SPACs, or Special Purpose Acquisition Companies, are pretty complex. A lot of traders and even many investors don’t really understand how they work. Unfortunately, most SPACs have caused big losses for both regular investors and the people on the inside. It’s been a bit like the wild west. But now, the SEC says they’re putting an end to that.
SEC Chairman Gary Gensler said that the “new steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions.”
The Securities and Exchange Commission unveiled a set of final rules designed to increase disclosures and boost investor safeguards by speculative Special Purpose Acquisition Companies (SPACs). This initiative extends its reach to subsequent business combination transactions between SPACs and their target companies, often referred to as de-SPAC transactions.
Originally proposed on March 30, 2022, the amendments aim to increase transparency and integrity in the financial markets. Investors, key players in SPAC IPOs, and de-SPAC transactions can dive into the details of the proposal through the publicly accessible comment file online.
The newly adopted rules bring in a series of crucial changes, including mandated disclosures on SPAC sponsor compensation, conflicts of interest, dilution, and important information regarding the target company. In specific scenarios, the target company involved in a de-SPAC transaction may now be required to co-register with the SPAC, thereby sharing responsibility for disclosures in the registration statement.
Moreover, the SEC, in a bid to align regulatory treatment, deems any business combination transaction with a reporting shell company, including a SPAC, as a sale of securities to the reporting shell company’s shareholders. Notably, the rules also bring projections in de-SPAC transactions in line with traditional IPOs.
To bolster Securities Act protections in business combinations involving shell companies, the Commission introduces Rule 145a. This rule asserts that any business combination of a reporting shell company, not primarily focused on business combinations, is considered an offer, offer to sell, offer for sale, or sale under Section 2(a)(3) of the Securities Act. Additionally, financial statement requirements are revamped to align more closely with traditional IPOs.
In a bid to enhance projections disclosure, the SEC extends its regulatory framework to business combinations involving blank check companies, including SPACs. The new rules adopt a definition of “blank check company” under the PSLRA, rendering the safe harbor for forward-looking statements unavailable for such entities. In de-SPAC transactions, the final rules also mandate comprehensive disclosure of all material bases and assumptions underlying projections. The final rules, set to take effect 125 days after publication in the Federal Register, signal a proactive stride towards better investor protections.