Today, at an open meeting, the Securities and Exchange Commission (SEC) revealed new rules that will cover SPACs or Special Purpose Acquisition Companies. SPACs are “blank check” firms that are public firms that are created to enact a merger or acquisition of another firm. As the SPAC has little to no operating information the process for approval is streamlined in comparison to taking an established firm public. In recent years, SPAC activity boomed, only to quickly subside as the SEC scrutinized the capital markets sector, proposing new rules that have slowed the SPAC sector.
In the past decade or so, the number of public firms have declined. This is largely due to the cost of being a public firm which continues to increase. The current ecosystem demands initial costs as well as significant ongoing expenses to adhere to the disclosure regime. Today, most firms seek to remain private for as long as possible to dodge the public market toll. Some industry insiders view SPACs as a potential way to boost public listings while others have criticized the structures as opaque and creating benefits for sponsors and early investors while lacking sufficient investor protection qualities.
In 2022, the SEC Small Business Capital Formation Advisory Committee (SBCFAC) told the Commission to help make SPACs work – not shut them down by over-regulating them. SBCFAC said it would like for SPACs to “remain a viable path for companies to pursue as a means of getting access to public market capital” adding that it was concerned that the proposed rules “might render SPACs unusable as an alternative to IPOs.”
The new rules aim to require additional disclosures about SPAC compensation, dilution, the target company and “other information important to investors.” In certain situations the target company in a de-SPAC must be a co-registrant with the SPAC.
Any business combination regarding a shell company must disclose its shareholders. And the SEC claims it seeks to better align regulatory treatment of projections in de-SPAC transactions while assessing if SPACs are investment companies under the Investment Company Act.
The Commission has now adopted the new rules which will go into effect 125 days after publication in the Federal Register.
While the three Democrat Commissioners, voted in unison to approve the new rules – which are said to entail over 600 pages of regulations, both Republican Commissioners criticized the new regulations approved by the majority.
SEC Chairman Gary Gensler stated that the new “steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions.”
“We simply do not like them.” – Commissioner Uyeda
Commissioner Mark Uyeda issued a stern dissent on the new rules criticizing the Commission for imposing a “crushingly burdensome disclosure regulation on SPACs as a form of merit regulation in guise.”
Uyeda noted that the SPAC sector is currenlty a “shell of its former self” following the new rule proposal and the rule recommendations shows the Commission “intends to never let them return.” Uyeda chastised the Commission for not taking a more balanced approach.
“In the long term, this may result in fewer opportunities for companies to access our public markets and fewer opportunities for people to make investments,” said Commissioner Uyeda. “The Commission lacks statutory authority to outright ban making investments in SPACs or becoming a reporting company via a de-SPAC transaction. Instead, it has resorted to promulgating rules aimed at significantly increasing the costs and decreasing the attractiveness of being associated with SPACs, to the extent that few rational actors would even attempt such an offering. Today’s recommendation effectively constitutes a form of de facto merit regulation.”
Commissioner Uyeda is concerned that the proposed rules may result in a broad enforcement action pertaining to existing SPACs which may be in violation of the new rules.
Commissioner Hester Peirce slammed the proposed rules as well asking if going forward five years down the road and if there are no SPACs will the rules be deemed a success? CorpFin Staff claimed they did not look at whether or not the rules would decimate the SPAC sector only reviewing investor protection concerns and “fulsome disclosure.” CorpFin did admit that the end result may be fewer SPACs.
Doug Ellenoff, Managing Partner of the law firm of Ellenoff, Grossman, and Schole, shared some perspective on the new SPAC rules. EGS has been the most active law firm in the SPAC market and thus has a vested interest in the success of the sector. Ellenoff took a more diplomatic approach to the SPAC rules, admitting they could have been even worse.
“As critical as I’ve been about the SEC’s approach to regulating SPACs, as well as their toxic public narrative, it would seem that the dissenting voices at the agency have had a very positive impact on what appears to be the final rules,” stated Ellenoff.
He described the new rules as an “acceptable set of rules that are largely consistent with how the industry currently conducts itself,” while acknowledging he has yet to review the final document.
“Without the full benefit of reviewing the actual final rules, it appears that the SEC continues to claim that it requires additional disclosure, which seems odd since there is no actual indication in the last couple of years of providing any comments to that effect, although we’d take no issue with that or have any objection- maybe it’ll be in future guidance. Secondly, they are formally assigning liability for disclosure to the target and its ownership not just the SPAC itself- understandable and actually what practically happens in any case. Lastly, the SEC has introduced the possibility of more trading restrictions on the associated non-public shareholders due to their now argued view on treating spacs as shell corporations. None of these new rules will affect the continued need or desire for SPACs. What is clear though is that due to the influence of the dissenting voices at the SEC and submitted comments by public commentators, the most aggressive proposals seem to have been tabled or deferred for some future consideration.”
The SEC SPAC Fact Sheet is available here.
The Final Rules are available here.
