Aligning SPACs and Traditional IPOs: SEC Adopts Rules Enhancing Investor Protections in SPAC IPOs and de-SPAC Transactions

On January 24, 2024, the Securities and Exchange Commission (the SEC), following a 3-to-2 vote of the SEC’s Commissioners,  announced the adoption of new final rules and amendments intended to enhance disclosures and provide additional investor protections in initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and target companies (de-SPAC transactions). 

As long expected by market participants, the SEC’s new rules largely aim to harmonize the disclosure regime and legal liabilities between SPAC IPOs and de-SPAC transactions, on the one hand, and traditional IPOs, on the other. SEC Chair Gary Gensler stated that “Today’s adoption will help ensure that the rules for SPACs are substantially aligned with those of traditional IPOs, enhancing investor protection through three areas: disclosure, use of projections, and issuer obligations.”  

Among other things, the final rules and amendments make the following changes to SPAC IPO and de-SPAC transactions:

The final rules differ in certain respects from the rules that were proposed on March 30, 2022 (as discussed in our April 4, 2022 Capital Markets & Securities Law Watch blog post), including:

• Fairness Opinions: the proposed rules initially would have required a statement from the SPAC as to whether it reasonably believed that a de-SPAC transaction (and related financing transactions) was fair or unfair to the SPAC’s unaffiliated shareholders. After receiving a number of comments that the proposed rule could be interpreted to require a fairness opinion (even if not explicitly required), the SEC noted that the final rules revised new Item 1606(a) to focus on situations in which a determination as to the advisability of the de-SPAC transaction is required by the law of the jurisdiction in which the SPAC was organized, which they believe makes clear that Item 1606(a) does not require the de-SPAC transaction to be substantively fair or the SPAC to make a fairness determination when it is not otherwise required to do so under state or applicable foreign corporate law.
• Underwriter Liability: the proposed rules included a new Rule 140a that would clarify that anyone who acts an underwriter in a SPAC IPO and participates in the distribution associated with a de-SPAC transaction by taking steps to facilitate that transaction (or a related financing transaction) is engaged in the distribution of securities of the surviving public entity and would be treated as underwriter under Section 2(a)(11) of the Securities Act (i.e. liability protections similar to those in traditional underwritten IPOs would apply to de-SPAC transactions in which a statutory underwriter has participated). After receiving comments about the impact of the proposed Rule 140a on the SPAC market due to increased costs and liability/litigation risks, the SEC decided to decline to adopt the proposed Rule 140a, but provided general guidance regarding statutory underwriter status and followed existing practice of applying Section 2(a)(11) flexibly.
• ICA Safe Harbor: the proposed rules included a new Rule 3a-10 under the Investment Company Act, which would have provided a safe harbor from the definition of an investment company for certain SPACs. The SEC decided not to adopt Rule 3a-10, and instead provided its view on the facts and circumstances that are relevant to whether a SPAC meets the definition of an investment company.

The new rules and amendments are set to take effect 125 days after their publication in the Federal Register. Compliance with structured data requirements, involving the tagging of information pursuant to new subpart 1600 of Regulation S-K in Inline XBRL, will be required 490 days after the rules are published in the Federal Register.

The announcement today of the new rules discussed above highlights the increased scrutiny that SPACs and de-SPAC transactions have undergone in recent years, and it remains to be seen whether these new requirements will further cool off the SPAC market. As Commissioner Hester Peirce noted in a statement on the adoption of the new rules, “the rule will exacerbate a problem—the shrinking pool of public companies—by closing down one road into the public markets. Certain features of [SPACs] needed fixing, but the market was fixing them before the Commission proposed this rule.”

Winston’s Capital Markets and Securities Law Watch will continue to provide updates on the new rulemaking and post additional updates as they become available.