May 31, 2022) (``CFA Institute''); Glenn Davis, Deputy Director,
Council of Institutional Investors (June 9, 2022) (``CII''); Dylan
Bruce, Financial Services Counsel, Consumer Federation of America
(June 13, 2022) (``Consumer Federation''); Elizabeth Warren, United
States Senator (July 8, 2022) (``Senator Elizabeth Warren''); Kerrie
Waring, Chief Executive Officer, International Corporate Governance
Network (June 13, 2022) (``ICGN''); Melanie Senter Lubin, President,
North American Securities Administrators Association, Inc. (June 13,
2022) (``NASAA''); Paul A. Swegle, Kinsel Law Offices (Apr. 9, 2022)
(``Paul Swegle'').
\118\ Letter from Committee on Capital Markets Regulation.
\119\ Letter from CII.
\120\ Letter from Consumer Federation.
\121\ Letter from ICGN.
\122\ Letters from ICGN, NASAA.
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Also, several commenters suggested that proposed Item 1603(a) would
codify, to an extent, existing disclosure practices.\123\
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\123\ Letters from ABA, NASAA, Vinson & Elkins.
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ii. Promoters
Some commenters said Item 1603 should not apply to ``promoters.''
\124\ One commenter asserted that application to the SPAC sponsor and
its affiliates would include all significant participants in the SPAC
and thus the ``promoter'' provision would not significantly benefit
investors.\125\ Another commenter said that ``disclosure regarding a
promoter of the SPAC's initial public offering that will have no
involvement with the de-SPAC transaction would be immaterial to
investors.'' \126\
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\124\ Letters from Freshfields, Vinson & Elkins.
\125\ Letter from Freshfields (stating that ``the proposed rules
also already require disclosure of all persons who have direct and
indirect material interests in the SPAC sponsor and the amount and
nature of their interests'' and that ``this should encompass the
most relevant entities and persons'').
\126\ Letter from Vinson & Elkins.
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iii. Compensation
A number of commenters suggested that the proposed disclosure
requirements regarding sponsor compensation would provide useful
information to investors.\127\ A few commenters expressed the view that
sponsor compensation is already sufficiently disclosed.\128\
---------------------------------------------------------------------------
\127\ Letters from Better Markets, Charles Pieper, Committee on
Capital Markets Regulation, CFA Institute, Consumer Federation,
Senator Elizabeth Warren, ICGN, NASAA.
\128\ Letters from Samir Kapadia, Director, and Bobby
Cunningham, Director, SPAC Association (June 13, 2022) (``SPAC
Association''); Vinson & Elkins (expressing the view that sponsor
compensation and reimbursement is already disclosed under existing
disclosure requirements and the material terms of lock-up agreements
are already sufficiently disclosed as a matter of industry
practice).
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One commenter said the SPAC sponsor ``20 percent promote is fully
and fairly disclosed and has been for decades.'' \129\ Another
commenter said they ``believe the sponsor's compensation and
reimbursement are already sufficiently disclosed in response to
existing disclosure requirements and that incremental disclosure
requirements are thus not merited.'' \130\
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\129\ Letter from SPAC Association. We understand that the term
SPAC sponsor ``promote'' typically refers to the acquisition by the
SPAC sponsor of a significant percentage of the shares of the SPAC,
typically 20%. We observe the term used to connote a meaning of
``special compensation,'' but it does not involve a preferred
return, such as in real estate private equity investment structures
that also use this terminology.
\130\ Letter from Vinson & Elkins.
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One commenter that did not support the additional proposed
disclosure requirements stated that, if the Commission were nonetheless
to impose new requirements, ``the reference to `compensation' should be
revised to refer instead to all equity and rights to cash held by the
SPAC directors and officers and their affiliates, as certain equity
interests may be purchased for value (i.e., not be `compensation') and
reimbursement of advances or repayment of loans would not be
compensation.'' \131\ Another commenter said ``sponsor compensation
comes almost entirely in the form of capital gains associated with
securities issued in the `promote' resulting from stock price increases
after the de-SPAC transaction, and quantifying such compensation may
involve speculation or be subject to criticism as incomplete.'' \132\
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\131\ Letter from Vinson & Elkins.
\132\ Letter from Loeb & Loeb LLP (June 13, 2022) (``Loeb &
Loeb'').
---------------------------------------------------------------------------
Another commenter said that, ``in addressing non-equity
compensation and reimbursements, proposed Item 1603(a)(6) should
explain its requirement to identify other compensation and
reimbursements that are material, individually or in the aggregate and
that the required disclosure may be qualitative and not quantitative,
except where amounts are above a specified de minimis threshold,
similar to the approach taken in certain respects under the existing
compensation disclosure framework in Item 402 of Regulation S-K [17 CFR
229.402].'' \133\
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\133\ Letter from ABA.
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iv. Transfer of SPAC Ownership
Several commenters recommended we adopt requirements to disclose
transfers of SPAC securities by the SPAC sponsor and others. One
commenter recommended, in response to request for comment,\134\ adding
a sentence at the end of Item 1603(a)(6) that states: ``Disclose any
arrangements under which the SPAC sponsor, its affiliates and any
promoters have transferred ownership of any securities in the SPAC to
other parties in exchange for compensation or other benefit to the
sponsor, its affiliates, any promoters, or to the SPAC.'' \135\ The
commenter said that ``SPAC sponsors at times sell off a portion of
their promote or other securities to a `risk-capital syndicate' as a
way of cashing out early on a portion of the compensation they receive
for their work on the SPAC'' and that ``the amount of interest that a
sponsor retains in securities of the SPAC is material for investors
seeking to evaluate the incentive of the sponsor in pursuing a SPAC
merger.'' \136\ Another commenter suggested expanding current Forms 3
and 4 director and officer reporting requirements to cover SPAC
sponsors and their transactions in SPAC securities after the de-SPAC
transaction.\137\ Similarly, another commenter recommended disclosure
of post-de-SPAC transaction transfers, noting ``this reporting could be
time limited, for example to two years'' following the de-SPAC
transaction.\138\
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\134\ Proposing Release, supra note 7, at 29467 (request for
comment number 9) (``Should we require more or less information
about the sponsor's compensation and reimbursements?'').
\135\ Letter from Michael Klausner, Stanford Law School, and
Michael Ohlrogge, NYU School of Law (June 13, 2022) (``Michael
Klausner and Michael Ohlrogge''), included as an attachment to a
letter from Michael Ohlrogge, NYU School of Law (June 13, 2022).
\136\ Id.
\137\ Letter from Paul Swegle.
\138\ Letter from NASAA.
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v. Interest in SPAC Sponsor and Organizational Chart
One commenter said that the proposed approach departs from the
traditional approach to beneficial ownership reporting and recommended
that this item should clarify that ``an indirect economic interest in
less than 10% of a SPAC's founder shares or warrants through ownership
of equity interests in a [SPAC] [s]ponsor should not, in and of itself
and absent other factors, be considered a direct or indirect material
interest in the [SPAC] [s]ponsor.'' \139\ Another commenter said the
identity of natural persons controlling the sponsor is already
disclosed in response to existing 17 CFR 229.403 (``Item 403'' of
Regulation S-K).\140\
---------------------------------------------------------------------------
\139\ Letter from ABA.
\140\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
vi. Agreements
One commenter recommended that the Commission should revise
proposed Item 1603(a)(8) to ``specify that if a SPAC, the SPAC sponsor,
or any affiliated party enters into an agreement regarding the
redemption of outstanding securities of the SPAC after the date of the
merger registration statement or proxy, that the SPAC be required to
issue a proxy amendment or similar
[[Page 14171]]
filing prior to the redemption deadline to inform SPAC shareholders of
the new agreement.'' \141\
---------------------------------------------------------------------------
\141\ Letter from Michael Klausner and Michael Ohlrogge.
---------------------------------------------------------------------------
Another commenter said the material terms of lock-up agreements are
already disclosed as a matter of industry practice and that requiring
additional disclosure would ``go beyond the disclosure requirements
applicable to lock-up agreements that are entered into in connection
with a traditional IPO.'' \142\ Regarding proposed requirements to
disclose any exceptions to relevant lock-up agreements, one commenter
recommended excluding exceptions that are not material or are
customary.\143\ This commenter noted that frequently these exceptions
provide that the transferee agree to the lock-up agreement as a
condition of the transfer.\144\
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\142\ Letter from Vinson & Elkins.
\143\ Letter from Freshfields (``Exceptions to lockups that are
customary and not significant or material [include]: transfers to
affiliates, transfers to family members, gifts and other charitable
donations, transfers by will or inheritance, transfers upon
dissolution of a marriage, and in-kind distributions to an entity's
members and partners'').
\144\ Letter from Freshfields.
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3. Final Rules
After considering the comments received, we are adopting Item
1603(a) as proposed with certain modifications we discuss below.
Additionally, for clarity and consistency throughout Item 1603, we have
replaced the term ``executive officers'' with the term ``officers.''
i. General Discussion
Item 1603(a)'s disclosure requirements will provide a SPAC's
prospective investors and existing shareholders with detailed
information relating to the SPAC sponsor that could be important in
understanding and analyzing a SPAC, including how the rights and
interests of the SPAC sponsor, its affiliates, and any promoters may
differ from, or may conflict with, those of public shareholders.\145\
Given that a SPAC does not conduct an operating business, information
about the background and experience of the SPAC sponsor is important in
assessing a SPAC's prospects for success and may be a relevant factor
in the market value of a SPAC's securities.\146\ Corresponding
disclosure with respect to SPAC sponsor affiliates and promoters will
also provide investors with important information, because the SPAC
sponsor's affiliates and any promoters of the SPAC may also carry out
activities similar to those of a SPAC sponsor. Furthermore, the
enhanced disclosure regarding the SPAC sponsor's compensation and the
SPAC 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.
---------------------------------------------------------------------------
\145\ Item 1603(a) will operate in addition to existing
disclosure requirements that may be applicable to a SPAC's
arrangements with SPAC sponsors such as 17 CFR 229.701 (``Item 701''
of Regulation S-K), which requires disclosure about, among other
things, the terms of any private securities transactions between a
SPAC and SPAC sponsors within the past three years, and 17 CFR
229.404 (``Item 404'' of Regulation S-K), which requires disclosure
about certain related party transactions.
\146\ See, e.g., Chen Lin, Fangzhou Lu, Roni Michaely & Shihua
Qin, SPAC IPOs and Sponsor Network Centrality (SSRN Working Paper,
2021); 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).
---------------------------------------------------------------------------
Several commenters suggested that proposed Item 1603(a) would
codify, to an extent, existing disclosure practices.\147\ We agree that
the requirements in Item 1603 to provide detailed disclosure about the
SPAC sponsor, the SPAC sponsor's experience, and its rights and
interests will codify existing disclosure practices. This will help
ensure that issuers provide consistent and comprehensive information
across transactions, so that investors can make more informed
investment and voting decisions.
---------------------------------------------------------------------------
\147\ Letters from ABA, NASAA, Vinson & Elkins.
---------------------------------------------------------------------------
i. Promoters
We are retaining the applicability of Item 1603 to promoters.\148\
We disagree with the commenters who asserted that Item 1603 should not
apply to ``promoters'' and that the disclosure regarding a promoter
would not significantly benefit investors or would be immaterial to
investors.\149\ Certain persons are explicitly included as a
``promoter'' under Securities Act Rule 405 and Exchange Act Rule 12b-
2.\150\ There may be facts and circumstances involving a SPAC where a
person may be considered either a ``promoter,'' ``SPAC sponsor,''
``officer,'' or ``director'' or may be more than one of these. As with
a SPAC sponsor, the promoter's background and experience, compensation,
and conflicts of interest are material information for investors in the
SPAC IPO (particularly given the absence of an operating business) and
any de-SPAC transaction. Such information will enable investors to
better understand promoter incentives and activities.\151\ A registrant
is not required to repeat the same disclosure twice merely because a
person fits in two categories (for example, both a ``promoter'' and a
``SPAC sponsor'').
---------------------------------------------------------------------------
\148\ The proposal's disclosure requirements related to
``promoters'' included the following proposed items: (1) Item
1603(a)(3) (promoter's experience), (2) Item 1603(a)(4) (promoter's
role), (3) 17 CFR 229.1602(b)(6) (``Item 1602(b)(6)'') and Items
1603(a)(6), and 1604(a)(3) (promoter's compensation), and (4) Items
1602(a)(5), 1602(b)(7), 1603(b)(1), 1604(a)(4), and 1604(b)(3)
(promoter conflicts of interest).
\149\ Letters from Freshfields, Vinson & Elkins. See supra notes
124, 125, and 126 and accompanying text.
\150\ Securities Act Rule 405 provides: The term promoter
includes: (i) Any person who, acting alone or in conjunction with
one or more other persons, directly or indirectly takes initiative
in founding and organizing the business or enterprise of an issuer;
or (ii) Any person who, in connection with the founding and
organizing of the business or enterprise of an issuer, directly or
indirectly receives in consideration of services or property, or
both services and property, 10 percent or more of any class of
securities of the issuer or 10 percent or more of the proceeds from
the sale of any class of such securities. However, a person who
receives such securities or proceeds either solely as underwriting
commissions or solely in consideration of property shall not be
deemed a promoter within the meaning of this paragraph if such
person does not otherwise take part in founding and organizing the
enterprise. Exchange Act Rule 12b-2 contains similar provisions.
\151\ Item 1603 also applies to disclosure in de-SPAC
transactions. See, e.g., instructions to Form S-4 and F-4.
---------------------------------------------------------------------------
Additionally, in the final rules, we have made technical changes to
ensure consistent reference to ``SPAC sponsor, its affiliates, and
promoters'' among disclosure requirements relating to the cover page,
summary, and body sections of the prospectus.\152\
---------------------------------------------------------------------------
\152\ See Items 1602(a)(3) (adding term ``promoter'' in cover
page requirements to be consistent with Item 1602(b)(6) prospectus
summary requirements) and (b)(6), 1603(a)(6), and 1604(a)(3), (b)(4)
(adding the term ``promoter'' to summary prospectus requirements to
be consistent with cover page requirements in Item 1604(a)(3)), and
(c)(1) (adding the terms ``its affiliates, and promoters'' to
prospectus body requirements to be consistent with cover page and
summary requirements in Item 1604(a)(3) and (b)(4)).
---------------------------------------------------------------------------
ii. Compensation
We are adopting the SPAC sponsor compensation disclosure largely as
proposed with certain modifications in response to comments. We
disagree with the commenter who suggested that--because sponsor
compensation and reimbursement are already disclosed under existing
disclosure requirements and current market practice provides for
similar disclosure as to the material terms of lock-up agreements--the
proposed additional disclosure requirements should not be
[[Page 14172]]
adopted.\153\ On the contrary, we believe compliance with the final
rules will be minimally burdensome where disclosure of this information
is already market practice and will create a uniform and transparent
regime across-the-board, maintaining a minimum standard of disclosure
across transactions, even if market practice were to change in the
future.
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\153\ Letter from Vinson & Elkins. See also letter from SPAC
Association (asserting that ``the SPAC 20% promote is fully and
fairly disclosed and has been for decades''). See supra notes 128,
129, and 130 and accompanying text.
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We agree with comments that returns based on the price appreciation
from the ``promote'' stake owned by the SPAC sponsor may be a
significant source of potential remuneration to the SPAC sponsor that
investors would want to know about in making their investment and
voting decisions.\154\ As a result, we have added terms explicitly
requiring disclosure of the amount of securities issued or to be issued
by the SPAC to the SPAC sponsor, its affiliates, and promoters and the
price paid or to be paid for such securities.\155\ For example, where a
SPAC sponsor purchased a 20 percent ownership interest in the SPAC,
this interest and the purchase price would be required to be disclosed
under the revised provision and would not be excluded on the basis of
not being ``compensation.''
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\154\ Letters from Loeb & Loeb, Vinson & Elkins. See supra notes
131 and 132 and accompanying text.
\155\ See Items 1602(a)(3) and (b)(6), 1603(a)(6), and
1604(a)(3), (b)(4), and (c)(1). For the avoidance of doubt, in Items
1602(a)(3) and (b)(6), 1603(a)(6), and 1604(a)(3), disclosure should
be provided with respect to each person who is one of the types of
named persons in those items; registrants may provide totals of
those individual disclosures but the disclosure of a single lump sum
covering all types of persons named in those items would be
insufficient by itself.
---------------------------------------------------------------------------
Pursuant to these changes, any mechanisms, such as an anti-dilution
provision,\156\ to keep the SPAC sponsor ownership at a certain level
(or similar mechanisms for affiliates or promoters) and any potential
cancellation of shares issued or to be issued to the SPAC sponsor (or
its affiliates or promoters) or increase in shares issued to the SPAC
sponsor (or its affiliates or promoters) will be required to be
disclosed since these features would affect shares issued or to be
issued to those parties. The approach taken in the final rules will
address the concerns over speculation related to quantifying
compensation expressed by one commenter,\157\ because these contractual
terms are known at the time of the IPO and therefore do not require any
speculation about possible stock price changes after the de-SPAC
transaction.
---------------------------------------------------------------------------
\156\ See, e.g., Clifford Chance, Guide to Special Purpose
Acquisition Companies 5 (Sept. 2021), available at <a href="https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2021/09/guide-to-special-purpose-acquisition-companies.pdf">https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2021/09/guide-to-special-purpose-acquisition-companies.pdf</a> (``However, if
additional public shares or equity-linked securities are issued in
connection with the de-SPAC transaction, the exchange ratio for the
founder shares will typically be adjusted to maintain the 20%
promote for the sponsors.''); Michael Klausner, Michael Ohlrogge &
Harald Halbhuber, Net Cash Per Share: The Key to Disclosing SPAC
Dilution, 40 Yale J. on Reg. 18, 28 (2022) (stating that ``[s]ome
SPACs also provide `anti-dilution' protection to sponsors by giving
them the right to an additional 20% of newly raised PIPE equity at
the time of a merger'' and stating that typically ``sponsors waive
their right to some or all these additional shares, though in some
cases they do so in exchange for additional shares.'').
\157\ Letter from Loeb & Loeb. See supra note 132 and
accompanying text.
---------------------------------------------------------------------------
Regarding the comments concerning reimbursement of advances and
repayment of loans,\158\ we do not believe it is necessary to modify
the proposed term ``reimbursement.'' The term is not limited to
specific types of reimbursements. Any funds outlaid by the SPAC sponsor
that are later returned to the SPAC sponsor would constitute a
``reimbursement'' under the rule, notwithstanding that the return of
the funds to the SPAC sponsor may also include other amounts (such as
accrued interest).
---------------------------------------------------------------------------
\158\ Letter from Vinson & Elkins. See supra note 131 and
accompanying text.
---------------------------------------------------------------------------
We are not adopting another commenter's recommendation that
required disclosure be qualitative rather than quantitative unless the
amounts are above a specified de minimis threshold.\159\ Because de
minimis thresholds for several categories of compensation could be
significant on an aggregate basis, if quantitative disclosure were only
required above a certain de minimis threshold, investors may not
receive the complete set of compensation information they need to
evaluate the structure of the SPAC in which they may invest. We would
not object, however, to the registrant disclosing de minimis
reimbursements (such as for perquisites that are de minimis) by
providing an aggregate total of those de minimis reimbursements by
category rather than on an item-by-item basis. We view such disclosure
as consistent with the requirement in Item 1603(a)(6) to disclose the
reimbursements' ``nature.''
---------------------------------------------------------------------------
\159\ Letter from ABA. See supra note 133 and accompanying text.
---------------------------------------------------------------------------
iii. Transfer of SPAC Ownership
In response to several commenters' recommendation to disclose
transfers of SPAC securities by the SPAC sponsor and others, we are
modifying Item 1603(a)(6) to require such disclosure.\160\ We agree
that disclosure of share transfers by a SPAC sponsor, its affiliates,
and promoters would provide important information to investors seeking
to evaluate the incentives of these parties. We believe it would also
be important for investors to know if the SPAC ownership level of these
parties has changed because of cancellation of the securities.\161\
Accordingly, in the final rule, we have revised proposed Item
1603(a)(6) to add the requirement: ``Disclose any circumstances or
arrangements under which the SPAC sponsor, its affiliates, and
promoters, directly or indirectly, have transferred or could transfer
ownership of securities of the SPAC, or that have resulted or could
result in the surrender or cancellation of such securities.'' With
respect to indirect transfers, for example, if there was a transfer of
ownership interests in the SPAC sponsor or ownership interests in a
holding company that owns interests in the SPAC sponsor, then
disclosure would be required under this item.\162\
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\160\ Letters from Michael Klausner and Michael Ohlrogge, NASAA,
Paul Swegle. See supra notes 135, 136, 137, and 138 and accompanying
text.
\161\ Certain earn-out provisions entered into in connection
with a de-SPAC transaction may involve cancellation of securities if
certain targets are not met.
\162\ In addition, in final Item 1603(a)(6) we replaced ``has or
will be'' with ``has been or will be,'' and replaced ``rendered''
with ``rendered or to be rendered,'' for clarity.
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At this time, we are not making any changes to add requirements to
disclose transfers after the de-SPAC transaction occurs, because we
believe, for most SPACs, SPAC sponsors will already have Form 3 and 4
reporting obligations.\163\
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\163\ See 17 CFR 240.16a-2 under the Exchange Act (Among others,
any person who is the beneficial owner, directly or indirectly, of
more than 10% of any class of equity securities registered pursuant
to Exchange Act section 12 and any director or officer of the issuer
of such securities shall be subject to the provisions of Exchange
Act section 16); Exchange Act section 16(a). SPAC sponsors also may
have beneficial ownership reporting obligations pursuant to sections
13(d) and 13(g) of the Exchange Act and rules thereunder.
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iv. Interest in SPAC Sponsor and Organizational Chart
We are adopting Item 1603(a)(7) as proposed except that we are not
adopting the proposal to provide an organizational chart.
One commenter said that ``proposed Item 1603(a)(7) should clarify
that . . . an indirect economic interest in less than 10% of a SPAC's
founder shares or warrants through ownership of equity interests in a
Sponsor should not, in and of itself and absent other factors, be
considered a direct or indirect material
[[Page 14173]]
interest in the Sponsor.'' \164\ We do not believe that the disclosures
of material interests in the SPAC sponsor should be based on a bright-
line absolute percentage of ownership, whether based on percentage
ownership of shares of the SPAC or based on percentage ownership of
shares of the SPAC sponsor. As a general matter, we note that
registrants regularly apply materiality standards that are not tied to
absolute percentages in connection with their disclosure under the
Federal securities laws. We believe a bright-line standard would not be
appropriate here because the percentage of ownership of a SPAC sponsor
that is material could differ from SPAC sponsor to SPAC sponsor. Also,
we note that percentage ownership is not the only way in which a
material interest in the SPAC sponsor may be present.\165\ For example,
where a person has a voting interest but no economic interest in the
SPAC sponsor, the required disclosure would need to be provided with
respect to such voting interest.
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\164\ Letter from ABA.
\165\ See, e.g., definition of ``control'' in Rule 405 (The term
control . . . means the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by
contract, or otherwise.).
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Related to our consideration of this comment, however, we have
determined not to adopt the proposed organizational chart requirement
in Item 1603(a)(7). The proposed organizational chart requirement would
have required graphical display of levels of ownership that are above
the level of direct ownership of the SPAC sponsor (i.e., tracing
``upstream'' through layers of interest-holders to the ultimate
interest-holder). It also would have required graphical display of
levels of ownership of companies other than the SPAC sponsor (but that
would be under common control with the SPAC sponsor) that are below
these interest-holders (i.e., tracing ``downstream'' through layers of
affiliated controlled persons). We believe, in this context at this
time, particularly with respect to institutions with an interest in the
SPAC sponsor that may have complex company organizational structures,
the complexity of the upstream and downstream tiers of ownership
discussed above may be difficult to prepare graphically. As a result,
we are not adopting the organizational chart requirement.
Another commenter said the identity of natural persons controlling
the sponsor is already disclosed in response to existing Item 403 of
Regulation S-K.\166\ Item 403 requires security ownership information
concerning certain beneficial owners and management, but new Item
1603(a) will elicit additional information because of its requirements
concerning background, experience, and roles, among other things. Also,
while current Item 403(a) requires identifying any person who is known
to be the beneficial owner of more than five percent of any class of
the SPAC's voting securities, new Item 1603(a)(7) adds a requirement to
name controlling persons of the SPAC sponsor. Furthermore, to the
extent portions of Item 1603(a) may overlap with Item 403 as they may
pertain to specific registrant facts and circumstances, registrants are
not required to provide duplicative disclosure. Therefore, we do not
expect that any partial overlap--depending on specific registrant facts
and circumstances--in disclosure that could be required under the final
rule with disclosure required under Item 403 would impose significant
additional burdens on registrants.
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\166\ Letter from Vinson & Elkins.
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v. Agreements
We are adopting Item 1603(a)(8) and (9), concerning agreements, as
proposed. Final Item 1603(a)(8) provides that the registrant must
describe any agreement, arrangement, or understanding, including any
payments, between the SPAC sponsor and unaffiliated security holders of
the special purpose acquisition company regarding the redemption of
outstanding securities of the special purpose acquisition company. One
commenter recommended that the Commission should revise proposed Item
1603(a)(8) to ``specify that if a SPAC, the SPAC sponsor, or any
affiliated party enters into an agreement regarding the redemption of
outstanding securities of the SPAC after the date of the merger
registration statement or proxy, that the SPAC be required to issue a
proxy amendment or similar filing prior to the redemption deadline to
inform SPAC shareholders of the new agreement.'' \167\ We do not
believe it is necessary to revise the item in the manner suggested to
capture events that follow the filing of a proxy statement in
connection with a de-SPAC transaction, as we believe registrant
obligations to amend such filings under current law, including to
ensure disclosure are not misleading, are sufficient.\168\
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\167\ Letter from Michael Klausner and Michael Ohlrogge.
\168\ See 17 CFR 240.14a-9 (``Rule 14a-9''). See also 17 CFR
240.14a-6(h).
---------------------------------------------------------------------------
Final Item 1603(a)(9) provides that the registrant must disclose,
in a tabular format to the extent practicable, the material terms of
any agreement, arrangement, or understanding regarding restrictions on
whether and when the SPAC sponsor and its affiliates may sell
securities of the special purpose acquisition company, including: the
date(s) on which the agreement, arrangement, or understanding may
expire; the natural persons and entities subject to such an agreement,
arrangement, or understanding; any exceptions under such an agreement,
arrangement, or understanding; and any terms that would result in an
earlier expiration of such an agreement, arrangement, or understanding.
In response to the commenter who stated that the required
additional disclosure would go beyond the disclosure requirements
applicable to lock-up agreements entered into in connection with a
traditional IPO,\169\ we believe that, based on Commission staff
experience reviewing filings, registrants in IPOs currently provide
information that is analogous to the Item 1603(a)(9) required
information. To the extent Item 1603(a)(9) may incrementally require
more disclosure compared to IPOs, we believe this is appropriate
because investors in SPACs often focus heavily on the nature of the
SPAC sponsor's interest in the SPAC and because agreements,
arrangements, or understandings regarding restrictions on whether and
when the SPAC sponsor and its affiliates may sell securities of the
SPAC often can be more complex than lock-up agreements in IPOs. For
example, SPAC lock-up agreements often include provisions that depend
on certain levels of stock price appreciation.\170\
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\169\ Letter from Vinson & Elkins. See supra note 142 and
accompanying text.
\170\ See, e.g., Connie Loizos, The Year of the Disappearing
Lock-up, TechCrunch (Jan. 4, 2022) (``many related deals contain
language that restricts sponsors from selling shares for a year from
the day the deal is completed, but there are much faster ways out.
According to one popular provision, if a SPAC's shares trade
slightly above their initial pricing for more than 20 days in a 30-
day period, the lockup provision vanishes.''), available at <a href="https://techcrunch.com/2022/01/04/the-year-of-the-disappearing-lock-up/">https://techcrunch.com/2022/01/04/the-year-of-the-disappearing-lock-up/</a>;
Lock-Up Periods: Regular IPOS V/S SPACS IPOS, Legal Scale (Sept. 21,
2022), available at <a href="https://www.legalscale.com/lock-up-periods-regular-ipos-v-s-spacs-ipos/">https://www.legalscale.com/lock-up-periods-regular-ipos-v-s-spacs-ipos/</a>; Ran Ben-Tzur, Itka Safir, Terms of IPO
Lock-Up Agreements for Technology Companies Shift as Direct Listings
and SPACs Gain Traction (2020), available at <a href="https://www.fenwick.com/insights/publications/terms-of-ipo-lock-up-agreements-for-technology-companies-shift-as-direct-listings-and-spacs-gain-traction">https://www.fenwick.com/insights/publications/terms-of-ipo-lock-up-agreements-for-technology-companies-shift-as-direct-listings-and-spacs-gain-traction</a> (out of 80 traditional IPO-companies surveyed,
four (i.e., 5%) used Price-based lock-up releases).
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[[Page 14174]]
With respect to the suggestion to exclude from this disclosure
customary exceptions to lock-up agreements,\171\ we are concerned that
almost all, if not all, exceptions found in any lock-up agreement could
be determined to be customary by a registrant, which would mean they
would not be disclosed to investors under the suggested approach.
Further, even where lock-up agreements are filed as an exhibit,\172\
exceptions to SPAC lock-up agreements considered ``customary'' by
industry participants may be difficult for a reasonable investor to
understand, and therefore narrative disclosure in the body of the
filing may help investors understand these terms.\173\
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\171\ Letter from Freshfields. See supra notes 143 and 144 and
accompanying text.
\172\ See 17 CFR 229.601(a) and (b)(10)(ii)(A) (requiring the
filing of any contract to which directors, officers, promoters,
voting trustees, security holders named in the registration
statement or report are parties, with certain exceptions). See also
requirements for registrant to furnish exhibits required by Item 601
of Regulation S-K in: Form S-1, Item 16; Form F-1, Item 8; Form S-4,
Item 21(a); Form F-4, Item 21.
\173\ When we use the term ``narrative'' disclosure here, we do
not mean that solely qualitative information should be provided.
Depending on the facts and circumstances, quantitative information
may be required in connection with these lock-up disclosures.
Depending on the facts and circumstances, one example of such
quantitative disclosure could be where the exception to the lock-up
depends on application of a formula involving a financial measure.
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In addition, we believe each such exception to a lock-up agreement
is important to investors because exceptions to restrictions on
transfer in lock-up agreements can result in the sale of a significant
amount of shares that could affect the trading price of the SPAC or of
the post-de-SPAC transaction combined company.\174\ In addition, in
connection with disclosure in a SPAC IPO, to the extent that an
investor may have invested in the SPAC based in part on the experience
and expertise of the SPAC sponsor and its affiliates, we believe the
disclosure about exceptions to lock-up agreements could be important to
these investors in understanding the extent to which the interests of
the SPAC sponsor and investor are aligned.\175\ Similarly, this
information is important in connection with disclosure in a de-SPAC
transaction. For example, this information remains important in
connection with a de-SPAC transaction where the SPAC sponsor will have
a continuing management role at the post-de-SPAC transaction combined
company. Also, for example, even where the SPAC sponsor may not have a
continuing management role, this information is important where the
SPAC sponsor may have the ability to express views that influence the
current management of the post-de-SPAC transaction combined company--
potentially due to the size of the SPAC sponsor's ownership stake in
the combined company or the value of the SPAC sponsor's ongoing counsel
based on the SPAC sponsor's expertise. In each of these examples, we
believe the disclosure about exceptions to lock-up agreements will be
important because it will help the investor understand the extent to
which the interests of the SPAC sponsor and investor are aligned.
---------------------------------------------------------------------------
\174\ See, e.g., Cooley LLP, Blog: 10 Key Considerations for
Going Public with a SPAC (Aug. 3, 2020), available at <a href="https://www.jdsupra.com/legalnews/blog-10-key-considerations-for-going-80315/">https://www.jdsupra.com/legalnews/blog-10-key-considerations-for-going-80315/</a> (``Most SPAC sponsors will be subject to a 1-year lock-up,
which can create staggered releases of shares into the market after
the combination and may at times try to push the target company
holders to also have a 1-year lockup to align interests. Companies
should be thoughtful, in discussions with their financial advisors,
on how additional shares will come into the market and implications
for the public company's trading volatility.'').
\175\ With respect to lock-up agreements generally, see Alon
Brav & Paul Gompers, The Role of Lockups in Initial Public
Offerings, 16 The Rev. of Fin. Stud. 1 (2003), available at <a href="https://doi.org/10.1093/rfs/16.1.0001">https://doi.org/10.1093/rfs/16.1.0001</a> (finding lockup agreements serve as a
commitment device to address moral hazard concerns).
---------------------------------------------------------------------------
While one commenter suggested that current market practice is for
transferees who receive shares pursuant to an exception from a lock-up
to agree to the lock-up as a condition of the transfer,\176\ we do not
believe this means information about exceptions to lock-up agreements
will not be important to investors. If the SPAC sponsor or affiliates
may divest their ownership of the SPAC, this may affect investor
evaluation of the SPAC and the incentives of the SPAC sponsor,
regardless of whether a transferee is also subject to transfer
restrictions. Investors may consider the potential amounts of shares
that could be transferred to be an important factor that could affect
the market valuation of the issuer. Moreover, based on the Commission
staff's experience, some registrants today already discuss each
exception in detail, while others discuss the exceptions in general
terms.
---------------------------------------------------------------------------
\176\ Letter from Freshfields. See supra note 144 and
accompanying text.
---------------------------------------------------------------------------
C. Conflicts of Interest
1. Proposed Rules
SPAC sponsors and others may have material potential or actual
conflicts with the interests of investors that could have adverse
effects on those investors. The Commission proposed conflicts of
interest disclosure requirements in certain items in proposed Item
1602, 1603, 1604, and 1605 in connection with SPAC registered offerings
other than de-SPAC transactions, such as IPO transactions, and in
connection with de-SPAC transactions, described in more detail below.
The Commission proposed Item 1602(a)(5) and (b)(7), which apply to
registered offerings other than de-SPAC transactions, to require that
some of these conflicts of interest disclosure requirements appear on
the prospectus front cover page and in the prospectus summary,
respectively.\177\ The Commission also proposed prospectus cover page
and prospectus summary conflict of interest disclosure requirements in
connection with de-SPAC transactions in proposed Item 1604(a)(4) and
(b)(3).\178\
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\177\ See also proposed General Instruction VIII to Form S-1,
proposed General Instruction VII to Form F-1.
\178\ See also proposed General Instruction I.1 to Form S-4,
proposed General Instruction I.1 to Form F-4, proposed Item 14(f)(1)
of Schedule 14A, and proposed General Instruction K to Schedule TO.
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The Commission proposed that Item 1603 (including 1603(b) regarding
conflicts of interest) apply to de-SPAC transactions, as well as other
registered offerings, including SPAC IPOs.\179\ Proposed Item 1603(b)
would require disclosure of any actual or potential material conflict
of interest between (1) the SPAC sponsor or its affiliates or the
SPAC's officers, directors, or promoters, and (2) unaffiliated security
holders. This proposed item included any conflict of interest with
respect to determining whether to proceed with a de-SPAC transaction
and any conflict of interest arising from the manner in which a SPAC
compensates the SPAC sponsor or the SPAC's executive officers and
directors or the manner in which the SPAC sponsor compensates its own
executive officers and directors. In addition, the Commission proposed
Item 1603(c) to require disclosure regarding the fiduciary duties each
officer and director of a SPAC owes to other companies.
---------------------------------------------------------------------------
\179\ See (a) proposed General Instruction VIII to Form S-1, (b)
proposed General Instruction I.1 to Form S-4, (c) proposed General
Instruction VII to Form F-1, (d) proposed General Instruction I.1 to
Form F-4. (e) proposed Item 14(f)(1) of Schedule 14A, and (f)
proposed General Instruction K to Schedule TO.
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Furthermore, in connection with de-SPAC transactions, the
Commission proposed Item 1605(d) to require disclosure of any material
interests in the de-SPAC transaction or any related financing
transaction held by the SPAC sponsor and the SPAC's officers and
directors, including fiduciary or contractual obligations to other
entities
[[Page 14175]]
as well as any interest in, or affiliation with, the target
company.\180\
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\180\ See also proposed General Instruction I.1 to Form S-4,
proposed General Instruction I.1 to Form F-4, proposed Item 14(f)(1)
of Schedule 14A, and proposed General Instruction K to Schedule TO.
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2. Comments
Broadly categorized, commenters on the conflicts of interest
proposals focused on five areas: (1) general comments, including those
with general expressions of support for or opposition to the proposals,
(2) SPAC and target company officer and director conflicts of interest,
(3) de-SPAC conflicts of interest, (4) addition of disclosure of
``break-even'' thresholds, and (5) additional responses to Commission
requests for comment.
A number of commenters generally supported the proposed enhanced
disclosure requirements in regard to conflicts of interest and
fiduciary duties.\181\
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\181\ Letters from ABA, Better Markets, Bullet Point Network,
CFA Institute, CII, Committee on Capital Markets Regulation,
Consumer Federation, ICGN, NASAA, Paul Swegle, Public Citizen (June
10, 2022) (``Public Citizen'').
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Several commenters suggested that the proposed disclosure
requirements would codify, to an extent, existing disclosure
practices.\182\ Some commenters suggested that proposed disclosure
requirements about conflicts of interest and fiduciary duties would
provide useful information to investors.\183\
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\182\ Letters from ABA, NASAA, Vinson & Elkins.
\183\ Letters from Better Markets, CFA Institute, CII, Committee
on Capital Markets Regulation, Consumer Federation, ICGN, NASAA.
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One commenter said that ``in requiring disclosure of known actual
or potential material conflicts of interest, proposed Item 1603(b)
should clarify that a knowledge-based standard is the appropriate
standard in determining whether disclosure is required under this
item.'' \184\
---------------------------------------------------------------------------
\184\ Letter from ABA.
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Another commenter recommended ``that disclosures should include the
names of all sponsors and their financial arrangements with SPACs'' and
``information on the nature of the claims the investors have on the
SPAC if no de-SPAC transaction takes place'' during the applicable
period or they choose to exit before the de-SPAC is completed.\185\
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\185\ Letter from ICGN.
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A few commenters discussed issues related to potential SPAC and
target company officer and director conflicts of interest.\186\ One of
these commenters recommended that ``there should be mandatory
disclosures of conflicts of interest among SPAC directors, SPAC
officers, target company directors and target company officers.'' \187\
Another of these commenters recommended that ``proposed Item 1603(c)
should be limited to those situations where the fiduciary duties of an
officer or director owed to other companies might reasonably be
expected to present a potential conflict with respect to a potential
de-SPAC transaction or the SPAC's ability to pursue de-SPAC transaction
opportunities.'' \188\
---------------------------------------------------------------------------
\186\ Letters from ABA, CII.
\187\ Letter from CII.
\188\ Letter from ABA.
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Some commenters viewed proposed Item 1605, including proposed Item
1605(d) concerning conflicts of interest in connection with de-SPAC
transactions, as redundant with current rules.\189\ One of these
commenters said these disclosures are ``duplicative of those already
prescribed in the existing regulatory schemes for proxy materials and
registration statements filed in connection with de-SPAC
transactions.'' \190\ In lieu of adopting proposed Item 1605, the
commenter recommended a ``uniform methodology to address conflicts of
interest arising from business combinations in general by revising
Items 1004(a)(2) and 1013(b) of Regulation M-A [17 CFR 229.1004(a)(2)
and 229.1013(b)] and Item 403 of Regulation S-K to incorporate the
provisions of proposed Item 1605.'' \191\ The other commenter opposed
the adoption of new disclosure requirements 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,'' because this ``would be redundant with the existing
requirements of Schedule 14A Item 5.'' \192\
---------------------------------------------------------------------------
\189\ Letters from ABA, Vinson & Elkins.
\190\ Letter from ABA.
\191\ Letter from ABA.
\192\ Letter from Vinson & Elkins.
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Some commenters recommended that certain additional disclosures
should be required. One commenter on the proposal said that registrants
``should also provide, in an easily understandable, tabular format. .
.the break-even points for non-redeeming investors under different
scenarios, the break-even point for the sponsor, the ownership
distribution for non-redeeming investors, the effects of outstanding
warrants and sponsor shares, and the resulting ownership of the target
company for non-redeeming shareholders and alternative investors.''
\193\ Another commenter said that registrants should provide a break-
even average share price for the sponsor, which would inform investors
and, in the commenter's opinion, the target company.\194\ The commenter
said ``this will be a simple numerical representation of the effective
cost basis of the sponsor and can be used to ascertain the extent to
which a sponsor's position differs from that of other investors.''
\195\ One commenter stated that ``SPACs should disclose the minimum
post-merger share value at which proceeding with the SPAC merger will
yield a higher return to the SPAC sponsor than liquidating the SPAC.''
\196\
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\193\ Letter from NASAA.
\194\ Letter from Jonathan Kornblatt, CMT, Fintech Institutional
Advisory (June 12, 2022) (``Jonathan Kornblatt'').
\195\ Letter from Jonathan Kornblatt.
\196\ Letter from Michael Klausner and Michael Ohlrogge.
---------------------------------------------------------------------------
A few commenters responded to requests for comment in the proposal
related to whether we should also require a description of any policies
and procedures used to minimize potential or actual conflicts of
interest.\197\ One commenter said that ``a requirement for disclosure
of policies and procedures or assessment and management of conflicts of
interest would result in incremental boilerplate disclosures.'' \198\
Another commenter said it would be ``superfluous to require a
description of any policies and procedures used or to be used to
minimize potential or actual conflicts of interest in addition to what
proposed Item 1603 has already prescribed.'' \199\
---------------------------------------------------------------------------
\197\ Proposing Release, supra note 7, at 29468 (request for
comment number 17).
\198\ Letter from Vinson & Elkins.
\199\ Letter from ABA.
---------------------------------------------------------------------------
One commenter responded to requests for comment related to whether
SPACs should be required to provide additional disclosure regarding
material conflicts of interest in Exchange Act reports following their
IPOs.\200\ The commenter said that, ``regarding disclosure in Exchange
Act reports following the SPAC IPO and the Form 8-K announcing the
signing of the de-SPAC transaction, additional disclosure should be
required only where the conflict of interest is material and has not
been previously disclosed.'' \201\
---------------------------------------------------------------------------
\200\ Proposing Release, supra note 7, at 29468 (request for
comment number 18).
\201\ Letter from Vinson & Elkins.
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3. Final Rules
We are adopting Items 1602(a)(5) and (b)(7), 1603(b), 1604(a)(4)
and (b)(3), and 1605(d) substantially as proposed, except for the
changes discussed below. Having considered comments received, we are
adopting the final rules to provide information to investors about the
material potential or actual conflicts
[[Page 14176]]
that SPAC sponsors and others covered by the final rules may have with
the interests of investors. These conflicts could influence the actions
of the SPAC to the detriment of its unaffiliated security holders. The
potential conflicts of interest of SPAC sponsors and others may be
particularly relevant for investors to the extent that they arise when
a SPAC and its management are deciding whether to engage in a de-SPAC
transaction. The SPAC sponsor's compensation structure creates
incentives to complete a de-SPAC transaction. These incentives may
induce a SPAC sponsor and others to compel the SPAC to complete the de-
SPAC transaction on unfavorable terms to avoid liquidation of the SPAC
at the expiry of this period.
There are numerous situations that could give rise to these
potential conflicts. For example, SPAC sponsors or their affiliates may
have a potential conflict of interest stemming from the nature of the
SPAC sponsor's compensation or security ownership (particularly where
the security owned is purchased at disparate prices, often
substantially lower than the price paid by public security holders).
This type of potential conflict of interest may present significant
financial incentives to pursue a de-SPAC transaction even in the
absence of attractive target company transaction opportunities.\202\
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\202\ See, e.g., Usha Rodrigues & Mike Stegemoller, Exit, Voice,
and Reputation: The Evolution of SPACs, 37 Del. J. Corp. L. 849, 896
(2013) (stating that ``sponsors were expected to put more and more
of their own money at risk (in the form of private placements),
setting themselves up for substantial losses if no acquisition
occurred'' as the SPAC form evolved).
---------------------------------------------------------------------------
SPAC sponsors and their affiliates may also sponsor multiple SPACs,
which may result in decisions regarding the allocation of these
persons' time and target company acquisition opportunities that may
adversely affect SPAC security holders. Alternatively (or in addition),
SPAC sponsors and their affiliates may owe employment, contractual, or
fiduciary duties to other companies than the SPAC, which, among other
things, may affect the ability of the SPAC to execute a de-SPAC
transaction or may affect the terms to which a SPAC agrees in any
ultimate de-SPAC transaction. In these situations, the SPAC sponsor and
others covered by the final rules may not only be incentivized to take
actions that benefit other entities, but they may be compelled by these
other duties to do so, potentially at the expense of the SPAC and its
security holders. In addition, SPAC sponsors and their affiliates may
seek to enter a de-SPAC transaction with a target company they are
affiliated with when superior target company transaction opportunities
may be available.
The final rules will provide investors with a more complete
understanding of the conflicts of interest related to an investment in
a SPAC, including in situations like the examples above. Investors will
have improved information concerning interests of the SPAC sponsor and
others covered by the final rule that could reduce the value of their
investment or that could result in opportunities potentially available
to the SPAC not being realized. In this way, the final rules will allow
investors to analyze risks associated with potential conflicts of
interest regarding a SPAC more accurately.
We are not including a knowledge qualifier in conflicts of interest
disclosure, as suggested by one commenter,\203\ because we expect the
SPAC and its officers and directors will be in a position to know their
own conflicts and that the SPAC may obtain similar information from the
SPAC sponsor, its affiliates, and promoters (who will be in a position
to know their own conflicts) by virtue of the relationship between the
SPAC and the SPAC sponsor and between the SPAC and any promoters.\204\
In addition, we note that registrants can rely on 17 CFR 230.409 and
240.12b-21 with respect to information unknown or not reasonably
available.
---------------------------------------------------------------------------
\203\ Letter from ABA. See supra note 184 and accompanying text.
\204\ Similarly, current Item 404 regarding conflicts of
interest does not contain such knowledge qualifier.
---------------------------------------------------------------------------
Another commenter recommended the conflicts of interest disclosures
should include: names of all sponsors and their financial arrangements
with SPACs; claims investors have on the SPAC if no de-SPAC transaction
takes place; and claims investors have on the SPAC if investors exit
before the de-SPAC transaction.\205\ We note that all of those items
were included in the proposal, and we are adopting them as
proposed.\206\
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\205\ Letter from ICGN. See supra note 185 and accompanying
text.
\206\ See, e.g., proposed Items: 1603(a)(1) (names of sponsors)
and (a)(5) through (6) (agreements and compensation) and 1602(b)(3)
and (4) (redemption rights and plans in the event no de-SPAC
transaction is consummated).
---------------------------------------------------------------------------
A few commenters discussed issues related to potential SPAC and
target company officer and director conflicts of interest.\207\ One of
these commenters recommended the conflicts of interest disclosures
cover SPAC officers, SPAC directors, target company officers, and
target company directors.\208\ In considering the comment, we observed
that proposed Item 1604 was inconsistent with proposed Items 1603(b)
and 1605(d) by not covering SPAC officers and directors. We do not
believe there are any special factors warranting such a difference. As
a result, we have modified the language in Item 1604 to require
disclosure regarding SPAC officers and directors as in the other
adopted items. This change to Item 1604(a)(4) (cover page) and (b)(3)
(prospectus summary) will ensure the benefits of the rule that we
discuss generally above will apply to these rules as well.\209\ With
respect to target company officers and directors, we believe that
disclosure of their conflicts of interest is consistent with co-
registration requirements in connection with the final amendments to
registration forms and with final Rule 145a.\210\ As discussed in
connection with those requirements, since the de-SPAC transaction is in
substance an offering by the target company, the conflicts of interest
of target company officers and directors may be important to investor
investment, redemption, and voting decisions. Thus, we have amended
Items 1603(b), 1604(a)(4) (prospectus cover page) and (b)(3)
(prospectus summary), and 1605(d) to require this disclosure.\211\ We
would not expect registrants to provide duplicative disclosure merely
because a person falls into more than one of the categories of persons
covered by the final rules.\212\
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\207\ Letters from ABA, CII.
\208\ Letter from CII. See supra note 187 and accompanying text.
\209\ We are also making related minor changes for clarity in
Item 1604(a)(4) and (b) to change the term ``or its affiliates'' to
``, SPAC affiliates.'' In Item 1604(b) and in a number of other
places in the final rules, we also eliminated the term ``shall''
(e.g., by replacing it with the word ``must'') consistent with
relevant plain English guidance.
\210\ See infra sections III.C and IV.A.
\211\ In addition, in final Item 1603(b) we replaced ``with
respect to'' with ``that may arise'' (in the phrase ``any material
conflict of interest that may arise in determining whether to
proceed with a de-SPAC transaction'') for clarity and consistency
with Item 1602(b)(7). In final Item 1603(b) we also revised the
phrase ``the manner in which the special purpose acquisition company
compensates a SPAC sponsor, officers, or directors'' by replacing
the term ``and'' with ``or,'' because the requirements of Item
1603(b) should apply disjunctively where any of the named persons
has a relevant material conflict of interest.
\212\ For example, if the SPAC hypothetically happened to share
officers or directors with the target company, the same disclosure
(that was relevant for both the SPAC and target company) for the
same individual person would not need to be provided once for the
person as a SPAC official and a second time for the person as a
target company official. The SPAC and target should be mindful,
though, that different disclosures about conflicts arising under
each role may be required.
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One commenter recommended that we limit Item 1603(c) disclosure to
[[Page 14177]]
those situations where officer or director fiduciary duties owed to
other companies might reasonably be expected to present a potential
conflict with a SPAC's de-SPAC transaction opportunities.\213\ We do
not agree with this recommendation, because we do not believe conflicts
will only arise in situations where there are fiduciary duties owed to
other companies that are expected to present a potential conflict with
a SPAC's de-SPAC transaction opportunities. For example, a director's
obligations to other companies may compete with his or her attention to
the SPAC. Because we believe this information is material to investors,
we are not making any changes to the proposal in this respect in the
final rules we are adopting.
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\213\ Letter from ABA. See supra note 188 and accompanying text.
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Some commenters expressed the view that proposed Item 1605,
including proposed Item 1605(d) concerning conflicts of interest in
connection with de-SPAC transactions, would be redundant with current
rules.\214\ The Commission is not making changes in the final rules we
are adopting in response to these comments. Given the unique qualities
of de-SPAC transactions, we believe registrants will benefit from the
centralization of the SPAC-related requirements in the Item 1600 series
of Regulation S-K rather than in a different location as
suggested.\215\ Regarding any potential for redundancy with other
Commission rules, if there are facts and circumstances that may result
in required disclosure under a current rule being the same as under any
of the rules we are adopting, registrants will not be required to
repeat disclosures (except where the applicable rule may require, such
as by calling for the disclosure in a specific location such as the
prospectus cover page or prospectus summary).
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\214\ Letters from ABA, Vinson & Elkins. See supra notes 189,
190, 191, and 192 and accompanying text.
\215\ The Commission adopted a similar approach in rules
regarding limited partnership roll-up transactions. See 17 CFR
229.900 through 229.915.
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Some commenters recommended we adopt certain requirements (in
addition to those proposed) involving ``break-even'' disclosure.\216\
With respect to disclosure of a SPAC sponsor's ``break-even'' price per
share, one commenter said this would help investors ``ascertain the
extent to which a sponsor's position differs from that of other
investors.'' \217\ We believe that the other conflicts of interest
disclosures required by the final rules will provide sufficient
information to allow investors to understand the potential differences
in incentives between them and a SPAC sponsor, and as a result we are
not adopting the suggested ``break-even'' disclosure.
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\216\ Letters from Jonathan Kornblatt, Michael Klausner and
Michael Ohlrogge, NASAA. See supra notes 193, 194, 195, and 196 and
accompanying text.
\217\ Letter from Jonathan Kornblatt.
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We are not requiring registrants to provide ``break-even'' price
per share disclosure regarding non-redeeming investors as suggested by
commenters because each investor would already know the basis at which
they acquired the shares of the SPAC and the SPAC may not know this
information for many of its investors, who could have acquired the
shares at a variety of prices through the public market. We are
likewise not requiring disclosure suggested by commenters that would
provide a price at which the SPAC sponsor would recoup their
investments in the SPAC. We believe such disclosure could be confusing
for investors, as many SPAC sponsors may consider such amounts as sunk
costs, which they do not consider when deciding whether to proceed with
a de-SPAC transaction. As a commenter notes,\218\ SPAC sponsors may be
incentivized to proceed with de-SPAC transactions below the initial
SPAC share price; however, that is largely because SPAC sponsors lack
redemption rights. Generally, SPAC shareholders would seek de-SPAC
transactions that result in share prices that exceed their redemption
value. SPAC sponsor decisions to proceed with a transaction may be
driven by the SPAC sponsor's expectation of their future deal flow and
potential legal or reputational concerns among other factors. The
``break-even'' disclosure suggested by commenters would not take into
account these factors. Moreover, none of these factors can be easily
quantified, and the ones that can be quantified would be burdensome to
produce and potentially difficult for investors to analyze and assess
(given the difficulty in reliably quantifying those factors) and also
would not be easily comparable across different SPACs (given the SPAC-
specific and SPAC sponsor-specific nature of those factors). The rules
as adopted will improve investors' ability to understand the SPAC
sponsor's conflicts of interest, and we are concerned that adding a
disclosure that takes into account difficult-to-quantify factors like
the ones discussed above would detract from the disclosures that we are
adopting.
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\218\ See letter from Michael Klausner and Michael Ohlrogge
(``If a sponsor has committed to make no new investments in the SPAC
at the time of its merger, then any post-merger share value greater
than $0 will be preferable to the sponsor than receiving nothing in
a liquidation. If, however, the sponsor commits to purchase new
securities in the SPAC at the time of the SPAC merger, then the
share value at which a merger will be a better deal for a sponsor
than a liquidation will be above $0.'').
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In the final rules, we are not requiring a description of policies
and procedures used to minimize potential or actual conflicts of
interest. We believe the other disclosures we are adopting regarding
conflicts of interest, including new Item 1603, will appropriately
address investor protection concerns in this regard. We are also not
making any changes that would expand the Series 1600 of Regulation S-K
disclosures regarding conflicts of interest beyond registration
statements, proxy statements, information statements, and tender offer
statements as proposed to other Exchange Act reports (such as to Form
10-Q, 10-K, or 8-K).\219\
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\219\ See letter from Vinson & Elkins, supra note 201 and
accompanying text, and Proposing Release, supra note 7, at 29468
(request for comment number 18).
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Finally, we are making additional minor or technical changes in the
final rules. First, we are making a change to the description of
persons against whose interests the conflicts must be compared against
from ``unaffiliated security holders'' to ``unaffiliated security
holders of the SPAC'' in Items 1603(b) and 1604(a)(4) (prospectus cover
page) and (b)(3) (prospectus summary). This change will avoid any
potential ambiguity or confusion regarding whether target company
officers and directors must compare their interests to security holders
of the target company or security holders of the SPAC.
Second, we are making a technical change in final Item 1605(d) to
use ``or'' instead of ``and'' each time in the phrase ``held by the
SPAC sponsor and the special purpose acquisition company's officers . .
. and directors.'' This change makes clear the disclosure should apply
with respect to each named person and not only where all such persons
share the same interest.
Third, we have made certain technical changes in some of the final
rules regarding conflicts of interest to clarify the sets of persons
being compared.\220\
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\220\ In final Item 1602(a)(5) and (b)(7), we have revised the
punctuation and conjunctions compared to the proposal to clarify the
two sets of persons that are to be compared in connection with the
required potential or actual conflict of interest disclosure by
changing the proposed phrase ``between the SPAC sponsor or its
affiliates or promoters and purchasers in the offering'' to
``between the SPAC sponsor, its affiliates, or promoters; and
purchasers in the offering.'' To clarify the two sets of persons to
be compared in Item 1604(a)(4), we have added the words ``, on one
hand,'' before the first set of persons and the words ``, on the
other hand,'' before the second set of persons. For clarity and
consistency throughout Item 1603, we have also revised the term
``executive officer(s)'' in each place where it is used in Item
1603(b) and (c) to refer to ``officer(s).''
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[[Page 14178]]
Fourth, in final Item 1603(b), we are changing each reference to
``the SPAC sponsor'' to ``any SPAC sponsor'' because there can be more
than one such sponsor.
Fifth, we have revised the phrase ``State whether there may be
actual or potential conflicts of interest . . .'' in proposed Item
1602(a)(5) to add a materiality qualifier such that the phrase in final
Item 1602(a)(5) provides ``State whether there may be actual or
potential material conflicts of interest. . . .'' This change makes
prospectus cover page disclosure requirements under Item 1602(a)(5)
consistent with the similar provisions of Item 1603(b), which require
disclosure in the body of the disclosure document. We believe both
provisions should contain the same materiality qualifier, because the
provisions are related since Item 1602(a)(5) requires the registrant to
provide a cross-reference to related disclosures in the prospectus,
which includes disclosures made under Item 1603(b).
D. Dilution
1. Proposed Rules
Information about dilution conveys important information to
investors about factors that may affect the value of a security
holder's interest in a SPAC. Dilution in current Commission filings is
typically measured by calculating changes in net tangible book value
per share.\221\ There are a number of potential sources of dilution in
common SPAC structures, including: (a) shareholder redemptions, (b)
SPAC sponsor compensation, (c) underwriting fees, (d) warrants, (e)
convertible securities, and (f) PIPE financings.
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\221\ See 17 CFR 229.506 (``Item 506'' of Regulation S-K). 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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The Commission proposed several new rules that would require
additional information about SPAC dilution in connection with
registered offerings by SPACs, including IPOs, and in connection with
de-SPAC transactions.\222\ With respect to registered offerings by
SPACs (including IPOs) other than de-SPAC transactions, the Commission
proposed Item 1602(a)(3) and (4), (b)(6), and (c).\223\ With respect to
de-SPAC transactions, the Commission proposed Item 1604(a)(3), (b)(4),
(5), and (6), and (c).\224\ Each of these proposed disclosure
requirements is addressed in more detail below.
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\222\ See proposed Items 1602(a)(3) and (4), (b)(6), and (c) and
1604(a)(3), (b)(4), (5), and (6), and (c) of Regulation S-K.
\223\ See proposed General Instruction VIII to Form S-1 and
proposed General Instruction VII to Form F-1.
\224\ See (a) proposed General Instruction VIII to Form S-1, (b)
proposed General Instruction I.1 to Form S-4, (c) proposed General
Instruction VII to Form F-1, (d) proposed General Instruction I.1 to
Form F-4, (e) proposed Item 14(f)(1) of Schedule 14A, and (f)
proposed General Instruction K to Schedule TO.
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First, with respect to SPAC IPOs, in Item 1602(a)(3), the
Commission proposed that the prospectus outside front cover page
include, among other things, disclosure of whether compensation of the
SPAC sponsor and its affiliates may result in a material dilution of
the purchasers' equity interests. Also, the Commission proposed Item
1602(a)(4) to require on the outside front cover page of the
prospectus, disclosure in the tabular format specified below the
``estimated remaining pro forma net tangible book value per share at
quartile intervals up to the maximum redemption threshold,'' consistent
with the methodologies and assumptions used in the disclosure provided
pursuant to Item 506 of Regulation S-K:
Remaining Pro Forma Net Tangible Book Value per Share
----------------------------------------------------------------------------------------------------------------
25% of maximum 50% of maximum 75% of maximum Maximum
Offering Price of __ redemption redemption redemption redemption
----------------------------------------------------------------------------------------------------------------
.................. .................. .................. ..................
----------------------------------------------------------------------------------------------------------------
Instruction 1 to Item 1602(a)(4) provided that, if the offering
includes an over-allotment option, separate rows must be included in
the tabular disclosure showing remaining pro forma net tangible book
value per share with and without the exercise of the over-allotment
option.\225\
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\225\ In this context, the Commission considers the term over-
allotment option to be interchangeable with the term ``greenshoe
option.'' For a general description of the nature of a ``greenshoe''
or ``over-allotment option,'' see, e.g., Patrick M. Corrigan,
Footloose with Green Shoes: Can Underwriters Profit from IPO
Underpricing?, 38 Yale J. on Reg. 908, 917-918 (2021)
(``Underwriting agreements in firm commitment offerings also give
underwriters the right, but not the obligation, to purchase an
additional amount of shares [(`Option Shares')] at the same price as
the underwriter is obligated to purchase the [specified number of
shares set out in the underwriting agreement (`Firm Shares')]. . . .
Underwriters typically have 30 days following the execution of the
underwriting agreement to exercise their option. The closing for the
Option Shares may occur on the same closing date as for the Firm
Shares, or on a later date. In modern IPOs, the size of the green
shoe option is virtually always 15% of the Firm Shares, an amount
that constitutes the maximum permissible under FINRA rules.'')
(Footnotes omitted).
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In addition, in Item 1602(b)(6) the Commission proposed that for
SPAC IPOs, the summary prospectus include, among other things,
disclosure of the extent to which compensation of the SPAC sponsor, its
affiliates, and promoters may result in a material dilution of the
purchasers' equity interests. In addition to the prospectus cover page
and prospectus summary requirements for SPAC IPOs, the Commission also
proposed Item 1602(c) regarding dilution. This proposed item would
require, in addition to the disclosure required by Sec. 229.506 (Item
506 of Regulation S-K), a description of material potential sources of
future dilution following the registered offering by the special
purpose acquisition company. This proposed item also would require
disclosure in tabular format of the amount of future dilution from the
public offering price that will be absorbed by purchasers of the
securities being offered, to the extent known and quantifiable.
The other dilution provisions proposed by the Commission related to
de-SPAC transactions. The Commission proposed Item 1604(a)(3) to
require on
[[Page 14179]]
the outside front cover page of the prospectus, among other things,
disclosure of whether compensation of the SPAC sponsor, its affiliates,
and promoters may result in a material dilution of the equity interests
of non-redeeming shareholders who hold the securities until the
consummation of the de-SPAC transaction. Proposed Item 1604(a)(3) also
required the provision of a cross-reference, highlighted by prominent
type or in another manner, to the locations of related disclosures in
the prospectus.
Three additional proposed rules with respect to de-SPAC
transactions, Item 1604(b)(4) through (6), each required prospectus
summary disclosure. First, proposed Item 1604(b)(4) required, among
other things, tabular disclosure of whether compensation of the SPAC
sponsor and its affiliates has resulted or may result in a material
dilution of the equity interests of unaffiliated security holders of
the special purpose acquisition company. Second, proposed Item
1605(b)(5) required, among other things, disclosure of the dilutive
impact, if any, of any financing transactions that have occurred or
will occur in connection with the consummation of the de-SPAC
transaction on unaffiliated security holders. Third, proposed Item
1604(b)(6) required disclosure of the rights of security holders to
redeem the outstanding securities of the special purpose acquisition
company and the potential impact of redemptions on the value of the
securities owned by non-redeeming shareholders.
For de-SPAC transactions, the Commission also proposed Item 1604(c)
to require a description of each material potential source of future
dilution that non-redeeming shareholders may experience by electing not
to tender their shares in connection with the de-SPAC transaction.
Under Item 1604(c), proposed Item 1604(c)(1) required the provision of
a sensitivity analysis disclosure in tabular format that expresses the
amount of potential dilution under a range of reasonably likely
redemption levels. Proposed Item 1604(c)(1) also required, at each
redemption level in the sensitivity analysis, quantification of the
dilutive impact on non-redeeming shareholders of each source of
dilution, such as the amount of compensation paid or to be paid to the
SPAC sponsor, the terms of outstanding warrants and convertible
securities, and underwriting and other fees. Additionally, proposed
Item 1602(c)(2) required a description of the model, methods,
assumptions, estimates, and parameters necessary to understand the
sensitivity analysis disclosure.
2. Comments
A number of commenters generally supported some or all of the
proposed enhanced dilution disclosure requirements.\226\ Several of
these commenters suggested that proposed dilution disclosure
requirements would provide useful information to investors.\227\ Other
commenters, however, generally opposed or raised concerns regarding
some or all of the proposed enhanced dilution disclosure
requirements.\228\ Several of these commenters expressed views that the
proposed disclosure requirements regarding dilution would not be
helpful to investors.\229\ Specific comments on various aspects of the
proposal are described below.
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\226\ Letters from Better Markets (``The disclosures should
assist shareholders in understanding . . . potential sources of
dilution of their shares. . . .''), Bullet Point Network (``We also
agree with the SEC's proposal to add sensitivity tables to show the
dilution across a range of redemption scenarios. . . .''), CFA
Institute (``we encourage a rapid implementation of the Proposed
Rules on improving disclosures, transparency of dilution. . . .''),
CII (``We generally agree . . . on the need to . . . bring greater
clarity to dilution under various SPAC share redemption scenarios. .
. .''), Committee on Capital Markets Regulation (``In particular,
the Committee supports the proposed enhanced disclosures regarding .
. . dilution. . . .''), Consumer Federation, ICGN (``Finally, the
disclosure around dilution concerns . . . are also critical
components for investor decision-making.''), PricewaterhouseCoopers
LLP (June 10, 2022) (``PwC'') (``We believe the proposed disclosure
changes will lead to greater transparency and clarity in important
areas (e.g., actual or potential conflicts/misalignments of
interests or actual or potential sources of dilution).'').
\227\ See, e.g., Consumer Federation (``more detailed
information on the potential impact of dilution on the value of SPAC
shares could help investors better understand the various sources of
dilution and the extent to which their investments might drop in
value, which they could then factor into their decision making.''),
NASAA (``NASAA believes that some of the most important de-SPAC
disclosures proposed are those concerning the potential for dilution
and the potential impacts to returns from sponsor compensation,
`promote' shares, underwriting fees and warrants.'').
\228\ Letters from ABA; Freshfields; Loeb & Loeb; Michael
Klausner, Stanford Law School, Michael Ohlrogge, NYU School of Law,
and Harald Halbhuber, NYU School of Law (June 13, 2022) (``Michael
Klausner, Michael Ohlrogge, and Harald Halbhuber''); Letter from
Christopher J. Capuzzi, Daniel L. Forman, Adam M. Harris, David B.
Hennes, Carl P. Marcellino, and Paul D. Tropp, Ropes & Gray LLP
(June 13, 2022) (``Ropes & Gray''); White & Case.
\229\ See, e.g., Letters f
[…truncated; see source link]Indexed from Federal Register on February 26, 2024.
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