SEC Proposes New Rules on SPACs

Designed to align SPAC regulation more closely with IPO rules

The U.S. Securities and Exchange Commission (SEC) proposed, on March 30, 2022, new rules governing special purpose acquisition companies (SPACs). The proposed new rules and amendments would require, among other things, additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution.

SEC Chair Gary Gensler stated, in part: "For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations. Today's proposal would help ensure that these tools are applied to SPACs."

Key Takeaways

  • The SEC is proposing new rules designed to align the regulation of SPACs more closely with that of traditional IPOs.
  • SEC Chair Gary Gensler supports the proposal.
  • Commissioner Hester M. Peirce dissents, seeing "a set of substantive burdens that seems designed to damn, diminish, and discourage SPACs."

More Requirements of the Proposed SPAC Rules

If adopted, the new rules would require additional disclosures about business combination transactions between SPACs and private operating companies, including the fairness of these transactions. The new rules would address projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act (PSLRA) safe harbor for forward-looking statements and the use of projections in SEC filings and in business combination transactions.

The intent of the proposed rules is to align more closely the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for an initial public offering (IPO).

The proposal also includes a new rule addressing the status of SPACs under the Investment Company Act of 1940. Under the proposed rule, SPACs must satisfy certain conditions that limit their duration, asset composition, business purpose, and activities, if they are to avoid being required to register under that act.

Economic Drivers of SPACs

SEC Chair Gensler observed: "Ultimately, I think it's important to consider the economic drivers of SPACs. Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO. Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers."

Dissenting View

SEC Commissioner Hester M. Peirce released a lengthy dissenting statement. In a key passage, she said: "Today's proposal does more than mandate disclosures that would enhance investor understanding. It imposes a set of substantive burdens that seems designed to damn, diminish, and discourage SPACs because we do not like them, rather than elucidate them so that investors can decide whether they like them. The typical SPAC would not meet the proposal's parameters without significant changes to its operations, economics, and timeline."

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  1. U.S. Securities and Exchange Commission. "SEC Proposes Rules to Enhance Disclosure and Investor Protection Relating to Special Purpose Acquisition Companies, Shell Companies, and Projections."

  2. U.S. Securities and Exchange Commission. "Damning and Deeming: Dissenting Statement on Shell Companies, Projections, and SPACs Proposal, from Commissioner Hester M. Peirce."

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