Los Angeles, Calif./Fort Lauderdale, Fla. (March 5, 2024) - On January 24, 2024, the U.S. Securities and Exchange Commission ("SEC") adopted new rules relating to initial public offerings ("IPOs") of special purpose acquisition companies ("SPACs") and the subsequent combination of SPACs with target companies ("de-SPAC transactions"). The new rules adopted by the SEC seek to enhance disclosures and provide additional investor protections in SPAC and de-SPAC transactions.

SPACs and De-SPAC Transactions

SPACs, also known as "blank-check companies," are essentially publicly traded shell companies that merge with or acquire privately held target companies to take these target companies public. SPACs are initially taken public via IPOs to raise capital. Subsequently, SPACs either (1) merge with target companies in a de-SPAC transaction so that the once privately held target companies have access to public capital without formally going through the IPO process, or (2) face liquidation if a certain period of time passes without entering into a deal with a target company.

The SPAC market boomed in 2020 and 2021, with hundreds of SPACs being formed and tens of billions of dollars being invested in these SPACs. In more recent years, the SPAC market has cooled, with only 86 SPAC transactions in 2022 and 31 SPAC transactions in 2023. The SEC's new rules seek to harmonize the regulatory treatment of SPAC and de-SPAC transactions with traditional IPOs, an act that will likely diminish the utility of SPACs as a capital raising tool and further drive the decline of the SPAC market.

New Rules

In its effort to enhance disclosures and provide additional protections to SPAC investors that are typically afforded to traditional IPO investors, the SEC has adopted rules that, among other things, do the following:

  • Require additional disclosures about SPAC sponsor compensation, conflicts of interest, dilution, the target company, and other information important to investors in SPAC IPOs and de-SPAC transactions.
  • In certain situations, require the target company in a de-SPAC transaction to be a co-registrant with the SPAC (or another shell company), thereby requiring the target company to assume responsibility for the disclosures and registration statement filed in connection with the de-SPAC transaction.
  • 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.
  • Better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995.
  • Provide additional guidance to assist SPACs in addressing when they may meet the definition of an "investment company" under the Investment Company Act of 1940 and regarding statutory underwriter status under the Securities Act of 1933 in connection with de-SPAC transactions.
  • Require additional disclosures in a de-SPAC transaction regarding any determination by a board of directors or similar body as to whether the transaction is advisable and in the best interests of the SPAC and its shareholders, and in some circumstances, accompanied by any outside report, opinion, or appraisal received that materially relates to the transaction.
  • Require a re-determination of smaller reporting company status following the consummation of a de-SPAC transaction, with such re-determination to be reflected in filings beginning 45 days after the transaction's consummation.

The new regulations will go into effect 125 days following the date of publication in the Federal Register.

Contributed by Haley Gorey, Law Clerk

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