Publication Date: 2024-06-06 | Regulator: US Securities and Exchange Commission (SEC)
Title: Final Rule – Special Purpose Acquisition Companies, Shell Companies, and Projections
The provided documents contain information related to regulatory compliance requirements for special purpose acquisition companies (SPACs) in the context of prospectus summaries. The documents highlight the need for clear and concise disclosure of important features, associated risks, and material terms in plain English.
Specifically, the documents emphasize the importance of disclosing information about the background and material terms of de-SPAC transactions, including whether the SPAC believes the transaction is fair to unaffiliated security holders and any conflicts of interest that may exist. Additionally, the documents mention the requirement for tabular disclosure of compensation received by the SPAC sponsor and its affiliates, as well as the dilutive impact on the equity interests of unaffiliated security holders.
The documents also stress the benefits of visualizing information through tables and other prominent formats to enhance investors’ perception and understanding. This is particularly important for investors who may have limited financial literacy or education levels.
In summary, the documents emphasize the need for comprehensive and transparent disclosure in prospectus summaries, ensuring that investors have access to key information about SPACs, their operations, and potential risks. The goal is to provide investors with the necessary information to make informed investment decisions.
The new rules aim to enhance investor protections in SPAC transactions by addressing information asymmetry, conflicts of interest, and ensuring more robust disclosure requirements. Here are some ways in which the rules seek to achieve this:
- Increased Disclosure Requirements: The rules require additional disclosures to address information asymmetries between investors and the SPAC. These disclosures include information about dilution, compensation, conflicts of interest, and the information considered by the SPAC in assessing the transaction.
- Standardization and Comparability: The rules aim to increase standardization in the presentation of projections and other information, reducing information acquisition costs and facilitating comparisons across SPACs. This allows investors to better understand and consider the disclosed projections when making investment decisions.
- Identification of Conflicts of Interest: The rules require disclosure of any actual or potential conflicts of interest between specified parties of the SPAC and target, as well as unaffiliated security holders of the SPAC. This helps investors assess the potential risks and evaluate the fairness of the transaction.
- Liability Provisions: The rules include provisions to ensure that shareholders consistently receive the full protections of Securities Act disclosure and liability provisions in connection with the de-SPAC transaction. This helps protect investors from potential misconduct or inadequate disclosures.
- Mitigation of Information Asymmetry: The required disclosure of preparers’ identities and purposes for which the projections were prepared helps mitigate information asymmetry between the SPAC and investors. It allows investors to assess the qualifications and potential conflicts of interest of the preparers.
By enhancing transparency, standardization, and disclosure requirements, the new rules aim to provide investors with more complete and useful information to make informed investment and voting decisions. This promotes market efficiency, reduces adverse selection, and increases investor confidence in the SPAC market.
The key requirements for Prospectus Cover Page and Prospectus Summary Disclosure in SPAC transactions, as outlined in the provided documents, include the following:
Prospectus Cover Page Disclosure:
- Time Frame for De-SPAC Transaction: The cover page should disclose the time frame within which the SPAC intends to consummate a de-SPAC transaction.
- Redemption Terms: Disclose the terms related to the redemption of securities by investors.
- Compensation Disclosure: Provide information on the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters, including securities issued.
- Conflict of Interest: Disclose any actual or potential conflict of interest between specified parties of the SPAC and target, and unaffiliated security holders of the SPAC.
- Tabular Disclosure: Include a tabular disclosure of net tangible book value per share, as adjusted, for various redemption levels.
Prospectus Summary Disclosure:
- Identification and Evaluation of Business Combination Candidates: Disclose the manner in which the SPAC will identify and evaluate potential business combination candidates.
- Time Frame for De-SPAC Transaction: Provide information on the period of time within which the SPAC intends to consummate a de-SPAC transaction, including any potential extensions.
- Trust or Escrow Account: Disclose the material terms of the trust or escrow account associated with the SPAC.
- Additional Financing Plans: Include details on the SPAC’s plans to seek additional financing and the potential impact on shareholders.
- Dilution: Provide information on the impact of compensation and securities issuances on dilution.
These requirements aim to enhance transparency and provide investors with essential information to assess their investment and voting decisions. The Prospectus Cover Page and Prospectus Summary Disclosure requirements are designed to reduce information asymmetry between the SPAC and potential investors, enabling investors to make more informed choices.
The prospectus summary should include a brief description of the following information in plain English:
- The manner in which the special purpose acquisition company (SPAC) will identify and evaluate potential business combination candidates. This should also specify whether the SPAC will seek shareholder approval for the de-SPAC transaction.
- The material terms of the trust or escrow account, including the amount or percentage of the gross offering proceeds that the SPAC will place in the trust or escrow account. This information is important for investors to understand how their funds will be managed and safeguarded.
It is important to note that the prospectus summary should be written in plain English to ensure clarity and accessibility for investors.
The new disclosure requirements for SPAC sponsors and their compensation, as outlined in the provided documents, include the following:
- Experience and Responsibilities: SPACs are required to disclose the experience, material roles, and responsibilities of the SPAC sponsor and its affiliates. This information helps investors evaluate the qualifications and capabilities of the sponsor in selecting and executing quality transactions.
- Agreements and Arrangements: SPACs must disclose any agreements, arrangements, or understandings between the SPAC sponsor and the SPAC, its executive officers, directors, or affiliates. This includes agreements related to determining whether to proceed with a de-SPAC transaction and agreements with unaffiliated security holders regarding the redemption of outstanding securities.
- Controlling Persons and Material Interests: SPACs are required to identify the controlling persons of the SPAC sponsor and disclose any persons with direct and indirect material interests in the SPAC sponsor. The nature and amount of these interests must also be disclosed, providing transparency regarding potential conflicts of interest.
- Lock-Up Agreements: Material terms of any lock-up agreements between the SPAC sponsor and its affiliates must be disclosed. This includes details about restrictions on selling securities of the SPAC and the duration of the lock-up period.
- Compensation Disclosure: SPACs must disclose the nature and amounts of all compensation awarded, earned, or paid to the SPAC sponsor, its affiliates, and any promoters for services rendered to the SPAC and its affiliates. This includes compensation in the form of cash, shares of stock, warrants, rights, or any other form. Reimbursements to be paid to the SPAC sponsor, its affiliates, and any promoters upon the completion of a de-SPAC transaction must also be disclosed.
These new disclosure requirements aim to provide investors with a clearer understanding of the compensation structure, potential conflicts of interest, and incentives of SPAC sponsors and their affiliates. By providing this information, investors can make more informed decisions regarding their investments in SPACs.
Under the new rules, the conflicts of interest that must now be disclosed in SPAC transactions include the following:
- SPAC Sponsor and Affiliates: Any conflicts of interest between the SPAC sponsor or its affiliates and the SPAC itself, its officers, directors, or promoters must be disclosed. This includes any financial arrangements, compensation agreements, or other relationships that may create conflicts of interest.
- Target Company Officers and Directors: Conflicts of interest between the target company’s officers and directors and the SPAC or its security holders must be disclosed. This includes any financial arrangements, compensation agreements, or other relationships that may create conflicts of interest.
- Unaffiliated Security Holders: Conflicts of interest between the SPAC sponsor or its affiliates, the SPAC’s officers, directors, or promoters, and the unaffiliated security holders of the SPAC must be disclosed. This includes any conflicts that may arise in determining whether to proceed with a de-SPAC transaction or conflicts arising from the compensation arrangements of the SPAC sponsor, officers, and directors.
The purpose of disclosing these conflicts of interest is to provide investors with a more complete understanding of the potential conflicts that may exist in a SPAC transaction. By having this information, investors can better assess the risks associated with these conflicts and make more informed investment decisions. The disclosure requirements aim to enhance transparency and promote investor protection in SPAC transactions.
The new rules aim to address dilution concerns for SPAC shareholders by introducing enhanced disclosure requirements. These requirements provide investors with more detailed information about potential sources of dilution and the impact of dilution on their investments. Here’s how the new rules address dilution concerns:
- Dilution Disclosures: The new rules require SPACs to provide centralized and standardized dilution disclosures. This includes disclosing potential sources of dilution and tabular disclosure of net tangible book value per share, as adjusted. These disclosures help investors understand the effects of dilution on their investments and make better-informed investment decisions.
- Comparison Information: The additional detail provided in the dilution disclosures allows investors to compare between different SPACs and differentiate them from other investments. This comparison information helps investors assess the material differences in a SPAC and understand the potential impact of dilution on their investments.
- Context and Assumptions: The rules also require SPACs to include a description of the model, methods, assumptions, estimates, and parameters necessary to understand the tabular dilution disclosure. This provides investors with the necessary context to fully understand the underlying assumptions and limitations of the dilution disclosure.
- De-SPAC Dilution Disclosures: The rules recognize that dilution can change significantly by the time a SPAC reaches the de-SPAC transaction stage. SPACs are required to disclose the dilutive impact of certain compensation and securities issuances on non-redeeming shareholders. This disclosure helps investors assess the potential dilution effects of these transactions.
By providing more comprehensive and standardized dilution disclosures, the new rules aim to reduce the costs to investors of conducting a dilution analysis. The tabular format of the disclosures improves comparability across SPACs, allowing investors to analyze and compare dilution information more easily. This increased transparency and comparability should enable investors to better anticipate the effects of dilution on their investments and make more informed investment decisions.
The new rules for the re-determination of Smaller Reporting Company (SRC) status in connection with de-SPAC transactions include the following key provisions:
- Re-determination Requirement: The rules require a post-de-SPAC transaction registrant to re-determine its SRC status prior to its first filing, other than the Form 8-K filed with Form 10 information, following the de-SPAC transaction. This re-determination must be reflected in the issuer’s next periodic report.
- Timing of Re-determination: The re-determination of SRC status must be conducted after the consummation of the de-SPAC transaction and before the first filing, other than the Form 8-K, following the transaction. This ensures that the SRC status is accurately determined based on the post-combination entity’s facts and circumstances.
- Public Float Measurement: The rules specify that the public float should be measured as of a date within four business days after the consummation of the de-SPAC transaction. This measurement helps determine whether the post-combination company meets the public float threshold for SRC status.
- Annual Revenue Measurement: The rules require the measurement of annual revenues using the target company’s annual revenues as of the most recently completed fiscal year reported in the Form 8-K filed with Form 10 information. This measurement helps determine whether the post-combination company meets the annual revenue threshold for SRC status.
- Exclusion of Certain Filings: The rules exclude certain filings, such as the Form 8-K filed with Form 10 information, from the requirement to reflect non-SRC status. The registrant is not required to reflect non-SRC status in any filing due within the 45-day period following the de-SPAC transaction. Non-SRC status must be reflected in filings made after the end of this 45-day period.
These rules aim to ensure that the SRC status of a post-de-SPAC transaction registrant is accurately determined and reflected in its filings. By requiring a re-determination of SRC status and providing specific guidelines for measurement, the rules promote transparency and consistency in determining the reporting obligations of post-combination entities resulting from de-SPAC transactions.
The new rules address the scope of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995 (PSLRA) by removing the availability of the safe harbor for forward-looking statements made in connection with de-SPAC transactions. Here are the key provisions of the new rules:
- Removal of Safe Harbor for De-SPAC Transactions: The rules remove the availability of the safe harbor for forward-looking statements made in connection with de-SPAC transactions. This means that forward-looking statements made by de-SPAC companies will not be protected by the safe harbor provisions of the PSLRA.
- Retention of Safe Harbor for Other Transactions: The rules do not affect the availability of the safe harbor for forward-looking statements made in connection with other transactions, such as initial public offerings (IPOs) or follow-on offerings by existing public companies. The safe harbor provisions of the PSLRA will continue to apply to forward-looking statements made in these contexts.
- Impact on Liability for Forward-Looking Statements: The removal of the safe harbor for de-SPAC transactions means that issuers and other parties involved in these transactions may face increased liability for forward-looking statements. Without the protection of the safe harbor, issuers may be subject to greater scrutiny and potential legal action related to the accuracy and reliability of their forward-looking statements.
- Consideration of Other Safe Harbors and Legal Doctrines: The rules acknowledge that other safe harbors in Commission rules and legal doctrines, such as the bespeaks caution doctrine, may continue to provide protection against liability under common law for forward-looking statements. These existing safe harbors and legal doctrines can help mitigate liability concerns associated with providing projections and other forward-looking information.
Overall, the new rules narrow the scope of the safe harbor for forward-looking statements under the PSLRA by removing its availability for de-SPAC transactions. This change aims to enhance investor protection and promote more accurate and reliable disclosures in the context of these transactions.
The re-determination of Smaller Reporting Company (SRC) status will have implications for Special Purpose Acquisition Companies (SPACs) in the following ways:
- Re-determination Requirement: The new rules require a post-de-SPAC transaction registrant to re-determine its SRC status following the completion of a de-SPAC transaction. This means that the SRC status of the post-combination company will need to be reassessed based on its updated financials and other relevant factors.
- Loss of SRC Status: If a post-de-SPAC company no longer qualifies as an SRC upon re-determination, it will lose the benefits and accommodations associated with SRC status. This includes reduced disclosure requirements and certain scaled reporting obligations that are available to smaller reporting companies.
- Incremental Disclosure Requirements: Losing SRC status may result in additional disclosure requirements for the post-de-SPAC company. For example, if a registration statement is filed after the point at which non-SRC status must be reflected, the company may be required to provide incremental disclosures, such as an additional year of financial statements beyond what was provided in the Form S-4 filed in connection with the de-SPAC transaction.
- Timing Considerations: The rules provide a 45-day period following the consummation of the de-SPAC transaction during which a registrant does not need to reflect non-SRC status in any filing. This allows companies some time to adjust their reporting and disclosure practices before reflecting the change in their filings.
- Investor Protection and Transparency: The re-determination of SRC status aims to enhance investor protection and ensure that investors have access to appropriate levels of information when assessing post-de-SPAC companies. By aligning the disclosure requirements of post-de-SPAC companies with those of traditional IPOs, the rules seek to reduce regulatory arbitrage and promote transparency in the market.
Overall, the re-determination of SRC status in connection with de-SPAC transactions introduces additional compliance obligations and disclosure requirements for post-combination companies. It is important for SPACs and their legal and financial advisors to carefully consider these rules and ensure compliance with the re-determination requirements to effectively manage the transition and maintain regulatory compliance.
The new financial statement requirements for transactions involving shell companies include the following key provisions:
- Financial Statement Reporting Alignment: The Securities and Exchange Commission (SEC) has adopted amendments to its forms and rules to align the financial statement reporting requirements in business combinations involving shell company registrants with those in traditional initial public offerings (IPOs). This alignment aims to ensure that investors receive consistent and comparable financial information regardless of the transaction structure.
- Financial Statement Disclosures: The amendments require the financial statements of a business that will be a predecessor to the shell company registrant to become those of the registrant for financial reporting purposes after a business combination. This means that the financial statements of the acquired business will be included in the registrant’s filings, providing investors with relevant financial information.
- Choice of Going Public Method: The amendments clarify that a company’s choice of going public method, whether through an IPO or a business combination transaction with a shell company, should not result in substantially different financial statement disclosures being provided to investors. The goal is to ensure consistency and comparability in financial reporting regardless of the method chosen.
- Significance Measurement: The new rules direct registrants to determine the significance of a shell company business combination transaction based on Rule 1-02(w)(1) to assess the financial statement reporting requirements. This helps determine the appropriate financial statement disclosures and reporting obligations for the transaction.
- Financial Statement Filing Requirements: The amendments clarify when and how financial statements for a recently acquired or to be acquired business should be filed. The financial statements of the shell company are required to be included in any filing that requires the registrant’s financial statements, as if the shell company were the registrant for the filing, unless the financial statements of the registrant already include the period in which the acquisition of the shell company was consummated.
These new financial statement requirements aim to provide investors with consistent and comparable financial information in transactions involving shell companies. By aligning the reporting requirements with traditional IPOs, the SEC seeks to enhance transparency and investor protection in the financial markets.
The Securities and Exchange Commission (SEC) has provided guidance for Special Purpose Acquisition Companies (SPACs) under the Investment Company Act of 1940. The guidance addresses the status of SPACs as investment companies and provides insights into the factors that may impact their classification. Here are the key points from the guidance:
- Individualized Analysis: The SEC emphasizes that determining whether a SPAC qualifies as an investment company under the Investment Company Act is a question of facts and circumstances. It requires an individualized analysis considering various factors.
- Investment Company Definition: The guidance clarifies that a SPAC may meet the definition of an investment company under section 3(a)(1)(A) or 3(a)(1)(C) of the Investment Company Act, or both, depending on the specific facts and circumstances.
- Holding Out: If a SPAC holds itself out in a manner that suggests investors should primarily invest in its securities to gain exposure to its portfolio of securities before the de-SPAC transaction, it is likely to be considered an investment company under section 3(a)(1)(A). For example, marketing itself as a fixed-income investment or an alternative to a mutual fund may indicate engagement in the business of investing, reinvesting, or trading in securities.
- Merging with an Investment Company: If a SPAC engages or proposes to engage in a de-SPAC transaction with a target company that qualifies as an investment company (e.g., closed-end fund or business development company), the SPAC is likely to be considered an investment company under section 3(a)(1)(A) of the Investment Company Act. This is because the SPAC would be proposing to engage in the business of investing, reinvesting, and trading in securities.
- Compliance Options: The guidance suggests that if a SPAC’s activities cause it to fall within the definition of an investment company, it should consider options to bring itself into compliance. This may include changing its operations, winding down its activities, or registering as an investment company under the Investment Company Act.
It is important to note that the guidance provides general principles and factors to consider, but the determination of a SPAC’s status as an investment company ultimately depends on the specific facts and circumstances of each case. SPACs should carefully evaluate their operations and seek legal advice to ensure compliance with the Investment Company Act.
The Securities and Exchange Commission (SEC) has provided guidance on the status of potential underwriters in de-SPAC transactions. The guidance clarifies the definition of underwriters and their potential liability in these transactions. Here are the key points from the guidance:
- Definition of Underwriter: The SEC refers to the definition of underwriter as stated in Section 2(a)(11) of the Securities Act of 1933. According to this definition, an underwriter is “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking.”
- Broad Application of Underwriter Status: The SEC emphasizes that the term “underwriter” should be applied broadly and flexibly, considering the facts and circumstances of each transaction. It is not limited to traditional IPOs or capital raising activities. The SEC intends to follow its longstanding practice of applying the terms “distribution” and “underwriter” broadly.
- De-SPAC Transactions as Distributions: The guidance states that de-SPAC transactions, which involve the introduction of a private operating company to the public capital markets, are considered distributions of securities. The SEC clarifies that the concept of distribution is not limited to traditional IPOs and can include other types of transactions, such as spin-offs.
- Liability of Underwriters: The guidance acknowledges that underwriters play an important role as gatekeepers in the distribution of securities. If a party acts as an underwriter in a de-SPAC transaction and participates in the distribution of securities, they may be subject to underwriter liability under Section 11 of the Securities Act. This liability is similar to the liability in traditional underwritten IPOs.
It is important to note that the guidance provides general principles and interpretations. The determination of underwriter status in de-SPAC transactions depends on the specific facts and circumstances of each case. Parties involved in de-SPAC transactions should carefully evaluate their roles and consult legal counsel to understand their potential underwriter status and associated liabilities.
The document mentions several time frames and deadlines related to regulatory compliance. Here are some of the key time frames and deadlines mentioned:
Minimum Dissemination Period: The document refers to a 20-calendar day minimum dissemination period for security holders to review prospectuses and proxy and information statements in de-SPAC transactions.
Maximum Dissemination Period: The document states that if the laws of a SPAC’s jurisdiction of incorporation or organization have a maximum advance time period provision for the dissemination of materials to security holders that is less than 20 calendar days, the SPAC must satisfy the maximum dissemination period permitted under the applicable law.
Notice Period for Stockholder Meeting: The document mentions that there are currently no U.S. states with a maximum period of notice for a stockholder meeting that is less than 20 calendar days.
Deadline for Mailing Materials: The document clarifies that the requirements to “distribute” various security holder materials are satisfied when the materials are sent, not when they are received by the security holder. For example, if a registrant is mailing a full set of hard copy materials to security holders, the requirement would be met when the materials are placed in the mail.
Policy on Disclosure Requirements for SPAC Sponsors and Compensation
- PurposeThe purpose of this policy is to establish guidelines for the disclosure requirements related to SPAC sponsors and their compensation. It aims to ensure transparency and provide investors with comprehensive information regarding the compensation structure and arrangements of SPAC sponsors.
- ScopeThis policy applies to all SPAC sponsors and their affiliated entities involved in special purpose acquisition company (SPAC) transactions.
- Definitions
- SPAC: Special Purpose Acquisition Company, a publicly traded company formed for the purpose of acquiring or merging with an operating company.
- SPAC Sponsor: The entity or individuals responsible for establishing and managing the SPAC.
- Disclosure Requirements4.1. Experience and Roles:
- Disclose the experience, material roles, and responsibilities of the SPAC sponsor and its key personnel.
- Provide information on any agreement, arrangement, or understanding between the SPAC sponsor and the SPAC, its executive officers, directors, or affiliates, regarding the determination of proceeding with a de-SPAC transaction.
- Disclose any agreement, arrangement, or understanding between the SPAC sponsor and unaffiliated security holders of the SPAC regarding the redemption of outstanding securities.
4.2. Controlling Persons and Material Interests:
- Identify the controlling persons of the SPAC sponsor.
- Disclose the persons who have direct and indirect material interests in the SPAC sponsor, along with the nature and amount of their interests.
- Provide an organizational chart illustrating the relationship between the SPAC, the SPAC sponsor, and the SPAC sponsor’s affiliates.
4.3. Compensation Disclosure:
- Disclose the nature and amounts of all compensation awarded, earned, or paid to the SPAC sponsor, its affiliates, and any promoters for services rendered in all capacities to the SPAC and its affiliates.
- Specify the form of compensation (e.g., cash, shares of stock, warrants, and rights).
- Include the number of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and any promoters, along with the price paid or to be paid for such securities.
- Disclose any circumstances or arrangements under which the SPAC sponsor, its affiliates, and promoters 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.
- Provide information on any reimbursements to be paid to the SPAC sponsor, its affiliates, and any promoters upon the completion of a de-SPAC transaction.
- Compliance and Oversight5.1. Responsibility:
- The Compliance Department is responsible for overseeing compliance with this policy.
- The SPAC sponsor’s management is responsible for ensuring accurate and timely disclosure in accordance with the policy.
5.2. Monitoring and Review:
- Regularly monitor and review the disclosure practices to ensure compliance with applicable regulations and guidelines.
- Conduct periodic internal audits to assess the effectiveness of the disclosure controls and procedures.
- Training and Awareness
- Provide training to relevant personnel on the disclosure requirements and the importance of accurate and transparent disclosure.
- Foster a culture of compliance and awareness regarding the disclosure obligations of SPAC sponsors.
- Policy Review
- This policy will be reviewed annually or as needed to ensure alignment with regulatory changes and best practices.
- Policy Approval
- This policy has been approved by [Name of Approving Authority] on [Date of Approval].
Please note that this policy framework is a general guideline and should be tailored to the specific requirements and circumstances of your organization. It is recommended to consult legal counsel or compliance professionals to ensure compliance with applicable laws and regulations.
