[Federal Register Volume 87, Number 93 (Friday, May 13, 2022)]
[Proposed Rules]
[Pages 29458-29574]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-07189]
[[Page 29457]]
Vol. 87
Friday,
No. 93
May 13, 2022
Part II
Securities and Exchange Commission
-----------------------------------------------------------------------
17 CFR Parts 210, 229, 230, et al.
Special Purpose Acquisition Companies, Shell Companies, and
Projections; Proposed Rule
Federal Register / Vol. 87, No. 93 / Friday, May 13, 2022 / Proposed
Rules
[[Page 29458]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 230, 232, 239, 240, 249, and 270
[Release Nos. 33-11048; 34-94546; IC-34549; File No. S7-13-22]
RIN 3235-AM90
Special Purpose Acquisition Companies, Shell Companies, and
Projections
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
-----------------------------------------------------------------------
SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing rules intended to enhance investor protections in initial
public offerings by special purpose acquisition companies (``SPACs'')
and in subsequent business combination transactions between SPACs and
private operating companies. Specifically, we are proposing specialized
disclosure requirements with respect to, among other things,
compensation paid to sponsors, conflicts of interest, dilution, and the
fairness of these business combination transactions. The proposed new
rules and amendments to certain rules and forms under the Securities
Act of 1933 and the Securities Exchange Act of 1934 would address the
application of disclosure, underwriter liability, and other provisions
in the context of, and specifically address concerns associated with,
business combination transactions involving SPACs as well as the scope
of the Private Securities Litigation Reform Act of 1995. Further, we
are proposing a rule that would deem any business combination
transaction involving a reporting shell company, including a SPAC, to
involve a sale of securities to the reporting shell company's
shareholders and are proposing to amend a number of financial statement
requirements applicable to transactions involving shell companies. In
addition, we are proposing to update our guidance regarding the use of
projections in Commission filings as well as to require additional
disclosure regarding projections when used in connection with business
combination transactions involving SPACs. Finally, we are proposing a
new safe harbor under the Investment Company Act of 1940 that would
provide that a SPAC that satisfies the conditions of the proposed rule
would not be an investment company and therefore would not be subject
to regulation under that Act.
DATES: Comments should be received on or before June 13, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
Send an email to [email protected]. Please include
File Number S7-13-22 on the subject line; or.
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-13-22. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's website (http://www.sec.gov/rules/proposed.shtml).
Comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
Operating conditions may limit access to the Commission's Public
Reference Room. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on our website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Charles Kwon, Office of Rulemaking,
Division of Corporation Finance, at (202) 551-3430; or with respect to
proposed Rules 140a and 145a under the Securities Act, Adam Turk,
Office of Chief Counsel, Division of Corporation Finance, at (202) 551-
3500; with respect to proposed Rule 15-01 of Regulation S-X, Ryan
Milne, Office of Chief Accountant, Division of Corporation Finance, at
(202) 551-3400; with respect to the proposed amendments relating to
projections disclosure and tender offer rules, Daniel Duchovny, Office
of Mergers & Acquisitions, Division of Corporation Finance, at (202)
551-3440; and with respect to proposed Rule 3a-10 under the Investment
Company Act, Rochelle Kauffman Plesset, Seth Davis, or Taylor Evenson,
Senior Counsels; Lisa Reid Ragen, Branch Chief; or Thoreau Bartmann,
Assistant Director, Chief Counsel's Office, Division of Investment
Management, at (202) 551-6825; U.S. Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment new 17 CFR 210.15-01 (Rule 15-01 of Regulation S-X), new 17 CFR
229.1601 through 229.1610 (subpart 1600 of Regulation S-K), new 17 CFR
230.140a (Securities Act Rule 140a), new 17 CFR 230.145a (Securities
Act Rule 145a), and new 17 CFR 270.3a-10 (Investment Company Act Rule
3a-10). We are also proposing for public comment amendments to:
---------------------------------------------------------------------------
\1\ 15 U.S.C. 77a et seq.
------------------------------------------------------------------------
CFR citation (17
Commission reference CFR)
------------------------------------------------------------------------
Securities Act of 1933 (``Securities Act''): \1\
Rule 137......................................... 230.137
Rule 138......................................... 230.138
Rule 139......................................... 230.139
Rule 163A........................................ 230.163A
Rule 164......................................... 230.164
Rule 174......................................... 230.174
Rule 405......................................... 230.405
Rule 419......................................... 230.419
[[Page 29459]]
Rule 430B........................................ 230.430B
Rule 437a........................................ 230.437a
Form S-1......................................... 239.11
Form F-1......................................... 239.31
Form S-4......................................... 239.25
Form F-4......................................... 239.34
Securities Exchange Act of 1934 (``Exchange Act''):
\2\
Rule 12b-2....................................... 240.12b-2
Rule 14a-6....................................... 240.14a-6
Rule 14c-2....................................... 240.14c-2
Schedule 14A..................................... 240.14a-101
Schedule TO...................................... 240.14d-100
Form 20-F........................................ 249.220f
Form 8-K......................................... 249.308
Regulation S-K (17 CFR 229.10 through 229.1406):
Item 10.......................................... 229.10
Item 601......................................... 229.601
Regulation S-T (17 CFR 232.10 through 232.903):
Rule 405......................................... 232.405
Regulation S-X (17 CFR 210.1-01 through 210.13-02):
Rule 1-02........................................ 210.1-02
Rule 3-01........................................ 210.3-01
Rule 3-02........................................ 210.3-02
Rule 3-05........................................ 210.3-05
Rule 3-14........................................ 210.3-14
Rule 8-02........................................ 210.8-02
Rule 10-01....................................... 210.10-01
Rule 11-01....................................... 210.11-01
------------------------------------------------------------------------
Table of Contents
---------------------------------------------------------------------------
\2\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------
I. Introduction
II. Proposed New Subpart 1600 of Regulation S-K
A. Definitions
B. Sponsors
C. Conflicts of Interest
D. Dilution
E. Prospectus Cover Page and Prospectus Summary Disclosure
1. Prospectus Cover Page
2. Prospectus Summary
F. Disclosure and Procedural Requirements in De-SPAC
Transactions
1. Background of and Reasons for the De-SPAC Transaction; Terms
and Effects
2. Fairness of the De-SPAC Transaction
3. Reports, Opinions, and Appraisals
4. Proposed Item 1608 of Regulation S-K
G. Structured Data Requirement
III. Aligning De-SPAC Transactions With Initial Public Offerings
A. Aligning Non-Financial Disclosures in De-SPAC Disclosure
Documents
B. Minimum Dissemination Period
C. Private Operating Company as Co-Registrant to Form S-4 and
Form F-4
D. Re-Determination of Smaller Reporting Company Status
E. PSLRA Safe Harbor
F. Underwriter Status and Liability in Securities Transactions
1. Participants in a Distribution as ``Underwriters''
2. The De-SPAC Transaction as a ``Distribution'' of the Combined
Company's Securities
3. Proposed Rule: SPAC IPO Underwriters are Underwriters in
Registered De-SPAC Transactions
IV. Business Combinations Involving Shell Companies
A. Shell Company Business Combinations and the Securities Act of
1933
1. Shell Company Business Combinations
2. Proposed Rule 145a
3. Excluded Transactions
B. Financial Statement Requirements in Business Combination
Transactions Involving Shell Companies
1. Number of Years of Financial Statements
2. Audit Requirements of Predecessor
3. Age of Financial Statements of the Predecessor
4. Acquisitions of Businesses by a Shell Company Registrant or
Its Predecessor That Are Not or Will Not Be the Predecessor
5. Financial Statements of a Shell Company Registrant After the
Combination With Predecessor
6. Other Amendments
V. Enhanced Projections Disclosure
A. Background
B. Rule Proposals
1. Item 10(b) of Regulation S-K
2. Item 1609 of Regulation S-K
VI. Proposed Safe Harbor Under the Investment Company Act
A. Background
1. Potential Status as an Investment Company
2. Rationale for the Safe Harbor
3. Boundaries of the Safe Harbor
B. Conditions
1. Nature and Management of SPAC Assets
2. SPAC Activities
3. Duration Limitations
VII. Additional Requests for Comment
VIII. General Request for Comments
IX. Economic Analysis
A. Broad Economic Considerations
B. Baseline and Affected Parties
1. SPAC Initial Public Offerings
2. De-SPAC Transactions
3. Blank Check Companies
4. Shell-Company Business Combinations
5. Projections Under Item 10(b) of Regulation S-K
6. Investment Company Act Safe Harbor
C. Benefits and Costs of the Proposed Rules
1. Disclosure-Related Proposals
2. Liability-Related Proposals
3. Shell-Company Related Proposals
4. Enhanced Projections Disclosure (Amendments to Item 10(b) of
Regulation S-K)
5. Investment Company Act Safe Harbor
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Reasonable Alternatives
1. Disclosure-Related Proposals
2. Liability-Related Proposals
3. Expanding Disclosure in Reporting Shell Company Business
Combinations
4. Enhanced Projections Disclosures
5. Investment Company Act Safe Harbor
F. Requests for Comment
X. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Estimates of the Effects of the Proposed New Rules and
Amendments on the Collections of Information
C. Incremental and Aggregate Burden and Cost Estimates
D. Request for Comment
XI. Small Business Regulatory Enforcement Fairness Act
XII. Initial Regulatory Flexibility Analysis and Certification
A. Reasons for, and Objectives of, the Proposed Action
[[Page 29460]]
B. Legal Basis
C. Regulatory Flexibility Act Certification
D. Small Entities Subject to the Proposed Rules and Amendments
E. Reporting, Recordkeeping, and Other Compliance Requirements
F. Duplicative, Overlapping or Conflicting Federal Rules
G. Significant Alternatives
Statutory Authority and Text of Proposed Rule and Form Amendments
I. Introduction
Special purpose acquisition companies first began to emerge in the
1990s as an alternative to blank check companies regulated pursuant to
Rule 419 under the Securities Act.\3\ In response to widespread fraud
and abuse in blank check offerings, Congress passed the Securities
Enforcement Remedies and Penny Stock Reform Act of 1990,\4\ which
required the Commission to adopt rules governing registration
statements filed by blank check companies offering penny stock.\5\ In
response, the Commission adopted comprehensive disclosure and other
requirements for blank check offerings in Rule 419.\6\ Following the
adoption of Rule 419, securities offerings by SPACs, which are not
subject to the rule's requirements but have many similar features,
began to appear, with the number of these offerings fluctuating over
the years.\7\ In the past two years, however, the U.S. securities
markets have experienced an unprecedented surge in the number of
initial public offerings by SPACs, with SPACs raising more than $83
billion in such offerings in 2020 and more than $160 billion in such
offerings in 2021.\8\ In 2020 and 2021, more than half of all initial
public offerings were conducted by SPACs.
---------------------------------------------------------------------------
\3\ The term ``blank check company'' is defined in 17 CFR
230.419(a)(2) as a development stage company that has no specific
business plan or purpose or that has indicated that its business
plan is to engage in a merger or acquisition with an unidentified
company or companies, and that is issuing ``penny stock,'' as
defined in 17 CFR 240.3a51-1 (Exchange Act Rule 3a51-1).
\4\ Public Law 101-429, 104 Stat. 931 (Oct. 15, 1990).
\5\ Id. at sec. 508; Section 7(b) of the Securities Act.
\6\ Blank Check Offerings, Release No. 33-6932 (Apr. 13, 1992)
[57 FR 18037 (Apr. 28, 1992)]. Rule 419 requires a blank check
company to meet certain disclosure and investor protection
requirements in registered offerings of securities.
\7\ Between 2011 and 2021, the average number of initial public
offerings by SPACs registered under the Securities Act per year was
98, with the highest number of such offerings (613) in 2021 and the
lowest number of such offerings (9) in 2012. In 2008, both the New
York Stock Exchange and Nasdaq adopted rules to permit the listing
of SPACs on these exchanges for the first time. See, e.g., Release
No. 34-57785 (May 6, 2008) [73 FR 27597 (May 13, 2008)] and Release
No. 34-58228 (July 25, 2008) [73 FR 44794 (July 31, 2008)].
\8\ By comparison, SPACs raised a total of $13.6 billion in
initial public offerings in 2019 and a total of $10.8 billion in
initial public offerings in 2018. As used in this release, ``initial
public offering'' refers to a securities offering registered under
the Securities Act by an issuer that was not subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act
immediately prior to the registration.
---------------------------------------------------------------------------
A SPAC is typically a shell company \9\ that is organized for the
purpose of merging with or acquiring one or more unidentified private
operating companies (a ``de-SPAC transaction'') within a certain time
frame (often two years) and that conducts a firm commitment
underwritten initial public offering of $5 million or more in units
consisting of redeemable shares and warrants.\10\ A SPAC is organized
and managed by its sponsor, which is usually compensated through an
amount equal to a percentage (often 25 percent) of the SPAC's initial
public offering proceeds (in the form of discounted shares and
warrants) to be received upon the completion of a de-SPAC
transaction.\11\ Although SPACs are not subject to the requirements of
Rule 419,\12\ they are typically structured to operate under similar,
though usually less stringent, conditions in order to attract investors
and to comply with exchange listing requirements.\13\
---------------------------------------------------------------------------
\9\ The term ``shell company'' is defined in Securities Act Rule
405 and Exchange Act Rule 12b-2 as a registrant, other than an
asset-backed issuer, that has: (1) No or nominal operations; and (2)
either: (i) No or nominal assets; (ii) assets consisting solely of
cash and cash equivalents; or (iii) assets consisting of any amount
of cash and cash equivalents and nominal other assets.
\10\ The descriptions included in this release of common
features currently seen in SPACs and SPAC transaction structures are
based, in part, on reviews by the Commission staff of SPAC filings
with the Commission. The terms ``private operating company'' and
``target company'' are used interchangeably in this release, unless
otherwise indicated. We are proposing to define the term ``target
company'' for purposes of the requirements applicable to SPACs. See
infra Section II.A.
\11\ This sponsor compensation is often referred to as the
sponsor's ``promote'' or ``founder shares,'' which usually amounts
to around 20% of the total shares of a SPAC after its initial public
offering. The underwriting fees in a SPAC's initial public offering
are typically between 5% and 5.5% of the offering proceeds, of which
3.5% is also usually conditioned on the completion of the de-SPAC
transaction.
\12\ Issuers that raise more than $5 million in a firm
commitment underwritten initial public offering are excluded from
the definition of ``blank check company'' in Rule 419, and thus are
not subject to the requirements of the rule, because they are not
selling ``penny stock,'' as defined in Exchange Act Rule 3a51-1. The
definition of ``penny stock'' in Exchange Act Section 3(a)(51) and
Rule 3a51-1 encompasses any equity security except those excluded
under the rule, such as an NMS stock, as defined in 17 CFR
242.600(b)(55), that meets certain criteria; securities issued by a
registered investment company; and securities of an issuer that has
net tangible assets in excess of $2 million, or $5 million if the
issuer has been in continuous operation for less than three years,
or average revenue of at least $6 million for the last three years.
In 1993, the Commission issued guidance stating that issuers may
aggregate the proceeds of a firm commitment underwritten initial
public offering in order to exceed the $5 million net tangible
assets test in Rule 3a51-1(g)(1). See Penny Stock Definition for
Purposes of Blank Check Rule, Release No. 33-7024 (Oct. 25, 1993)
[58 FR 58099 (Oct. 29, 1993)]. SPACs often have provisions in their
governing instruments that prohibit them from being ``penny stock''
issuers. As used in this release, the term ``SPAC'' excludes those
issuers that are subject to Rule 419. In Dec. 2020, the Commission
received a rulemaking petition (``Rulemaking Petition'') requesting
that the Commission adopt rule amendments to permit SPACs to conduct
initial public offerings on a best-efforts basis without being
subject to Rule 419. See Rulemaking Petition from Loeb & Loeb LLP,
File No. 4-768 (Dec. 21, 2020), available at: https://www.sec.gov/rules/petitions/2020/petn4-768.pdf. As of the date of this release,
we have not received any comment letters in response to the
Rulemaking Petition.
\13\ These conditions are generally market driven, and are
typically set forth in their governing instruments and/or
contractual arrangements, or are pursuant to the laws of the state
or country of organization or the listing standards of national
securities exchanges. See, e.g., NYSE Listed Company Manual Section
102.06 and Nasdaq Listing Rule IM-5101-2. For example, Section
102.06 of the NYSE Listed Company Manual requires, among other
things, that at least 90% of the initial public offering proceeds,
together with the proceeds of any other concurrent sales of equity
securities, be held in a trust account controlled by an independent
custodian until the consummation of a business combination with a
fair market value equal to at least 80% of the net assets held in
the trust, with the time period to consummate the de-SPAC
transaction not to exceed three years. In contrast, under Rule 419,
a blank check company must, among other things, complete a merger or
acquisition within 18 months after the effective date of its
registration statement and must place the offering proceeds and the
securities sold in the offering in an escrow or trust account until
the completion of the merger or acquisition, which precludes trading
in the blank check company's securities until after the merger or
acquisition is completed.
---------------------------------------------------------------------------
Following its initial public offering, a SPAC generally places all
or substantially all of the offering proceeds into a trust or escrow
account,\14\ and the SPAC's shares and warrants are typically
registered under Section 12(b) of the Exchange Act and then begin
trading on a national securities exchange.\15\ If a SPAC does not
complete a de-SPAC transaction within the time frame specified in its
governing instruments, the SPAC may seek an extension of the time frame
from its shareholders or may dissolve and liquidate, with the sponsor
not earning the ``promote'' and the assets held in the trust or escrow
account returned on a pro rata basis to its shareholders.\16\
---------------------------------------------------------------------------
\14\ The assets in the trust or escrow account are typically
invested in U.S. government securities and money market funds that
invest in U.S. government securities. See infra Section VI.
\15\ The shares and warrants usually begin trading as a unit,
with a unit frequently consisting of a common share and a fraction
of a warrant, and are traded separately after a certain period. The
warrants often become exercisable one year after the SPAC's initial
public offering or upon the completion of a de-SPAC transaction.
\16\ Exchange rules require a listed SPAC to complete a de-SPAC
transaction within a specified timeframe not to exceed 36 months
after its initial public offering. See, e.g., NYSE Listed Company
Manual Section 102.06.and Nasdaq Listing Rule IM-5101-2.
---------------------------------------------------------------------------
[[Page 29461]]
If, on the other hand, a SPAC identifies a candidate for a business
combination transaction, the shareholders of the SPAC have the
opportunity to either: (1) Redeem their shares prior to the business
combination and receive a pro rata amount of the initial public
offering proceeds held in the trust or escrow account, or (2) remain a
shareholder of the company after the business combination.\17\ To
offset shareholder redemptions and to fund larger de-SPAC transactions,
SPACs often conduct additional private capital-raising transactions,
typically in the form of private investment in public equity (PIPE)
transactions.\18\ De-SPAC transactions often result in the former
SPAC's shareholders owning a minority interest in the post-business
combination company, with the former private operating company's
shareholders and PIPE investors owning a majority interest in the post-
business combination company following these transactions.\19\
---------------------------------------------------------------------------
\17\ According to a study of SPAC initial public offerings
between 2010 and 2018, an average of 54.4% and a median of 57.1% of
shares issued in an initial public offering by a SPAC during this
period were redeemed prior to the completion of a de-SPAC
transaction. Usha R. Rodrigues and Michael Stegemoller, SPACs:
Insider IPOs (SSRN Working Paper, 2021). Another analysis found
that, between July 1, 2021 and Dec. 1, 2021, mean and median SPAC
redemption rates were 55% and 66%, respectively. Michael Klausner,
Michael Ohlrogge, and Emily Ruan, A Sober Look at SPACs, 39 Yale J.
on Regul. 228 (2022). See infra Section IX.C.1.a.4. for a discussion
of shareholder redemptions based on analysis by the Division of
Economic and Risk Analysis (DERA) of available data.
\18\ The parties to a de-SPAC transaction often negotiate a
minimum cash condition pursuant to which a SPAC must have a
specified minimum amount of cash at the closing of the de-SPAC
transaction, which could include funds in the trust or escrow
account, the proceeds from PIPE transactions, and other sources.
When a SPAC conducts a PIPE transaction in connection with a de-SPAC
transaction, the post-business combination company generally files a
Securities Act registration statement following the de-SPAC
transaction to register the resale of the securities purchased in
the PIPE transaction.
\19\ According to one study, of the 47 SPAC mergers that
occurred between Jan. 2019 and June 2020, SPAC shareholders,
including the sponsor, held a median of 35% of the merged company
after a de-SPAC transaction (of which the sponsor held a median of
12% of the merged company), with the remaining 65% of the merged
company held by other parties including the target company's
shareholders and PIPE investors. Klausner, Ohlrogge, and Ruan, supra
note 17.
---------------------------------------------------------------------------
Shareholder approval is often required in de-SPAC transactions,
and, in such cases, a SPAC provides its shareholders with a proxy
statement on Schedule 14A, or an information statement on Schedule 14C
if it is not soliciting proxies from its shareholders.\20\ If a SPAC or
the target company is registering an offering of its securities (or the
securities of a new holding company) to be issued in the de-SPAC
transaction, then a registration statement on Form S-4 or F-4 would be
filed for the securities offering. If no registration statement or
proxy or information statement is required, then the SPAC disseminates
a tender offer statement (Schedule TO) for the redemption offer to its
security holders with information about the target company.\21\
Regardless of how the de-SPAC transaction is structured, the operations
of the private company are conducted by the post-business combination
company following the consummation of a de-SPAC transaction, with the
shareholders of the private company now owning shares in a publicly
listed company.
---------------------------------------------------------------------------
\20\ 17 CFR 240.14a-2 (Exchange Act Rule 14a-2) and 17 CFR
240.14c-2 (Exchange Act Rule 14c-2).
\21\ The Commission has promulgated rules under the Exchange Act
setting forth filing, disclosure, and dissemination requirements in
connection with tender offers. See, e.g., Regulations 14D and 14E
and Exchange Act Rule 13e-4. When an issuer conducts a tender offer,
the issuer may be required to file and disseminate a Schedule TO
pursuant to Rule 13e-4. The redemption rights in a SPAC context
generally have indicia of being a tender offer, such as a limited
period of time for the SPAC security holders to request redemption
of their securities. The Commission staff, however, has not insisted
that SPACs comply with the tender offer rules when a SPAC files a
Schedule 14A or 14C in connection with the approval of a de-SPAC
transaction or an extension of the timeframe to complete a de-SPAC
transaction and conducts the solicitation in accordance with
Regulation 14A or 14C, as the federal proxy rules mandate
substantially similar disclosures and applicable procedural
protections as required by the tender offer rules. However, this
staff position does not apply when a SPAC does not file a Schedule
14A or 14C in connection with the de-SPAC transaction or an
extension. SPACs that do not file a Schedule 14A or 14C, such as
SPACs that are foreign private issuers, have generally filed and
disseminated Schedules TO for the redemptions of their securities
and complied with the procedural requirements of the tender offer
rules. In these circumstances, the staff has taken the position that
the Schedule TO should include the same financial and other
information as is required in Schedule 14A or 14C for a de-SPAC
transaction. See infra Section II.F.4 for a discussion of proposed
Item 1608 of Regulation S-K and Section IV.A. for a discussion of
proposed Rule 145a under the Securities Act, which would affect when
a SPAC may be required to file a Form S-4 or F-4 in connection with
a de-SPAC transaction.
---------------------------------------------------------------------------
De-SPAC transactions can be viewed as a way for private operating
companies to become public reporting companies under the Exchange Act
and obtain a listing on a national securities exchange while avoiding
certain of the safeguards for investors and conventions of the typical
initial public offering process.\22\ From the perspective of the
shareholders and management of a private operating company, some of the
purported advantages of combining with a SPAC compared to conducting an
underwritten initial public offering could include: Greater pricing
certainty in merger negotiations; a relatively shorter time frame in
becoming a public company; and the perceived freedom to use projections
in connection with de-SPAC transactions, with reduced liability
exposure.\23\ De-SPAC transactions also offer private operating
companies an infusion of capital from the SPAC,\24\ as well as
potentially greater share liquidity for the post-business combination
company based on the existing trading market for the SPAC's
securities.\25\
---------------------------------------------------------------------------
\22\ See infra note 119.
\23\ See, e.g., Klausner, Ohlrogge, and Ruan, supra note 17;
Rodrigues and Stegemoller, supra note 17; Minmo Gahng, Jay R.
Ritter, and Donghang Zhang, SPACs (SSRN Working Paper, 2021).
\24\ Typically, much of this cash comes from PIPE investors
around the time of the de-SPAC transaction and not from investors in
the SPAC's initial public offering. See, e.g., Klausner, Ohlrogge,
and Ruan, supra note 17.
\25\ However, one study found evidence of illiquidity in SPAC
shares, with relatively thin trading volume particularly during the
period before the announcement of a proposed de-SPAC transaction.
Rodrigues and Stegemoller, supra note 17.
---------------------------------------------------------------------------
Although the basic structure of SPACs has existed since the 1990s,
the recent surge in SPAC offerings and the increasing use of de-SPAC
transactions as a mechanism for private operating companies to access
the U.S. public securities markets have caused some market observers to
express concerns about various aspects of the SPAC structure.\26\ For
example, some commentators have raised concerns regarding the amount of
sponsor compensation and other costs and their dilutive effects on a
SPAC's shareholders.\27\ A number of commentators have also pointed to
the nature of the sponsor compensation (i.e., dependent on the
completion of a de-SPAC transaction) as a potential conflict of
interest in the SPAC structure
[[Page 29462]]
that could lead sponsors to enter into de-SPAC transactions that are
unfavorable to unaffiliated shareholders of the SPACs without
performing robust due diligence in connection with these transactions,
when the alternative is to liquidate the SPACs and return the initial
public offering proceeds to the shareholders.\28\ Other commentators
have criticized stock exchange listing rules under which SPAC
shareholders have voted in favor of proposed de-SPAC transactions while
still redeeming their shares prior to the closing of the
transactions.\29\ A number of studies have found that returns are
relatively poor for investors in companies following a de-SPAC
transaction.\30\
---------------------------------------------------------------------------
\26\ For example, in May 2021, the Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets of the House
Financial Services Committee held a hearing on ``Going Public:
SPACs, Direct Listings, Public Offerings, and the Need for Investor
Protections,'' which included testimony on, among other things,
misaligned incentives in the SPAC structure, disclosure issues with
respect to SPACs, and the use of projections in de-SPAC
transactions. A webcast of the hearing is available at: https://financialservices.house.gov/events/eventsingle.aspx?EventID=407753.
\27\ See Testimony of Stephen Deane, CFA Institute, before the
Investor Protection, Entrepreneurship, and Capital Markets
Subcommittee of the U.S. House Committee on Financial Services, May
24, 2021 (``Deane Testimony''), https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-deanes-20210524.pdf. See also
Amrith Ramkumar, SPAC Insiders Can Make Millions Even When the
Company They Take Public Struggles, The Wall Street Journal, Apr.
25, 2021.
\28\ See, e.g., Klausner, Ohlrogge, and Ruan, supra note 17;
Rodrigues and Stegemoller, supra note 17; Gahng, Ritter, and Zhang,
supra note 23; letter dated Feb. 16, 2021 from Americans for
Financial Reform and Consumer Federation of America to the House
Financial Services Committee (``AFR Letter''); Deane Testimony;
Testimony of Andrew Park, Americans for Financial Reform, before the
Investor Protection, Entrepreneurship, and Capital Markets
Subcommittee of the U.S. House Committee on Financial Services, May
24, 2021 (``Park Testimony''), https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-parka-20210524.pdf.
\29\ See Mira Ganor, The Case for Non-Binary, Contingent,
Shareholder Action, 23 U. Pa. J. Bus. L. 390 (2021); Rodrigues and
Stegemoller, supra note 17. We note that exchange listing rules only
explicitly require that, when a shareholder vote on a business
combination is held, the public shareholders voting against a
business combination have a right to redeem shares. See, e.g.,
Nasdaq Listing Rule IM-5101-2 (stating, in part, that ``public
Shareholders voting against a business combination must have the
right to convert their shares of common stock into a pro rata share
of the aggregate amount then in the deposit account (net of taxes
payable and amounts distributed to management for working capital
purposes) if the business combination is approved and
consummated'').
\30\ See, e.g., Lora Dimitrova, Perverse Incentives of Special
Purpose Acquisition Companies, the ``Poor Man's Private Equity
Funds,'' Journal of Accounting and Economics (2017); Johannes Kolb
and Tereza Tykvov[aacute], Going Public via Special Purpose
Acquisition Companies: Frogs Do Not Turn Into Princes, Journal of
Corporate Finance (2016); Klausner, Ohlrogge, and Ruan, supra note
17; Gahng, Ritter, and Zhang, supra note 23; Chen Lin, Fangzhou Lu,
Roni Michaely, and Shihua Qin, SPAC IPOs and Sponsor Network
Centrality (SSRN Working Paper, 2021). See also Testimony of Scott
Kupor, Andreessen Horowitz, before the Investor Protection,
Entrepreneurship, and Capital Markets Subcommittee of the U.S. House
Committee on Financial Services, May 24, 2021, https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-kupors-20210524.pdf; Alexander Osipovich and Dave Michaels,
Investors Flock to SPACs, Where Risks Lurk and Track Records Are
Poor, The Wall Street Journal, Nov. 13, 2020.
---------------------------------------------------------------------------
In addition, some commentators have expressed concerns regarding
the adequacy of the disclosures provided to investors in these
transactions in terms of explaining the potential benefits, risks and
effects for investors, as well as the potential benefits for the
sponsor and other affiliates of the SPAC.\31\ One of these commentators
also expressed the view that the disclosure about the private operating
company provided through the de-SPAC transaction process may be less
complete and less reliable than that provided by an issuer in a
traditional initial public offering.\32\ Other commentators have
criticized the use of projections in de-SPAC transactions that, in
their view, have appeared to be unreasonable, unfounded or potentially
misleading, particularly where the target company is an early stage
company with no or limited sales, products, and/or operations,\33\ as
well as the lack of a named underwriter in these transactions that
would typically perform traditional gatekeeping functions, such as due
diligence, and would be subject to liability under Section 11 of the
Securities Act for untrue statements of material facts or omissions of
material facts.\34\ In response to a number of these and other issues,
the Commission staff has provided guidance relating to SPACs on five
occasions since December 2020.\35\
---------------------------------------------------------------------------
\31\ See, e.g., AFR Letter; Testimony of Professor Usha R.
Rodrigues, University of Georgia School of Law, before the Investor
Protection, Entrepreneurship, and Capital Markets Subcommittee of
the U.S. House Committee on Financial Services, May 24, 2021
(``Rodrigues Testimony''), https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-rodriguesu-20210524.pdf. A number
of recent SEC actions have highlighted disclosures about the private
operating company that are allegedly incomplete, inaccurate, and
materially misleading. See, e.g., In the Matter of Momentus, Inc.,
Stable Road Acquisition Corp., SRC-NI Holdings, LLC, and Brian
Kabot, Release No. 33-10955, 34-92391 (July 13, 2021); In the Matter
of Nikola Corp., Release No. 33-11018, 34-93838 (Dec. 21, 2021); SEC
v. Akazoo S.A., Case No. 1:20-cv-08101 (S.D.N.Y. filed Sept. 30,
2020); SEC v. Hurgin, et al., Case No. 1:19-cv-05705 (S.D.N.Y. filed
June 18, 2019).
\32\ See AFR Letter.
\33\ See, e.g., Michael Dambra, Omri Even-Tov, and Kimberlyn
George, Should SPAC Forecasts be Sacked? (SSRN Working Paper, 2022);
AFR Letter; Park Testimony; Rodrigues and Stegemoller, supra note
17. See also Heather Somerville and Eliot Brown, SPAC Startups Made
Lofty Promises. They Aren't Working Out., The Wall Street Journal,
Feb. 25, 2022.
\34\ See AFR Letter; Deane Testimony; Rodrigues Testimony. See
also John C. Coffee Jr., Gatekeeper Failure and Reform: The
Challenge of Fashioning Relevant Reforms, 84 B. U. L. Rev. 301
(2004) and John C. Coffee, Jr., Gatekeepers: The Professions and
Corporate Governance (2006).
\35\ See CF Disclosure Guidance: Topic No. 11--Special Purpose
Acquisition Companies (Division of Corporation Finance, Dec. 22,
2020); Staff Statement on Select Issues Pertaining to Special
Purpose Acquisition Companies (Division of Corporation Finance, Mar.
31, 2021); Public Statement on Financial Reporting and Auditing
Considerations of Companies Merging with SPACs (Office of Chief
Accountant, Mar. 31, 2021); Public Statement on SPACs, IPOs and
Liability Risk under the Securities Laws (Division of Corporation
Finance, Apr. 8, 2021); and Staff Statement on Accounting and
Reporting Considerations for Warrants Issued by Special Purpose
Acquisition Companies (``SPACs'') (Division of Corporation Finance
and Office of Chief Accountant, Apr. 12, 2021). This guidance and
other staff statements (including those cited herein) represent the
views of Commission staff and are not a rule, regulation, or
statement of the Commission. The Commission has neither approved nor
disapproved the content of these documents and, like all staff
statements, they have no legal force or effect, do not alter or
amend applicable law, and create no new or additional obligations
for any person.
---------------------------------------------------------------------------
In September 2021, the Commission's Investor Advisory Committee
\36\ issued preliminary recommendations regarding SPACs and expressed
concerns about whether sponsors and target companies have engaged in
regulatory arbitrage by using de-SPAC transactions as a path to the
public markets. In addition, the Investor Advisory Committee expressed
concerns about potential conflicts of interest between sponsors and
retail investors, and the effectiveness of the disclosures provided in
these transactions.\37\ Among other things, the Investor Advisory
Committee recommended that the Commission ``regulate SPACs more
intensely'' through an enhanced focus on and stricter enforcement of
existing disclosure rules in areas such the sponsor's role in a SPAC,
the process and risks in identifying and assessing target companies,
PIPE financing terms, and de-SPAC transaction due diligence, as well as
application of the Plain English disclosure rules.\38\ The Investor
Advisory Committee also recommended that the Commission prepare and
publish a report analyzing the parties involved in SPAC transactions at
[[Page 29463]]
various stages and the compensation and incentives of these parties.
---------------------------------------------------------------------------
\36\ The Investor Advisory Committee was established by Section
911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
(``Dodd-Frank Act''), Public Law 111-203, 124 Stat. 1376 (2010), to
advise and consult with the Commission on regulatory priorities,
issues, and initiatives.
\37\ See Recommendations of the Investor Advisory Committee
Regarding Special Purpose Acquisition Companies (Sept. 9, 2021)
(``IAC Recommendations''), available at: https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210909-spac-recommendation.pdf. The Dodd-Frank Act authorizes the Investor
Advisory Committee to submit findings and recommendations for review
and consideration by the Commission. The Commission then issues a
public statement assessing the finding or recommendation and
disclosing the Commission's intended action, if any, in regard to
the finding or recommendation. See Section 911(g) of the Dodd-Frank
Act.
\38\ 17 CFR 230.421(d) (Securities Act Rule 421(d)) requires
registrants to write the prospectus cover page, prospectus summary,
and risk factors sections of prospectuses using plain English
principles, including the use of short sentences; definite,
concrete, everyday language; active voice; tabular presentation of
complex information whenever possible; no legal or business jargon;
and no multiple negatives. Plain English Disclosure, Release No. 33-
7497 (Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)].
---------------------------------------------------------------------------
Also in September 2021, the Commission's Small Business Capital
Formation Advisory Committee \39\ held a panel discussion on initial
public offerings, direct listings, and SPACs.\40\ The panelists
expressed their views on a range of topics related to SPACs, including
the factors behind the significant growth of the SPAC market over the
past two years, the potential benefits of SPACs to the public markets,
the potential benefits of enhanced disclosure requirements applicable
to SPACs, and perceived issues surrounding the use of projections in
de-SPAC transactions. The panel discussion also addressed the costs
embedded in the SPAC structure and the dilutive effects of these costs
on non-redeeming shareholders, as well as the poor market-adjusted
returns of companies, on average, following de-SPAC transactions.\41\
---------------------------------------------------------------------------
\39\ The Small Business Capital Formation Advisory Committee was
established by Section 2 of the SEC Small Business Advocate Act of
2016, Public Law 114-284, 130 Stat. 1447 (2016), to provide advice
to the Commission on the Commission's rules, regulations, and
policies relating to (1) capital raising by emerging, privately held
small businesses and public companies with less than $250 million in
public market capitalization; (2) trading in their securities; and
(3) public reporting and corporate governance requirements
applicable to these companies.
\40\ The panelists were Isabelle Freidheim, Michael Klausner,
David Ni, and Phyllis Newhouse.
\41\ See Transcript of SEC Small Business Capital Formation
Advisory Committee (Sept. 27, 2021), available at: https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-092721.pdf.
---------------------------------------------------------------------------
Having considered these and other perspectives on the SPAC market,
we are of the view that greater transparency and more robust investor
protections could assist investors in evaluating and making investment,
voting, and redemption decisions with respect to these transactions.
Accordingly, we are proposing new rules and rule amendments to enhance
existing disclosure requirements and investor protections in initial
public offerings by SPACs and in de-SPAC transactions. A number of the
rules and amendments we are proposing are intended to improve the
usefulness and clarity of the information provided to investors so that
they can make better informed decisions as to whether to purchase
securities in SPAC initial public offerings, to purchase or sell SPAC
securities in secondary trading markets, and in voting, investment and
redemption decisions in connection with de-SPAC transactions.
The proposed rules and amendments, if adopted, could help the SPAC
market function more efficiently by improving the relevance,
completeness, clarity, and comparability of the disclosures provided by
SPACs at the initial public offering and de-SPAC transaction stages,
and by providing important investor protections to strengthen investor
confidence in this market. In developing these proposals, we have
considered the recommendations and views discussed above, as well as
the Commission staff's experience in reviewing disclosures in SPAC
initial public offerings and de-SPAC transactions.
Specifically, we are proposing to add new Subpart 1600 of
Regulation S-K that would set forth specialized disclosure requirements
in connection with initial public offerings by SPACs and in connection
with de-SPAC transactions. In new Subpart 1600, we are proposing to,
among other things:
Require additional disclosures about the sponsor of the
SPAC, potential conflicts of interest, and dilution;
Require additional disclosures on de-SPAC transactions,
including a requirement that the SPAC state (1) whether it reasonably
believes that the de-SPAC transaction and any related financing
transaction are fair or unfair to investors, and (2) whether it has
received any outside report, opinion, or appraisal relating to the
fairness of the transaction; and
Require certain disclosures on the prospectus cover page
and in the prospectus summary of registration statements filed in
connection with SPAC initial public offerings and de-SPAC transactions.
In addition, in view of the increasing number of private companies
using de-SPAC transactions to become publicly-traded reporting
companies, we are proposing amendments to provide procedural
protections and to align the disclosures provided, as well as the legal
obligations of companies, in de-SPAC transactions more closely with
those in traditional initial public offerings. Specifically, we are
proposing to:
Amend the registration statement forms and schedules filed
in connection with de-SPAC transactions to require additional
disclosures about the private operating company;
Require that disclosure documents in de-SPAC transactions
be disseminated to investors at least 20 calendar days in advance of a
shareholder meeting or the earliest date of action by consent, or the
maximum period for disseminating such disclosure documents permitted
under the laws of the jurisdiction of incorporation or organization if
such period is less than 20 calendar days;
Deem a private operating company in a de-SPAC transaction
to be a co-registrant of a registration statement on Form S-4 or Form
F-4 when a SPAC files such a registration statement for a de-SPAC
transaction, such that the private operating company and its signing
persons would be subject to liability under Section 11 of the
Securities Act as signatories to the registration statement;
Amend the definition of smaller reporting company to
require a re-determination of smaller reporting company status
following the consummation of a de-SPAC transaction; and
Define ``blank check company'' to encompass SPACs and
certain other blank check companies for purposes of the Private
Securities Litigation Reform Act of 1995 (PSLRA) \42\ such that the
safe harbor for forward-looking statements under the PSLRA would not be
available to SPACs, including with respect to projections of target
companies seeking to access the public markets through a de-SPAC
transaction.
---------------------------------------------------------------------------
\42\ Public Law 104-67, 109 Stat. 737 (1995).
---------------------------------------------------------------------------
Underwriters play a critical role in the securities offering
process as gatekeepers to the public markets. In light of this
important role, we are proposing a new rule, Securities Act Rule 140a,
that would deem anyone who has acted as an underwriter of the
securities of a SPAC and takes steps to facilitate a de-SPAC
transaction, or any related financing transaction or otherwise
participates (directly or indirectly) in the de-SPAC transaction to be
engaged in a distribution and to be an underwriter in the de-SPAC
transaction. By affirming the underwriter status of SPAC IPO
underwriters in connection with de-SPAC transactions, the proposed rule
should better motivate SPAC underwriters to exercise the care necessary
to ensure the accuracy of the disclosure in these transactions by
affirming that they are subject to Section 11 liability for that
information.
In addition, private companies have historically used shell
companies with Exchange Act reporting obligations in various forms of
transactions, including SPACs, to become a public company without
undergoing a traditional initial public offering. In many cases, such
shell company shareholders may not receive a Securities Act
registration statement containing disclosures about the private company
that is entering the public market for the first time. Due to the
significant increase in the use of reporting shell company business
combination transactions as a means to
[[Page 29464]]
enter the U.S. capital markets, and in an effort to provide reporting
shell company shareholders with more consistent Securities Act
protections regardless of transaction structure, we are proposing to
add new Rule 145a that would deem any business combination of a
reporting shell company, involving another entity that is not a shell
company, to involve a sale of securities to the reporting shell
company's shareholders.\43\
---------------------------------------------------------------------------
\43\ Throughout this release, we use ``shell company'' in lieu
of the phrase ``shell company, other than a business combination
related shell company.'' The term ``business combination related
shell company'' is defined in Securities Act Rule 405 and Exchange
Act Rule 12b-2 as a shell company that is: ``(1) Formed by an entity
that is not a shell company solely for the purpose of changing the
corporate domicile of that entity solely within the United States;
or (2) Formed by an entity that is not a shell company solely for
the purpose of completing a business combination transaction (as
defined in 17 CFR 230.165(f)) among one or more entities other than
the shell company, none of which is a shell company.'' For purposes
of proposed Rule 145a (see infra Section IV.A.), the term
``reporting shell company'' is defined as a company, other than an
asset-backed issuer as defined in Item 1101(b) of Regulation AB,
that has: (1) No or nominal operations; (2) either: (i) No or
nominal assets; (ii) assets consisting solely of cash and cash
equivalents; or (iii) assets consisting of any amount of cash and
cash equivalents and nominal other assets; and (3) an obligation to
file reports under Section 13 or Section 15(d) of the Exchange Act.
We similarly use ``reporting shell company'' in lieu of the phrase
``reporting shell company, other than a business combination related
shell company'' throughout this release.
---------------------------------------------------------------------------
Further, we are proposing new Article 15 of Regulation S-X, as well
as related amendments, to more closely align the financial statement
reporting requirements in business combinations involving a shell
company and a private operating company with those in traditional
initial public offerings. This is consistent with our view that the
manner in which a company goes public should not generally result in
substantially different financial statement disclosures being provided
to investors.
We are also proposing amendments intended to enhance the
reliability of projections disclosure in Commission filings, as well as
additional requirements when projections are disclosed in connection
with de-SPAC transactions. The proposed amendments to Item 10(b) of
Regulation S-K would address broader concerns regarding the use of
projections generally, while proposed Item 1609 of Regulation S-K would
address concerns specific to de-SPAC transactions.
Finally, as the SPAC market has grown dramatically in recent years,
some SPACs have sought to operate in novel ways that suggest a need for
SPACs and their sponsors to increase their focus on evaluating when a
SPAC could be an investment company and thus subject to the
requirements under the Investment Company Act of 1940 (``Investment
Company Act'').\44\ We are concerned that SPACs may fail to recognize
when their activities raise the investor protection concerns addressed
by the Investment Company Act. To assist SPACs in focusing on, and
appreciating, when they may be subject to investment company
regulation, we are proposing a new safe harbor under the Investment
Company Act. The proposed rule would provide a safe harbor from the
definition of ``investment company'' under Section 3(a)(1)(A) of the
Investment Company Act for SPACs that satisfy certain conditions that
limit a SPAC's duration, asset composition, business purpose and
activities.\45\
---------------------------------------------------------------------------
\44\ 15 U.S.C. 80a-1 et seq.
\45\ See infra Section VI for a discussion of proposed Rule 3a-
10.
---------------------------------------------------------------------------
We welcome feedback and encourage interested parties to submit
comments on any or all aspects of the proposed new rules and
amendments. When commenting, it would be most helpful if you include
the reasoning behind your position or recommendation.
II. Proposed New Subpart 1600 of Regulation S-K
We are proposing to add new Subpart 1600 to Regulation S-K to set
forth specialized disclosure requirements applicable to SPACs regarding
the sponsor, potential conflicts of interest, and dilution, and to
require certain disclosures on the prospectus cover page and in the
prospectus summary.\46\ Proposed Subpart 1600 would also require
enhanced disclosure for de-SPAC transactions, including a fairness
determination requirement. We are proposing to amend a number of forms
and schedules used by SPACs for initial public offerings and de-SPAC
transactions to require the information set forth in proposed Subpart
1600.\47\ To the extent that the disclosure requirements in proposed
Subpart 1600 address the same subject matter as the existing disclosure
requirements of the forms or schedules, the requirements of proposed
Subpart 1600 would be controlling.\48\ The following table summarizes
the proposed items in Subpart 1600, as described more fully below: \49\
---------------------------------------------------------------------------
\46\ The proposed requirements in new Subpart 1600 would, to an
extent, codify and standardize some of the disclosures already
commonly provided by SPACs.
\47\ See the proposed amendments to Forms S-1, F-1, S-4, and F-
4, and Schedules 14A and TO. While we are not proposing amendments
to Schedule 14C, the disclosure contemplated by proposed Subpart
1600 would be required in Schedule 14C pursuant to Item 1 of
Schedule 14C, which states that a Schedule 14C must include the
information called for by all of the items of Schedule 14A, with
limited exceptions, to the extent each item would be applicable to
any matter to be acted upon at a shareholder meeting if proxies were
to be solicited in connection with the meeting. If the securities to
be issued in a de-SPAC transaction are registered on a form other
than Form S-4 or F-4, such as Form S-1 or F-1, but would be
authorized to be registered on Form S-4 or F-4, the proposed
requirements of Form S-4 or F-4, as applicable, in regard to de-SPAC
transactions would apply in that context.
\48\ Proposed General Instruction L.1. to Form S-4; Proposed
General Instruction I.1. to Form F-4; Proposed Item 14(f)(1) to
Schedule 14A; Proposed General Instruction K to Schedule TO. We are
also proposing to re-designate existing General Instruction K to
Schedule TO as General Instruction L to the schedule.
\49\ The information in this table is not comprehensive and is
intended only to summarize the proposed items of Subpart 1600. This
table should be read together with the complete text of this
release.
----------------------------------------------------------------------------------------------------------------
Applicable forms and
Item Summary description Principal objective(s) schedules
----------------------------------------------------------------------------------------------------------------
Item 1601, Definitions............... Definitions for the Establish the scope of Forms S-1, F-1, S-4,
terms ``special the issuers and and F-4; Schedules
purpose acquisition transactions subject 14A, 14C, and TO.
company,'' ``de-SPAC to the requirements of
transaction,'' Subpart 1600.
``target company,''
and ``SPAC sponsor''.
Item 1602, Registered offerings by Require certain Enhance the clarity and Forms S-1 and F-1.
special purpose acquisition information on the readability of
companies. prospectus cover page prospectuses in SPAC
and in the prospectus initial public
summary of offerings and the
registration disclosures relating
statements for to dilution in these
offerings by SPACs prospectuses.
other than de-SPAC
transactions. Require
enhanced dilution
disclosure in these
registration
statements.
[[Page 29465]]
Item 1603, SPAC sponsor; conflicts of Require certain Provide investors with Forms S-1, F-1, S-4,
interest. disclosure regarding a more complete and F-4; Schedules
the sponsor and its understanding of the 14A, 14C and TO.
affiliates and any role of sponsors and
promoters of SPACs and their conflicts of
disclosure regarding interest.
conflicts of interest
between the sponsor or
its affiliates or
promoters and
unaffiliated security
holders.
Item 1604, De-SPAC transactions...... Require certain Enhance the clarity and Forms S-4 and F-4;
information on the readability of Schedules 14A, 14C,
prospectus cover page prospectuses in de- and TO.
and in the prospectus SPAC transactions and
summary of disclosures relating
registration to dilution in these
statements for de-SPAC prospectuses.
transactions. Require
enhanced dilution
disclosure in these
registration
statements.
Item 1605, Background of and reasons Require disclosure on Provide investors with Forms S-4 and F-4;
for the de-SPAC transaction; terms the background, a more complete Schedules 14A, 14C,
of the de-SPAC transaction; effects. material terms and understanding of the and TO.
effects of a proposed background of and
de-SPAC transaction. motivations behind a
proposed de-SPAC
transaction.
Item 1606, Fairness of the de-SPAC Require disclosure on Provide investors with Forms S-4 and F-4;
transaction and any related whether a SPAC additional information Schedules 14A, 14C,
financing transaction. reasonably believes regarding a proposed and TO.
that a de-SPAC de-SPAC transaction
transaction and any and address concerns
related financing regarding potential
transactions are fair conflicts of interest
or unfair to and misaligned
investors, as well as incentives.
a discussion of the
bases for this
reasonable belief.
Item 1607, Reports, opinions, Require disclosure on Provide investors with Forms S-4 and F-4;
appraisals and negotiations. whether a SPAC or its additional information Schedules 14A, 14C,
sponsor has received a underlying a fairness and TO.
report, opinion or determination by a
appraisal from an SPAC.
outside party
regarding the fairness
of a de-SPAC
transaction or any
related financing
transaction.
Item 1608, Tender offer filing Require additional Align the information Schedule TO.
obligations in de-SPAC transactions disclosures in a provided in such a
*. Schedule TO filed in Schedule TO with the
connection with a de- information provided
SPAC transaction. in other filings in
connection with a de-
SPAC transaction.
Item 1609, Financial projections in Require additional Provide investors with Forms S-4 and F-4;
de-SPAC transactions **. disclosures regarding additional information Schedules 14A, 14C,
financial projections regarding the use of and TO.
disclosed in a projections in
disclosure document connection with a de-
for a de-SPAC SPAC transaction.
transaction.
Item 1610, Structured data Require information Provide investors and Forms S-1, F-1, S-4,
requirement ***. disclosed pursuant to other market and F-4; Schedules
Subpart 1600 to be participants with 14A, 14C, and TO.
tagged in a information that is
structured, machine- more readily available
readable data language. and more easily
accessible for
aggregation,
comparison, filtering,
and other analysis.
----------------------------------------------------------------------------------------------------------------
Notes:
* Proposed Item 1608 is discussed in Section II.F.4.
** Proposed Item 1609 is discussed in Section V.B.2.
*** Proposed Item 1610 is discussed in Section II.G.
A. Definitions
For purposes of proposed new Subpart 1600, we are proposing Item
1601 to define the term ``special purpose acquisition company'' to mean
a company that has indicated that its business plan is to (1) register
a primary offering of securities that is not subject to the
requirements of Rule 419; \50\ (2) complete a de-SPAC transaction
within a specified time frame; and (3) return all remaining proceeds
from the registered offering and any concurrent offerings to its
shareholders if the company does not complete a de-SPAC transaction
within the specified time frame.\51\ While the proposed definition does
not include certain features common to SPACs, such as the listing of
the SPAC's securities on a national securities exchange \52\ or the
issuance of redeemable securities, the proposed definition incorporates
the key defining features of the issuers that in our view should be
subject to the disclosure and procedural requirements of Subpart 1600,
while remaining sufficiently broad to take into account potential
variations in the SPAC structure and the possibility that SPACs may
continue to evolve. In particular, the proposed definition would
encompass issuers that would otherwise be subject to Rule 419's
investor protection requirements but for the fact that the issuer is
not issuing ``penny
[[Page 29466]]
stock.'' \53\ At the same time, the proposed definition does not
include criteria such as listing on a national securities exchange,
certain requirements that are applicable to exchange-traded SPACs,\54\
or the issuance of redeemable securities, as these criteria would
result in an overly narrow definition by including transactional terms
that have not applied to every SPAC offering in the past or that could
change as the SPAC market continues to evolve.
---------------------------------------------------------------------------
\50\ Blank check companies subject to Rule 419 must comply with
a comprehensive set of disclosure and investor protection
requirements under the rule and would not be subject to the
requirements applicable to SPACs under the proposed rules. See supra
notes 6 and 13.
\51\ Proposed Item 1601(b).
\52\ In this regard, we note that the securities of SPACs were
not listed on national securities exchanges until the 2000s.
\53\ See supra note 12.
\54\ See infra note 57.
---------------------------------------------------------------------------
The term ``de-SPAC transaction'' would be defined as a business
combination such as a merger, consolidation, exchange of securities,
acquisition of assets, or similar transaction involving a SPAC and one
or more target companies (contemporaneously, in the case of more than
one target company).\55\ The term ``target company'' would be defined
as an operating company, business, or assets.\56\ As proposed, these
definitions are intentionally broad and, taken together, would
encompass more typical transactions such as the acquisition of one or
more private operating companies by a SPAC, as well as less common
transactions that may or may not be permitted under exchange listing
rules but for which the proposed enhanced disclosure and procedural
requirements described below may be appropriate because they raise the
same investor protection concerns.\57\
---------------------------------------------------------------------------
\55\ Proposed Item 1601(a).
\56\ Proposed Item 1601(d).
\57\ The proposed definitions would apply to both exchange-
traded SPACs and SPACs traded in the over-the-counter market. Some
transactions encompassed by the proposed definitions may not be
permitted under exchange listing rules for SPACs, and nothing in
this release is intended to indicate that such transactions are or
should be permitted under the exchanges' SPACs listing rules or that
exchange listing requirements should not, at a minimum, apply to
SPACs seeking an exchange listing. The Commission has consistently
recognized the importance of national securities exchange listing
standards. Among other things, such listing standards help ensure
that exchange-listed companies will have sufficient public float,
investor base, and trading interest to provide the depth and
liquidity necessary to promote fair and orderly markets.
Furthermore, Section 6(b)(5) of the Exchange Act requires exchange
listing rules be designed to prevent fraudulent and manipulative
acts and practices, promote just and equitable principles of trade,
and protect investors and the public interest. The Commission has
also stated that listing standards are of significant importance to
investors that may rely on the status an exchange listing ascribes
to a security. See, e.g., Release No. 34-57785 (May 6, 2008) [73 FR
27597, 27599 (May 13, 2008)] (SR-NYSE-2008-17) (order approving
initial and continued listing standards for NYSE exchange-listed
SPACs).
---------------------------------------------------------------------------
The term ``SPAC sponsor'' would be defined as the entity and/or
person(s) primarily responsible for organizing, directing or managing
the business and affairs of a SPAC, other than in their capacities as
directors or officers of the SPAC as applicable.\58\ Although a sponsor
of a SPAC may perform a variety of functions within the SPAC's
structure, the proposed definition encompasses activities that, based
on the staff's experience reviewing SPAC filings and public commentary,
are commonly associated with sponsors of SPACs. We are proposing to
define this term broadly so that the appropriate entities or persons
are subject to the proposed enhanced disclosure requirements applicable
to the sponsors of a SPAC.\59\
---------------------------------------------------------------------------
\58\ Proposed Item 1601(c). In regard to natural persons, we are
proposing to exclude from the scope of the definition of ``SPAC
sponsor'' the activities performed by natural persons in their
capacities as directors and/or officers of the SPAC to avoid overlap
with existing disclosure requirements relating to directors and
officers. See infra Section II.B. for a discussion of the activities
of a sponsor.
\59\ Proposed Item 1603.
---------------------------------------------------------------------------
Request for Comment
1. Should we define the term ``special purpose acquisition
company'' as proposed? Does the proposed definition provide a workable
approach to determining which issuers would be subject to the
requirements of proposed Subpart 1600? Should we define this term
differently? If so, how? For example, are there certain other common
characteristics of SPACs that should be included in the definition,
such as redemption rights, exchange listing, the placing of initial
public offering proceeds in a trust or escrow account, and/or that the
de-SPAC transaction must meet a minimum fair market value (e.g., at
least 80%) of the value of the proceeds in the trust or escrow account?
Should we include a reference to ``shell company'' in the definition?
2. Should we define ``de-SPAC transaction'' as proposed? Should the
scope of the proposed definition instead be tied to de-SPAC
transactions that are permitted under exchange listing standards? \60\
---------------------------------------------------------------------------
\60\ See supra notes 13 and 16.
---------------------------------------------------------------------------
3. Should we define the term ``SPAC sponsor'' as proposed? Does the
proposed definition reflect those activities commonly associated with a
SPAC's sponsor? Would the proposed definition encompass persons or
entities that are not commonly considered to be sponsors of a SPAC? If
so, how should we revise the definition to avoid scoping in such
persons or entities? In regard to natural persons, should we exclude
from the scope of the definition the activities performed by natural
persons in their capacities as directors and/or officers of the SPAC,
as proposed?
4. Should we define the term ``target company'' as proposed? Is
this definition sufficiently clear? Would this definition, in
combination with the other proposed definitions, be overly broad and
encompass transactions that should not be treated as de-SPAC
transactions?
5. Are there other terms that we should define in proposed Subpart
1600? If so, which terms and how should we define them?
6. With respect to the proposed definition of ``special purpose
acquisition company,'' is it clear what ``has indicated that its
business plan'' is intended to convey? Should we require registrants to
affirmatively state in filings whether they are a special purpose
acquisition company? For example, should we amend Form S-1, Form F-1,
Form S-4, and/or Form F-4 to add to the registration statement cover
page of these forms a check box for issuers to indicate whether they
are special purpose acquisition companies? Should we also amend
Schedule 14A, Schedule 14C and Schedule TO to include this check box on
the cover pages of these schedules?
B. Sponsors
The sponsor's role is critical to the success of a SPAC. At the
earliest stage, the sponsor typically organizes and manages the SPAC,
including appointing the initial directors and officers of the SPAC,
and provides the initial capital for the SPAC's operations prior to its
initial public offering.\61\ In subsequent stages, among other things,
the sponsor may work with one or more investment banks in preparing for
the SPAC's initial public offering and may place the proceeds from the
offering into a trust or escrow account. Following the initial public
offering, the sponsor typically identifies potential candidates for a
business combination transaction, negotiates the transaction to acquire
the target private operating company and promotes the transaction to
the SPAC's shareholders. As discussed above, the value of the sponsor's
compensation is
[[Page 29467]]
usually contingent on the completion of a de-SPAC transaction.\62\
---------------------------------------------------------------------------
\61\ See proposed Item 1601(c) for the proposed definition for
``SPAC sponsor.'' There is often an identity of interest between the
sponsor and the SPAC's officers and directors, in that the same
persons may work for both the sponsor and the SPAC in different
capacities. In many instances, SPACs will not hold a public election
for directors until the de-SPAC transaction or thereafter. Some
SPACs provide that only the founder shares may vote in director
elections until the de-SPAC transaction.
\62\ See text accompanying supra notes 14-16.
---------------------------------------------------------------------------
In view of the central role of the sponsor in a SPAC's activities,
we are proposing Item 1603(a) to require additional disclosure about
the sponsor, its affiliates and any promoters \63\ of the SPAC in
registration statements and schedules filed in connection with SPAC
registered offerings and de-SPAC transactions, including disclosure on
the following:
---------------------------------------------------------------------------
\63\ The term ``promoter'' is defined in Securities Act Rule 405
and Exchange Act Rule 12b-2.
---------------------------------------------------------------------------
The experience, material roles, and responsibilities of
these parties, as well as any agreement, arrangement or understanding
(1) between the sponsor and the SPAC, its executive officers, directors
or affiliates, in determining whether to proceed with a de-SPAC
transaction and (2) regarding the redemption of outstanding securities;
The controlling persons of the sponsor and any persons who
have direct and indirect material interests in the sponsor, as well as
an organizational chart that shows the relationship between the SPAC,
the sponsor, and the sponsor's affiliates;
Tabular disclosure of the material terms of any lock-up
agreements with the sponsor and its affiliates; and
The nature and amounts of all compensation that has or
will be awarded to, earned by, or paid to the sponsor, its affiliates
and any promoters for all services rendered in all capacities to the
SPAC and its affiliates, as well as the nature and amounts of any
reimbursements to be paid to the sponsor, its affiliates and any
promoters upon the completion of a de-SPAC transaction.\64\
---------------------------------------------------------------------------
\64\ This would include, for example, fees and reimbursements in
connection with lease, consulting, support services, and management
agreements with entities affiliated with the sponsor, as well as
reimbursements for out-of-pocket expenses incurred in performing due
diligence or in identifying potential business combination
candidates.
---------------------------------------------------------------------------
Proposed Item 1603(a)'s disclosure requirements are intended to
provide a SPAC's prospective investors and existing shareholders with
detailed information relating to the sponsor that could be important in
understanding and analyzing a SPAC, including how the rights and
interests of the sponsor, its affiliates, and any promoters may differ
from, and may conflict with, those of public shareholders.\65\ Given
that a SPAC does not conduct an operating business, information about
the background and experience of the sponsor is often important in
assessing a SPAC's prospects for success and may be a relevant factor
in the market value of a SPAC's securities.\66\ To the extent that a
sponsor's activities and arrangements with a SPAC are carried out
through, or in conjunction with, the sponsor's affiliates and any
promoters of the SPAC, we are proposing to require corresponding
disclosure with respect to these affiliates and promoters. In addition,
enhanced disclosure on the sponsor's compensation and the sponsor's
agreements, arrangements, or understandings may be helpful to a SPAC's
prospective investors and existing shareholders in considering whether
to acquire or redeem the SPAC's securities, and in evaluating the
potential risks and merits of a proposed de-SPAC transaction because it
could highlight additional motivations for completing a de-SPAC
transaction.
---------------------------------------------------------------------------
\65\ Proposed Item 1603(a) would operate in addition to existing
disclosure requirements that may be applicable to a SPAC's
arrangements with its sponsor such as Item 701 of Regulation S-K,
which requires disclosure about, among other things, the terms of
any private securities transactions between a SPAC and its sponsor
within the past three years, and Item 404 of Regulation S-K, which
requires disclosure about certain related party transactions.
\66\ See, e.g., Lin, Lu, Michaely, and Qin, supra note 30;
Andrea Pawliczek, A. Nicole Skinner, and Sarah L.C. Zechman, Signing
Blank Checks: The Roles of Reputation and Disclosure in the Face of
Limited Information (SSRN Working Paper, 2021).
---------------------------------------------------------------------------
While proposed Item 1603 calls for detailed disclosure about the
sponsor, its experience and its rights and interests, we note that some
of this information is already being provided, to an extent, by SPACs.
Codifying and amplifying these existing disclosure practices would help
ensure that issuers provide consistent and comprehensive information
across transactions, so that investors can make more informed
investment, voting and redemption decisions.
Request for Comment
7. Should we require additional information regarding sponsors of
SPACs pursuant to Item 1603(a), as proposed? If so, should we also
require disclosure regarding the sponsor's affiliates and any promoters
of the SPAC, as proposed?
8. Should we require disclosure about the experience and material
roles and responsibilities of the sponsor, its affiliates and any
promoters of the SPAC in directing and managing the SPAC's activities,
as proposed? How would investors use this information?
9. Should we require more or less information about the sponsor's
compensation and reimbursements? Should we require this disclosure only
when the amounts exceed a de minimis threshold? If so, what should the
de minimis threshold be?
10. Should we require additional disclosure about the sponsor's
agreements, arrangements, or understandings in determining whether to
proceed with a de-SPAC transaction and regarding the redemption of
outstanding securities of the SPAC, as proposed?
11. Should we require disclosure about the controlling persons of
the sponsor and any persons who have direct and indirect material
interests in the sponsor, as proposed? Should we take a different
approach than requiring disclosure on persons with ``material
interests'' in the sponsor? Should we consider requiring additional
disclosure on the controlling persons of entities that own or control
the sponsor? Should we require an organizational chart that shows the
relationship among the SPAC, the sponsor, and the sponsor's affiliates,
as proposed? Would both narrative disclosure and an organizational
chart be helpful to investors?
12. Should we require disclosure of the material terms of any lock-
up agreements with the sponsor and its affiliates as proposed? Would
the proposed requirement to provide this disclosure in a tabular format
be helpful to investors? Should we instead require this disclosure in a
non-tabular format?
13. Is there additional information regarding sponsors that should
be disclosed? Should we require more or less information about the
sponsor depending on the size or other characteristics of a SPAC?
14. Should additional disclosure be required regarding affiliated
entities involved in the SPAC's operations?
C. Conflicts of Interest
Within a SPAC's structure, there may be a number of potential or
actual conflicts of interest between the sponsor and public investors
that could influence the actions of the SPAC. A notable example is the
potential conflict of interest stemming from the contingent nature of
the sponsor's compensation, whereby the sponsor and its affiliates have
significant financial incentives to pursue a business combination
transaction even though the transaction could result in lower returns
for public shareholders than liquidation of the SPAC or an alternative
transaction.\67\ Other conflicts of interest may arise when a sponsor
is a sponsor of multiple SPACs and
[[Page 29468]]
manages several different SPACs at the same time; when a sponsor and/or
its affiliates hold financial interests in, or have contractual
obligations to, other entities; or when a SPAC enters into a business
combination with a private operating company affiliated with the
sponsor, the SPAC, or the SPAC's founders, officers, or directors.
Further, a SPAC's officers often do not work full-time at the SPAC, may
work for both the sponsor and the SPAC, and/or may have
responsibilities at other companies, which may impact such officers'
ability to devote adequate time and attention to the activities of the
SPAC and may influence their decision to proceed with a particular de-
SPAC transaction. These potential conflicts of interest could be
particularly relevant for investors to the extent that they arise when
a SPAC and its sponsor are evaluating and deciding whether to recommend
a business combination transaction to shareholders, especially as the
SPAC nears the end of the period to complete such a transaction under,
e.g., its governing instruments or the proposed safe harbor under the
Investment Company Act,\68\ if adopted, and the sponsor may be under
pressure to find a target and complete the de-SPAC transaction on less
favorable terms or face losing the value of its securities in the SPAC.
---------------------------------------------------------------------------
\67\ See, e.g., Usha Rodrigues and Mike Stegemoller, Exit,
Voice, and Reputation: The Evolution of SPACs, 37 Del. J. Corp. L.
849 (2013).
\68\ See infra Section VI.
---------------------------------------------------------------------------
We are proposing Item 1603(b) to require disclosure of any actual
or potential material conflict of interest between (1) the sponsor or
its affiliates or the SPAC's officers, directors, or promoters, and (2)
unaffiliated security holders. This would include any conflict of
interest in determining whether to proceed with a de-SPAC transaction
and any conflict of interest arising from the manner in which a SPAC
compensates the sponsor or the SPAC's executive officers and directors,
or the manner in which the sponsor compensates its own executive
officers and directors. In addition, we are proposing Item 1603(c) to
require disclosure regarding the fiduciary duties each officer and
director of a SPAC owes to other companies. Such disclosure could allow
investors to assess whether and to what extent officers or directors
may have to navigate a conflict of interest consistent with their
obligations under the laws of the jurisdiction of incorporation or
organization, may be compelled to act in the interest of another
company or companies that compete with the SPAC for business
combination opportunities, or may have their attention divided such
that it may affect their decision-making with respect to the SPAC.
The proposed disclosure requirements would provide a SPAC's
shareholders and prospective investors with a more complete
understanding of any actual or potential material conflicts of interest
associated with the SPAC and the benefits that may be realized by the
sponsor and its affiliates and any promoters arising from these
conflicts of interest. Such disclosure could allow investors to more
accurately assess the potential risk associated with the conflicts of
interest in a SPAC. Further, disclosure about the fiduciary duties a
SPAC's officers and directors owe to other companies could allow the
SPAC's shareholders and prospective investors to better assess the
actions of these officers and directors in managing the SPAC's
activities and in determining to proceed with a proposed de-SPAC
transaction.
Request for Comment
15. Should we require disclosure with respect to material conflicts
of interest that may arise in connection with de-SPAC transactions, as
proposed? Should we include a materiality threshold, as proposed? Is it
clear what would constitute an actual or potential material conflict of
interest, or is further guidance or specification needed? For example,
are there other specific conflicts of interest that we should identify
in the rule?
16. Would the proposed disclosure requirements adequately inform
investors as to potential material conflicts of interest? Are there
approaches that could minimize potential boilerplate or duplicative
disclosure? Should we require that this disclosure be presented in a
tabular format?
17. Is there any additional information that we should require
regarding conflicts of interest? For example, should we also require a
description of any policies and procedures used or to be used to
minimize potential or actual conflicts of interest? Should we require
disclosure of how the board of directors assesses and manages such
conflicts, in particular where directors themselves have conflicts of
interest?
18. Should SPACs be required to provide additional disclosure
regarding material conflicts of interest in Exchange Act reports
following their initial public offerings? For example, should periodic
reports require that any changes in previously disclosed conflicts of
interest be reported? Should we require disclosure about material
conflicts of interest relating to both the SPAC and the identified
target company in the Form 8-K that is required to be filed in
connection with the announcement of a de-SPAC transaction?
19. Should we require disclosure about any fiduciary duties each
officer and director of a SPAC owes to other companies, as proposed?
How would investors use this information? Should we require additional
or different disclosure regarding these fiduciary duties? Would this
requirement potentially result in the disclosure of information that is
not relevant to SPAC investors? Should this disclosure requirement be
focused instead on material conflicts of interests arising from these
fiduciary duties to other companies? Should we require that this
disclosure be provided in a tabular format? Should we consider other
approaches to this disclosure?
D. Dilution
We are proposing Items 1602(a)(4), 1602(c) and 1604(c) to require
additional disclosure about the potential for dilution in (1)
registration statements filed by SPACs, including those for initial
public offerings, and (2) de-SPAC transactions. Proposed Item 1602(c)
would be applicable to all registered offerings by a SPAC other than a
de-SPAC transaction, while proposed Item 1604(c) would be applicable to
all de-SPAC transactions. We are also proposing Item 1602(a)(4) to
require simplified tabular dilution disclosure on the prospectus cover
page in registered offerings by a SPAC on Form S-1 or F-1 other than
for de-SPAC transactions.
There are a number of potential sources of dilution in a SPAC's
structure, including dilution resulting from shareholder redemptions,
sponsor compensation, underwriting fees, outstanding warrants and
convertible securities, and PIPE financings. This dilution may be
particularly pronounced for the shareholders of a SPAC who do not
redeem their shares prior to the consummation of the de-SPAC
transaction and who may not realize or appreciate that these costs are
disproportionately borne by the non-redeeming shareholders.\69\
According to one study, the median dilutive impact of sponsor
compensation, underwriting fees, warrants, and rights equaled 50.4% of
the cash raised in a SPAC initial public offering.\70\ Further, several
[[Page 29469]]
commentators have asserted that the complexity of the disclosures in
these transactions makes it difficult for investors to understand the
dilutive impact of sponsor compensation on the SPAC's non-redeeming
shareholders.\71\
---------------------------------------------------------------------------
\69\ For example, the dilutive impact of underwriting fees
deferred until the completion of a de-SPAC transaction and the
number of shares received by the sponsor is not required to be
disclosed in a manner that takes into account the additional
dilution caused by redemptions.
\70\ Klausner, Ohlrogge, and Ruan, supra note 17.
\71\ See, e.g., AFR Letter; Klausner, Ohlrogge, and Ruan, supra
note 17; Michael Klausner, Michael Ohlrogge, and Harald Halbhuber,
SPAC Disclosure of Net Cash Per Share (SSRN Working Paper, 2022).
---------------------------------------------------------------------------
In light of the potential for significant dilution embedded within
the typical SPAC structure, enhanced disclosure regarding dilution
could enable investors in a SPAC initial public offering and subsequent
purchasers of SPAC shares to better understand the potential impact
upon them of the various dilutive events that may occur over the
lifespan of the SPAC.\72\ We are therefore proposing to require
dilution disclosure in registration statements filed by SPACs other
than for de-SPAC transactions that would require a description of
material potential sources of future dilution following a SPAC's
initial public offering, as well as tabular disclosure of the amount of
potential future dilution from the public offering price that will be
absorbed by non-redeeming SPAC shareholders, to the extent
quantifiable.\73\ This proposed disclosure would be in addition to the
disclosure already required under Item 506 of Regulation S-K.\74\
---------------------------------------------------------------------------
\72\ In this regard, we note that the initial purchasers in SPAC
initial public offerings often resell or redeem their shares prior
to the completion of the de-SPAC transaction. See, e.g., Benjamin
Mullin and Amrith Ramkumar, BuzzFeed Suffers Wave of SPAC Investor
Withdrawals Before Going Public, The Wall Street Journal, Dec. 2,
2021. See also supra note 17.
\73\ Proposed Item 1602(c).
\74\ Under Item 506, a company is required to provide disclosure
regarding dilution when (1) the company is not subject to the
reporting requirements of the Exchange Act and is registering an
offering of common equity securities where there is substantial
disparity between the public offering price and the effective cash
cost to officers, directors, promoters, and affiliated persons of
common equity acquired by them in transactions during the past five
years, or which they have the right to acquire; or (2) the company
is registering an offering of common equity securities and the
company has had losses in each of its last three fiscal years and
there is a material dilution of the purchasers' equity interest. In
the first instance, a company must provide a comparison of the
public contribution under the proposed public offering and the
effective cash contribution of such persons. In both instances, Item
506 requires disclosure of the net tangible book value per share
before and after the distribution; the amount of the increase in
such net tangible book value per share attributable to the cash
payments made by purchasers of the shares being offered; and the
amount of the immediate dilution from the public offering price
which will be absorbed by such purchasers.
---------------------------------------------------------------------------
In addition, we are proposing to require simplified tabular
dilution disclosure incorporating a range of potential redemption
levels on the prospectus cover page of SPAC registration statements on
Forms S-1 and F-1.\75\ In providing disclosure pursuant to Item 506,
SPACs currently provide prospective investors with estimates of
dilution as a function of the difference between the initial public
offering price and the pro forma net tangible book value per share
after the offering. These estimates often include an assumption that
the maximum allowable number of shares eligible will be redeemed prior
to the de-SPAC transaction.\76\ While this information can be useful,
investors may benefit from a more detailed and prominent tabular
presentation of this dilution disclosure that shows various potential
levels of redemption, not just the upper bound on dilution attributable
to redemptions. We are therefore proposing to require that registration
statements on Form S-1 or Form F-1 filed by SPACs, including for an
initial public offering, include on the prospectus cover page a
simplified dilution table, in the following format, which would present
the reader with an estimate of the remaining pro forma net tangible
book value per share at quartile intervals up to the maximum redemption
threshold:
---------------------------------------------------------------------------
\75\ Proposed Item 1602(a)(4).
\76\ In practice, redemption rates rarely reach this level.
Remaining Pro Forma Net Tangible Book Value per Share
----------------------------------------------------------------------------------------------------------------
25% of maximum 50% of maximum 75% of maximum
Offering price of __ redemption redemption redemption Maximum redemption
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
The proposed Item 1602(a)(4) dilution disclosure would be
calculated in a manner consistent with the methodologies and
assumptions more fully articulated in the disclosures provided pursuant
to Item 506 elsewhere in the prospectus. If the initial public offering
includes an overallotment option, the table would need to include
separate rows showing remaining pro forma net tangible book value per
share with the exercise and without the exercise of the over-allotment
option. We are also proposing to require that SPACs provide a cross-
reference to the more detailed dilution disclosure later in the
prospectus when providing this tabular disclosure on the prospectus
cover page.
In regard to de-SPAC transactions, investors could benefit from
clearer dilution disclosure that takes into account the unique
characteristics of the SPAC structure, including any terms negotiated
with the target private operating company, as well as the potential for
additional financing from PIPE investors. At the time of a de-SPAC
transaction, investors are making a decision as to whether to remain a
shareholder of the post-business combination company going forward.
Apart from the operating success of the post-business combination
company, dilution is likely to have a significant impact on the value
of a shareholder's continued investment in the company. We are
therefore proposing Item 1604(c) to require disclosure of each material
potential source of additional dilution that non-redeeming shareholders
may experience at different phases of the SPAC lifecycle by electing
not to redeem their shares in connection with the de-SPAC
transaction.\77\
---------------------------------------------------------------------------
\77\ Depending on the circumstances, material potential sources
of additional disclosure may include dilution from sponsor
compensation, underwriting fees, outstanding warrants and
convertible securities, and financing transactions (including PIPE
transactions).
---------------------------------------------------------------------------
For example, to the extent material, this disclosure would need to
explain that, when a SPAC's shareholders retain their warrants after
redeeming their shares prior to the de-SPAC transaction, the non-
redeeming shareholders and the post-business combination company may
face potential additional dilution. Proposed Item 1604(c)(1) would also
require a sensitivity analysis in a tabular format that shows the
amount of potential dilution under a range of reasonably likely
redemption levels and quantifies the increasing impact of dilution on
non-redeeming shareholders as redemptions increase. We are also
proposing to require disclosure of a description of the model, methods,
assumptions, estimates, and parameters
[[Page 29470]]
necessary to understand the sensitivity analysis disclosure.
Request for Comment
20. Should we require disclosure of material potential sources of
future dilution in registration statements filed by SPACs for initial
public offerings and in disclosure documents for de-SPAC transactions,
as proposed? How would investors benefit from this additional
disclosure? Should we require other information either in addition to,
or in lieu of, the proposed dilution disclosure, such as disclosure of
the cumulative amount of dilution that non-redeeming shareholders may
experience or the amount of net cash underlying each share at the time
of a de-SPAC transaction? If so, should we require that this disclosure
be presented in a tabular format? Should we provide additional
explanation on how to calculate the amount of dilution for purposes of
these disclosure requirements? Should we provide further guidance about
disclosures that SPACs should consider making to help non-affiliated
shareholders understand the potential for dilution and the consequences
of dilution for non-affiliated shareholders?
21. Should we also consider requiring enhanced dilution disclosure
in other Commission filings? If so, what additional information should
we require in this context? How would investors use this additional
dilution disclosure?
22. Should we require simplified tabular disclosure regarding
dilution on the prospectus cover page of a Form S-1 or Form F-1, as
proposed? Should we require additional or less information, or
alternative information, in the tabular disclosure? For example, would
a tabular presentation of cash remaining per non-redeemed share in lieu
of a tabular presentation of remaining pro forma net tangible book
value per share be useful to investors? Should we consider adding a
similar requirement to provide simplified tabular disclosure (1) in the
prospectus summary of a Form S-1 or F-1 or (2) on the prospectus cover
page and/or in the prospectus summary of a Form S-4 or Form F-4 for a
de-SPAC transaction? If so, what information should be included in such
tabular disclosure? Are there other ways to present the potential for
dilution to investors in a more accessible format?
23. Should we require, in disclosure documents for de-SPAC
transactions, a sensitivity analysis in a tabular format, as proposed?
Should we consider additional or alternative approaches to this
disclosure requirement?
24. Are there any significant challenges in providing the proposed
enhanced dilution disclosure at the initial public offering stage or at
the de-SPAC transaction stage?
25. Should we consider additional amendments that would highlight
or simplify dilution disclosure so that it is more clear and accessible
for investors?
E. Prospectus Cover Page and Prospectus Summary Disclosure
In response to concerns raised about the complexity of disclosures
in Securities Act registration statements filed by SPACs for initial
public offerings and for de-SPAC transactions,\78\ we are proposing
Item 1602 to require that certain information be included on the
prospectus cover page and in the prospectus summary using plain English
principles.\79\ Given the unique nature of SPAC offerings and the
potential risks they present to investors, investors could benefit from
requiring the issuer to highlight certain disclosures on the cover page
and in the prospectus summary, in a form that can be more easily read
and understood.
---------------------------------------------------------------------------
\78\ See, e.g., IAC Recommendations, supra note 37 (expressing
concerns ``relating to the effectiveness of disclosure about the
risks, economics and mechanics of SPACs as a result of the
complexity of these transactions and the staggered nature of the
disclosure process''); Rodrigues Testimony; Klausner, Ohlrogge, and
Ruan, supra note 17.
\79\ See Securities Act Rule 421(d). See supra note 38.
---------------------------------------------------------------------------
1. Prospectus Cover Page
Item 501(b) of Regulation S-K sets forth disclosure requirements
for the outside front cover page of prospectuses, such as the name of
the registrant, title and amount of securities being offered, and the
offering price of the securities. In regard to registered offerings
(including initial public offerings) by SPACs other than de-SPAC
transactions, we are proposing Item 1602(a) to require information on
the prospectus cover page in plain English about, among other things,
the time frame for the SPAC to consummate a de-SPAC transaction,
redemptions, sponsor compensation, dilution (including simplified
tabular disclosure), and conflicts of interest. In regard to de-SPAC
transactions, we are proposing Item 1604(a) to require that SPACs
include information on the prospectus cover page in plain English
about, among other things, the fairness of the de-SPAC transaction,
material financing transactions, sponsor compensation and dilution, and
conflicts of interest.
Investors should benefit from having these significant aspects of
SPAC offerings and de-SPAC transactions disclosed prominently on the
prospectus cover page in plain English,\80\ in addition to the
information otherwise required under Item 501 of Regulation S-K.
Although most SPACs already provide much of the proposed information on
prospectus cover pages, the proposed rules would standardize this
information across all registration statements filed by SPACs for
initial public offerings and for de-SPAC transactions.
---------------------------------------------------------------------------
\80\ Id.
---------------------------------------------------------------------------
2. Prospectus Summary
Item 503 of Regulation S-K requires a brief summary of the
information in the prospectus where the length or complexity of the
prospectus makes a summary useful. While the information that should be
included in a prospectus summary will depend on the particular offering
and issuer, a prospectus summary should provide disclosure in clear
language of the most significant aspects of the transaction being
registered.\81\ In light of the often complex disclosure in
registration statements filed by SPACs, a requirement that SPACs
present certain information in the prospectus summary in plain English
should help investors more easily to identify and assess those aspects
of the transaction that are likely to be important in their investment,
voting, and redemption decisions.\82\
---------------------------------------------------------------------------
\81\ See Instruction to Item 503(a) and 17 CFR 230.421(b)
(Securities Act Rule 421(b)).
\82\ In the context of asset-backed offerings, the Commission
previously specified that certain information be included on the
prospectus cover page and in the prospectus summary. See Items 1102
and 1103 of Regulation S-K. Asset-Backed Securities, Release No. 33-
8518 (Dec. 22, 2004) [70 FR 1506 (Jan. 7, 2005)]. See also Item 3 of
Form S-4 and Item 3 of Form F-4 (specifying that certain information
be included in the prospectus summary).
---------------------------------------------------------------------------
In regard to registered offerings other than de-SPAC transactions,
we are proposing Item 1602(b) to require that SPACs include the
following information in the prospectus summary in plain English:
The process by which a potential business combination
candidate will be identified and evaluated;
Whether shareholder approval is required for the de-SPAC
transaction;
The material terms of the trust or escrow account,
including the amount of gross offering proceeds that will be placed in
the trust;
The material terms of the securities being offered,
including redemption rights;
Whether the securities being offered are the same class as
those held by the sponsor and its affiliates;
The length of the time period during which the SPAC
intends to
[[Page 29471]]
consummate a de-SPAC transaction, and its plans if it does not do so,
including, whether and how the time period may be extended, the
consequences to the sponsor of not completing an extension of this time
period, and whether shareholders will have voting or redemption rights
with respect to an extension of time to consummate a de-SPAC
transaction;
Any plans to seek additional financing and how such
additional financing might impact shareholders;
Tabular disclosure of sponsor compensation and the extent
to which material dilution may result from such compensation; and
Material conflicts of interest.
Based on the Commission staff's experience in reviewing
registration statements filed by SPACs, we believe these topics are
among those that investors are likely to find most important when
considering an investment in the SPAC prior to the identification of a
potential business combination candidate.
In regard to registered de-SPAC transactions, we are proposing Item
1604(b) to require that registrants include the following information
in the prospectus summary in plain English:
The background and material terms of the de-SPAC
transaction;
The fairness of the de-SPAC transaction;
Material conflicts of interest;
Tabular disclosure on sponsor compensation and dilution;
Financing transactions in connection with de-SPAC
transactions; and
Redemption rights.
Based on the Commission staff's experience in reviewing
registration statements for de-SPAC transactions, we believe investors
would find this information, in particular those topics that illuminate
potential conflicts of interest and the overall fairness of the
proposed transaction, important when making an investment decision at
the de-SPAC transaction stage.
Request for Comment
26. Would requiring certain information in regard to SPAC offerings
on the prospectus cover page and in the prospectus summary make it
easier for investors to review and understand the disclosures in these
registration statements? Are there other ways we could make these
registration statements easier for investors to understand?
27. Should we require the proposed cover page disclosures for SPAC
initial public offerings and de-SPAC transactions? Is there other
information that we should require to be included on the cover page,
either in addition to, or in lieu of, the information proposed to be
required? Conversely, are there any proposed additional cover page
disclosures that we should not adopt?
28. Should we require the inclusion of the proposed specified
information in the prospectus summary? Is there other information that
we should require to be included in the prospectus summary?
29. Is the subset of the disclosure under proposed Item 1605 that
we are proposing to require to be more prominently presented on the
prospectus cover page and in the prospectus summary via proposed Items
1604(a) and (b) the most informative or otherwise important information
for purposes of the prospectus cover page and the prospectus summary?
Should any additional disclosure provided pursuant to proposed Item
1605 be added to or replace an existing element of the information
proposed to be required on the prospectus cover page or in the
prospectus summary?
30. Are there other changes we should consider in regard to the
prospectus cover page and prospectus summary? For example, should we
impose any additional formatting requirements, such as the use of
tables or bullet points, for certain information in the prospectus
summary? Would such formatting requirements improve the clarity of this
disclosure?
F. Disclosure and Procedural Requirements in De-SPAC Transactions
We are proposing specialized disclosure and procedural requirements
in de-SPAC transactions so that investors can better understand and
evaluate the merits of a prospective de-SPAC transaction.\83\ The
proposed rules would require: (1) Additional disclosures on the
background of and reasons for the transaction; (2) a statement from the
SPAC as to whether it reasonably believes that the de-SPAC transaction
and any related financing transaction are fair or unfair to
unaffiliated security holders; (3) disclosure on any outside report,
opinion, or appraisal relating to the fairness of the transaction; and
(4) additional information in a Schedule TO filed in connection with a
de-SPAC transaction, as well as clarify the need to comply with the
procedural requirements of the tender offer rules when filing such a
Schedule TO.\84\
---------------------------------------------------------------------------
\83\ As discussed above, a SPAC is required to provide its
shareholders with a proxy statement on Schedule 14A if shareholder
approval is required in a de-SPAC transaction. If a SPAC is
registering an offering of its shares to be issued in the de-SPAC
transaction, the SPAC generally files a registration statement on
Form S-4 or F-4. Alternatively, if shareholder approval is required
but the SPAC is not soliciting proxies from its shareholders, the
SPAC is required to provide an information statement on Schedule
14C. Otherwise, if no registration statement, proxy statement or
information statement is required, the SPAC must disseminate a
Schedule TO (tender offer statement) to its shareholders. See
Section IV.A. for a discussion of proposed Rule 145a, which would
affect when a SPAC may be required to file a Form S-4 or F-4 in
connection with a de-SPAC transaction.
\84\ In addition, we are proposing new rules applicable to
business combinations involving shell companies more generally,
which would include de-SPAC transactions. See infra Section IV.
---------------------------------------------------------------------------
1. Background of and Reasons for the De-SPAC Transaction; Terms and
Effects
In order to provide investors with a more complete understanding of
the de-SPAC transaction, we are proposing Item 1605 of Regulation S-K
which would require disclosure of the background, material terms, and
effects of the de-SPAC transaction, including:
A summary of the background of the de-SPAC transaction,
including, but not limited to, a description of any contacts,
negotiations, or transactions that have occurred concerning the de-SPAC
transaction; \85\
---------------------------------------------------------------------------
\85\ For example, this disclosure could encompass whether any
portion of the underwriting fees in connection with a SPAC's initial
public offering is contingent upon the SPAC's completion of a de-
SPAC transaction and whether the underwriter in the SPAC's initial
public offering has provided additional services to the SPAC
following the initial public offering, such as locating potential
target companies, providing financial advisory services, acting as a
placement agent for PIPE transactions, and/or arranging debt
financing. For a discussion of the role of the underwriter in
connection with a de-SPAC transaction, see infra Section III.F.
---------------------------------------------------------------------------
A brief description of any related financing transaction,
including any payments from the sponsor to investors in connection with
the financing transaction;
The reasons for engaging in the particular de-SPAC
transaction and for the structure and timing of the de-SPAC transaction
and any related financing transaction;
An explanation of any material differences in the rights
of security holders of the post-business combination company as a
result of the de-SPAC transaction; \86\ and
---------------------------------------------------------------------------
\86\ This proposed disclosure requirement is intended to address
situations where the shares of a SPAC are being exchanged for shares
of a new holding company or the target company in a de-SPAC
transaction.
---------------------------------------------------------------------------
Disclosure regarding the accounting treatment and the
federal income tax consequences of the de-SPAC transaction, if
material.\87\
---------------------------------------------------------------------------
\87\ Proposed Items 1605(a) and (b). This disclosure would be
required in any Form S-4 or F-4 or Schedule 14A, 14C, or TO filed in
connection with a de-SPAC transaction. We note that registrants are
already subject to similar disclosure requirements in Schedules 14A
and 14C and in Forms S-4 and F-4. These proposed disclosure
requirements are intended to complement these existing requirements
by setting forth specialized disclosure requirements that are
specific to de-SPAC transactions.
---------------------------------------------------------------------------
[[Page 29472]]
These disclosure requirements are modeled, in part, on Item
1004(a)(2) and Item 1013(b) of Regulation M-A \88\ and are intended to
provide investors with, among other things, an enhanced basis upon
which to evaluate a SPAC's reasons for proposing a de-SPAC transaction
and for choosing a particular structure and financing for the
transaction, through a specialized disclosure rule tailored to SPACs
that would address disclosure issues more specific to de-SPAC
transactions. These proposed requirements would also help promote
consistent disclosure, which would allow for greater comparability of
these disclosures across de-SPAC transactions. As proposed, Item
1605(b) would require a reasonably detailed discussion of the reasons
for, and the structure and timing of, a proposed de-SPAC transaction,
which could include a discussion of the key events and activities in
identifying the target private operating company and in negotiating the
terms of the merger or acquisition, as well as the material factors
considered by a SPAC's board of directors in approving the terms of the
proposed de-SPAC transaction and in recommending shareholder approval
of the transaction.
---------------------------------------------------------------------------
\88\ 17 CFR 229.1000 through 229.1016. Regulation M-A is a
subpart (the 1000 series) of Regulation S-K. Item 1004(a)(2) sets
forth disclosure requirements regarding the material terms of
mergers or similar transactions, and Item 1013(b) requires
disclosure of alternative means considered by the subject company or
affiliate in the context of a going-private transaction. In our
view, these rules are appropriate models for the proposed
specialized disclosure requirements for de-SPAC transactions, in
that Item 1004(a)(2) sets forth disclosure requirements for mergers
generally and the same potential for self-interested transactions
exists in de-SPAC transactions as in going-private transactions.
---------------------------------------------------------------------------
In addition, we are proposing Item 1605(c) to require disclosure of
the effects of the de-SPAC transaction and any related financing
transaction on the SPAC and its affiliates, the sponsor and its
affiliates, the private operating company and its affiliates, and
unaffiliated security holders of the SPAC. Such disclosure could allow
investors to better assess whether the transactions have been
structured in a manner that would benefit one of these parties in
particular or that would be to the detriment of other parties. As
proposed, the disclosure must provide a reasonably detailed discussion
of both the benefits and detriments to non-redeeming shareholders of
the de-SPAC transaction and any related financing transaction, with
such benefits and detriments quantified to the extent practicable.\89\
For example, if the sponsor's interests and returns may differ from
those of public investors in regard to a prospective de-SPAC
transaction, the disclosure should describe and quantify, to the extent
practicable, dollar amounts or prospective returns the sponsor and its
affiliates stand to gain or lose that are dependent on the completion
of the transaction.
---------------------------------------------------------------------------
\89\ Proposed Item 1605(c).
---------------------------------------------------------------------------
We are also proposing Item 1605(d) to require disclosure of the
SPAC's sponsors', officers' and directors' material interests in the
de-SPAC transaction or any related financing transaction, including any
fiduciary or contractual obligations to other entities and any interest
in, or affiliation with, the private operating company that is the
target of the de-SPAC transaction. This proposed disclosure requirement
is intended to address, among other things, the concern that a sponsor
may be proposing a de-SPAC transaction that will produce benefits or
detriments that are not fully disclosed to investors.\90\
---------------------------------------------------------------------------
\90\ See, e.g., IAC Recommendations, supra note 37 (stating that
``there may be financial arrangements that constitute conflicts of
interest that are not fully disclosed or understood by investors'');
Rodrigues and Stegemoller, supra note 17; Klausner, Ohlrogge, and
Ruan, supra note 17; Deane Testimony.
---------------------------------------------------------------------------
Under Item 403 of Regulation S-K, SPACs currently provide tabular
disclosure regarding the beneficial ownership of its equity or voting
securities, as applicable, by management and beneficial owners of more
than 5% of a class of voting securities.\91\ The proposed disclosure
requirement in Item 1605(d) would be broader than Item 403, and would
require disclosure of any material interests that the sponsor and the
SPAC's officers and directors have in a de-SPAC transaction or any
related financing transaction, including fiduciary or contractual
obligations to other entities as well as any interest in, or
affiliation with, the target company. The proposed disclosure
requirement would also encompass material interests that are non-
pecuniary in nature that may nevertheless affect the decision to
proceed with a prospective de-SPAC transaction or related financing
transaction. In the context of a de-SPAC transaction, this disclosure
could help investors, when making an investment, voting or redemption
decision with respect to the de-SPAC transaction, to assess whether, on
balance, the benefits of the de-SPAC transaction justify the
detriments, and particularly whether the sponsor is motivated to
complete a de-SPAC transaction by interests not held by all investors.
---------------------------------------------------------------------------
\91\ Under Item 403, beneficial ownership is determined in
accordance with 17 CFR 240.13d-3(d)(1) (Exchange Act Rule 13d-
3(d)(1)), pursuant to which a person is generally deemed to be the
beneficial owner of securities that the person has the right to
acquire within 60 days.
---------------------------------------------------------------------------
Proposed Item 1605(e) would require disclosure of whether or not
security holders are entitled to any redemption or appraisal rights,
and if so, a summary of the redemption or appraisal rights.\92\ Under
the proposed rules, SPACs would be required to disclose, among other
things, whether shareholders may redeem their shares regardless of
whether they vote in favor of or against a proposed de-SPAC
transaction, or abstain from voting, and whether shareholders have the
right to redeem their securities at the time of any extension of the
time period to complete a de-SPAC transaction. If there are no
redemption or appraisal rights available for security holders who
object to the de-SPAC transaction, the proposed rules would require
disclosure of any other rights that may be available to security
holders under the law of the jurisdiction of organization. These
disclosures would help investors better assess the impact of any
redemption or appraisal rights on a proposed de-SPAC transaction,
including whether the existence of such rights might lead some
investors to redeem their securities after voting in favor of a de-SPAC
transaction.\93\
---------------------------------------------------------------------------
\92\ This proposed disclosure requirement would build upon, and
be in addition to, the existing disclosure requirement in Item 202
of Regulation S-K (Description of registrant's securities). Under
Item 202, SPACs are currently required to disclose the redemption
provisions of their capital stock being registered, such as whether
redemptions would be required under certain circumstances at the
SPAC's option, e.g., whether a SPAC may require the redemption of
warrants held by public shareholders for nominal consideration if
the underlying shares trade above a certain threshold price.
\93\ One commentator has observed that SPAC shareholders may
vote in favor of a proposed de-SPAC transaction while redeeming
their shares prior to the closing of the transaction, such that the
vote is decoupled from any economic interest in the post-business
combination company. Rodrigues and Stegemoller, supra note 17. See
also supra note 29.
---------------------------------------------------------------------------
Request for Comment
31. Would the proposed disclosure requirements provide investors
with important information regarding the background of and reasons for
a de-SPAC transaction? Is there any additional information about the
background of and reasons for the de-SPAC transaction that we should
require to be disclosed? Are there any additional or alternative
requirements that we should consider to further
[[Page 29473]]
improve the disclosures about de-SPAC transactions?
32. Should we adopt the proposed disclosure requirements with
respect to the effects of the de-SPAC transaction and any related
financing transaction, as proposed? Should we require additional or
alternative disclosure regarding the effects of the de-SPAC transaction
and any related financing transaction?
33. Should we require disclosure with respect to material interests
in a prospective de-SPAC transaction or any related financing
transaction held by the sponsor and the SPAC's officers and directors,
as proposed? Should we require additional or alternative disclosure
regarding the interests of these parties in the de-SPAC transaction?
34. Should we require disclosure regarding whether or not security
holders are entitled to any redemption or appraisal rights and a
summary of any such rights, as proposed? Is there additional or
alternative disclosure about redemption or appraisal rights that we
should require?
35. Would the disclosure requirements in proposed Item 1605 result
in duplicative disclosures? If so, are there alternative approaches
that we should consider to avoid this result?
2. Fairness of the De-SPAC Transaction
To address concerns regarding potential conflicts of interest and
misaligned incentives in connection with the decision to proceed with a
de-SPAC transaction and to assist investors in assessing the fairness
of a particular de-SPAC transaction to unaffiliated investors,\94\ we
are proposing Item 1606(a) to require a statement from a SPAC as to
whether it reasonably believes that the de-SPAC transaction and any
related financing transaction are fair or unfair to the SPAC's
unaffiliated security holders, as well as a discussion of the bases for
this statement.\95\ We are proposing to require that this statement
encompass both the de-SPAC transaction and any related financing
transaction so that the fairness determination would require
consideration of the combined effects of both transactions, which are
often dependent on each other, on unaffiliated security holders. As
proposed, a SPAC would be required to include this statement in any
Forms S-4 and F-4 or Schedules 14A, 14C, and TO filed in connection
with a de-SPAC transaction.\96\ Proposed Item 1606(a) would also
require disclosure on whether any director voted against, or abstained
from voting on, approval of the de-SPAC transaction or any related
financing transaction, and if so, identification of the director and,
if known after making a reasonable inquiry, the reasons for the vote
against the transaction or abstention.
---------------------------------------------------------------------------
\94\ See supra note 28. See also Michael Klausner and Michael
Ohlrogge, SPAC Governance: In Need of Judicial Review (SSRN Working
Paper, 2021).
\95\ In this regard, we are proposing an instruction to Item
1606 that a ``statement that the special purpose acquisition company
has no reasonable belief as to the fairness or unfairness of the de-
SPAC transaction or any related financing transaction to
unaffiliated security holders will not be considered sufficient
disclosure in response to [Item 1606(a)].'' As proposed, a SPAC
would not be required to disclose that a de-SPAC transaction and any
related financing transaction are fair but rather would be required
to state its reasonable belief as to the fairness or unfairness of
the transaction as well as the bases for this statement.
\96\ We have modeled certain of the proposed requirements in
Item 1606 and Item 1607 (see infra Section II.F.3.), on the
disclosures required in going-private transactions subject to 17 CFR
240.13e-3 (Exchange Act Rule 13e-3). See Items 1014 and 1015 of
Regulation M-A. In our view, the disclosure requirements in Rule
13e-3 provide an appropriate model for the proposed requirements
with respect to de-SPAC transactions, in that the conflicts of
interests and misaligned incentives inherent in going-private
transactions are similar to those often present in de-SPAC
transactions.
---------------------------------------------------------------------------
Under proposed Item 1606(b), a SPAC would be required to discuss in
reasonable detail the material factors upon which a reasonable belief
regarding the fairness of a de-SPAC transaction and any related
financing transaction is based and, to the extent practicable, the
weight assigned to each factor. These factors would include but not be
limited to: The valuation of the private operating company; the
consideration of any financial projections; any report, opinion, or
appraisal obtained from a third party; and the dilutive effects of the
de-SPAC transaction and any related financing transaction on non-
redeeming shareholders. Together, these proposed disclosures are
intended to help investors assess the reasonableness of the SPAC's
stated belief about the fairness of the transaction.
To provide additional context for understanding the process by
which a SPAC determined to proceed with a de-SPAC transaction, we are
proposing Items 1606(c), (d), and (e), which would require disclosure
on whether:
The de-SPAC transaction or any related financing
transaction is structured so that approval of at least a majority of
unaffiliated security holders is required;
A majority of directors who are not employees of the SPAC
has retained an unaffiliated representative to act solely on behalf of
unaffiliated security holders for purposes of negotiating the terms of
the de-SPAC transaction or any related financing transaction and/or
preparing a report concerning the fairness of the de-SPAC transaction
or any related financing transaction; and
The de-SPAC transaction or any related financing
transaction was approved by a majority of the directors of the SPAC who
are not employees of the SPAC.
Request for Comment
36. Should we adopt Item 1606 as proposed?
37. Should we require a statement from the SPAC as to whether it
reasonably believes that the de-SPAC transaction and any related
financing transaction are fair or unfair to unaffiliated security
holders, as proposed? Should the scope of the fairness determination
include both the de-SPAC transaction and any related financing
transaction, as proposed? Should the fairness determination be as to
the SPAC's security holders as a whole, rather than to the SPAC's
unaffiliated security holders? The factors enumerated in proposed Item
1606(b) in determining fairness include, but are not limited to, the
valuation of the target company, the consideration of any financial
projections, any report, opinion, or appraisal described in Item 1607
of Regulation S-K, and the dilutive effects described in Item 1604(c)
of Regulation S-K. Is there any additional or alternative information
that should be disclosed in connection with the SPAC's fairness
determination?
38. Should we include an instruction to Item 1606 that a statement
that the SPAC has no reasonable belief as to the fairness or unfairness
of the de-SPAC transaction or any related financing transaction to
unaffiliated security holders will not be considered sufficient
disclosure in response to Item 1606(a), as proposed?
39. What are the potential benefits and costs of the statement that
would be required by proposed Item 1606(a)? Would the costs of
complying with this disclosure requirement discourage SPAC initial
public offerings or discourage private operating companies from
pursuing business combinations with SPACs?
40. Should we require registrants to disclose whether any director
voted against, or abstained from voting on, the approval of a de-SPAC
transaction or any related financing transaction, as well as the
reasons for such vote or abstention, as proposed? Are there additional
or alternative disclosures that we should require in this regard?
41. Should we require registrants to discuss in reasonable detail
the material factors and, to the extent practicable, the weight
assigned to each factor
[[Page 29474]]
underlying the fairness determination, as proposed? Are there
additional or alternative factors that should be specified in the
proposed rule to enhance an investor's understanding of the fairness
determination?
42. How would investors use disclosure about whether the approval
of at least a majority of unaffiliated security holders is required and
whether the de-SPAC transaction or any related financing transaction
was approved by a majority of non-employee directors of the SPAC? How
would investors use disclosure about whether a representative has been
retained to represent the investors in the negotiations of the de-SPAC
transaction?
3. Reports, Opinions, and Appraisals
In addition, we are proposing Item 1607 to require disclosure about
certain reports, opinions, or appraisals from outside parties.\97\
Proposed Item 1607(a) would require disclosure about whether or not the
SPAC or its sponsor has received any report, opinion, or appraisal
obtained from an outside party relating to the consideration or the
fairness of the consideration to be offered to security holders or the
fairness of the de-SPAC transaction or any related financing
transaction to the SPAC, the sponsor or security holders who are not
affiliates.\98\ This requirement would provide additional transparency
about whether a SPAC's board of directors and/or its sponsor have
access to information underlying a fairness determination that
shareholders could find useful in making voting, investment, and
redemption decisions in connection with the de-SPAC transaction.\99\
---------------------------------------------------------------------------
\97\ As noted above, we have modeled the proposed requirements
in Item 1607 on the disclosures required in going-private
transactions subject to Exchange Act Rule 13e-3. See Item 1015 of
Regulation M-A.
\98\ Though currently not a routine practice in de-SPAC
transactions, SPACs often obtain fairness opinions in connection
with de-SPAC transactions involving an affiliated private operating
company.
\99\ For example, the proposed rule would require a SPAC to
disclose whether or not the SPAC or its sponsor has received a
fairness opinion or valuation report from a financial advisor.
---------------------------------------------------------------------------
To assist investors in considering the usefulness and reliability
of any outside party report, opinion or appraisal described in response
to proposed Item 1607(a), as well as any negotiation or report by an
unaffiliated representative acting solely on behalf of unaffiliated
security holders described in response to proposed Item 1606(d),
proposed Item 1607(b) would require disclosure of:
The identity, qualifications, and method of selection of
the outside party and/or unaffiliated representative;
Any material relationship between (1) the outside party,
its affiliates, and/or unaffiliated representative, and (2) the SPAC,
its sponsor and/or their affiliates, that existed during the past two
years or is mutually understood to be contemplated and any compensation
received or to be received as a result of the relationship; \100\
---------------------------------------------------------------------------
\100\ For example, this disclosure could include whether the
compensation for a financial advisor's fairness opinion is
conditioned on the completion of the de-SPAC transaction or whether
the amount of compensation due the financial advisor may include a
bonus or may be increased depending on the ultimate financial terms
of the de-SPAC transaction.
---------------------------------------------------------------------------
Whether the SPAC or the sponsor determined the amount of
consideration to be paid to the private operating company or its
security holders, or the valuation of the private operating company, or
whether the outside party recommended the amount of consideration to be
paid or the valuation of the private operating company; and
A summary concerning the negotiation, report, opinion or
appraisal, which would be required to include a description of the
procedures followed; the findings and recommendations; the bases for
and methods of arriving at such findings and recommendations;
instructions received from the SPAC or its sponsor; and any limitation
imposed by the SPAC or its sponsor on the scope of the investigation.
Finally, proposed Item 1607(c) would require all such reports,
opinions or appraisals to be filed as exhibits to the Form S-4, Form F-
4, and Schedule TO for the de-SPAC transaction or included in the
Schedule 14A or 14C for the transaction, as applicable.
Request for Comment
43. Should we require disclosure regarding reports, opinions, or
appraisals from an outside party, as proposed? Is there any additional
or alternative information that we should require with respect to these
reports, opinions, or appraisals? Is there any proposed information
that should not be required?
44. Should we require that the reports, opinions or appraisals be
filed as exhibits to the Form S-4, Form F-4, or Schedule TO for the de-
SPAC transaction or included in the Schedule 14A or Schedule 14C for
the transaction, as proposed? Should we require instead that such
reports, opinions, or appraisals be made available for inspection and
copying upon written request? Should we require the filing of board
books and other written materials presented to the board in connection
with the reports, opinions, or appraisals, as is the case with going-
private transactions? Are there other means by which investors should
be able to access such report, opinion, or appraisal, such as posting
on a website?
45. As proposed, filers would be required to include a summary of
the report, opinion, or appraisal and file such report, opinion, or
appraisal as an exhibit to the filing. Would investors benefit from
having both the summary and the actual report, opinion, or appraisal
disclosed, or would one or the other item of disclosure be sufficient?
4. Proposed Item 1608 of Regulation S-K
We are proposing Item 1608 of Regulation S-K to codify a staff
position that a Schedule TO filed in connection with a de-SPAC
transaction should contain substantially the same information about a
target private operating company that is required under the proxy rules
and that a SPAC must comply with the procedural requirements of the
tender offer rules when conducting the transaction for which the
Schedule TO is filed, such as a redemption of the SPAC securities.
Redemption rights offered by a SPAC to its security holders in
connection with the de-SPAC transaction or an extension of the
timeframe to complete a de-SPAC transaction generally have indicia of
being a tender offer, but the Commission staff has not objected if a
SPAC does not comply with the tender offer rules when the SPAC files a
Schedule 14A or 14C in connection with a de-SPAC transaction or an
extension and complies with Regulation 14A or 14C, because the federal
proxy rules would generally mandate substantially similar disclosures
and applicable procedural protections as required by the tender offer
rules.\101\ Proposed Item 1608, if adopted, would not affect the
availability of this staff position for those SPACs that file Schedule
14A or 14C for their de-SPAC transactions or extensions. SPACs that are
unable to avail themselves of this position and file a Schedule TO
(such as foreign private issuers \102\), however, would be subject
[[Page 29475]]
to the requirements of proposed Item 1608 of Regulation S-K, which
would codify the staff's view regarding the information required to be
included in a Schedule TO filed for a SPAC redemption and clarify the
need to comply with the procedural requirements of the tender offer
rules.\103\
---------------------------------------------------------------------------
\101\ See supra note 21.
\102\ ``Foreign private issuer'' is defined in Securities Act
Rule 405 and Exchange Act Rule 3b-4(c). A foreign private issuer is
any foreign issuer other than a foreign government, except for an
issuer that (1) has more than 50% of its outstanding voting
securities held of record by U.S. residents and (2) any of the
following: (i) A majority of its officers and directors are citizens
or residents of the United States, (ii) more than 50 percent of its
assets are located in the United States, or (iii) its business is
principally administered in the United States.
\103\ The staff has historically expressed the view that the
same information about the target company that would be required in
a Schedule 14A should be included in such a Schedule TO, in view of
the requirements of Item 11 of Schedule TO and Item 1011(c) of
Regulation M-A and the importance of this information in making a
redemption decision. Item 11 of Schedule TO states ``Furnish the
information required by Item 1011(a) and (c) of Regulation M-A.''
Item 1011(c) of Regulation M-A states ``Furnish such additional
material information, if any, as may be necessary to make the
required statements, in light of the circumstances under which they
are made, not materially misleading.''
---------------------------------------------------------------------------
Proposed Item 1608 would require a SPAC that files a Schedule TO
pursuant to Exchange Act Rule 13e-4(c)(2) for any redemption of
securities offered in connection with a de-SPAC transaction to include
disclosures required by specified provisions of Forms S-4 and F-4, and
Schedule 14A, as applicable. Proposed Item 1608 would specify and
standardize the information required in a Schedule TO that is filed in
connection with a de-SPAC transaction so that it is consistent with the
information required by the proposed amendments to Forms S-4 and F-4
and Schedule 14A. As a result, SPAC shareholders who are not solicited
for their votes to approve a de-SPAC transaction (in a solicitation
subject to Regulation 14A) would nevertheless receive the same
information about the target private operating company that could be
material to their redemption decisions.\104\ Proposed Item 1608 would
clarify that SPACs that file a Schedule TO for a redemption also must
comply with the procedural requirements of Rule 13e-4 and Regulation
14E (such as the requirement to keep the redemption period open for at
least 20 business days). This proposed codification would eliminate any
potential ambiguity as to the SPAC's obligation to provide the tender
offer rules' procedural protections to the SPAC security holders who
are considering whether to redeem their securities.
---------------------------------------------------------------------------
\104\ Proposed Item 1608 would also be consistent with exchange
listing rules regarding the use of Schedule TO in de-SPAC
transactions. See, e.g., Nasdaq Listing Rule IM-5101-2(e) and NYSE
Listed Company Manual Section 102.06(c).
---------------------------------------------------------------------------
Request for Comment
46. Should we adopt Item 1608 as proposed?
47. Is there any additional or alternative information that we
should require in proposed Item 1608 when a Schedule TO is filed in
connection with a de-SPAC transaction?
48. Are there any requirements of Rule 13e-4 and Regulation 14E
that should not apply to SPACs that file a Schedule TO for the
redemption of the SPAC securities?
49. Are there any other provisions of Rule 13e-4 or Regulation 14E
that should be amended to ensure that SPAC security holders are
provided with the information material to their decision on whether to
redeem their SPAC securities or to address other issues arising from
the SPAC redemption process? For example, should we amend Exchange Act
Rule 14e-5, which generally prohibits a bidder or its affiliates from
making purchases outside of a tender offer, to permit a sponsor's
purchases of SPAC securities outside of the redemption offer as long as
certain conditions are satisfied (such as requiring disclosures of the
sponsor's purchases and limiting the purchase price to no more than the
price offered through the redemption offer), e.g., in a manner
consistent with the Division of Corporation Finance's Tender Offers and
Schedules Compliance and Disclosure Interpretation 166.01 (Mar. 22,
2022)? \105\
---------------------------------------------------------------------------
\105\ This staff interpretation is available at: https://www.sec.gov/divisions/corpfin/guidance/cdi-tender-offers-and-schedules.htm.
---------------------------------------------------------------------------
50. As noted above, the staff has taken the position that a SPAC
filing a Schedule 14A or 14C in connection with a de-SPAC transaction
or an extension of the time frame to complete a de-SPAC transaction
would not need to file a Schedule TO or otherwise comply with the
tender offer rules, including the procedural requirements of the tender
offer rules, such as the all-holders requirement. Should we codify this
position? Should we reconsider this position?
G. Structured Data Requirement
We are proposing to require SPACs to tag all information disclosed
pursuant to Subpart 1600 of Regulation S-K in a structured, machine-
readable data language. Specifically, we are proposing to require SPACs
to tag the disclosures required under Subpart 1600 in Inline XBRL in
accordance with Rule 405 of Regulation S-T and the EDGAR Filer
Manual.\106\ The proposed requirements would include detail tagging of
the quantitative disclosures and block text tagging of the narrative
disclosures that would be required under Subpart 1600.
---------------------------------------------------------------------------
\106\ This tagging requirement would be implemented by including
a cross-reference to Rule 405 of Regulation S-T in Subpart 1600 of
Regulation S-K, and by revising 17 CFR 232.405(b) of Regulation S-T
to include the proposed SPAC-related disclosures. A corresponding
Note and Instruction would also be added to Schedules 14A and TO,
respectively. Pursuant to Rule 301 of Regulation S-T, the EDGAR
Filer Manual is incorporated by reference into the Commission's
rules. In conjunction with the EDGAR Filer Manual, Regulation S-T
governs the electronic submission of documents filed with the
Commission. Rule 405 of Regulation S-T specifically governs the
scope and manner of disclosure tagging requirements for operating
companies and investment companies, including the requirement in 17
CFR 232.405(a)(3) to use Inline XBRL as the specific structured data
language to use for tagging the disclosures.
---------------------------------------------------------------------------
In 2009, the Commission adopted rules requiring operating companies
to submit the information from the financial statements (including
footnotes and schedules thereto) included in certain registration
statements and periodic and current reports in a structured, machine-
readable data language using eXtensible Business Reporting Language
(``XBRL'').\107\ In 2018, the Commission adopted modifications to these
requirements by requiring issuers to use Inline XBRL, which is both
machine-readable and human-readable, to reduce the time and effort
associated with preparing XBRL filings and improve the quality and
usability of XBRL data for investors.\108\
---------------------------------------------------------------------------
\107\ Interactive Data to Improve Financial Reporting, Release
No. 33-9002 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)] (``2009
Financial Statement Information Adopting Release'') (requiring
submission of an Interactive Data File to the Commission in exhibits
to such reports). See also Interactive Data to Improve Financial
Reporting, Release No. 33-9002A (Apr. 1, 2009) [74 FR 15666 (Apr. 7,
2009)].
\108\ Inline XBRL Filing of Tagged Data, Release No. 33-10514
(June 28, 2018) [83 FR 40846, 40847 (Aug. 16, 2018)]. Inline XBRL
allows filers to embed XBRL data directly into an HTML document,
eliminating the need to tag a copy of the information in a separate
XBRL exhibit. Id. at 40851.
---------------------------------------------------------------------------
Requiring Inline XBRL tagging of the Subpart 1600 disclosures would
benefit investors by making SPAC disclosures more readily available and
easily accessible to investors and other market participants for
aggregation, comparison, filtering, and other analysis, as compared to
requiring a non-machine readable data language such as ASCII or HTML.
This would enable automated extraction and analysis of granular SPAC
disclosures, allowing investors and other market participants to more
efficiently perform large-scale analysis and comparison of SPAC
disclosures across SPAC transactions and time periods, including
information on sponsor compensation and material conflicts of interest.
At the same time, we do not expect the incremental compliance burden
associated with tagging the additional information to be unduly
burdensome, because SPACs subject to the proposed
[[Page 29476]]
tagging requirements would be subject to similar Inline XBRL
requirements in other Commission filings.\109\ However, because issuers
(including SPACs) are not required to tag any filings until after they
have filed a periodic report on Form 10-Q, 20-F, or 40-F, the proposed
tagging requirement for disclosures in SPAC IPO registration statements
would accelerate the tagging obligations (and related compliance
burdens) of SPACs compared to those of other filers.\110\ Enhancing the
usability of the SPAC initial public offering disclosures through a
tagging requirement is of particular importance given the unique nature
of SPAC offerings and the potential risks they present to investors.
---------------------------------------------------------------------------
\109\ Id.
\110\ See 17 CFR 229.601(b)(101)(i)(A).
---------------------------------------------------------------------------
Request for Comment
51. Should we require SPACs to tag the disclosures required by
Subpart 1600 of Regulation S-K, as proposed? Are there any changes we
should make to ensure accurate and consistent tagging? If so, what
changes should we make?
52. Should we modify the scope of the Subpart 1600 disclosures
required to be tagged? For example, should we require tagging of
quantitative disclosures only? Should we limit the tagging requirement
to only those disclosures required in de-SPAC transactions?
53. Where an item in Subpart 1600 requests that a registrant
provide a tabular presentation without specifying a particular format
for the table, or data points to include in the table, such as the
proposed disclosure related to SPAC sponsor compensation, dilution of
unaffiliated shareholders, and the related sensitivity analysis, should
we instead require specific elements in the tabular presentation? If we
do not propose a specific tabular presentation or required elements,
would detail tagging provide useful data for investors and other market
participants?
54. Should we require SPACs to use a different structured data
language to tag the Subpart 1600 disclosures? If so, what structured
data language should we require, and why?
55. We have not proposed exemptions or different requirements from
the proposed structured data requirement for foreign private issuers,
smaller reporting companies,\111\ or emerging growth companies.\112\
Should we exempt or provide different requirements from some or all of
the proposed structured data requirements for these or other classes of
registrants?
---------------------------------------------------------------------------
\111\ See infra Section III.D.
\112\ Section 101(a) of the JOBS Act amended Section 2(a) of the
Securities Act [15 U.S.C. 77b(a)] and Section 3(a) of the Exchange
Act [15 U.S.C. 78c(a)] to define an ``emerging growth company'' as
an issuer with less than $1 billion in total annual gross revenues
during its most recently completed fiscal year, as such amount is
indexed for inflation every five years by the Commission. If an
issuer qualifies as an EGC on the first day of its fiscal year, it
maintains that status until the earliest of (1) the last day of the
fiscal year of the issuer during which it has total annual gross
revenues of $1.07 billion or more; (2) the last day of its fiscal
year following the fifth anniversary of the first sale of its common
equity securities pursuant to an effective registration statement;
(3) the date on which the issuer has, during the previous three-year
period, issued more than $1 billion in nonconvertible debt; or (4)
the date on which the issuer is deemed to be a ``large accelerated
filer'' (as defined in Exchange Act Rule 12b-2). See Section
2(a)(19) of the Securities Act [15 U.S.C. 77b(a)(19)]; Section
3(a)(80) of the Exchange Act [15 U.S.C. 78c(a)(80)]; and Inflation
Adjustments and Other Technical Amendments under Titles I and II of
the JOBS Act, Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545
(Apr. 12, 2017)].
---------------------------------------------------------------------------
III. Aligning De-SPAC Transactions With Initial Public Offerings
As discussed above, private operating companies have increasingly
turned to de-SPAC transactions as a means of accessing public
securities markets and becoming public reporting companies. As the
SPACs that were part of the unprecedented growth in the SPAC market in
2020 and 2021 continue to identify target private operating companies
and consummate de-SPAC transactions, it is likely that a significant
proportion of companies in the coming years that enter the U.S. public
securities markets will do so through de-SPAC transactions.
A private operating company's path to the public markets through a
de-SPAC transaction usually commences when a SPAC begins considering it
as a potential business combination candidate. After agreeing to the
terms of the business combination, the SPAC typically files a Form 8-K
announcing the transaction that includes limited information on the
material terms of the business combination agreement.\113\ This
announcement is usually followed by a disclosure document (a Securities
Act registration statement, proxy statement, or information statement)
filed by the SPAC that includes more extensive information about the
private operating company.\114\ SPACs use a variety of legal structures
to effect de-SPAC transactions, and the particular transaction
structure and the consideration used can affect (1) the Commission
filings required for the transaction,\115\ (2) which entity will have a
continuing Exchange Act reporting obligation following the
transaction,\116\ and (3) the disclosures provided in connection with
the transaction.\117\
---------------------------------------------------------------------------
\113\ A SPAC is required to file a Form 8-K that provides
certain disclosures regarding the business combination agreement if
the agreement is a material definitive agreement not made in the
ordinary course of business. See Item 1.01 of Form 8-K.
\114\ The disclosure document may be a Form S-4 or F-4, Schedule
14A or Schedule TO, depending on, among other things, whether
shareholder approval is required and whether the SPAC is registering
an offering of shares to be issued in the transaction.
\115\ SPACs may use cash, securities, or a combination of both
to acquire a target company in a de-SPAC transaction, and the form
of consideration is a factor in determining whether a registration
statement, proxy or information statement, or tender offer statement
is required to be filed in connection with a de-SPAC transaction.
Additionally, the SPAC, the target company or a new holding company
may issue securities in a de-SPAC transaction, which may necessitate
the filing of a registration statement on Form S-4 or F-4 for the
transaction.
\116\ For example, when a holding company is formed to acquire
both the private operating company and the SPAC, and the holding
company files a registration statement for the de-SPAC transaction,
generally the holding company would continue as the registrant with
the Exchange Act reporting obligation following the transaction. In
these situations, the private operating company would be the holding
company's predecessor, as the term is used in Regulation S-X, with
respect to the financial statements and possibly the accounting
acquirer under generally accepted accounting principles as used in
the United States (``U.S. GAAP''), with the equity ownership
percentage in the combined company held by the former owners of the
private operating company and the degree to which former management
of the private operating company continues with the combined company
among the factors that could impact the accounting acquirer
determination under U.S. GAAP. Under the proposed amendments to
Regulation S-X, the SPAC would be an acquired business. See infra
Section IV.B.
\117\ The disclosures required in connection with a de-SPAC
transaction are determined by the applicable disclosure form (Form
S-4 or F-4, Schedule 14A or 14C, or Schedule TO) and which entity is
filing the form. Under the proposed amendments, companies would not
be subject to the same disclosure requirements in every de-SPAC
transaction structure. For example, if the SPAC is a domestic
registrant and a new holding company is a foreign issuer, and the
private operating company meets the criteria to be a foreign private
issuer, the holding company (the company filing the de-SPAC
transaction filing) would also qualify as a foreign private issuer.
Foreign private issuer status would permit the foreign holding
company to file a Form F-4 for the de-SPAC transaction and apply the
foreign private issuer disclosure regime. In contrast, if a de-SPAC
transaction is structured so that (1) a domestic SPAC is the company
issuing securities as the acquiring entity of the foreign private
operating company, (2) there is no foreign holding company, and (3)
the SPAC makes the de-SPAC transaction filing, the registrant would
continue to be a domestic issuer and follow domestic reporting rules
until the next determination date for foreign private issuer status.
---------------------------------------------------------------------------
After the completion of the de-SPAC transaction, the post-business
combination company is required to file a Form 8-K within four business
days that includes even more information about the private operating
company that is equivalent to the information that a new reporting
company would be required to provide when filing a Form
[[Page 29477]]
10 under the Exchange Act.\118\ The result is that investors may
receive disclosures about the future public company that differ from,
or are not provided in the same manner as, the information disclosed in
a Form S-1 or F-1 filed in connection with a traditional initial public
offering. Additionally, some of the investor protections afforded in a
traditional initial public offering are not available or are more
attenuated when a private operating company becomes a public company
through a de-SPAC transaction.\119\
---------------------------------------------------------------------------
\118\ Form 10 is the long-form registration statement to
register a class of securities under Section 12(b) or 12(g) of the
Exchange Act. See Items 2.01(f), 5.01(a)(8), and 9.01(c) of Form 8-
K. By the time the Form 8-K with Form 10 information is filed, the
securities of the post-business combination company have often
already begun trading on a national securities exchange with a new
ticker symbol, in that the securities of the SPAC generally trade on
an exchange until the consummation of the de-SPAC transaction, after
which the securities of the post-business combination company
generally commence trading on the following business day.
\119\ For example, a private company engaged in a traditional
initial public offering is generally more limited in its ability to
make communications about its offering prior to the filing of a
Securities Act registrations statement on Form S-1 than companies
engaged in a business combination transaction that will be
registered on Form S-4 or F-4. De-SPAC transactions also often lack
named underwriters that perform due diligence and other traditional
gatekeeping functions, and it may be more difficult for investors to
trace their purchases to the registered de-SPAC transaction for
purposes of establishing a Section 11 claim for material
misstatements or omissions in de-SPAC disclosure documents.
---------------------------------------------------------------------------
In light of the increasingly common reliance on de-SPAC
transactions as a vehicle for private operating companies to access the
U.S. public securities markets, we are proposing a number of new rules
and amendments to existing rules to align more closely the treatment of
private operating companies entering the public markets through de-SPAC
transactions with that of companies conducting traditional initial
public offerings. In our view, a private operating company's method of
becoming a public company should not negatively impact investor
protection. Accordingly, the proposed new rules and amendments are
intended to provide investors with disclosures and liability
protections comparable to those that would be present if the private
operating company were to conduct a traditional firm commitment initial
public offering.
These proposed new rules and amendments would (1) more closely
align the non-financial statement disclosure requirements with respect
to the private operating company in disclosure documents for a de-SPAC
transaction with the disclosure required in a Form S-1 or F-1 for an
initial public offering; \120\ (2) require a minimum dissemination
period for disclosure documents in de-SPAC transactions; (3) treat the
private operating company as a co-registrant of the Form S-4 or Form F-
4 for a de-SPAC transaction when a SPAC is filing the registration
statement; (4) require a re-determination of smaller reporting company
status following the consummation of a de-SPAC transaction; (5) amend
the definition of ``blank check company'' for PSLRA purposes such that
the safe harbor for forward-looking information would not apply to
projections in filings by SPACs and certain other blank check companies
that are not penny stock issuers; and (6) provide, in a Commission
rule, that underwriters in a SPAC initial public offering are deemed to
be underwriters in a subsequent de-SPAC transaction under certain
circumstances.
---------------------------------------------------------------------------
\120\ We are also proposing to more closely align the financial
statement disclosure requirements with respect to the private
operating company in any business combination involving a shell
company with the disclosure required in a Form S-1 for an initial
public offering, which would encompass de-SPAC transactions. See
infra Section IV.B.
---------------------------------------------------------------------------
A. Aligning Non-Financial Disclosures in De-SPAC Disclosure Documents
In regard to non-financial statement disclosures, we are proposing
that, if the target company in a de-SPAC transaction is not subject to
the reporting requirements of Section 13(a) or 15(d) of the Exchange
Act, disclosure with respect to such company pursuant to the following
items in Regulation S-K would be required in the registration statement
or schedule filed in connection with the de-SPAC transaction: (1) Item
101 (description of business); (2) Item 102 (description of property);
(3) Item 103 (legal proceedings); (4) Item 304 (changes in and
disagreements with accountants on accounting and financial disclosure);
(5) Item 403 (security ownership of certain beneficial owners and
management, assuming the completion of the de-SPAC transaction and any
related financing transaction); \121\ and (6) Item 701 (recent sales of
unregistered securities).\122\ If the private operating company is a
foreign private issuer,\123\ the proposed rules would include the
option of providing disclosure relating to the private operating
company in accordance with Items 3.C, 4, 6.E, 7.A, 8.A.7, and 9.E of
Form 20-F, consistent with disclosure that could be provided by these
entities in an initial public offering.\124\
---------------------------------------------------------------------------
\121\ We note that Item 18(a)(5) of Form S-4 currently requires
disclosure pursuant to Item 403 regarding the target company and a
SPAC's principal shareholders, through Item 6 of Schedule 14A, in a
Form S-4 that includes a proxy seeking shareholder approval of the
de-SPAC transaction.
\122\ Proposed General Instruction L.2. to Form S-4; Proposed
General Instruction I.2. to Form F-4; Proposed Item 14(f) of
Schedule 14A; Proposed General Instruction K to Schedule TO. We note
that disclosure pursuant to Item 303 (management's discussion and
analysis of financial condition and results of operations) of
Regulation S-K is already required with respect to a non-reporting
target company in Forms S-4 and F-4 and in Schedules 14A and 14C for
a de-SPAC transaction. As proposed, disclosure pursuant to Item 701
of Regulation S-K would be required in Part I (information required
in the prospectus) of Form S-4 and Form F-4, whereas in Form S-1,
the Item 701 disclosure requirement appears under Part II
(information not required in prospectus) of the form.
\123\ See supra note 102.
\124\ Disclosure requirements for foreign private issuers differ
from domestic registrants, including the absence of quarterly
reporting requirements, the use of different forms with different
disclosure provisions, and an ability to present financial
statements in accordance with IFRS instead of U.S. GAAP. In
addition, foreign private issuers are not required to file current
reports on Form 8-K using the Form 8-K disclosure criteria; rather,
they can furnish current reports on Form 6-K applying the disclosure
requirements of that Form. See Foreign Issuer Reporting
Enhancements, Release 33-8959 (Sep. 23, 2008) [73 FR 58300 (Oct. 6,
2008)].
---------------------------------------------------------------------------
The proposed additional information is already required to be
included in a Form 8-K due within four business days of the completion
of the de-SPAC transaction, such that registrants currently should
already be preparing this information in anticipation of this Form 8-K
filing in connection with a de-SPAC transaction.\125\ Aligning the
disclosure requirements in de-SPAC transactions in this manner with
those in initial public offerings would mandate that this additional
information about the private operating company be provided to
shareholders before they make voting, investment, or redemption
decisions in connection with the proposed transactions.\126\ As
proposed, this information would also be available to investors prior
to the inception of trading of the post-business
[[Page 29478]]
combination company's securities on a national securities exchange,
rather than being required in a Form 8-K due within four business days
of the completion of the de-SPAC transaction. Further, if this
disclosure is included in a Form S-4 or Form F-4, any material
misstatements or omissions contained therein would subject the issuers
and other parties to liability under Sections 11 and 12 of the
Securities Act, which would align with the protections afforded to
investors under the Securities Act for disclosures provided in a Form
S-1 or F-1 for an initial public offering.
---------------------------------------------------------------------------
\125\ This Form 8-K is required to include the same information
that would be required for a newly reporting company when filing a
Form 10 under the Exchange Act. See Items 2.01(f), 5.01(a)(8), and
9.01(c) of Form 8-K. In this regard, we note that these items of
Form 8-K each provide that if any disclosure required by these items
has been previously reported, the registrant may identify the filing
in which that disclosure is included instead of including that
disclosure in the Form 8-K.
\126\ In this regard, we note that many, but not all, Forms S-4
and F-4 and Schedules 14A and 14C that are filed in connection with
de-SPAC transactions contain information about the target company as
proposed. The proposed amendments, if adopted, would require that
this information be provided in all de-SPAC transactions subject to
the specialized disclosure requirements in Subpart 1600.
---------------------------------------------------------------------------
Request for Comment
56. Should we require additional information regarding the private
operating company in disclosure documents filed in connection with a
de-SPAC transaction, as proposed? Would these additional disclosures
provide investors with a better understanding of the private operating
company's operations and related risks? Should we require more or less
disclosure regarding the private operating company in the registration
statements or schedules filed in connection with de-SPAC transactions?
57. What are the benefits of providing this information earlier to
investors when they are making voting, investment, and redemption
decisions in connection with a de-SPAC transaction or at or before the
commencement of trading in the post-business combination company's
securities on a securities exchange? Would it be unduly burdensome to
provide this additional information regarding the private operating
company at this earlier point in time?
58. Should a private operating company that would qualify as a
foreign private issuer have the option of providing disclosure in
accordance with certain items of Form 20-F, as proposed?
59. Should we require additional or less information in proposed
Item 1608 and Schedule TO when a SPAC files a Schedule TO in connection
with a de-SPAC transaction? For example, should we require disclosure
regarding management's discussion and analysis of financial condition
and results of operations (Item 303 of Regulation S-K) pursuant to Item
1608 or Schedule TO?
60. Should the proposed disclosure requirements with respect to the
private operating company be scaled to take into account the size,
nature, or certain characteristics of the company?
B. Minimum Dissemination Period
In addition to the need for enhanced disclosure in de-SPAC
transactions, we recognize the importance of ensuring that SPAC
shareholders have adequate time to analyze the information presented in
these transactions. There is currently no federally mandated period in
business combination transactions to provide security holders with a
minimum amount of time to consider proxy statement or other
disclosures.\127\ In view of the unique circumstances surrounding de-
SPAC transactions, we are proposing to amend Exchange Act Rules 14a-6
and 14c-2, as well as to add instructions to Forms S-4 and F-4,\128\ to
require that prospectuses and proxy and information statements filed in
connection with de-SPAC transactions be distributed to shareholders at
least 20 calendar days in advance of a shareholder meeting or the
earliest date of action by consent, or the maximum period for
disseminating such disclosure documents permitted under the applicable
laws of the SPAC's jurisdiction of incorporation or organization if
such period is less than 20 calendar days.\129\ As stated above, SPACs
are organized for the purpose of completing a de-SPAC transaction
within a certain time frame, and as a SPAC approaches the end of this
period, there is less time available for a SPAC to find a candidate for
a business combination transaction, prepare and file the appropriate
de-SPAC disclosure documents with the Commission, disseminate such
documents to its shareholders, receive the requisite shareholder
approval when applicable, and consummate the de-SPAC transaction.
Although the laws of a SPAC's jurisdiction of incorporation or
organization may require the SPAC to send a notice to its shareholders
at least a specified number of days before the shareholder meeting to
approve a proposed business combination transaction, such notices are
generally limited to information regarding the time, place, and purpose
of the meeting, along with a copy or summary of the business
combination agreement.\130\ They do not generally require a minimum
period of time for dissemination of any other information about the
transaction (including any proxy statements or other materials required
by the federal securities laws) to shareholders.\131\ Similarly, such
requirements do not exist in exchange listing standards.\132\ Without a
minimum period for dissemination of prospectuses, proxy statements, and
other materials before a shareholder meeting (or action by consent), a
SPAC and its sponsor may have incentives to provide prospectuses or
proxy or information statements for a de-SPAC transaction to the SPAC's
security holders within an abbreviated time frame, leaving the security
holders with relatively little time to review what are often complex
disclosure documents for these transactions.
---------------------------------------------------------------------------
\127\ In Form S-4 and Form F-4, however, there is a minimum 20-
business day period requirement in sending a prospectus to security
holders prior to a security holder meeting that is applicable when a
registrant incorporates by reference information about the
registrant or the company being acquired into the form. General
Instruction A.2 of Form S-4 and General Instruction A.2 of Form F-4.
\128\ Proposed General Instruction L.3. to Form S-4; Proposed
General Instruction I.3. to Form F-4.
\129\ The proposed amendments would be applicable to Forms S-4
and F-4 and Schedules 14A and 14C. We are not proposing to amend the
20 business day period when a Schedule TO is filed in connection
with a de-SPAC transaction. See supra Section II.F.4.
\130\ See, e.g., DEL. CODE ANN. tit. 8, sec. 251(c) (2022)
(stating, in part, that ``[d]ue notice of the time, place and
purpose of the meeting shall be given to each holder of stock,
whether voting or nonvoting, of the corporation at the stockholder's
address as it appears on the records of the corporation, at least 20
days prior to the date of the meeting [to vote on an agreement of
merger or consolidation]'').
\131\ See R. Franklin Balotti, et al., Delaware Law of
Corporations and Business Organizations, Sec. 9.16 (4th ed. 2022 &
Supp. 2022) (``[t]he only statutory requirements for the notice of
the meeting are that it state the time, place and purpose of the
meeting and that the notice contain a copy of the merger agreement
or a summary of the agreement . . . [i]n practice, of course, many
such meetings will be governed by the federal proxy rules, which
require that a full proxy statement be submitted to the
stockholders.'').
\132\ Although both the NYSE and Nasdaq generally require that
listed companies solicit proxies and provide proxy statements for
all shareholder meetings, neither requires a minimum number of days
between when proxy materials are provided to shareholders and when
the meeting is held. Instead, for example, NYSE Listed Company
Manual Section 402.03 simply ``recommends that a minimum of 30 days
be allowed between the record and meeting dates so as to give ample
time for the solicitation of proxies.''
---------------------------------------------------------------------------
We are proposing a minimum 20-calendar day dissemination period for
prospectuses and proxy and information statements that, in our view,
would provide an important investor protection.\133\ We recognize that
SPACs are often required under their governing
[[Page 29479]]
instruments and applicable exchange listing rules to complete de-SPAC
transactions within a certain time frame and that relying on the safe
harbor we are proposing under the Investment Company Act would also
limit the time frame in which to announce and complete a de-SPAC
transaction.\134\ Nevertheless, given the complexity of the SPAC
structure, the conflicts of interest that are often present in this
structure and the effects of dilution on non-redeeming shareholders,
the proposed 20-calendar day period would establish a minimum time
period for shareholders to review prospectuses and proxy and
information statements in de-SPAC transactions (subject to the carve-
out discussed below),\135\ so that they have sufficient time to
consider the disclosures and to make more informed voting, investment
and redemption decisions.\136\ In the event that the laws of a SPAC's
jurisdiction of incorporation or organization have a provision
applicable to the dissemination of prospectuses and proxy and
information statements required under the federal securities laws, we
are proposing to include a provision that would require a registrant to
satisfy the maximum dissemination period permitted under the applicable
law of such jurisdiction when this period is less than 20 calendar days
to avoid conflicting with such a requirement.\137\
---------------------------------------------------------------------------
\133\ The proposed 20-calendar day period is the same length of
time as the 20-day advance disclosure period in 17 CFR 13e-3(f)(1)
(Exchange Act Rule 13e-3(f)(1)). In adopting a 20-day advance
disclosure requirement for dissemination of documents in connection
with going private transactions, the Commission stated this
requirement was intended to provide reasonable assurance that the
information required to be disclosed to security holders would be
disseminated sufficiently far in advance of the transactions to
permit security holders to make ``an unhurried and informed''
decision. Going Private Transactions by Public Companies or Their
Affiliates, Release No. 33-6100 (Aug. 2, 1979) [44 FR 46736 (Aug. 8,
1979)].
\134\ See infra Section VI.B.3.
\135\ When a registrant incorporates by reference information
about the registrant or the company being acquired in the Form S-4
or F-4 for a de-SPAC transaction, the 20-business day period in Form
S-4 and Form F-4, which we are not proposing to amend, would
continue to be applicable. General Instruction A.2 of Form S-4 and
General Instruction A.2 of Form F-4.
\136\ The proposed minimum dissemination period is intended to
apply to the dissemination of certain Commission filings in
connection with de-SPAC transactions and is not intended to impact
any requirements of the jurisdiction of incorporation or
organization regarding the notice of an annual or special meeting,
such as Section 251(c) of the Delaware General Corporation Law.
\137\ For example, if the jurisdiction has no minimum
dissemination period and does not have a maximum dissemination
period, the minimum 20-day period, as proposed, would apply. If the
jurisdiction has a minimum dissemination period of less than 20 days
(e.g., 10 days) and does not have a maximum dissemination period,
the minimum 20-day period, as proposed, would apply. If the
jurisdiction has a minimum dissemination period of less than 20 days
(e.g., 10 days) and a maximum dissemination period of less than 20
days (e.g., 15 days), the maximum dissemination period under the
jurisdiction would apply. If the jurisdiction has no minimum
dissemination period and a maximum dissemination period of less than
20 days (e.g., 15 days), the maximum dissemination period under the
jurisdiction would apply.
---------------------------------------------------------------------------
Request for Comment
61. Should we require a minimum dissemination period for
prospectuses and proxy or information statements in de-SPAC
transactions as proposed? Is a 20-day period necessary or appropriate
to enable shareholders to review and consider these disclosure
documents relating to a de-SPAC transaction? Should this 20 calendar
day period be longer or shorter? Should the minimum dissemination
period be based on business days (e.g., 20 business days) instead of
calendar days as proposed?
62. Would there be timing concerns on the part of SPACs in meeting
the proposed minimum 20-day dissemination period? Should we include an
exception for the applicable laws of the SPAC's jurisdiction of
incorporation or organization, as proposed? Should we include other
exceptions to the proposed minimum 20-day dissemination period?
63. Would additional guidance be helpful in determining how to
apply this proposed requirement?
64. Are there additional or alternative requirements we should
adopt in connection with the dissemination of disclosure documents in a
de-SPAC transaction?
C. Private Operating Company as Co-Registrant to Form S-4 and Form F-4
Under Section 6(a) of the Securities Act, each ``issuer'' must sign
a Securities Act registration statement.\138\ The Securities Act
broadly defines the term ``issuer'' to include every person who issues
or proposes to issue any securities.\139\ Currently, when a SPAC offers
and sells its securities in a registered de-SPAC transaction, only the
SPAC, its principal executive officer or officers, its principal
financial officer, its controller or principal accounting officer, and
at least a majority of its board of directors (or persons performing
similar functions) are required to sign the registration statement for
the transaction. In these situations, the private operating company,
for which the de-SPAC transaction effectively serves as its initial
public offering, and its officers and directors do not sign the
registration statement that contains disclosure about the private
operating company's business and financial results and thereby may
avoid liability as signatories to the registration statement under
Section 11 of the Securities Act, unlike if the private operating
company had conducted a traditional initial public offering registered
on Form S-1 or Form F-1.\140\
---------------------------------------------------------------------------
\138\ In addition, Section 6(a) requires the issuer's principal
executive officer or officers, principal financial officer,
comptroller or principal accounting officer, and the majority of its
board of directors or persons performing similar functions (or, if
there is no board of directors or persons performing similar
functions, by the majority of the persons or board having the power
of management of the issuer) to sign a registration statement. When
the issuer is a foreign entity, the registration statement must also
be signed by the issuer's duly authorized representative in the
United States.
\139\ Section 2(a)(4) of the Securities Act.
\140\ Even when not liable under Section 11, the private
operating company and its affiliates, however, may be subject to
enforcement actions by the Commission, including those under
Securities Act Section 17(a) and Exchange Act Section 10(b) and Rule
10b-5, as well as potential liability under 17 CFR 240.10b-5
(Exchange Act Rule 10b-5) in private rights of action. See, e.g., In
the Matter of Momentus, Inc., et al., Release No. 34-92391 (July 13,
2021) (settled proceeding charging privately held company with
violations of Section 17(a) of the Securities Act and Section 10(b)
of the Exchange Act and Rule 10b-5 for, among other things,
allegedly materially false statements and omissions in the
registration statement/proxy statement filed in connection with a
business combination with a publicly traded SPAC).
---------------------------------------------------------------------------
We are proposing to amend Form S-4 and Form F-4 to require that the
SPAC and the target company be treated as co-registrants when these
registration statements are filed by the SPAC in connection with a de-
SPAC transaction.\141\ In view of the protections that the Securities
Act provides to investors in a traditional initial public offering, it
is appropriate in our view to interpret Section 6(a) to encompass the
target company, in addition to the SPAC, as an issuer for purposes of
Section 6(a) and the signature requirements of Form S-4 or Form F-4.
---------------------------------------------------------------------------
\141\ Proposed General Instruction L.4. to Form S-4; Proposed
General Instruction I.4. to Form F-4. Section 6(a) of the Securities
Act uses the term ``issuer,'' but Securities Act registration
statement forms use the term ``registrant.'' The term ``registrant''
is defined in Rule 405 as ``the issuer of the securities for which
the registration statement is filed.'' As a co-registrant of the
Form S-4 or Form F-4, the private operating company would have an
Exchange Act reporting obligation pursuant to Section 15(d) of the
Exchange Act following the effectiveness of the registration
statement.
---------------------------------------------------------------------------
A de-SPAC transaction marks the introduction of the private
operating company to the U.S. public securities markets, and investors
look to the business and prospects of the private operating company in
evaluating an investment in the combined company.\142\ Accordingly, it
is the private operating company that, in substance, issues or proposes
to issue its securities, as securities of the newly combined public
company.\143\ While
[[Page 29480]]
similar policy considerations can arise in other business combination
contexts, given the substantial increase in the number of SPAC
transactions in recent years, the number of shareholders typically
impacted by such transactions, and concerns that are unique to the SPAC
structure, we are concerned that a narrow approach to registrant status
in de-SPAC transactions could undermine the statutory liability scheme
that Congress applied to initial public offerings of securities.
---------------------------------------------------------------------------
\142\ That is, the operations of the private company constitute
the business and the basis for the financial and other disclosures
of the newly combined public company following a de-SPAC
transaction.
\143\ The legislative history of the broad definition of the
term ``issuer'' in the Securities Act suggests that the
identification of the ``issuer'' of a security should be based on
the economic reality of a transaction to ensure that, in service of
the disclosure purpose of the Act, the person(s) that have access to
the information relevant to investors are responsible as an
``issuer'' for providing such information. See, e.g., H.R. REP. 73-
85, 12 (``Special provisions govern the definition of `issuer' in
connection with security issues of an unusual character. . . . [For
example, in the case of an investment trust], although the actual
issuer is the trustee, the depositor is the person responsible for
the flotation of the issue. Consequently, information relative to
the depositor and to the basic securities is what chiefly concerns
the investor--information respecting the assets and liabilities of
the trust rather than of the trustee.'').
---------------------------------------------------------------------------
We are proposing to amend the signature instructions to Form S-4
and F-4 to state that, if a SPAC is offering its securities in a de-
SPAC transaction that is registered on the form, the term
``registrant'' for purposes of the signature requirements of the form
would mean the SPAC and the target company.\144\ This requirement would
make the additional signatories to the form, including the principal
executive officer, principal financial officer, controller/principal
accounting officer, and a majority of the board of directors or persons
performing similar functions of the target company, liable (subject to
a due diligence defense for all parties other than the SPAC and the
target company), for any material misstatements or omissions in the
Form S-4 or Form F-4 and would thereby mitigate the risk that the
target company's directors and management would not be held accountable
to investors for the accuracy of the disclosures in the registration
statement due to the absence of the deterrent threat of liability under
Section 11.\145\ Moreover, this proposed requirement could improve the
reliability of the disclosure provided to investors in connection with
de-SPAC transactions by creating strong incentives for such additional
signing persons to review more closely the disclosure about the target
company in these registration statements and to conduct more searching
due diligence in connection with de-SPAC transactions and related
registration statements.
---------------------------------------------------------------------------
\144\ The Commission has previously specified who constitutes
the ``registrant'' for purposes of signing a Securities Act
registration statement in certain contexts. For example, an
instruction in Forms S-4 and F-4 requires two or more existing
corporations to be deemed co-registrants when they will be parties
to a consolidation and the securities to be offered are those of a
corporation not yet in existence at the time of filing. See
Instruction 3 to the signature page for Form S-4 and Form F-4 (``If
the securities to be offered are those of a corporation not yet in
existence at the time the registration statement is filed which will
be a party to a consolidation involving two or more existing
corporations, then each such existing corporation shall be deemed a
registrant and shall be so designated on the cover page of this
Form, and the registration statement shall be signed by each such
existing corporation and by the officers and directors of each such
existing corporation as if each such existing corporation were the
registrant.'').
\145\ In this regard, we note that the target company's
directors and executive officers are the parties most similarly
situated to the directors and officers of a private company
conducting a traditional initial public offering, in terms of their
knowledge of, and background in, the company going public through a
de-SPAC transaction.
---------------------------------------------------------------------------
Request for Comment
65. Should we amend Form S-4 and Form F-4, as proposed, to require
that the SPAC and the private operating company be treated as co-
registrants when the registration statement is filed by the SPAC in
connection with a de-SPAC transaction?
66. Would amending Form S-4 and Form F-4 in this manner improve the
disclosure provided in connection with de-SPAC transactions that are
registered on these forms?
67. Should the proposed amendment to Form S-4 and Form F-4 be
extended to apply to all business combination transactions where a
shell company, other than a business combination related shell company,
is the acquirer?
68. Should the sponsor of a SPAC also be required to sign a Form S-
4 or Form F-4 filed in connection with a de-SPAC transaction, as well
as a Form S-1 or Form F-1 filed for a SPAC's initial public offering,
in view of, among other things, the sponsor's control over the SPAC and
the sponsor's role in preparing these registration statements? Would
such a requirement be consistent with the Commission's approach in
requiring a majority of the board of directors of any corporate general
partner to sign a registration statement when the registrant is a
limited partnership?
69. Should we also adopt corresponding amendments to Form S-1 and
Form F-1 in the event that these forms are used by a SPAC for a de-SPAC
transaction?
D. Re-Determination of Smaller Reporting Company Status
Smaller reporting companies are a category of registrants that are
eligible for scaled disclosure requirements in Regulation S-K and
Regulation S-X and in various forms under the Securities Act and the
Exchange Act.\146\ For example, smaller reporting companies are not
required to provide quantitative and qualitative information about
market risk pursuant to Item 305 of Regulation S-K.\147\ In general, a
smaller reporting company is a company that is not an investment
company, an asset-backed issuer or a majority-owned subsidiary of a
parent that is not a smaller reporting company, and had (1) a public
float of less than $250 million, or (2) had annual revenues of less
than $100 million during the most recently completed fiscal year for
which audited financial statements are available and either had no
public float or a public float of less than $700 million.\148\ Smaller
reporting company status is determined at the time of filing an initial
registration statement under the Securities Act or Exchange Act for
shares of common equity and is re-determined on an annual basis. Once a
company determines that it is not a smaller reporting company, it will
retain this status unless it determines, when making its annual
determination, that its public float was less than $200 million or,
alternatively, that its public float and annual revenues fell under
certain thresholds.\149\
---------------------------------------------------------------------------
\146\ See, e.g., 17 CFR 229.10(f) (Item 10(f) of Regulation S-
K); Rules 8-01, 8-02, 8-03, 8-07, and 8-08 of Regulation S-X; Item
1A of Form 10 and Form 10-K; Item 3.02 of Form 8-K. A foreign
private issuer is not eligible to use the scaled disclosure
requirements for smaller reporting companies unless it uses the
forms and rules designated for domestic issuers and provides
financial statements prepared in accordance with U.S. GAAP.
Instruction 2 to Item 10(f); Instruction 2 to definition of
``smaller reporting company'' in Securities Act Rule 405 and
Exchange Act Rule 12b-2.
\147\ Item 305(e) of Regulation S-K.
\148\ The definition of ``smaller reporting company'' is set
forth in Securities Act Rule 405, Exchange Act Rule 12b-2 and Item
10(f) of Regulation S-K.
\149\ See Item 10(f)(2)(iii) of Regulation S-K; Securities Act
Rule 405; Exchange Act Rule 12b-2.
---------------------------------------------------------------------------
Currently, most SPACs qualify as smaller reporting companies,\150\
and a post-business combination company after a de-SPAC transaction is
permitted by rule \151\ to retain this status until the next annual
determination date when a SPAC is the legal acquirer of the private
operating company in a de-SPAC transaction. The absence of a re-
determination of smaller reporting company status upon the completion
of these de-SPAC transactions permits certain post-business combination
companies to avail themselves of scaled disclosure and other
accommodations when they otherwise would not have
[[Page 29481]]
qualified as a smaller reporting company had they become public
companies through a traditional initial public offering.
---------------------------------------------------------------------------
\150\ See infra Section IX.B.2.f.
\151\ See Item 10(f)(2) of Regulation S-K; Securities Act Rule
405; Exchange Act Rule 12b-2.
---------------------------------------------------------------------------
In view of the informational asymmetries that result when a private
operating company chooses to go public through such a de-SPAC
transaction and the increasing prevalence of these transactions as a
vehicle for private operating companies to become reporting companies
under the Exchange Act, we are proposing to require a re-determination
of smaller reporting company status following the consummation of a de-
SPAC transaction. As proposed, this re-determination of smaller
reporting company status would occur prior to the time the post-
business combination company makes its first Commission filing, other
than the Form 8-K with Form 10 information,\152\ with the public float
threshold measured as of a date within four business days after the
consummation of the de-SPAC transaction and the revenue threshold
determined by using the annual revenues of the private operating
company as of the most recently completed fiscal year for which audited
financial statements are available.\153\ The applicable thresholds in
the current definition would remain unchanged.
---------------------------------------------------------------------------
\152\ A Form 8-K with Form 10 information is filed pursuant to
Items 2.01(f), 5.01(a)(8), and/or 9.01(c) of the form.
\153\ Proposed Item 10(f)(2)(iv) and the proposed amendments to
the definition of ``smaller reporting company'' in Securities Act
Rule 405 and Exchange Act Rule 12b-2. The float determination would
be required to precede the first Commission filing after the Form 8-
K with Form 10 information.
---------------------------------------------------------------------------
The proposed four-business day window to calculate the public float
threshold following a de-SPAC transaction would end on the due date for
the Form 8-K with Form 10 information that a post-business combination
company is required to file after the completion of a de-SPAC
transaction. The proposed four-business day period would provide some
flexibility for issuers to measure public float, compared to the annual
re-determination of smaller reporting company status,\154\ and would
allow for a more accurate reflection of a post-business combination
company's public float, in view of the limited trading history of the
common equity securities of the post-business combination company
following a de-SPAC transaction.
---------------------------------------------------------------------------
\154\ In re-determining smaller reporting company status
annually, a registrant is required to measure its public float as of
the last business day of its most recently completed second fiscal
quarter.
---------------------------------------------------------------------------
We are proposing to require a post-business combination company to
reflect this re-determination of smaller reporting company status in
its first periodic report (Form 10-K or Form 10-Q) following a de-SPAC
transaction, which would provide the post-business combination company
with time to prepare for any loss of the scaled disclosure and other
accommodations available to smaller reporting companies.\155\ As
proposed, a post-business combination company that fails to qualify for
smaller reporting company status after a de-SPAC transaction would
remain unqualified until its next annual re-determination of this
status.
---------------------------------------------------------------------------
\155\ For example, as proposed, a post-business combination
company would be required to re-determine whether it qualifies as a
smaller reporting company, using the initial qualification
thresholds in the definition, prior to the time the company makes
its first Commission filing (e.g., a Form 8-K, registration
statement or periodic report) after the filing of a Form 8-K with
Form 10 information, with its public float measured as of a date
within four business days after the completion of the de-SPAC
transaction. The company would not be required to reflect this re-
determination of smaller reporting company status in any Commission
filing until it files its first periodic report (Form 10-K or Form
10-Q) following the de-SPAC transaction. Thus, if a SPAC qualified
as a smaller reporting company before a de-SPAC transaction and was
the legal acquirer in the de-SPAC transaction, the post-business
combination company would continue to be able to rely on the scaled
disclosure accommodations for smaller reporting companies when
filing a registration statement between the re-determination date
and the post-business combination company's first periodic report.
---------------------------------------------------------------------------
Request for Comment
70. As proposed, the re-determination of smaller reporting company
status must be based on public float measured as of a date within four
business days after the consummation of the de-SPAC transaction and the
annual revenues of the private operating company as of the most
recently completed fiscal year for which audited financial statements
are available. Should we require the re-determination of smaller
reporting company status upon the completion of a de-SPAC transaction,
as proposed? Should public float be determined within a different time
frame (e.g., 30 days) or through a different method (e.g., as the
average over a certain period)? Should the annual revenues of the
private operating company be used in determining whether the revenue
threshold has been met, as proposed?
71. Should we require a post-business combination company following
a de-SPAC transaction to reflect the re-determination of smaller
reporting company status in its next periodic report, as proposed?
Alternatively, should we require a post-business combination company to
reflect the re-determination of smaller reporting company status at an
earlier or later point in time after the completion of a de-SPAC
transaction, such as in the first periodic report that covers the
period in which the de-SPAC transaction occurred (e.g., when a de-SPAC
transaction is completed after the end of a fiscal year but prior to
the due date of the Form 10-K for that fiscal year)? Should we provide
an accommodation if a de-SPAC transaction is completed close in time to
the due date for the registrant's first periodic report?
72. To the extent that a post-business combination company no
longer qualifies for smaller reporting company status as a result of
the proposed re-determination of this status following a de-SPAC
transaction, would the proposed re-determination make it more difficult
for such a company to file a registration statement after the filing of
its first periodic report that complies with the disclosure
requirements applicable to non-smaller reporting companies? If so,
should we provide any accommodations for this scenario?
73. Should we make any additional changes with respect to re-
determining smaller reporting company status after the completion of a
de-SPAC transaction? For example, should we replace the public float
test with a revenue test for this purpose? Should we provide any
guidance with respect to how to apply this proposal?
74. Should we similarly require a re-determination of emerging
growth company status, accelerated filer status, large accelerated
filer status and/or foreign private issuer status upon the completion
of a de-SPAC transaction?
E. PSLRA Safe Harbor
The PSLRA provides a safe harbor for forward-looking statements
under the Securities Act and the Exchange Act, under which a company is
protected from liability for forward-looking statements in any private
right of action under the Securities Act or Exchange Act when, among
other things, the forward-looking statement is identified as such and
is accompanied by meaningful cautionary statements.\156\ The safe
harbor is not available, however, when a forward-looking statement is
made in connection with an offering by a blank check company or an
initial public offering.\157\
---------------------------------------------------------------------------
\156\ Section 27A of the Securities Act and Section 21E of the
Exchange Act. The PSLRA does not impact the Commission's ability to
bring enforcement actions relating to forward-looking statements.
\157\ Section 27A(b) of the Securities Act and Section 21E(b) of
the Exchange Act. In addition, the safe harbor is not available for
an offering by a penny stock issuer, a roll-up transaction, a going
private transaction, an offering by a partnership or a limited
liability company, a tender offer, or an offering by an issuer
convicted of specified securities law violations or subject to
certain injunctive or cease and desist actions.
---------------------------------------------------------------------------
[[Page 29482]]
For purposes of the safe harbor, the term ``blank check company''
and certain other terms \158\ ``have the meanings given those terms by
rule or regulation of the Commission.'' \159\ The Commission has
defined the term ``blank check company'' for purposes of and in Rule
419 as a development stage company that is issuing ``penny stock,'' as
defined in Exchange Act Rule 3a51-1, and that has no specific business
plan or purpose, or has indicated that its business plan is to merge
with or acquire an unidentified company or companies, or other entity
or person.\160\ This definition, which has not been amended since it
was adopted by the Commission in 1992, predates the enactment of the
PSLRA in 1995. SPACs that raise more than $5 million in a firm
commitment underwritten initial public offering are excluded from this
definition of ``blank check company'' because they are not selling
``penny stock.'' \161\
---------------------------------------------------------------------------
\158\ These other terms are ``rollup transaction,''
``partnership,'' ``limited liability company,'' ``executive officer
of an entity,'' and ``direct participation investment program.''
\159\ Section 27A(i)(7) of the Securities Act and Section
21E(i)(5) of the Exchange Act.
\160\ See supra notes 3 and 13. The statutory definition of
``blank check company'' appears in Section 7(b)(3) of the Securities
Act.
\161\ See supra note 12.
---------------------------------------------------------------------------
Projections of the private operating company's performance are
typically prepared and disclosed in connection with a de-SPAC
transaction. Some market participants are of the view that the PSLRA
safe harbor for forward-looking statements is available in de-SPAC
transactions when a SPAC is not a blank check company under Rule 419
and thus may not exercise the same level of care in preparing forward-
looking statements, such as projections, as in a traditional initial
public offering.\162\ As noted above, a number of commentators have
raised concerns about the use of projections that they believe to be
unreasonable in de-SPAC transactions.\163\
---------------------------------------------------------------------------
\162\ See, e.g., Matt Levine, Money Stuff: Maybe SPACs Are
Really IPOs, Bloomberg, Apr. 12, 2021; Eliot Brown, Electric-Vehicle
Startups Promise Record-Setting Revenue Growth, The Wall Street
Journal, Mar. 15, 2021; Public Statement on SPACs, IPOs and
Liability Risk under the Securities Laws (Division of Corporation
Finance, Apr. 8, 2021).
\163\ See supra note 33.
---------------------------------------------------------------------------
To address concerns about the use of forward-looking statements,
such as projections, in connection with de-SPAC transactions, and
pursuant to the statutory authority under the PSLRA to define ``blank
check company'' by Commission rule or regulation, we are proposing to
amend the definition of ``blank check company'' for purposes of the
PSLRA to remove the ``penny stock'' condition and to define the term as
``a company that has no specific business plan or purpose or has
indicated that its business plan is to engage in a merger or
acquisition with an unidentified company or companies, or other entity
or person.'' \164\ As discussed above, private companies are
increasingly using de-SPAC transactions as a mechanism to become public
companies. For purposes of the PSLRA, we see no reason to treat
forward-looking statements made in connection with de-SPAC transactions
differently than forward-looking statements made in traditional initial
public offerings, in that both instances involve private issuers
entering the public U.S. securities markets for the first time and
similar informational asymmetries that exist between these issuers (and
their insiders and early investors) and public investors. Moreover, we
see no reason to treat blank check companies differently for purposes
of the PSLRA safe harbor depending on whether they raise more than $5
million in a firm commitment underwritten initial public offering and
thus are not selling penny stock.
---------------------------------------------------------------------------
\164\ We are also proposing to amend the definition to remove
the reference to ``development stage company'' because the reference
would be unnecessary for purposes of the proposed definition.
---------------------------------------------------------------------------
Amending the definition of ``blank check company'' in this manner
would clarify that the statutory safe harbor in the PSLRA is not
available for forward-looking statements, such as projections, made in
connection with de-SPAC transactions involving an offering of
securities by a SPAC or other issuer that meets the definition of
``blank check company'' as amended, such that forward-looking
statements by SPACs, such as statements regarding the projections of
target private operating companies in these transactions, would not
fall under the safe harbor.\165\ The proposed amendment would also
eliminate the current overlap in the safe harbor in regard to the
exclusion for offerings by blank check companies and the exclusion for
penny stock issuers.\166\ To avoid multiple definitions for the term
``blank check company,'' we are proposing to amend Rule 419 in a manner
that would otherwise retain the current scope of the rule. We are also
proposing to amend the references to ``blank check company'' in various
Securities Act rules to ``blank check company issuing penny stock,'' as
such term would be defined in Securities Act Rule 405, to maintain the
current scope of these rules.\167\
---------------------------------------------------------------------------
\165\ Forward-looking statements made by target private
operating companies do not fall under the safe harbor, because the
safe harbor is not available to companies that are not subject to
the reporting requirements of Section 13(a) or 15(d) of the Exchange
Act at the time that the statement is made. Further, the safe harbor
would not be available to the subset of shell companies that meet
the amended definition of ``blank check company'' (i.e., that has no
specific business plan or purpose or has indicated that its business
plan is to engage in a merger or acquisition with an unidentified
company or companies, or other entity or person).
\166\ The exclusion in the safe harbor for offerings by ``blank
check companies'' is subsumed by the exclusion for penny stock
issuers, in that the term ``blank check company,'' as currently
defined in Rule 419, is ``a development stage company that . . . is
issuing `penny stock.' ''
\167\ See proposed amendments to Rules 137, 138, 139, 163A, 164,
174, 430B, and 437a. As proposed, the term ``blank check company
issuing penny stock'' would be defined as a company that is subject
to Rule 419. Due to current Federal Register formatting
requirements, we are also proposing technical changes to Rule 163A
and Rule 164 to move the Preliminary Note(s) in these rules to
introductory paragraphs of the respective rules.
---------------------------------------------------------------------------
Request for Comment
75. Should we define ``blank check company'' in Rule 405, as
proposed? Should we include a reference in the definition to
``development stage company'' or the issuance of ``penny stock''?
Should we consider other changes to the proposed definition?
76. Would the proposed amendments improve the quality of
projections in connection with de-SPAC transactions by clarifying that
the safe harbor under the PSLRA is unavailable? Would the proposed
amendment discourage some SPACs from disclosing projections in
connection with these transactions or affect the ability of SPACs or
target companies to comply with their obligations under the laws of
their jurisdiction of incorporation or organization to disclose
projections used by the board of directors or the companies' fairness
opinion advisers?
77. As an alternative approach, should we issue an interpretation
addressing whether a de-SPAC transaction is an ``initial public
offering'' for purposes of the PSLRA?
78. Would including the proposed Rule 405 definition of ``blank
check company'' in Rule 419 create confusion for registrants and
investors? Should we consider retaining a separate definition of
``blank check company'' for purposes of Rule 419? If so, why?
79. Should we amend the references to ``blank check company'' in
Securities Act Rules 137, 138, 139, 163A, 164, 174, 430B and 437a to
refer to ``blank check company issuing penny stock,'' as proposed?
[[Page 29483]]
80. Should we amend Rule 419 so that some or all of its conditions
are applicable to SPACs that raise more than $5 million in a firm
commitment underwritten initial public offering? If so, which
conditions? What would be the advantages and drawbacks of such an
approach? Should we amend the definition of ``penny stock'' to bring
more SPACs within the scope of Rule 419?
81. Are there other rule amendments we should consider in
connection with the PSLRA?
F. Underwriter Status and Liability in Securities Transactions
Underwriters form an essential link in the distribution of
securities from an issuer to investors. The term ``underwriter'' is
broadly defined in Section 2(a)(11) of the Securities Act to mean ``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.'' \168\ The
determination of whether a particular person is an ``underwriter'' does
not depend on the person's business but rather on that person's
relationship to a particular securities offering. Any person whose
activities with respect to any given offering fall within one of the
prongs of the Section 2(a)(11) definition is deemed to meet the
statutory definition of underwriter--commonly known as a ``statutory
underwriter.'' \169\ Congress enacted a broad definition of
``underwriter'' in order to ``include as underwriters all persons who
might operate as conduits for securities being placed into the hands of
the investing public.'' \170\ Correspondingly, the Commission's
longstanding view is that, depending on facts and circumstances, any
person, including an individual investor who is not a professional in
the securities business, can be an ``underwriter'' within the meaning
of the Securities Act if that person acts as a link in a chain of
transactions through which securities are distributed from an issuer or
its control persons to the public.\171\
---------------------------------------------------------------------------
\168\ 15 U.S.C. 77b(a)(11). Section 2(a)(11) states that the
term ``issuer'' shall include, in addition to an issuer, any person
directly or indirectly controlling or controlled by the issuer, or
any person under direct or indirect common control with the issuer.
Therefore, any person who purchased securities from an affiliate of
an issuer is an underwriter under Section 2(a)(11) if that person
purchased with a view to the distribution of the securities.
\169\ See 2 Louis Loss (late), Joel Seligman, and Troy Paredes,
Securities Regulation 3.A.3 (6th ed. 2019) (``The term underwriter
is defined not with reference to the particular person's general
business but on the basis of his or her relationship to the
particular offering. . . . Any person who performs one of the
specified functions in relation to the offering is a statutory
underwriter even though he or she is not a broker or dealer.'').
\170\ Thomas Lee Hazen, The Law of Securities Regulation,
section 4:98.
\171\ 17 CFR 230.144, Preliminary Note; Notice of Adoption of
Rule 144 Relating to the Definition of the Terms ``Underwriter'' in
Sections 4(1) and 2(11) and ``Brokers Transactions'' in Section 4(4)
of the Securities Act of 1933, Adoption of Form 144, and Rescission
of Rules 154 and 155 Under That Act, Release No. 33-5223 (Jan. 11,
1972) [37 FR 591 (Jan. 13, 1972)].
---------------------------------------------------------------------------
As intermediaries between an issuer and the investing public,
underwriters play a critical role as ``gatekeepers'' to the public
markets.\172\ Historically, in initial public offerings, where the
investing public might be unfamiliar with a particular issuer,
financial firms that act as underwriters would lend their well-known
name to support that issuer's offering. Where public investors may not
have been inclined to invest with the company seeking to conduct a
public offering, they could take comfort in the fact that a large,
well-known financial institution, acting as underwriter, was including
its name on the first page of the issuer's prospectus.\173\ In
exchange, in a firm commitment underwritten offering, the underwriters
earn the ``gross spread'' between the price stated on the cover of the
prospectus (the price at which the underwriters will sell the issuer's
shares to the public for the first time) and the price at which the
underwriters are able to negotiate with the issuer for the initial
purchase of the issuer's shares.\174\
---------------------------------------------------------------------------
\172\ See, e.g., Ronald J. Gilson & Reinier Kraakman, The
Mechanisms of Market Efficiency, 70 Va. L. Rev. 549, 620 (1984);
Coffee, supra note 34, at 302 n. 1, 308 nn.13-14; John C. Coffee,
Jr., Brave New World?: The Impact(s) of the internet on Modern
Securities Regulation, 52 Bus. Law. 1195, 1210-13, 1232-33 (1999)
(each discussing the role of underwriters as ``gatekeepers'' or
``reputational intermediaries''). See also Securities Act Concepts
and Their Effects of Capital Formation, Release No. 33-7314 (July
25, 1996) [61 FR 40044 (July 31, 1996)] (discussing the role of
gatekeepers in maintaining the quality of disclosure); Michael P.
Dooley, The Effects of Civil Liability on Investment Banking and the
New Issues Market, 58 Va. L. Rev. 776 (1972) (``The most important
function performed during origination is the selection of candidates
for public investment. The decision to underwrite a particular issue
is normally made only after careful investigation of the issuer and
evaluation of its prospects. Not all corporations are able to win
sponsorship of proposed flotations, and prestigious underwriters
reject many more candidates than they accept. After initially
deciding to sponsor a flotation, the managing underwriter must
conduct another, more intensive investigation into the issuer's
affairs in order to satisfy the duty to conduct a `reasonable
investigation' imposed on underwriters by section 11 of the 1933 Act
. . . [t]he screening and investigative processes employed in
origination should weed out those prospective issuers least likely
to make productive use of publicly invested funds and should
identify elements of risk in those issues which are selected and
presented to the public. The successful performance of these
functions is important to the protection of investors and to the
optimum allocation of economic resources.'').
\173\ See, e.g., Harold S. Bloomenthal & Samuel Wolff, Due
diligence defenses--Underwriter's responsibilities and liabilities,
3B Sec. & Fed. Corp. Law Sec. 12:42 (2d ed.) (``The managing or
initiating underwriter plays a critical role in determining access
to capital markets. The decision of a particular investment banking
firm to put together an underwriting syndicate in order to float an
issue of securities or to refrain from doing so for a particular
issuer obviously has significance beyond investors since it
determines to a degree the shape of our economy. However, it has
specific and immediate significance to members of the investing
public in that in large part reliance is being placed on such
underwriters to screen the multitude of issuers seeking access to
the capital markets.'').
\174\ SPACs initially engage in firm commitment underwritten
offerings in order to first sell their securities to the public. See
supra Section I. However, as we further discuss below, the
compensation structure for SPAC initial public offerings is
generally different than that in traditional firm commitment
offerings because a significant portion of the compensation is
deferred.
---------------------------------------------------------------------------
An underwriter's participation in an issuer's offering also exposes
the underwriter to potential liability under the Securities Act. The
civil liability provisions of the Securities Act reflect the unique
position underwriters occupy in the chain of distribution of securities
and provide strong incentives for underwriters to take steps to help
ensure the accuracy of disclosure in a registration statement. Section
11 of the Securities Act imposes on underwriters, among other parties
identified in Section 11(a), civil liability for any part of the
registration statement, at effectiveness, which contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, to any person acquiring such security.\175\
Similarly, Section 12(a)(2) imposes liability upon anyone, including
underwriters, who offers or sells a security, by means of a prospectus
or oral communication, which includes an untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they were
made, not misleading, to any person purchasing such security from
them.\176\ These provisions provide significant investor protections to
those who acquire securities sold pursuant to a registration statement
by providing tools to hold companies, underwriters, and other parties
accountable for misstatements and omissions in connection with public
offerings of
[[Page 29484]]
securities.\177\ As a result, anyone who might be named as a potential
defendant in these suits has strong incentives to take the necessary
steps to avoid such liability.
---------------------------------------------------------------------------
\175\ 15 U.S.C. 77k.
\176\ 15 U.S.C. 77l(a)(2).
\177\ See William O. Douglas & George E. Bates, The Federal
Securities Act of 1933, 43 Yale L.J. 171 (1933) (``The civil
liabilities imposed by the Act are not only compensatory in nature
but also in terrorem. They have been set high to guarantee that the
risk of their invocation will be effective in assuring that the
`truth about securities' will be told.'').
---------------------------------------------------------------------------
One defense available to an underwriter in a distribution is the
``due diligence'' defense, which shields an underwriter from liability
if it can establish that, after reasonable investigation, the
underwriter had reasonable ground to believe and did believe, at the
time the registration statement became effective, that the statements
therein were true and that there was no omission to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading.\178\ To establish its ``due diligence''
defense, an underwriter must establish that it exercised reasonable
care in verifying the statements in the registration statement.
Underwriters in a traditional initial public offering are therefore
motivated to take the investigative steps necessary to establish the
``due diligence'' defense.\179\ The statutory provision of a due
diligence defense appears to reflect an intent to improve the standards
of conduct to which persons associated with the distribution of
securities are to be held by imposing upon them standards of ``honesty,
care, and competence.'' \180\ It was believed that the imposition of
civil liability under the Securities Act upon participants in a
distribution would cause them to exercise the care necessary to assure
the accuracy of the statements in the registration statement.\181\
---------------------------------------------------------------------------
\178\ See Section 11(b)(3) of the Securities Act. [15 U.S.C.
77k(b)(3).].
\179\ Similarly, Section 12(a)(2) of the Securities Act provides
a defense for defendants who, in the exercise of ``reasonable
care,'' could not have known of the alleged misstatement or omission
(15 U.S.C. 77l(a)(2)). Courts generally have construed these two
defenses similarly. See, e.g., In re WorldCom Inc. Sec. Litig., 346
F. Supp. 2d 628, 663-64 (S.D.N.Y. 2004).
\180\ H.R. No. 85, 73d Cong., 1st Sess. (1933) (From the
Introductory Statement to the Report submitted by Mr. Rayburn,
Committee on Interstate and Foreign Commerce: ``Honesty, care, and
competence are the demands of trusteeship. These demands are made by
the bill on the directors of the issues, its experts, and the
underwriters who sponsor the issue. If it be said that the
imposition of such responsibilities upon these persons will be to
alter corporate organization and corporate practice in this country,
such a result is only what your committee expects.'').
\181\ Id. (``The duty of care to discover varies in its demands
upon participants in security distribution with the importance of
their place in the scheme of distribution and with the degree of
protection that the public has a right to expect.''). See also New
High Risk Ventures, Release No. 33-5275 (July 27, 1972) [37 FR 16011
(Aug. 9, 1972)] (discussing the Commission's views that Section 11
was designed by Congress to incentivize persons associated with the
distribution of securities to ``exercise the `honesty, care and
competence' necessary to assure the accuracy of the [s]tatements in
the registration statement'').
---------------------------------------------------------------------------
Consistent with this intent, the Commission has stated that the due
diligence efforts performed by underwriters are central to the
integrity of our disclosure system.\182\ The investing public relies on
underwriters to ``screen the multitude of issuers seeking access to the
capital markets'' and expects them to verify the accuracy of the
information in the registration statement.\183\ Moreover, although the
Securities Act does not expressly require an underwriter to conduct a
due diligence investigation, the Commission has long expressed the view
that underwriters nonetheless have an affirmative obligation to conduct
reasonable due diligence.\184\ The Commission has stated that ``an
underwriter [in a securities offering] impliedly represents that he has
made such an investigation [of the accuracy of the information in the
registration statement] in accordance with professional standards'' and
``[i]nvestors properly rely on this added protection which has a direct
bearing on their appraisal of the reliability of the representations in
the prospectus.'' \185\
---------------------------------------------------------------------------
\182\ See, e.g., Circumstances Affecting the Determination of
What Constitutes Reasonable Investigation & Reasonable Grounds for
Belief Under Section 11 of the Sec. Act Treatment of Info. Inc. by
Reference into Registration Statements, Release No. 33-6335 (Aug. 6,
1981) [46 FR 42015 (Aug. 18, 1981)] (``In sum, the Commission
strongly affirms the need for due diligence and its attendant
vigilance and verification.'').
\183\ See Bloomenthal, supra note 173. See also Release No. 33-
5275, supra note 181.
\184\ See, e.g., In re Charles E. Bailey & Co., 35 S.E.C. 33, at
41 (Mar. 25, 1953) (``[An underwriter] owe[s] a duty to the
investing public to exercise a degree of care reasonable under the
circumstances of th[e] offering to assure the substantial accuracy
of representations made in the prospectus and other sales
literature.''); In re Brown, Barton & Engel, 41 SEC 59, at 64 (June
8, 1962) (``[I]n undertaking a distribution . . . [the underwriter]
had a responsibility to make a reasonable investigation to assure
[itself] that there was a basis for the representations they made
and that a fair picture, including adverse as well as favorable
factors, was presented to investors.''); In the Matter of the
Richmond Corp., infra note 185 (``It is a well established practice,
and a standard of the business, for underwriters to exercise
diligence and care in examining into an issuer's business and the
accuracy and adequacy of the information contained in the
registration statement. . . . The underwriter who does not make a
reasonable investigation is derelict in his responsibilities to deal
fairly with the investing public.'').
\185\ In the Matter of the Richmond Corp., Release No. 33-4584
(Feb. 27, 1963). See also In re WorldCom, Inc. Sec. Litig., 346 F.
Supp. 2d 628, 684 (S.D.N.Y. 2004) (``Underwriters . . . have special
access to information about an issuer at a critical time in the
issuer's corporate life, at a time it is seeking to raise capital.
The public relies on the underwriter to obtain and verify relevant
information and then make sure that essential facts are
disclosed.''); Sanders v. John Nuveen & Co., Inc., 524 F.2d 1064,
1069-70 (7th Cir. 1975) (``An underwriter's relationship with the
issuer gives the underwriter access to facts that are not equally
available to members of the public who must rely on published
information. And the relationship between the underwriter and its
customers implicitly involves a favorable recommendation of the
issued security. Because the public relies on the integrity,
independence and expertise of the underwriter, the underwriter's
participation significantly enhances the marketability of the
security. And since the underwriter is unquestionably aware of the
public's reliance on his participation in the sale of the issue, the
mere fact that he has underwritten it is an implied representation
that he has met the standards of his profession in his investigation
of the issuer.''); Chris-Craft Industries, Inc. v. Piper Aircraft
Corp., 480 F.2d 341, 370 (2d Cir. 1973) (``No greater reliance in
our self-regulatory system is placed on any single participant in
the issuance of securities than upon the underwriter. He is most
heavily relied upon to verify published materials because of his
expertise in appraising the securities issue and the issuer, and
because of his incentive to do so. He is familiar with the process
of investigating the business condition of a company and possesses
extensive resources for doing so. . . . Prospective investors look
to the underwriter . . . to pass on the soundness of the security
and the correctness of the registration statement and
prospectus.''); Escott v. BarChris Const. Corp., 283 F. Supp. 643,
697 (S.D.N.Y. 1968) (``The purpose of Section 11 is to protect
investors. To that end the underwriters are made responsible for the
truth of the prospectus.'').
---------------------------------------------------------------------------
1. Participants in a Distribution as ``Underwriters''
Common interpretations of the underwriter definition in Section
2(a)(11) traditionally have focused on the words ``with a view to'' in
the phrase ``purchased from an issuer with a view to . . .
distribution.'' Thus, an investment banking firm that arranges with an
issuer for the public sale of its securities is clearly an
``underwriter.'' However, as noted above, the statutory definition of
underwriter is much broader. Both federal courts and the Commission
previously have found that other parties involved in securities
offerings can be deemed ``statutory underwriters'' under the
underwriter definition, such as by selling ``for an issuer;'' \186\
and/or directly or indirectly
[[Page 29485]]
``participating'' in a distribution by engaging in activities
``necessary to the distribution'' \187\ or in ``distribution-related
activities.'' \188\ Such parties can attain underwriter status even if
they do not receive compensation for their services,\189\ do not sell
securities directly to the public,\190\ and do not have privity of
contract with the issuer.\191\ Similarly, courts have interpreted the
underwriter definition broadly to include promoters, officers, and
control persons who have arranged for public trading of an unregistered
security or have stimulated investor interest in such security through
advertisements, research reports, or other promotional efforts.\192\
Moreover, the Commission has stated that ``there is nothing in Section
2[(a)](11) which places a time limit on a person's status as an
underwriter'' because the ``public has the same need for protection
afforded by registration whether the securities are distributed shortly
after their purchase or after a considerable length of time.'' \193\
---------------------------------------------------------------------------
\186\ See SEC v. Chinese Consolidated Benevolent Association,
120 F.2d 738 (2d Cir. 1941) (charitable association deemed a
statutory underwriter in promoting the sale of war bonds, collecting
funds and distributing the securities to its members notwithstanding
the charitable association's lack of a relationship with the issuer
of the bonds); SEC v. Kern, 425 F.3d 143 (2d Cir. 2005). See also
Release No. 33-5223, supra note 171 (stating that any persons may be
underwriters within the meaning of Section 2(a)(11) ``if they act as
links in a chain of transactions through which securities move from
an issuer to the public . . . . the Commission hereby emphasizes and
draws attention to the fact that the statutory language of Section
2[(a)](11) is in the disjunctive. Thus, it is insufficient to
conclude that a person is not an underwriter solely because he did
not purchase securities from an issuer with a view to their
distribution. It must also be established that the person is not
offering or selling for an issuer in connection with the
distribution of the securities and that the person does not
participate or have a participation in any such undertaking, and
does not participate or have a participation in the underwriting of
any such undertaking.'').
\187\ See, e.g., Harden v. Raffensperger, Hughes & Co., 65 F.3d
1392 (7th Cir. 1995) (third party retained as a ``qualified
independent underwriter'' to perform due diligence and recommend a
minimum yield for a bond offering deemed a statutory underwriter).
The defendant argued that it was not an underwriter because it had
neither purchased nor sold any of the distributed securities. The
court held that the defendant's activities fell within the
``participates'' and ``has a participation'' language of Section
2(a)(11), reasoning that Section 2(a)(11) is broad enough to
encompass all persons who engage in the steps necessary to the
distribution of securities.
\188\ See, e.g., Geiger v. SEC, 363 F.3d 481, 487 (D.C. Cir.
2004) (defendant ``participated'' in a distribution as a statutory
underwriter through its actions in finding a buyer, negotiating the
terms of the transaction, and facilitating the resale of
securities).
\189\ See, e.g., Chinese Consolidated Benevolent Association,
supra note 186, at 740 (``The solicitation of offers to buy the
unregistered bonds, either with or without compensation, brought
defendant's activities literally within the prohibition of the
statute.''); see also J. William Hicks, 7A Exempted Trans. Under
Securities Act 1933 Sec. 9:39 (citing the Brief for the Securities
and Exchange Commission in Chinese Consolidated Benevolent
Association: ``The legislative history of Section 2[(a)](11) makes
it apparent that Congress did not intend to require the elements of
compensation or a contract with the issuer in order to make a
distributor of securities an underwriter. In an earlier draft of the
Securities Act, which was considered by the House Committee on
Interstate and Foreign Commerce, the definition of underwriter . . .
would have made the underwriting relationship depend upon the
receipt of compensation. In abandoning that definition and adopting
the definition which is included in the bill as enacted, Congress
showed a clear intention of extending the term to include all
persons who sell for an issuer, whether or not they do so for
profit.'').
\190\ See, e.g., Raffensperger, supra note 187.
\191\ See, e.g., Chinese Consolidated Benevolent Association,
supra note 186, at 740 (Hand, J. explaining, ``Whether the Chinese
government as issuer authorized the solicitation, or merely availed
itself of gratuitous and even unknown acts on the part of the
defendant whereby written offers to buy, and the funds collected for
payment, were transmitted to the Chinese banks does not affect the
meaning of the statutory provisions which are quite explicit. In
either case, the solicitation was equally for the benefit of the
Chinese government and broadly speaking was for the issuer in
connection with the distribution of the bonds.'').
\192\ See, e.g., SEC v. Allison, No. C-81-19 RPA, 1982 WL 1322
(N.D. Cal. 1982).
\193\ Release No. 33-5223, supra note 171, at 4. See also
Gilligan, Will & Co. v. SEC, 267 F.2d 461 (2d Cir. 1959) (holding
that a distribution exists if there are sales to those who cannot
``fend for themselves'' and citing Ralston Purina Co., 346 U.S. 119
(1953)).
---------------------------------------------------------------------------
2. The De-SPAC Transaction as a ``Distribution'' of the Combined
Company's Securities
Underwriter status depends upon a person's activities occurring
``in connection with'' a ``distribution'' of any security. The
Commission has explained that underwriter status under the
``participation'' prong of the underwriter definition depends on the
putative underwriter ``enjoying substantial relationships with the
issuer or underwriter, or engaging in the performance of any
substantial functions in the organization or management of the
distribution.'' \194\ The Securities Act does not define the term
``distribution;'' however, the federal courts and the Commission have
interpreted the term as synonymous with a ``public offering'' within
the meaning of Section 4(a)(2) of the Act.\195\ Moreover, a
distribution has been said to comprise ``the entire process by which in
the course of a public offer [a] block of securities is dispersed and
ultimately comes to rest in the hands of the investing public.'' \196\
---------------------------------------------------------------------------
\194\ See Opinion of General Counsel relating to Rule 142,
Release No. 33-1862 (Dec. 14, 1938).
\195\ See J. William Hicks, 7A Exempted Trans. Under Securities
Act 1933 Sec. 9:18. Courts have equated the term ``distribution''
with a public offering of securities. See, e.g., Berckeley Inv.
Group, Ltd. v. Colkitt, 455 F.3d 195, 215 (3d Cir. 2006) (``We agree
with the rationale of those courts and similarly hold that the term
``distribution'' in Sec. 2(a)(11) is synonymous with `public
offering.'''); see also Gilligan, Will & Co., supra note 193, at 466
(``a `distribution' requires a `public offering''' (citation
omitted)).
\196\ J. William Hicks, 7A Exempted Trans. Under Securities Act
1933 Sec. 9:18 (citing Geiger v. SEC, 363 F.3d 481, 484, 487 (D.C.
Cir. 2004), where the court agreed with the SEC that the
petitioners, Charles F. Kirby and Gene Geiger (head trader and
salesman, respectively, at a securities brokerage firm), who made
resales in broker transactions over a two-week period of 133,333
shares of the roughly 25 million shares then outstanding, were
engaged in a distribution within the meaning of Section 2(a)(11) of
the Securities Act and that one ``did not have to be involved in the
final step of [a] distribution to have participated in it''). See
also R.A Holman v. SEC, 366 F.2d 446, 449 (2d Cir. 1966) (finding
that an ongoing distribution and related manipulation had occurred
where a broker-dealer sold securities on a ``delayed delivery''
basis and there was a real possibility at the time of purchase that
the purchaser would cancel the order and quoting Lewisohn Copper
Corp., 38 SEC. 226, 234 (1958)); accord In the Matter of Oklahoma-
Texas Tr., 2 SEC. 764, 769, 1937 WL 32951 (Sept. 23, 1937), aff'd,
100 F.2d 888 (10th Cir. 1939) (finding an ongoing distribution where
portions of a registered offering continued to be held by securities
dealers).
---------------------------------------------------------------------------
The purpose of a SPAC initial public offering is to raise a pool of
cash in order to subsequently merge with a private operating company in
a de-SPAC transaction that will convert the private operating company
into a public company. Although the timing of a SPAC initial public
offering and a de-SPAC transaction is bifurcated because a private
operating company is not identified at the SPAC initial public offering
stage, the result of a de-SPAC transaction, however structured, is
consistent with that of a traditional initial public offering. The
substance of a de-SPAC transaction is, in many ways, analogous to the
distribution that occurs in a traditional IPO--i.e., a SPAC's assets
consist primarily of highly liquid assets, such as cash and government
securities, and the combined company effectively distributes its
securities to public holders of SPAC shares in exchange for the
contribution of the SPAC's assets to the combined company. The de-SPAC
transaction marks the introduction of the private operating company to
the public capital markets \197\ and is effectively how the private
operating company's securities ``come to rest''--in other words, are
distributed--to public investors as shareholders of the combined
company.\198\ Accordingly, as in a
[[Page 29486]]
traditional underwritten initial public offering, public investors--who
were unfamiliar with the formerly private company--would benefit from
the additional care and diligence exercised by SPAC underwriters in
connection with the de-SPAC transaction.\199\
---------------------------------------------------------------------------
\197\ Such a transaction may take a variety of forms and involve
a multitude of issuers. However, the rule we are proposing would
apply to all de-SPAC transactions involving a registered offer of
securities.
\198\ A court has addressed in dicta whether a somewhat
analogous situation involving the introduction of private companies
to the public markets through an existing shareholder base was a
distribution. See SEC v. Datronics Engineers, Inc., 490 F.2d 250,
254 (4th Cir. 1973), cert denied, 416 U.S. 937 (1974) wherein
Datronics, a public corporation, acquired a number of privately-
held, target companies in merger transactions. A subsidiary of the
defendant would merge with the target company, with the subsidiary
surviving the merger. Both the shareholder-principals of the target
and Datronics received stock in the surviving subsidiary. After the
merger, Datronics distributed some of its shares to its shareholders
as a dividend. In this way, formerly privately-held companies became
publicly owned without going through a registered public offering.
The court stated in dicta, ``we think that Datronics was an
underwriter within the meaning of the 1933 Act. Hence its
transactions were covered by the prohibitions, and were not within
the exemptions, of the Act. Sec. Sec. 3(a)(1) and 4(1) of the 1933
Act, 15 U.S.C. 77c, 77d. By definition, the term underwriter `means
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. . . .' Sec. 2(11) of the
1933 Act, 15 U.S.C. 77b(11). . . . By this underwriter distribution
Datronics violated [Section] 5 of the 1933 Act--sale of unregistered
securities.''
\199\ See Gilligan, Will & Co., supra note 193.
---------------------------------------------------------------------------
3. Proposed Rule: SPAC IPO Underwriters Are Underwriters in Registered
De-SPAC Transactions
Proposed Rule 140a would clarify that a person who has acted as an
underwriter in a SPAC initial public offering (``SPAC IPO
underwriter'') and participates in the distribution by taking steps to
facilitate the de-SPAC transaction, or any related financing
transaction,\200\ or otherwise participates (directly or indirectly) in
the de-SPAC transaction will be deemed to be engaged in the
distribution of the securities of the surviving public entity in a de-
SPAC transaction within the meaning of Section 2(a)(11) of the
Securities Act. Clarifying the underwriter status of SPAC IPO
underwriters in connection with de-SPAC transactions should motivate
them to exercise the care necessary to help ensure the accuracy of the
disclosures in these transactions by affirming that they are subject to
Section 11 liability for registered de-SPAC transactions.\201\ In this
way, proposed Rule 140a underscores and reinforces that the liability
protections in de-SPAC transactions involving registered offerings have
the same effect as those in underwritten initial public offerings.
---------------------------------------------------------------------------
\200\ Most SPAC deals contain an available cash condition that
represents a minimum amount of proceeds below which the target will
not be obligated to consummate the transaction. The cash condition
represents a number the sponsor group believes it can reasonably
achieve given their banking syndicate, network, access to capital,
and the target company itself. Since cash in trust is subject to
redemption, one mechanism to ensure the cash condition will be
satisfied is to secure commitments for a PIPE investment. See SPAC
Research Weekly Newsletter (Oct. 19, 2020), available at https://www.spacresearch.com/newsletter?date=2020-10-19. In addition the
staff has observed that for the vast majority of PIPEs associated
with de-SPAC transactions, the closing of the PIPE financing is
cross-conditioned on the closing of the de-SPAC transaction.
\201\ Under Section 11, ``any person acquiring such security''
has a right of recovery. The Commission's longstanding view for
traditional firm commitment registered offerings is that standing to
sue under this provision extends to all purchasers of securities,
whether the purchase occurred in the offering or subsequently in the
secondary market. See Brief of the SEC in DeMaria v. Andersen, 318
F.3d 170 (2d Cir. 2003).
---------------------------------------------------------------------------
As described above, the purpose of a SPAC's initial public offering
is to facilitate a subsequent de-SPAC transaction, and for target
companies merging with a SPAC, the de-SPAC transaction is the means
chosen, out of the several avenues available under the securities laws,
for a private operating company to go public. It is the method by which
the target company's securities, as securities of the combined company,
are distributed into the hands of public investors. Although SPAC IPO
underwriters typically are not retained to act as firm commitment
underwriters in the de-SPAC transaction, they nevertheless typically
participate in activities that are necessary to that distribution.\202\
For instance, it is common for a SPAC IPO underwriter (or its
affiliates) to participate in the de-SPAC transaction as a financial
advisor to the SPAC, and engage in activities necessary to the
completion of the de-SPAC distribution such as assisting in identifying
potential target companies, negotiating merger terms, or finding
investors for and negotiating PIPE investments. Furthermore, receipt of
compensation in connection with the de-SPAC transaction could
constitute direct or indirect participation in the de-SPAC transaction.
While SPAC IPO underwriting fees--those fees the SPAC IPO underwriters
earn for their efforts in connection with the initial offering of SPAC
shares to the public--generally range between 5% and 5.5% of IPO
proceeds, a significant portion (typically 3.5% of IPO proceeds) is
deferred until, and conditioned upon, the completion of the de-SPAC
transaction.\203\ A SPAC IPO underwriter therefore typically has a
strong financial interest in taking steps to ensure the consummation of
the de-SPAC transaction.\204\ For these reasons, proposed Rule 140a
would clarify that the SPAC IPO underwriter is an underwriter with
respect to the distribution that occurs in the de-SPAC transaction,
when it takes steps to facilitate the de-SPAC transaction, or any
related financing transaction, or otherwise participates (directly or
indirectly) in the de-SPAC transaction.
---------------------------------------------------------------------------
\202\ See generally Chinese Consolidated Benevolent Association,
supra note 186 and accompanying text.
\203\ See Klausner, Ohlrogge, and Ruan, supra note 17. It is not
necessary, however, for a SPAC IPO underwriter to derive a pecuniary
benefit from the distribution in order for Section 2(a)(11) to
apply. See Brief for the SEC at 19, Chinese Consolidated Benevolent
Association, supra note 186 (``The legislative history of Section
2[(a)](11) makes it apparent that Congress did not intend to require
the elements of compensation or a contract with the issuer in order
to make a distributor of securities an underwriter.'')
\204\ See Robert J. Haft, Peter M. Fass, Michele Haft Hudson,
and Arthur F. Haft, Tax-Advantaged Securities, Overview of SPACs
Sec. 6:134.60.
---------------------------------------------------------------------------
We note that proposed Rule 140a addresses the underwriter status of
only the SPAC IPO underwriter in the context of a de-SPAC transaction.
In addition, we have discussed above some of the activities that are
sufficient to establish that the SPAC IPO underwriter is participating
in the distribution of target company securities. This discussion,
however, is not intended to provide an exhaustive assessment of
underwriter status in the SPAC context, and neither is it intended to
limit the definition of underwriter for purposes of Section 2(a)(11) of
the Securities Act. Federal courts and the Commission may find that
other parties involved in securities distributions, including other
parties that perform activities necessary to the successful completion
of de-SPAC transactions, are ``statutory underwriters'' within the
definition of underwriter in Section 2(a)(11). For example, financial
advisors, PIPE investors, or other advisors, depending on the
circumstances, may be deemed statutory underwriters in connection with
a de-SPAC transaction if they are purchasing from an issuer ``with a
view to'' distribution, are selling ``for an issuer,'' and/or are
``participating'' in a distribution.
Request for Comment
82. Should we adopt a definition of distribution in Rule 140a, as
proposed?
83. Does the current regulatory regime provide sufficient
incentives for participants in a de-SPAC transaction to conduct
appropriate due diligence on the target private operating company and
the disclosures provided to public investors in connection with the de-
SPAC transaction? Would proposed Rule 140a likely result in improved
diligence of private company targets in de-SPAC transactions and
related disclosure? Would the other measures we are proposing in this
release mitigate the need for proposed Rule 140a?
84. Does the SPAC IPO underwriter have the means and access
necessary (via contract or otherwise) to perform due diligence at the
de-SPAC transaction stage, particularly where the SPAC IPO underwriter
is not retained as an advisor in the de-SPAC transaction or the target
is the registrant for the de-SPAC transaction? Could such access be
reasonably obtained in the course of the negotiation of the
underwriting agreement for the SPAC initial public offering or
otherwise?
85. Will shareholders after the de-SPAC transaction have difficulty
[[Page 29487]]
recovering against SPAC IPO underwriters liable under Securities Act
Section 11 due to potential challenges in tracing the shares they hold
to an effective registration statement for the de-SPAC transaction? Are
there steps we should take to address the challenges shareholders might
face in tracing their shares to such a registration statement? For
example, should we consider rulemaking to define ``any person acquiring
such security'' under Securities Act Section 11 in the context of de-
SPAC transactions and, if so, how should it be defined?
86. Should we limit the application of proposed Rule 140a to
situations in which the SPAC IPO underwriter takes steps to facilitate
the de-SPAC transaction, or any related financing transaction, or
otherwise participates (directly or indirectly) in the de-SPAC
transaction, as proposed?
87. Would a determination that SPAC IPO underwriters are engaged in
a distribution of the private operating company's securities, as
proposed, raise additional issues we should address? For example, does
it raise questions about when the SPAC IPO underwriters' participation
in the SPAC initial public offering distribution is completed for
purposes of calculating the restricted period under Regulation M?
88. As noted above, there may be additional parties that are
involved in a de-SPAC transaction that may fall within the statutory
definition of underwriter because they are ``participating in the
distribution'' of the target private operating company's securities to
the public. Should proposed Rule 140a be expanded to expressly include
such other parties? If so, which parties? Should the rule instead deem
any party playing a significant role at the de-SPAC transaction stage
to be an underwriter? Should the Commission provide additional guidance
as to which additional parties may be underwriters and what activities
or other considerations would be relevant to determining whether a
party falls within the statutory definition of underwriter in a de-SPAC
transaction?
89. Is it clear what parties would be considered a SPAC IPO
underwriter for purposes of proposed Rule 140a? Should we limit
underwriter status as clarified by Rule 140a to the entities acting as
traditional underwriter in a SPAC IPO? Are there other parties that
should be specifically excluded from the application of the rule?
90. Are there alternative approaches we should consider that would
enhance the incentives of participants in a de-SPAC transaction to
assure the accuracy of the disclosures provided to public investors in
connection with the de-SPAC transaction and/or align liability
protections for investors across the various avenues for private
operating companies to go public?
IV. Business Combinations Involving Shell Companies
In response to concerns regarding the use of shell companies \205\
as a means of accessing the U.S. capital markets, and as discussed more
fully below, we are proposing new rules that would apply to business
combination transactions involving shell companies, which include de-
SPAC transactions. First, we are proposing new Rule 145a under the
Securities Act that would deem such business combination transactions
to involve a sale of securities to a reporting shell company's
shareholders. Second, we are proposing new Article 15 of Regulation S-X
and related amendments to more closely align the required financial
statements of private operating companies in connection with these
transactions with those required in registration statements on Form S-1
or F-1 for an initial public offering.\206\ The issues we are
addressing with these rule proposals are common to these shell company
transactions, regardless of whether the shell company is a SPAC.
---------------------------------------------------------------------------
\205\ As stated above, throughout this release, we use ``shell
company'' and ``reporting shell company'' in lieu of the phrases
``shell company, other than a business combination related shell
company'' and ``reporting shell company, other than a business
combination related shell company.'' See supra note 43 for the
definition of ``reporting shell company.''
\206\ The requirements in Form S-4, Form F-4, and Schedule 14A
for an acquisition of a business were developed at a time when
acquirers were generally operating companies, and these requirements
do not specifically address transactions involving shell companies.
For example, Form S-4 was adopted by the Commission in 1985, which
predates the origins of SPACs in the 1990s. See Business Combination
Transactions-Adoption of Registration Form, Release No. 33-6578
(Apr. 23, 1985) [50 FR 19001 (May 6, 1985)].
---------------------------------------------------------------------------
A. Shell Company Business Combinations and the Securities Act of 1933
1. Shell Company Business Combinations
SPAC initial public offerings and business combinations occurred
with increased frequency in 2020 and 2021,\207\ but a business
combination with a reporting shell company \208\ is not a new means for
a private company to become a U.S. public company with an Exchange Act
reporting obligation.\209\ Historically, private companies have
utilized shell companies in various forms of transactions,\210\ such as
spin-offs, reverse mergers, and de-SPAC transactions to become U.S.
public companies,\211\ in many cases without filing a Securities Act
registration statement.\212\ Due to abuses involving shell company
transactions, over the years the Commission has adopted various rules
and limitations intended
[[Page 29488]]
to address the misuse of shell companies.\213\ For example:
---------------------------------------------------------------------------
\207\ See supra notes 7 and 8 regarding the 2020-2021 increase
in popularity of SPACs as a means for private companies to access
the public markets.
\208\ See supra note 9.
\209\ See generally, Ronald M. Shapiro and Laurence M. Katz, The
``Going Public through the Back Door'' Phenomenon--An Assessment, 29
Md. L. Rev. 320 (1969); Leib Orlanski, Going Public through the
Backdoor and the Shell Game, 58 Va. L. Rev. 1451 (1972) (both
describing various ways of combining with a public shell company as
a method to bring private corporations public).
\210\ Shell company business combinations can take many forms.
They can be as simple in structure as a statutory merger, with a
private operating company merging with and into a shell company that
has previously filed a Form 10 with the Commission, or as complex as
a de-SPAC transaction involving multiple merging entities, tax
blockers, and/or a new holding company. Among de-SPAC transactions,
the Commission staff has observed a number of variations, only some
of which are consistently registered transactions. For example, in
de-SPAC transactions structured as share exchanges, securities can
be offered and sold to the public holders of SPAC securities from
the target, a new holding company, or they can retain their
interests in the reporting SPAC.
\211\ These transactions generally can take the form of either a
``reverse merger'' in which the private business merges into the
shell company, with the shell company surviving and the former
shareholders of the private business controlling the surviving
entity or, in another common type of transaction, a ``back door
registration,'' the shell company merges into the formerly private
company, with the formerly private company surviving and the
shareholders of the shell company becoming shareholders of the
surviving entity. See Use of Form S-8, Form 8-K, and Form 20-F by
Shell Companies, Release No. 33-8587 (July 15, 2005) [70 FR 42234
(July 21, 2005)] (``Shell Company Adopting Release''). Both
alternatives transform a private company into a public company by
combining directly or indirectly with a public company (whether
through a merger, exchange offer, or otherwise).
\212\ For example, unregistered transactions can involve a
direct or indirect offer and sale of the public shell's securities
to holders of the target entity's securities in consideration for
their interests in the target entity. The public shell is then the
entity that survives the business combination. In the context of
SPACs, where there is no registration statement, transactions are
typically disclosed to the SPAC's public shareholders in a proxy or
information statement if there is a vote or consents being
solicited, or otherwise in a Schedule TO. In shell company mergers
where there is no vote, the shell company's shareholders may only
learn about the transaction when the shell company files an Item
5.06 Form 8-K to report a change in shell company status. With
respect to de-SPAC transactions, the Commission staff has observed
that in 2020 (Sept. 30, 2019 to Oct. 1, 2020), 21 de-SPAC
transactions were registered on Form S-4 or F-4 and 16 were
disclosed on proxy or information statements soliciting shareholder
votes or consents, respectively. Over the same months in 2021, 212
de-SPAC transactions were registered on Form S-4 or F-4 and 48 were
disclosed on proxy or information statements.
\213\ We note that these rules and limitations generally do not
apply to shell companies that qualify as ``business combination
related shell companies'' as defined in Rule 405. See infra Section
IV.A.3.
---------------------------------------------------------------------------
Rule 144 is not available for the resale of securities
initially issued by either reporting or non-reporting shell companies;
\214\
---------------------------------------------------------------------------
\214\ See 17 CFR 230.144(i), 17 CFR 230.145(c) and (d), and
Revisions to Rules 144 and 145, Release No. 33-8869 (Dec. 6, 2007)
[72 FR 71546 (Dec. 17, 2007)].
---------------------------------------------------------------------------
Shell companies are not permitted to use Form S-8; \215\
---------------------------------------------------------------------------
\215\ See Form S-8 [17 CFR 239.16b], General Instruction A.1,
Rule as to Use of Form S-8; Shell Company Adopting Release, supra
note 211.
---------------------------------------------------------------------------
Shell companies are considered ineligible issuers that
cannot use free writing prospectuses for communications during a
registered offering; \216\ and
---------------------------------------------------------------------------
\216\ See 17 CFR 230.165(e)(2)(ii) and Securities Offering
Reform, Release No. 33-8591 (July 19, 2005) [70 FR 44722 (Aug. 3,
2005)].
---------------------------------------------------------------------------
Broker-dealers are able to rely on the ``piggyback''
exception to publish quotations for shell companies for only 18 months
following the initial priced quotation on OTC Markets.\217\
---------------------------------------------------------------------------
\217\ See 17 CFR 240.15c2-11(f)(3)(i)(B)(2) and Publication or
Submission of Quotations Without Specified Information, Release No.
33-10842 (Sept. 16, 2020) [85 FR 68124 (Oct. 27, 2020)].
---------------------------------------------------------------------------
Although many of these rules address concerns related to market
manipulation and penny stock fraud, the Commission also has previously
expressed concerns about the use of a shell company to distribute
securities to the public without the protections afforded by the
Securities Act including, where required, a registration
statement.\218\ The lack of a registration statement could deprive
investors of the critical disclosures and protections that come with
Securities Act registration.\219\ The use of shell companies to
complete business combinations can thus also provide companies with
opportunities to avoid the disclosure, liability, and other provisions
applicable in traditional registered offerings.\220\ These concerns are
still present when shell companies are used in business combinations to
provide private companies with access to the public markets.
---------------------------------------------------------------------------
\218\ See generally Spin Offs and Shell Corporations, Release
No. 33-4982 (July 2, 1969) [34 FR 11581 (July 15, 1969)] (stating
the Commission's concern over the use of shell companies to effect
unregistered distributions of securities in spin-offs and in other
contexts).
\219\ Id. See also Notice of Adoption of Rules 145 and 153A,
Prospective Rescission of Rule 133, Amendment of Form S-14 Under the
Securities Act of 1933, and Amendment of Rule 14a-2, 14a-6 and 14c-5
Under the Securities Exchange Act of 1934, Release No. 33-5316 (Oct.
6, 1972) [37 FR 23631 (Nov. 7, 1972)] (``Rule 145 Adopting
Release'').
\220\ For example, in SEC v. M & A W., Inc., 538 F.3d 1043, 1053
(9th Cir. 2008), the court considered a civil enforcement action
against an individual engaged in the business of assisting private
corporations to become publicly-traded companies through reverse
merger transactions with reporting shell companies, alleging the
sale of unregistered securities. The court noted: ``[W]e are
informed by the purpose of registration, which is `to protect
investors by promoting full disclosure of information thought
necessary to informed investment decisions.' The express purpose of
the reverse mergers at issue in this case was to transform a private
corporation into a corporation selling stock shares to the public,
without making the extensive public disclosures required in an
initial offering. Thus, the investing public had relatively little
information about the former private corporation. In such
transactions, the investor protections provided by registration
requirements are especially important.'').
---------------------------------------------------------------------------
2. Proposed Rule 145a
The substantive reality of a reporting shell company \221\ business
combination with a company that is not a shell company is that
reporting shell company investors have effectively exchanged their
security representing an interest in the reporting shell company for a
new security representing an interest in the combined operating
company. As noted above, however, unlike investors in transaction
structures in which the Securities Act applies and a registration
statement would be filed (absent an exemption), investors in reporting
shell companies may not always receive the disclosures and other
protections afforded by the Securities Act at the time the change in
the nature of their investment occurs due to the business combination
involving another entity that is not a shell company.
---------------------------------------------------------------------------
\221\ See supra note 43 for a definition of this term.
---------------------------------------------------------------------------
Under the Securities Act, all offers and sales of securities must
either be registered or be exempt from registration, and any offer or
sale that is not registered or exempt violates Section 5.\222\ Section
2(a)(3) of the Securities Act defines a ``sale'' as, among other
things, ``every contract of sale or disposition of a security or
interest in a security, for value.'' \223\ In view of the remedial
purpose of the Securities Act, courts and the Commission have broadly
interpreted this term, particularly with respect to the creation of a
public market in shares of a private company.\224\ Moreover, the
Commission has concluded that certain business combination and other
transactions involve a sale of securities within the meaning of Section
2(a)(3).\225\
---------------------------------------------------------------------------
\222\ 15 U.S.C. 77e.
\223\ 15 U.S.C. 77b(3).
\224\ In this regard, the Supreme Court has stated that
securities legislation, enacted for the purpose of avoiding frauds,
is to be construed ``not technically and restrictively, but flexibly
to effectuate its remedial purposes.'' SEC v. Cap. Gains Rsch.
Bureau, Inc., 375 U.S. 180, 195, 84 S. Ct. 275, 284-85 (1963). See
also SEC v. Harwyn Indus. Corp., 326 F. Supp. 943, 954 (S.D.N.Y.
1971) (construing ``value'' in Section 2(a)(3) to include the
creation of a public market in the shares with its resulting
benefits to the defendants, the court stated, ``. . . [W]e must look
to its overall purpose, which is to provide adequate disclosure to
members of the investing public, rather than engage in strangulating
literalism.''); SEC v. Datronics Engineers, Inc., 490 F.2d 250, 254
(4th Cir. 1973), cert denied, 416 U.S. 937 (1974); In the Matter of
UniversalScience.com, Inc., Release No. 33-7879 (Aug. 8, 2000)
(distribution of securities as purported ``free stock'' constituted
a sale because it was a disposition for value, the ``value'' arising
``by virtue of the creation of a public market for the issuer's
securities.''); and Thomas Lee Hazen, The Law of Securities
Regulation Sec. 12:22 (``Concepts of purchase and sale are to be
construed flexibly in order to accomplish the purpose of the
securities laws. The courts will consider the economic reality of
the transaction and whether it lends itself to fraud in the making
of an investment decision.'').
\225\ See 17 CFR 230.145(a) and (b) (Securities Act Rules 145(a)
and (b)) and Rule 145 Adopting Release, supra note 219 (Rule 145
deems the submission to a vote of stockholders of a proposal for
certain mergers, consolidations, or reclassifications of securities
or transfers of assets to involve a ``sale,'' ``offer,'' ``offer to
sell,'' or ``offer for sale'' of the securities of the new or
surviving corporation to the security holders of the disappearing
corporation).
---------------------------------------------------------------------------
Due to the significant increase in reporting shell company business
combination transactions as a means to enter the U.S. capital markets,
including through the use of a SPAC, and in an effort to provide
reporting shell company shareholders with more consistent Securities
Act protections regardless of transaction structure, we are proposing
new Rule 145a \226\ that would deem any business combination of a
reporting shell company \227\ involving another entity that is not a
shell company to involve a sale of securities to the reporting shell
company's shareholders.\228\ It is our preliminary view that such a
transaction would be ``a disposition of a security or interest in a
security . . . for value,'' \229\ regardless of the form or structure
deployed, and regardless of whether a shareholder vote or consent is
solicited.\230\ By deeming such
[[Page 29489]]
transactions to be a ``sale'' for the purposes of the Securities Act,
the proposed rule is intended to address potential disparities in the
disclosure and liability protections available to reporting shell
company shareholders depending on the transaction structure deployed in
a reporting shell company business combination.
---------------------------------------------------------------------------
\226\ See proposed 17 CFR 230.145a.
\227\ See supra note 43 for a definition of this term.
\228\ This expresses our views as to the substance of these
transactions for the purposes of the Securities Act. Neither
proposed Rule 145a nor the description in this section is intended
to express a view with respect to the treatment of these
transactions under other laws including, but not limited to, state
corporate law and the Internal Revenue Code.
\229\ Although no securities may actually be changing hands, in
substance, shareholders in a reporting shell company merger are
effectively exchanging their interests in the shell company for
interests in a non-shell company; these shareholders can be viewed
as having surrendered ``value'' for the purposes of Section 2(a)(3).
\230\ We note that this rule does not change the conclusion that
a merger with a reporting shell company may constitute the offer and
sale of securities to other parties for which registration under the
Securities Act or an exemption would be required. For example, where
a SPAC survives the de-SPAC transaction, the SPAC will frequently
issue its securities to shareholders of the private company in
exchange for their interests in the private company. Such a
transaction would still require registration or an exemption from
registration.
---------------------------------------------------------------------------
Nothing in proposed Rule 145a would prevent or prohibit the use of
a valid exemption, if available, for the deemed sale of securities to
the reporting shell company's shareholders in the business
combination.\231\ However, our current view is that Section 3(a)(9) of
the Securities Act,\232\ which exempts any securities exchange by an
issuer with its existing security holders exclusively where no
commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange, generally would not be
available for the sales covered by proposed Rule 145a. In these
circumstances, we believe that the deemed exchange by the reporting
shell company's existing shareholders for the combined company's
securities should be viewed as part of the same offering as the
exchange of the private company's securities for their interests in the
combined company.\233\ As a result, because the exchange would not be
exclusively with the reporting shell company's existing security
holders, Section 3(a)(9) would not be available to exempt the deemed
sale to reporting shell company shareholders in proposed Rule 145a, if
adopted. In addition, we note that Section 3(a)(9) would not be
available where a commission or other remuneration is paid or given
directly or indirectly for soliciting of participation in the deemed
exchange. This would occur, for example, if a proxy solicitor is
compensated to solicit the approval of the reporting shell company's
shareholders for the business combination.
---------------------------------------------------------------------------
\231\ We note that even if an exemption applies, if Rule 145a is
adopted, investors would have the protections of the anti-fraud
provisions in Section 17(a) of the Securities Act and Section 10(b)
and Rule 10b-5 thereunder of the Exchange Act. [15 U.S.C. 77q; 15
U.S.C. 78j; and 17 CFR 240.10b-5, respectively].
\232\ 15 U.S.C. 77c(a)(9).
\233\ We note that none of the non-exclusive safe harbors in 17
CFR 230.152(b) would be likely to apply. In particular, the closing
of the business combination with the reporting shell company would
be simultaneous with the deemed exchange of reporting shell company
securities with its own holders and would therefore not meet the 30-
day safe harbor in 17 CFR 230.152(b)(1).
---------------------------------------------------------------------------
Given the substance of the transactions that would be covered by
new Rule 145a, we are proposing the rule so that shareholders more
consistently receive the full protections of the Securities Act
disclosure and liability provisions in business combinations involving
reporting shell companies, regardless of the transaction structure. Not
only would registration in this context result in enhanced liabilities
for signatories to any registration statement and potential underwriter
liability as described elsewhere in this release,\234\ it would also
include liability under Securities Act Section 11(a)(4) for experts,
which include every accountant, engineer, or appraiser, or any person
whose profession gives authority to a statement made by him, who has
with his consent been named as having prepared or certified any part of
the registration statement or as having prepared or certified any
report or valuation which is used in connection with the registration
statement.\235\ In addition, if the transaction is registered, Rule
145a would, in some cases, provide reporting shell company investors
with additional pre-sale disclosure about a transaction that would
significantly alter the nature of their investment.\236\ In this way,
proposed Rule 145a is consistent with the intent of other rules
intended to ``inhibit the creation of public markets in securities of
issuers about which adequate current information is not available to
the public.'' \237\ The proposed rule should also eliminate potential
regulatory arbitrage opportunities to avoid disclosure requirements or
liability through the use of alternative transaction structures when
combining with a reporting shell company.\238\
---------------------------------------------------------------------------
\234\ See supra Sections III.C and III.F, respectively.
\235\ See 15 U.S.C. 77k(a)(4). This would include auditors who
opine on the financial statements associated with the business
combination. Depending on the transaction and whether services are
provided by other parties, this could also include, for example,
valuation consultants, outside reviewers of management projections,
or anyone who provides a fairness opinion about the transaction.
\236\ Some public shell company business combinations are not
disclosed to investors until after the transaction has closed. See
supra note 212.
\237\ See Rule 145 Adopting Release, supra note 219.
\238\ See infra Sections III.F for a discussion of the sources
of liability in registered de-SPAC transactions.
---------------------------------------------------------------------------
3. Excluded Transactions
We wish to emphasize that proposed Rule 145a would have no impact
on business combinations between two bona fide non-shell entities.
However, we note that any reporting shell company that is made to
appear to have, or has cloaked itself as having, more than ``nominal''
assets or operations would still be subject to Rule 145a in a business
combination transaction.\239\
---------------------------------------------------------------------------
\239\ We reiterate the Commission's previous position on
structuring transactions to avoid shell company status in adopting
the 2005 shell company limitations. See Shell Company Adopting
Release, supra note 211, at n.32.
---------------------------------------------------------------------------
The Commission has historically recognized the usefulness of shell
companies formed solely to change an entity's domicile or to effect a
business combination transaction.\240\ As a result, the Commission has
excluded such so-called business combination related shell companies
\241\ from many of the shell company requirements and prohibitions that
have been put in place to ensure the protection of investors in such
companies.\242\ Consistent with this, the proposed rule would not apply
to reporting shell companies that are business combination related
shell companies as this term is defined in Securities Act Rule
405.\243\
---------------------------------------------------------------------------
\240\ See the Supplementary Information to the Shell Company
Adopting Release, supra note 211 (``We recognize that companies and
their professional advisors often use shell companies for many
legitimate corporate structuring purposes. Similarly, our definition
and use of the term 'shell company' is not intended to imply that
shell companies are inherently fraudulent. Rather, these rules
target regulatory problems that we have identified where shell
companies have been used as vehicles to commit fraud and abuse our
regulatory processes.'').
\241\ See supra note 43 for the definition of ``business
combination related shell company.''
\242\ See Shell Company Adopting Release, supra note 211.
\243\ Neither a SPAC nor any such entity formed to facilitate a
merger with a SPAC meets the definition of a business combination
related shell company because neither of these entities is a shell
company formed solely for the purpose of changing the corporate
domicile solely within the United States or formed solely for the
purpose of completing a business combination transaction among one
or more entities other than the shell company, none of which is a
shell company.
---------------------------------------------------------------------------
In addition, we are proposing to exclude the business combination
of one shell company into another shell company from the scope of Rule
145a. Such a business combination would not amount to a fundamental
change in the nature of the reporting shell company shareholder's
investment unlike a business combination with an entity that is not a
shell company.\244\
---------------------------------------------------------------------------
\244\ However, such a business combination may continue to fall
within Securities Act Rule 145 because there is a shareholder vote
and the transaction is one to which Rule 145 would apply (e.g., a
statutory merger or consolidation or similar plan or acquisition
where the sole purpose of the transaction is not to change an
issuer's domicile solely within the United States).
---------------------------------------------------------------------------
[[Page 29490]]
Request for Comment
91. Should we adopt Rule 145a as proposed?
92. Should we be seeking to align the required disclosures and
liabilities associated with shell company business combinations among
the various available transaction structures in order to provide
reporting shell company investors consistent disclosures and
protections across transaction structures? Are there alternative
approaches that would accomplish this goal?
93. How would the proposed rule affect business combinations
involving both SPACs and non-SPAC reporting shell companies? Would
these entities be more likely to register such transactions?
94. If the deemed sale to reporting shell company shareholders is
required to be registered under the Securities Act pursuant to the
proposed amendments, should we provide guidance with respect to the
timing of the effectiveness of such registration statement in relation
to the business combination?
95. Are there other transactions that have purposes or results
similar to reporting shell company business combinations that we should
deem to constitute sales? Conversely, does the proposed rule deem too
broad of a set of reporting shell company business combinations to be
sales? For example, should the rule be limited to SPACs?
96. Should proposed Rule 145a be limited to deeming shell company
business combinations ``sales'' with respect to only reporting shell
company shareholders? Are there other parties whose interest in a shell
company would be such that a shell company business combination should
be deemed a sale? For example, holders of securities other than common
shares?
97. Should reporting shell companies be prohibited from relying on
the exemption in Securities Act Section 3(a)(9) in a transaction deemed
a sale under proposed Rule 145a? Should we provide additional guidance
on the potential availability or lack of availability of other
exemptions from registration for the proposed Rule 145a sale? If so,
what exemptions should we address?
98. Should we exclude business combination related shell companies
from the scope of proposed Rule 145a, as proposed?
99. Should Rule 145a exclude the business combination of one shell
company into another shell company, as proposed? How frequently do such
mergers occur in absence of the proposed Rule 145a? In such a
situation, would either or both companies' shareholders benefit from
registration under the Securities Act?
100. Securities Act Rule 145(a) deems sales within the meaning of
Section 2(a)(3) of the Securities Act for certain transactions
submitted for the vote or consent of security holders. Securities Act
Rules 145(c) and (d) include provisions that have the effect of
limiting resales with respect to parties to transactions described in
Rule 145(a) and their affiliates that involve shell companies. Although
proposed Rule 145a would apply to all reporting shell company business
combinations, not all of these business combinations would also fall
within Rule 145(a). Should we consider resale limitations for Rule
145a? Should any such resale limitations be similar to those in
existing Rule 145?
101. Should we consider guidance or additional rule amendments for
transactions where the provisions of existing Rule 145 and Rule 145a
could overlap? For example, are there any rules that currently
reference Rule 145 that should be amended to apply (or not apply) to
transactions covered by proposed Rule 145a (e.g., Rule 500 of
Regulation D, which states the availability of the exemptions for Rule
145(a) transactions; Securities Act Rule 135, which allows notice of a
registered offering, including for a Rule 145(a) transaction; or Rule
172, which prohibits the use of access equals delivery in Rule 145(a)
transactions)? What, if any, issues should the Commission address
through guidance?
102. Are there other potential opportunities for regulatory
arbitrage in shell company or SPAC transactions that the Commission
should consider addressing?
B. Financial Statement Requirements in Business Combination
Transactions Involving Shell Companies
After a business combination involving a shell company, the
financial statements of the private operating company become those of
the registrant for financial reporting purposes. In other words, the
private operating company becomes the predecessor.\245\ How the private
operating company chooses to become a public company could affect its
financial statement disclosures due to differences in the requirements
of registration statements on Form S-1/F-1 and the requirements of Form
S-4/F-4. In our view, a company's choice of the manner in which it goes
public should not generally result in substantially different financial
statement disclosures being provided to investors.
---------------------------------------------------------------------------
\245\ The term ``predecessor'' when used in this section has the
same meaning as applied in its use under Regulation S-X and
determination of financial statement requirements.
---------------------------------------------------------------------------
We are proposing amendments to our forms, schedules, and rules to
more closely align the financial statement reporting requirements in
business combinations involving a shell company and a private operating
company with those in traditional initial public offerings. The
financial statements that would be required under the proposed
amendments are based, in part, on current staff guidance for
transactions involving shell companies.\246\ Codifying this guidance
should reduce any asymmetries between financial statement disclosures
in business combination transactions involving shell companies and
traditional initial public offerings. Accordingly, we are proposing new
Article 15 of Regulation S-X and related amendments to address certain
inconsistencies in the reporting of financial information that can
arise when applying existing requirements to business combination
transactions involving shell companies compared to the financial
statement requirements for a Securities Act registration statement.
---------------------------------------------------------------------------
\246\ Commission staff has provided informal guidance to address
practical questions related to financial reporting issues for shell
company mergers in the Division of Corporation Finance's Financial
Reporting Manual (``FRM''). The FRM is not a rule, regulation or
statement of the Commission, and the Commission has neither approved
nor disapproved its content.
---------------------------------------------------------------------------
1. Number of Years of Financial Statements
A registration statement on Form S-4 and F-4 and a proxy or
information statement require financial statements of the target
company for the same number of years of financial statements as would
be required by the target in an annual report and any subsequent
interim periods.\247\ Three years of statements of comprehensive
income, changes in stockholders' equity, and cash flows are required,
except in the following scenarios when two years are permitted:
---------------------------------------------------------------------------
\247\ See Items 17(b)(7) and 17(b)(8) of Form S-4; Items
17(b)(5) and 17(b)(6) of Form F-4; Item 14 of Schedule 14A; and
Instruction 1 of Schedule 14C.
---------------------------------------------------------------------------
The target company would qualify as a smaller reporting
company; \248\
---------------------------------------------------------------------------
\248\ See supra Section III.D.
---------------------------------------------------------------------------
The target company would be an emerging growth company
(``EGC'') \249\ if it were conducting an initial public offering of
common equity securities and the registrant is an EGC that has not yet
filed or been required to file its first annual report, even if the
target would
[[Page 29491]]
not be a smaller reporting company; \250\ or
---------------------------------------------------------------------------
\249\ See supra note 112.
\250\ An EGC is permitted to include two years of statements of
comprehensive income in its Securities Act registration statement
for an initial public offering of its common equity securities. EGCs
that are not smaller reporting companies are still required to
include three years of statements of comprehensive income in their
annual reports. See Rule 3-02 of Regulation S-X.
---------------------------------------------------------------------------
The transaction is registered on a Form F-4 and either (1)
the target company is a first time adopter of International Financial
Reporting Standards (``IFRS'') as issued by the International
Accounting Standards Board (``IASB''), or (2) the Form F-4 is the
initial registration statement of the private company and it provides
U.S. GAAP financial statements.\251\
---------------------------------------------------------------------------
\251\ Item 17(b)(5) of Form F-4; General Instruction G of Form
20-F; and Instruction 3 to Item 8.A.2 of Form 20-F.
---------------------------------------------------------------------------
Our proposed amendments would expand the circumstances in which
target companies may report two years of financial statements under the
second bullet above by removing whether or not the shell company has
filed its first annual report as a factor in determining the number of
years required. Because the scenarios described in the first and third
bullets above are already aligned with the financial statements
required in a traditional initial public offering, we have not proposed
any changes related to them. In addition, the proposed amendments would
not affect the number of years of statements of comprehensive income
that are required for the private operating company when it exceeds
both the smaller reporting company and EGC revenue thresholds (that is,
three years would continue to be required).\252\ However, to align the
reporting with a traditional initial public offering, the proposed
amendments would potentially reduce the number of years required when
the target company would be an EGC if it were conducting an initial
public offering of common equity securities and the registrant is an
EGC that has filed or been required to file its first annual report.
---------------------------------------------------------------------------
\252\ See Items 17(b)(7) and 17(b)(8) of Form S-4; Items
17(b)(5) and 17(b)(6) of Form F-4; Item 14 of Schedule 14A; and
Instruction 1 of Schedule 14C. In addition to providing three years
of financial statements due to the private operating company not
qualifying as an EGC, the private operating company would not be
able to take advantage of the delayed adoption dates for new or
revised accounting standards permitted by EGCs in its financial
statements. In the staff's view, the private operating company's
revenue, as predecessor, should be used to determine whether the
registrant qualifies as an EGC after the transaction. See FAQ 47 of
the Division of Corporation Finance's Jumpstart Our Business
Startups Act Frequently Asked Questions, available at https://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm (last revised Dec. 21, 2015). The FAQ does not represent
a rule, regulation or statement of the Commission, and the
Commission has neither approved nor disapproved its content.
---------------------------------------------------------------------------
In a traditional initial public offering under the Securities Act,
the registrant may provide two years of statements of comprehensive
income, changes in stockholders' equity, and cash flows when its most
recently completed fiscal year revenue is below the smaller reporting
company or EGC revenue thresholds (and all the other EGC qualifications
are met), or as noted in the third scenario above for a foreign private
issuer. We are proposing to align the number of fiscal years required
to be included in the financial statements for a private company that
will be the predecessor(s) in a shell company combination with the
financial statements required to be included in a Securities Act
registration statement for an initial public offering of equity
securities in proposed Rule 15-01(b) of Regulation S-X.
Proposed Rule 15-01(b) would provide that when the registrant is a
shell company, and the financial statements of a business \253\ that
will be a predecessor to the registrant are required in a registration
statement or proxy statement, the registrant must file financial
statements of the business that will be a predecessor to the registrant
in accordance with Sec. 210.3-01 to 3-12 and Sec. 210.10-01 (Articles
3 and 10 of Regulation S-X) or Sec. 210.8-01 to 8-08 (Article 8), if
applicable, as if the filing were a Securities Act registration
statement for the initial public offering of that business's equity
securities. As a result, a shell company registrant would be permitted
to include in its Form S-4/F-4/proxy or information statement two years
of statements of comprehensive income, changes in stockholders' equity,
and cash flows for the private operating company for all transactions
involving an EGC shell company and a private operating company that
would qualify as an EGC, and this determination would not be dependent
on whether the shell company has filed or was already required to file
its annual report or not. The proposed amendments would not affect the
number of years of statements of comprehensive income that are required
for the private operating company when it exceeds both the smaller
reporting company and EGC revenue thresholds (that is, three years
would continue to be required).\254\
---------------------------------------------------------------------------
\253\ We use the term ``business'' in this context, rather than
``private operating company,'' in order to be consistent with the
provisions in Regulation S-X that define and use business, such as
Rule 11-01(d) of Regulation S-X. In a business combination
transaction involving a shell company, the private operating company
would meet the definition of a business.
\254\ The private operating company would also not be able to
take advantage of the delayed adoption dates for new or revised
accounting standards as that transition is only available to EGC
companies. As described in FAQ 47 of the Division of Corporation
Finance's Jumpstart Our Business Startups Act Frequently Asked
Questions, the staff takes the view that the private operating
company's revenue, as predecessor, will determine the post-
transaction EGC status. See Securities Act Section 7(a)(2)(B).
---------------------------------------------------------------------------
2. Audit Requirements of Predecessor
Proposed Rule 15-01(a) would align the level of audit assurance
required for the target private operating company in business
combination transactions involving a shell company with the audit
requirements for an initial public offering.\255\ Specifically, we are
proposing that the term audit (or examination), when used in regard to
financial statements of a business that is or will be a predecessor to
a shell company, means an examination of the financial statements by an
independent accountant in accordance with the standards of the PCAOB
for the purpose of expressing an opinion thereon. As a result, a target
private operating company would be required to comply with Article 2 of
Regulation S-X as if it were filing an initial public offering for its
audited financial statements. Forms S-4 and F-4 \256\ currently provide
that, for an acquisition by a registrant that is not a shell company,
(i) the target operating company financial statements may be audited in
accordance with U.S. Generally Accepted Auditing Standards,\257\ (ii)
the financial statements of the most recent fiscal year are required to
be audited only to the extent practicable,\258\ and (iii) financial
statements before the latest fiscal year need not be audited if they
were not previously audited.\259\ The staff, however, has advised
registrants that it expects the financial statements of the business,
i.e., target private operating company, in a transaction involving a
shell company to be audited to the same extent as a registrant in an
initial public offering, because at consummation the financial
statements of the target private operating company become that of the
registrant.\260\ The proposed amendments
[[Page 29492]]
would codify this existing staff guidance.
---------------------------------------------------------------------------
\255\ See proposed Rule 15-01(a) of Regulation S-X and
Instruction 1 to Item 17(b) of Form S-4.
\256\ See Instruction 1 to Item 17(b)(5) of Form F-4 and General
Instruction E(c)(2) of Form 20-F.
\257\ See 17 CFR 210.1-02(d) (Rule 1-02(d) of Regulation S-X).
\258\ See Instruction 1 to Item 17(b)(7) of Form S-4.
\259\ Id.
\260\ See FRM at Section 4110.5 for a chart that outlines the
staff's application of certain PCAOB requirements in various filings
with the SEC, which includes transactions involving a shell company.
---------------------------------------------------------------------------
3. Age of Financial Statements of the Predecessor
Proposed Rule 15-01(c) would provide that the age of financial
statements for a private operating company that would be the
predecessor to a shell company in a registration statement or proxy
statement would be based on whether the private operating company would
qualify as smaller reporting company if filing its own initial
registration statement. Absent this amendment, our rules require filing
financial statements of the private operating company that would be
required in an annual report, which do not have the same age
requirements as those in the context of an initial registration
statement.\261\ Similar to the other proposed amendments to Regulation
S-X, this amendment would further align the financial statement
requirements for a private operating company involved in a business
combination with a shell company with those required in a Securities
Act registration statement for an initial public offering. If the
private operating company would qualify to be a smaller reporting
company, it would apply Rule 8-08 of Regulation S-X for the age of
financial statements.\262\ Otherwise, the private operating company
would apply the age of financial statement requirements in Rules 3-
01(c) and 3-12 of Regulation S-X. Based on the staff's experience
reviewing these transactions, we believe this proposed amendment to be
consistent with existing practice.
---------------------------------------------------------------------------
\261\ For example, in an annual report, a domestic company with
net losses in its recently completed fiscal year would have up to 90
days after its most recently completed fiscal year-end to update its
third quarter financial statements. In contrast, in an initial
registration statement, it would have up to only 45 days. See
General Instruction A. to Form 10-K and 17 CFR 210.3-12 (Rule 3-12
of Regulation S-X).
\262\ See 17 CFR 210.8-08 (Rule 8-08 of Regulation S-X), which
states financial statements may be as current as of the end of the
third fiscal quarter when the anticipated effective or mailing date
falls within 45 days after the end of the fiscal year, OR if the
date falls within 90 days of the end of the fiscal year and (1) if a
reporting company, all reports due were filed; (2) in good faith the
company expects to report income in the fiscal year just completed;
and (3) it reported income in at least one of the two previous
fiscal years.
---------------------------------------------------------------------------
We are not proposing amendments to the age requirements for the
financial statements of the shell company registrant because we
continue to believe that the age requirements in Articles 3 and 8 of
Regulation S-X that apply to existing registrants are appropriate.
Thus, the existing provisions in Articles 3 and 8 of Regulation S-X for
reporting companies required to file under Exchange Act Section 13(a)
or 15(d) would continue to apply to shell companies.\263\
---------------------------------------------------------------------------
\263\ See Rule 3-01(c) of Regulation S-X (Rule 8-08 for smaller
reporting companies), which applies to reporting companies required
to file under Exchange Act Section 13(a) or 15(d).
---------------------------------------------------------------------------
4. Acquisitions of Businesses by a Shell Company Registrant or Its
Predecessor That Are Not or Will Not Be the Predecessor
The financial statements of a target private operating company that
is or will be the predecessor to a shell company registrant are
required in registration statements or proxy statements related to the
business combination.\264\ The financial statements of any other
businesses, besides the predecessor, that have been, or are probable to
be, acquired may also be required.\265\ For example, ``Shell Company
A'' and ``Target Private Operating Company B'' are part of a business
combination and a Form S-4 registration statement is filed. Target
Private Operating Company B acquired ``Company C'' before the Form S-4
was filed. The proposed amendments in this section would address the
reporting required for Company C in this non-exclusive example.
---------------------------------------------------------------------------
\264\ See Item 17 of Form S-4 or Form F-4, Sec. 240.14A-3(b),
and Items 13 and 14 of Schedule 14A.
\265\ See 17 CFR 230.408(a) (Securities Act Rule 408(a)) and 17
CFR 240.12b-20 (Exchange Act Rule 12b-20).
---------------------------------------------------------------------------
Under existing rules,\266\ financial statements of a business
acquired or probable of being acquired by the target private operating
company (e.g., ``Company C'' in the above example) are required to be
filed in a registration statement or proxy/information statement only
when omission of those financial statements would render the target
company's financial statements substantially incomplete or misleading.
In order to specify when such financial statements are required, we are
proposing new Rule 15-01(d) of Regulation S-X to require application of
Rules 3-05 or 8-04 (or Rule 3-14 as it relates to a real estate
operation), the Regulation S-X provisions related to financial
statements of an acquired business, to acquisitions of businesses by a
shell company registrant, or its predecessor, that are not or will not
be the predecessor to the registrant.\267\ This proposal would further
align the financial reporting for a shell company business combination
contained in Forms S-4 or F-4 and a proxy or information statement with
what would be required to be included in a Securities Act registration
statement for an initial public offering of the target private
operating company. Based on staff's experience reviewing these
transactions, we understand this proposed amendment to be consistent
with the current market practice of applying Rule 3-05 (or Rule 8-04)
to acquisitions by the target private operating company in the context
of a business combination involving a shell company.
---------------------------------------------------------------------------
\266\ Id.
\267\ 17 CFR 210.8-04 (Rule 8-04) applies when the registrant
or, depending on the context, its predecessor would qualify to be a
smaller reporting company based on its annual revenues as of the
most recently completed fiscal year if it were filing a registration
statement itself.
---------------------------------------------------------------------------
In connection with this proposed amendment in Rule 15-01(d), we
also considered and are proposing amendments related to the
significance tests in Rule 1-02(w) of Regulation S-X that determine
when acquired business financial statements are required. The existing
tests as applied to acquisitions involving shell companies appear
inconsistent with the reasons underlying the sliding scale approach
adopted in Rule 3-05.\268\ Rule 1-02(w) requires the financial
information of the registrant, which may be a shell company, to be used
as the denominator for the significant subsidiary tests and does not
address the scenario when there is both a shell company registrant and
target private operating company that is or will be its predecessor.
Because a shell company has nominal activity, the application of such
tests results in limited to no sliding scale for business acquisitions,
including those made by the private operating company that will be the
predecessor to the shell company, because every acquisition would be
significant and thus require financial statements.\269\ Such
application may limit the ability to
[[Page 29493]]
recognize which acquisitions have a greater impact on the predecessor
than others.\270\
---------------------------------------------------------------------------
\268\ Instructions for the Presentation and Preparation of Pro
Forma Financial Information and Requirements for Financial
Statements of Businesses Acquired or To Be Acquired, Release No. 33-
6413 (June 24, 1982) [47 FR 29832 (July 9, 1982)] (``Rule 3-05
Adopting Release''). The requirements are based on the significant
subsidiary tests using a sliding scale so that the requirements for
filing such financial statements, as well as the periods covered by
such financial statements, will vary with the percentage impact of
the acquisition on the registrant. In adopting the sliding scale
approach, the Commission stated its belief that the selected
percentages ``meet the objectives of providing adequate financial
information to investors, shareholders and other users while at the
same time reducing the reporting burdens of registrants involved in
acquisitions.''
\269\ For example, financial statements of a business that the
private operating company has acquired and represents less than 5%
of its total assets, revenue and net income could be required in the
Form S-4 because the acquired business would be compared to the
shell company's financial statements.
\270\ The 2020 amendments to Rules 1-02(w) and 3-05 did not
affect the financial statements related to the acquisition of a
business that is the subject of a proxy statement or registration
statement on Form S-4 or Form F-4. See Amendments to Financial
Disclosures about Acquired and Disposed Businesses, Release 33-
10786, (May 21, 2020) [85 FR 54002 (Aug. 31, 2020)], n.20.
---------------------------------------------------------------------------
We are proposing to amend Rule 1-02(w) of Regulation S-X to require
that significance of the acquired business be calculated using the
private operating company's financial information as the denominator
instead of that of the shell company registrant. Using the private
operating company's financial statements for the denominator should
produce results more consistent with the sliding scale approach in Rule
3-05 and recognizes that certain acquisitions have a greater impact
than others.\271\
---------------------------------------------------------------------------
\271\ Ibid.
---------------------------------------------------------------------------
Related to the application of the significance tests, we considered
the impact of the application of 17 CFR 210.11-01(b)(3)(i)(B) (``Rule
11-01(b)(3)(i)(B) of Regulation S-X''). This rule permits, in certain
circumstances, the use of pro forma amounts that depict significant
business acquisitions and dispositions consummated after the latest
fiscal year-end, for which the registrant's financial statements are
required to be filed, for the registrant's financial information in the
significance tests.\272\ While we are not proposing amendments to this
paragraph in Rule 11-01, based on the proposed amendment to 17 CFR
210.11-01(d) (``Rule 11-01(d)'') described below, we highlight that
application of this rule may change and result in a future acquired
business being compared to the pro forma amounts related to the shell
company and target private operating company business combination
transaction in filings made after the consummation of the business
combination transaction.\273\ The impact of such application would be
that the SPAC's financial statements, including its cash, would be part
of the pro forma financial information and will likely increase the
denominator in the significance tests compared to measuring an
acquisition solely on the target private operating company.
---------------------------------------------------------------------------
\272\ Such pro forma use is permitted if the registrant has
filed audited financial statements for any such acquired business
for the periods required by Rule 3-05 or Rule 3-14 and the pro forma
information required by Rule 11-01 through 11-02 of Regulation S-X.
\273\ Pursuant to the proposed amendment to Rule 11-01d) that
would stipulate that the SPAC is a business, an acquisition of the
SPAC is considered to be an acquisition of a business, and the
conditions to use pro forma financial statements depicting the
acquisition as the denominator in the significance tests may be met.
---------------------------------------------------------------------------
We are proposing new 17 CFR 210.15-01(d)(2) (``Rule 15-01(d)(2)'')
to specify when the financial statements of a recently acquired
business (or real estate operation) that is not the private operating
company that will be the predecessor, which are omitted from a shell
company registration, proxy, or information statement under Regulation
S-X, would be required to be filed. Rule 3-05(b)(4)(ii) of Regulation
S-X provides that financial statements of a probable of being acquired
or recently acquired business may be omitted from a registration,
proxy, or information statement when their significance is measured at
50% or less (or Rule 3-14(b)(3)(ii) as it relates to a real estate
operation). The rule further provides that financial statements of a
recently acquired business, when omitted from the registration
statement or proxy or information statement, must be filed under cover
of Form 8-K within 75 days after consummation of the acquisition.
Because the significance of the acquisition is greater than 20% but
less than 50%, the recently acquired business's financial statements,
which are omitted from the registration, proxy, or information
statement, must be filed.\274\ However, it is unclear how those
financial statements are to be filed when the private operating company
is not yet subject to Exchange Act reporting requirements and thus may
not be able to file a Form 8-K. Rather than requiring a post-effective
amendment, we are proposing in Rule 15-01(d)(2) that the financial
statements of the acquired business omitted from the previously-filed
registration, proxy, or information statement would be required in an
Item 2.01(f) Form 8-K filed with Form 10 information.
---------------------------------------------------------------------------
\274\ Rule 3-05 generally requires financial statements of an
acquired business when the conditions in Rule 1-02(w) related to
significant subsidiary exceed 20%.
---------------------------------------------------------------------------
5. Financial Statements of a Shell Company Registrant After the
Combination With Predecessor
In recent years, the staff has received questions on whether the
historical financial statements of the shell company are required in
filings made after the business combination. Due to the lack of clarity
regarding the application of the financial statement requirements in
Articles 3 and 8 of Regulation S-X, we are proposing new Rule 15-01(e),
which would allow a registrant to exclude the financial statements of a
shell company, including a SPAC, for periods prior to the acquisition
once the following conditions have been met: (1) The financial
statements of the shell company have been filed for all required
periods through the acquisition date, and (2) the financial statements
of the registrant include the period in which the acquisition was
consummated.
In the example of a de-SPAC transaction, the financial statements
of the SPAC, as a shell company, would generally no longer be relevant
or meaningful to an investor after a de-SPAC transaction once the
financial statements of the registrant include the period in which the
de-SPAC transaction was consummated for any filing.\275\ The proposed
rule would apply regardless of whether the de-SPAC transaction is
accounted for as a forward acquisition of the target private operating
company by the SPAC or a reverse recapitalization of the target private
operating company. The financial statements of the SPAC would be
required in all filings (including registration statements and the Form
8-K with Form 10 information filed following the de-SPAC transaction)
prior to the filing of the first periodic report that includes those
post-business combination financial statements. The proposed amendments
should not result in a significant change from current practice as it
relates to periodic reports because the staff in the last several years
has not objected to the registrant excluding the historical financial
statements of the SPAC from periodic reports once the financial
statements for the registrant include the period in which the
acquisition or recapitalization was consummated.
---------------------------------------------------------------------------
\275\ Once the financial statements of the registrant include
the period in which the de-SPAC transaction was consummated, the
financial statements required would be those of the predecessor for
all historical periods presented.
---------------------------------------------------------------------------
Further, the proposed amendments would not change the requirement
that a registrant must provide all material information as may be
necessary to make required statements, in light of the circumstances
under which they were made, not misleading,\276\ so if there is
information included in or about the historical SPAC financial
statements that would be material to an investor, a registrant would
still be required to provide such information.
---------------------------------------------------------------------------
\276\ See Exchange Act Rule 12b-20, Securities Act Rule 408(a).
---------------------------------------------------------------------------
6. Other Amendments
In addition, we are proposing a number of other related amendments
as follows:
We are proposing to amend Rule 11-01(d) of Regulation S-X
to state that
[[Page 29494]]
a SPAC is a business for purposes of the rule. While Rule 11-01(d)
states that an entity is presumed to be a business, consideration of
the continuity of the SPAC's operations prior to and after the de-SPAC
transaction may lead some parties to conclude that the SPAC is not a
business under the rule. Nonetheless, given the significant equity
transactions generally undertaken by a SPAC, we believe the financial
statements of the SPAC could be material to an investor, particularly
when they underpin adjustments to pro forma financial information in a
transaction when an operating company is the legal acquirer of a SPAC.
As a result of the proposed rule, an issuer that is not a SPAC may be
required to file financial statements of the SPAC in a resale
registration statement on Form S-1.
Item 2.01(f) of Form 8-K currently requires a shell
company registrant to file, after an acquisition, the information that
would be required if the registrant were filing a general form for the
registration of securities on Form 10. We are proposing to revise this
Item to refer to ``acquired business,'' rather than ``registrant,'' in
an effort to clarify that the information provided relates to the
acquired business and for periods prior to consummation of the
acquisition and not the shell company registrant.
Rule 3-02 of Regulation S-X requires that statements of
comprehensive income be filed for the registrant and its predecessors.
However, as it relates to balance sheets, certain provisions in
Regulation S-X specify that they be filed for the registrant and do not
specifically refer to balance sheets of predecessors. We do not believe
the intent of these rules is to provide the predecessor's statements of
comprehensive income without the balance sheets as that would not be
considered a complete set of financial statements and would be
inconsistent with Article 3 of Regulation S-X that requires both. We
are proposing amendments to Rules 3-01, 8-02, and 10-01(a)(1) of
Regulation S-X to specifically refer to financial statements of
predecessors consistent with the provision regarding income statements.
These amendments codify existing financial reporting practices, and we
do not expect them to result in any changes in disclosures.
Request for Comment
103. Should we adopt the amendments and new rules related to
aligning financial statement disclosures, including Rule 15-01 of
Regulation S-X, as proposed?
104. Should Rule 15-01 provide that the term audit (or
examination), when used in regard to financial statements of a business
that is or will be a predecessor to a shell company, means an
examination of the financial statements by an independent accountant in
accordance with the standards of the PCAOB for the purpose of
expressing an opinion thereon, as proposed?
105. Should Article 15 of Regulation S-X address financial
statement requirements for the acquisition by a shell company of a
business that will be its predecessor, as proposed, or should we limit
the requirements to apply only to a de-SPAC transaction, and if so,
why?
106. Should the significance tests that determine whether the
financial statements of businesses that are not or will not be the
predecessor are required to be filed employ the denominator of the
private operating company in lieu of that of the shell company
registrant, as proposed? Should the pro forma financial information
that gives effect to the shell company transaction be allowed to be
used as the denominator in measuring the significance of other
acquisitions not involving a predecessor? Should there be restrictions
on when such pro forma financial information is used to measure
significance, such as only for acquisitions that occur subsequent to
consummation of the transaction and not for acquisitions that are done
in tandem with the shell company transaction?
107. Should the financial statements of a shell company not be
required in filings once the financial statements of the registrant
include the period in which the acquisition was consummated, as
proposed? Are there situations in which investors would continue to
rely upon the information in the shell company financial statements
after the acquisition was consummated and reflected in the financial
statements of the registrant, or other factors we should consider in
determining when the shell company financial statements should not be
required in filings after the acquisition is complete? Should the
accounting for the transaction as a forward acquisition or reverse
recapitalization determine whether the financial statements are
required in filings made after the acquisition was consummated?
108. Should Rule 11-01(d) of Regulation S-X be amended to state
that a SPAC is a business for purposes of the rule, as proposed? Would
it change the existing application of Rule 11-01(b)(3)(i)(B) of
Regulation S-X as it relates to de-SPAC transactions? Should eliciting
the financial statements of the SPAC in a resale registration statement
of an issuer that is not a SPAC be accomplished through a rule that
specifically requires the SPAC financial statements to be filed
(subject to the provisions of proposed Rule 15-01(e))?
109. The Form 8-K filed pursuant to Item 2.01(f) may require a
third fiscal year of certain financial statements for an acquired
business that is the predecessor to a shell company and an emerging
growth company, while Rule 15-01(b), as proposed, would only require
two. Should we amend the Form 8-K requirement to provide an exception
to the required Form 10-type information so the financial statements of
the acquired business need not be presented for any period prior to the
earliest audited period previously presented in connection with a
registration, proxy, or information statement of the registrant?
V. Enhanced Projections Disclosure
A. Background
Disclosure of financial projections is not expressly required by
the federal securities laws; however, there are various reasons why
registrants produce and disclose such information. For example,
projections may be disclosed to comply with state or foreign corporate
law regarding the board's decision to approve a business combination
transaction or the basis underlying a fairness opinion issued by a
financial advisor.\277\ Companies engaged in business combination
transactions may use projections to negotiate the offered
consideration, terms, and conditions and to allocate risks in those
transactions. Companies may also disclose projections to avoid claims
that the omission of such information violates federal anti-fraud
provisions or to satisfy certain requirements under Regulation M-
A.\278\
---------------------------------------------------------------------------
\277\ See, e.g., In re Netsmart Techs., Inc., 924 A.2d 171 (Del.
Ch. 2007), and the disclosure of the substantive work performed by
the financial advisor, see, e.g., In re Pure Res., Inc., 808 A.2d
421 (Del. Ch. 2002).
\278\ See Exchange Act Rules 10b-5, 12b-20, 13e-3(b)(1)(ii), and
17 CFR 240.14a-9 (Exchange Act Rule 14a-9), Securities Act Rule
408(a), and Exchange Act Section 14(e). See also Item
1004(b)(2)(iii) and 1011(c) of Regulation M-A. Omission of
projections used by the board or the fairness opinion advisers, in
particular, have been the subject of various lawsuits filed in
federal courts alleging violation of Rule 14a-9. See, e.g., Smith v.
Robbins & Myers, Inc., 969 F.Supp.2d 850 (2013), Azar v. Blount
Intern., Inc., No. 3:16-cv-483-SI, 2017 WL 1055966, 2017 U.S. Dist.
LEXIS 39493 (D. Or. Mar. 20, 2017), and NECA-IBEW Pension Trust Fund
v. Precision Castparts Corp., No. 3:16-cv-01756-YY, 2017 WL 4453561,
2017 U.S. Dist. LEXIS 165139 (D. Or. Oct. 3, 2017), adopted by 2018
WL 533912, 2018 U.S. Dist. LEXIS 11463 (D. Or. Jan. 24, 2018)
(relating to disclosed projections that management knew were not
reflective of management's plans for the registrant).
---------------------------------------------------------------------------
[[Page 29495]]
Recent events have raised renewed concerns about the use of
projections, particularly with respect to de-SPAC transactions in which
private operating companies disclose projections that may lack a
reasonable basis.\279\ For example, some companies have presented
projections of significant increases in revenue or market share even
though they do not have any operations at the time such projections
were prepared.\280\ Other companies have allegedly used materially
misleading assumptions, failed to take into account foreseeable future
events in developing projections, or used projections unsupported by a
target's experience.\281\ Similar potentially misleading projections
have been used in non-SPAC filings, including with respect to future
revenues, prospects and profitability.\282\ Although the Commission has
previously acknowledged that projections and other forward-looking
information can provide useful information for investors when making
voting and investment decisions,\283\ it has also recognized that the
use of such forward-looking information could raise investor protection
concerns.\284\ Accordingly, the Commission adopted Item 10(b) of
Regulation S-K to set forth its views on important factors to be
considered in formulating and disclosing such projections in certain
Commission filings.\285\ Item 10(b) states that management has the
option to present in Commission filings its good faith assessment of a
registrant's future performance, but it also states that management
must have a reasonable basis for such an assessment. Item 10(b) further
expresses the Commission's views on the need for disclosure of the
assumptions underlying the projections, the limitations of such
projections, and the format of the projections.
---------------------------------------------------------------------------
\279\ The Commission recently has brought enforcement actions
alleging the use of baseless or unsupported projections about future
revenues and the use of materially misleading underlying financial
projections. These cases involve both SPACs and other reporting
companies. See the following matters related to SPACs: In the Matter
of Momentus, Inc., et. al., Exch. Act Rel. No. 34-92391 (July 13,
2021); SEC vs. Hurgin, et al., Case No. 1:19-cv-05705 (S.D.N.Y.,
filed June 18, 2019); In the Matter of Benjamin H. Gordon, Exch. Act
Rel. No. 34-86164 (June 20, 2019); and, SEC vs. Milton, Case No.
1:21-cv-6445 (S.D.N.Y., filed July 29, 2021). See the following non-
SPAC cases: SEC vs. CanaFarma Hemp Products Corp, et al., Case No.
1:21-cv-08211 (S.D.N.Y., filed Oct. 5, 2021); SEC v. Thomas, et al.,
Civil Action No. 19-cv-1132 (D. Nev., filed June 28, 2019); In the
Matter of Ribbon Communications Inc., et. al., Exch. Act Rel. No.
34-83791 (Aug. 7, 2018); SEC v. Enviro Board Corporation, et al.,
[Civil Action No. 2:16-cv-06427 (C.D. Cal., filed Aug. 26, 2016)];
and SEC v. Roberts, et. al., Civil Action No. 8:15-cv-2093-T-17-MAP
(M.D. Fla., filed Sept. 9, 2015). See also Dave Michaels, Regulators
Hit Space SPAC Over Disclosures, The Wall Street Journal, July 26,
2021.
\280\ Some news reports have also suggested that many post-
business combination companies, particularly those with less revenue
or that are early stage companies, do not meet revenue or earnings
targets that they provided to investors at the time of the de-SPAC
transaction. An analysis performed by The Wall Street Journal
indicates that, of the 63 companies that became public companies
through a de-SPAC transaction in 2021 and had less than $10 million
in sales at the time of the transaction, at least 30 did not meet
their projections. The article reported that the companies in the
analysis expected to miss their 2021 revenue projections fell short
by an average of 53% and that companies falling short of their
earnings projections have estimated losses that are approximately
40% greater, on average, than they projected at the time of the de-
SPAC transaction. See Heather Somerville, SPACs Fall Short of Lofty
Goals, The Wall Street Journal, Feb. 26, 2022.
\281\ See supra note 275.
\282\ Id.
\283\ Disclosure of Projections of Future Economic Performance,
Release No. 33-5362 (Feb. 2, 1973) [38 FR 7220 (Mar. 19, 1973)] and
Guides for Disclosure of Projections of Future Economic Performance,
Release No. 33-5992 (Nov. 7, 1978) [43 FR 53246 (Nov. 15, 1978)].
\284\ See Release No. 33-5362, supra note 283.
\285\ See Adoption of Integrated Disclosure System, Release 33-
6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)]. In connection
with the adoption of the integrated reporting system, the Commission
rescinded several staff guides relating to the preparation of
registration statements and reports and relocated the substance of
some of them into Item 10(b) of Regulation S-K. See Rescission of
Guides and Redesignation of Industry Guides, Release No. 33-6384
(Mar. 16, 1982) [47 FR 11476 (Mar. 16, 1982)].
---------------------------------------------------------------------------
B. Rule Proposals
We are proposing to amend Item 10(b) of Regulation S-K to expand
and update the Commission's views on the use of projections. Among
other things, the proposed amendments would address the presentation of
projections by companies with no history of operations and provide that
the guidance in the item also applies to projections of future economic
performance of persons other than the registrant, such as the target
company in a business combination. Further, given the widespread use of
projections in de-SPAC transactions and the resulting heightened
concerns, we are also proposing new Item 1609 of Regulation S-K that
would be applicable to financial projections used in de-SPAC
transactions and would set forth additional disclosure requirements
relating to financial projections.
The proposed revisions to Item 10(b) of Regulation S-K and proposed
Item 1609 of Regulation S-K are intended to help address concerns about
the use of projections in de-SPAC transactions and similar
circumstances. By providing additional guidance for registrants and
mandating specific disclosures in de-SPAC transactions, these proposed
rules could enhance the attention and level of care companies bring to
the preparation of financial projections, both in de-SPAC transaction
filings and in other filings made with the Commission.
1. Item 10(b) of Regulation S-K
We are proposing to amend Item 10(b) to present the Commission's
updated views on projected financial information. The proposed
amendments to Item 10(b) would continue to state the Commission's view
that projected financial information included in filings subject to
Item 10(b) must have a reasonable basis. To address specific concerns
that some companies may present projections more prominently than
actual historical results (or the fact that they have no operations at
all) or use non-GAAP financial measures in the projections without a
clear explanation or definition of such a measure, we propose to amend
Item 10(b) to state that:
Any projected measures that are not based on historical
financial results or operational history should be clearly
distinguished from projected measures that are based on historical
financial results or operational history;
It generally would be misleading to present projections
that are based on historical financial results or operational history
without presenting such historical measure or operational history with
equal or greater prominence; and
The presentation of projections that include a non-GAAP
financial measure should include a clear definition or explanation of
the measure, a description of the GAAP financial measure to which it is
most closely related,\286\ and an explanation why the non-GAAP
financial measure was used instead of a GAAP measure.\287\
---------------------------------------------------------------------------
\286\ The reference to the nearest GAAP measure called for by
amended Item 10(b) would not require a reconciliation to that GAAP
measure. The need to provide a GAAP reconciliation would continue to
be governed by Regulation G and Item 10(e) of Regulation S-K.
\287\ The Commission stated a similar view in 2003. See
Conditions for Use of Non-GAAP Financial Measures, Release No. 33-
8176 (Jan. 22, 2003), section II.B.2 [68 FR 4820 (Jan. 30, 2003)].
---------------------------------------------------------------------------
These proposed changes, if adopted, should assist registrants in
presenting their projections in an appropriate format and with the
appropriate context, which in turn should facilitate investors'
evaluation of the projections, assessment of the reasonableness of the
bases for these projections (particularly when compared to historical
performance and results), and determinations about the appropriate
reliance to place on the projections
[[Page 29496]]
when making an investment or voting decision.
Finally, Item 10(b) currently refers to projections regarding the
future performance of a ``registrant.'' In business combination
transactions, it is common for projections of the target company to be
included in the Securities Act registration statement or proxy
statement filed by the acquiring company. In such a case, it may be
unclear if the guidance in Item 10(b) applies to the target company's
projections because the target company is not the registrant for that
filing. In our view, Item 10(b) should apply to such projections
because they are nevertheless being presented to investors through the
registration statement or proxy statement filed by the acquiring
company. Accordingly, we are proposing to amend Item 10(b) to state
that the guidance therein applies to any projections of future economic
performance of persons other than the registrant, such as the target
company in a business combination transaction, that are included in the
registrant's Commission filings.
Request for Comment
110. Should we amend Item 10(b) of Regulation S-K, as proposed? Is
there additional or different guidance we should provide?
111. Instead of applying to all filings covered by Item 10(b), as
proposed, should the proposed updated guidance apply solely to filings
relating to business combination transactions (including de-SPAC
transactions), while retaining the existing Item 10(b) guidance for
other filings?
112. Are the proposed amendments to Item 10(b) necessary in light
of proposed Item 1609 of Regulation S-K, which is limited to de-SPAC
transactions?
113. Are there different ways of presenting financial projections
that would be beneficial to investors? For example, should we require
registrants to present some or all financial projections in a
separately captioned section of a Commission filing?
2. Item 1609 of Regulation S-K
We are also proposing new Item 1609 of Regulation S-K that would
apply only to de-SPAC transactions.\288\ The nature of the SPAC
structure and de-SPAC transactions raise heightened concerns about the
use of projections in such transactions. As noted above, a sponsor's
compensation may depend to a large extent on the completion of the de-
SPAC transaction, and thus the SPAC and its sponsor may have an
incentive to use a private operating company's financial projections in
seeking support for the de-SPAC transaction.\289\ In particular, such
projections could be used to value the private operating company and
may influence how investors evaluate a proposed de-SPAC
transaction.\290\ Similarly, as a consequence of the SPAC's expected
valuation of the private operating company on the basis of this type of
financial projections, controlling shareholders and management of the
private operating company may have an incentive to be overly aggressive
in their development of projections as a means of justifying a higher
price for their company.\291\ Aggressive projections may also be used
by the SPAC or the private operating company to justify the target's
valuation in order to help meet any exchange listing requirement that
the target has a fair market value equal to at least 80% of the balance
of funds in the SPAC's trust account.\292\
---------------------------------------------------------------------------
\288\ The disclosure would be required in the forms or schedules
filed for de-SPAC transactions.
\289\ There is evidence that, in a majority of de-SPAC
transactions announced in the twelve months ending in the first
quarter of 2021, the private operating companies were pre-revenue,
thus making financial projections an important basis for SPACs and
private operating companies to find additional investments and to
receive support for de-SPAC transactions. See ``Why Have SPAC
Valuations Skyrocketed?,'' Stuart Gleichenhaus and Bill Stotzer, FTI
Consulting, Aug. 6, 2021.
\290\ In this regard, we note that there also is evidence of the
different uses of, and greater reliance on, financial projections by
retail investors than by institutional investors. See Dambra, Even-
Tov, and George, supra note 33.
\291\ See Kimball Chapman, Richard M. Frankel, and Xiumin
Martin, SPACs and Forward-Looking Disclosure: Hype or Information?
(SSRN Working Paper, 2021).
\292\ See, e.g., NYSE Listed Company Manual Section 102.06 and
Nasdaq Listing Rule IM- 5101-2.
---------------------------------------------------------------------------
For these reasons, we are proposing additional disclosures intended
to assist investors in assessing the bases of projections used in de-
SPAC transactions and determining to what extent they should rely on
such projections. Proposed Item 1609 would require a registrant to
provide the following disclosures:
With respect to any projections disclosed by the
registrant, the purpose for which the projections were prepared and the
party that prepared the projections;
All material bases of the disclosed projections and all
material assumptions underlying the projections, and any factors that
may materially impact such assumptions (including a discussion of any
factors that may cause the assumptions to be no longer reasonable,
material growth rates or discount multiples used in preparing the
projections, and the reasons for selecting such growth rates or
discount multiples); and
Whether the disclosed projections still reflect view of
the board or management of the SPAC or target company, as applicable,
as of the date of the filing; if not, then discussion of the purpose of
disclosing the projections and the reasons for any continued reliance
by the management or board on the projections.
These proposed disclosures would inform investors about why the
projections were prepared, and by whom, which could allow them to
better understand the motivations underlying such projections. In
addition, the proposed disclosures could help investors assess the
continued reliability of the projections both independently and through
the views of the board or management.
Request for Comment
114. Should we adopt Item 1609 as proposed? Are there additional
disclosures that we should require in de-SPAC transaction filings
related to financial projections?
115. As proposed, Item 1609 of Regulation S-K would apply only to
de-SPAC transactions. Should we expand the scope of the item to apply
to all companies that publicly disclose financial projections in
Commission filings?
116. Should we prohibit the disclosure of any specific financial
measures or metrics? If so, which measures or metrics?
117. Will proposed Item 1609 discourage the use of financial
projections in de-SPAC transactions? What impact would this have on
investors? Would our proposal have any impact on the ability to comply
with state or foreign law obligations regarding disclosures of
projections used in business combination transactions?
118. Both the proposed amendments relating to the PSLRA safe harbor
and proposed Item 1609 may result in market participants using
financial projections in de-SPAC transactions in a different manner
than they do currently. Would adoption of only one of the proposals
strike a better balance in terms of the costs and benefits with respect
to the use of projections? If so, which proposal?
[[Page 29497]]
VI. Proposed Safe Harbor Under the Investment Company Act
A. Background
While the number of SPACs has grown dramatically in recent
years,\293\ some SPACs have sought to operate in novel ways that
suggest that SPACs and their sponsors should increase their focus on
evaluating when a SPAC could be an investment company.\294\ We are
concerned that SPACs may fail to recognize when their activities raise
the investor protection concerns addressed by the Investment Company
Act.\295\ To assist SPACs in focusing on, and appreciating when, they
may be subject to investment company regulation, we are proposing Rule
3a-10, which would provide a safe harbor from the definition of
``investment company'' under Section 3(a)(1)(A) \296\ of the Investment
Company Act for SPACs that meet the conditions discussed below.\297\ We
believe that certain SPAC structures and practices may raise serious
questions as to their status as investment companies. While a SPAC
would not be required to rely on the safe harbor, we have designed the
proposed conditions of the safe harbor to align with the structures and
practices that we preliminarily believe would distinguish a SPAC that
is likely to raise these questions from one that would not.
---------------------------------------------------------------------------
\293\ See supra notes 7-8 and accompanying text.
\294\ The growth of the SPAC industry, among other things, has
also sparked debate about the status of SPACs as investment
companies. See, e.g., Kristi Marvin, 49 Law Firms Unite and Push
Back on Recent SPAC Litigation, SPAC Insider (Aug. 27, 2021),
available at https://spacinsider.com/2021/08/27/49-law-firms-unite-push-back-on-spac-litigation/; Alison Frankel, Law Profs Defend
Theory that SPAC is Illegal under the Investment Company Act,
Reuters (Nov. 1, 2021).
\295\ The Investment Company Act regulates the organization of
investment companies that engage primarily in investing,
reinvesting, and trading in securities, and whose own securities are
offered to the investing public. The Act is designed to minimize
conflicts of interest that arise in these complex operations
protecting investors by preventing insiders from managing the
companies to their benefit and to the detriment of public investors;
preventing the issuance of securities having inequitable or
discriminatory provisions; preventing the management of investment
companies by irresponsible persons; preventing the use of unsound or
misleading methods of computing earnings and asset value; preventing
changes in the character of investment companies without the consent
of investors; preventing investment companies from engaging in
excessive leveraging; and ensuring the disclosure of full and
accurate information about the companies and their sponsors. See
Section 1(b) of the Investment Company Act [15 U.S.C. 80a-1(b)].
\296\ 15 U.S.C. 80a-3(a)(1)(A).
\297\ Proposed 17 CFR 270.3a-10. SPACs that meet the proposed
rule's conditions would not need to register under the Investment
Company Act.
---------------------------------------------------------------------------
1. Potential Status as an Investment Company
Section 3(a)(1)(A) defines an ``investment company'' as any issuer
that is or holds itself out as being engaged primarily, or proposes to
engage primarily, in the business of investing, reinvesting, or trading
in securities. Depending on the facts and circumstances, SPACs could
meet the definition of ``investment company'' in Section 3(a)(1)(A). To
assess a SPAC's status as an investment company under that definition,
we generally look to the SPAC's assets, the sources of its income, its
historical development, its public representations of policy, and the
activities of its officers and directors (known as the ``Tonopah
factors'').\298\
---------------------------------------------------------------------------
\298\ See In the Matter of Tonopah Mining Co., 26 S.E.C. 426
(July 21, 1947). See generally SEC v. National Presto Industries,
Inc., 486 F.3d 305 (7th Cir. May 15, 2007), rev'g. SEC v. National
Presto Industries Inc., Case No. 02 C 5057 (N.D. Ill, Oct. 31,
2005). The Tonopah factors were first used by the Commission to
determine an issuer's primary engagement under Section 3(b)(2), but
have been applied in part or in totality to determine an issuer's
primary engagement in other contexts under the Investment Company
Act, including Section 3(a)(1)(A) of the Act. Certain Prima Facie
Investment Companies, Release No. IC-10937 (Nov. 13, 1979) [44 FR
66608 (Nov. 20, 1979)] at n.24 (``Proposing Release to Rule 3a-1'')
(``Although [Tonopah] was decided under [S]ection 3(b)(2) of the
Act, the ``primary engagement'' standard set forth in that case also
appears to be applicable to the identical standard of Section
3(a)(1)[A] and [S]ection 3(b)(1).''). The Commission has also
considered the activities of the company's employees, in addition to
company's officers and directors, in determining a company's primary
business. See, e.g., 17 CFR 270.3a-8 (Rule 3a-8 under the Investment
Company Act); Snowflake Inc., Release No. IC-34049 (Oct. 9, 2020)
[85 FR 65449 (Oct. 15, 2020)] (notice), Release No. IC-34085 (Nov.
4, 2020) (order); Lyft Inc., Release No. IC-33399 (Mar. 14, 2019)
[84 FR 10156 (Mar. 19, 2019)] (notice), Release No. IC-33442 (Apr.
8, 2019) (order).
---------------------------------------------------------------------------
SPACs are generally formed to identify, acquire and operate a
target company through a business combination and not with a stated
purpose of being an investment company.\299\ We understand that SPACs
typically view their public representations, historical development and
efforts of officers and directors as consistent with those of issuers
that are not investment companies. At the same time, most SPACs
ordinarily invest substantially all their assets in securities, often
for a period of a year or more, meaning that investors hold interests
for an extended period in a pool of securities. Moreover, whatever
income a SPAC generates during this period is generally attributable to
its securities holdings. The asset composition and sources of income
for most SPACs may therefore raise questions about their status as
investment companies under Section 3(a)(1)(A) of the Investment Company
Act and, in assessing this status, these factors would need to be
weighed together with the other Tonopah factors.
---------------------------------------------------------------------------
\299\ See generally supra Section I.
---------------------------------------------------------------------------
2. Rationale for the Safe Harbor
The safe harbor we are proposing focuses on conditions that limit a
SPAC's duration, asset composition, business purpose and activities as
a means of enhancing investor protection.\300\ The proposed rule is
designed so that, if a SPAC satisfies the rule's conditions, together
with the disclosure requirements being proposed in this release, such
SPAC's operations would be limited and differ sufficiently from those
of investment companies so as to generally not raise the types of
investor protection concerns that the Investment Company Act is
intended to address. In addition, the proposed rule may also promote
investor protection by highlighting for SPACs and their sponsors the
Investment Company Act concerns that certain SPAC activities may raise.
---------------------------------------------------------------------------
\300\ We understand that SPACs typically place most of their
assets in a trust or escrow accounts. Although the Commission has
never addressed the status of SPACs under the Investment Company
Act, the Commission has addressed the status of escrow or trust
accounts established by blank check companies that comply with Rule
419 under the Securities Act (``Rule 419 Accounts''). The Commission
took the position that ``although a Rule 419 Account may be an
investment company under the Investment Company Act of 1940, in
light of the purposes served by the regulatory requirement to
establish such an account, the limited nature of the investments,
and the limited duration of the account, such an account will
neither be required to register as an investment company nor
regulated as an investment company as long as it meets the
requirements of Rule 419.'' Blank Check Offerings, supra note 6
(``Rule 419 Adopting Release''), at text accompanying n.32. SPACs
have evolved since the Commission adopted Rule 419, and as noted
above, SPACs are not subject to the requirements of Rule 419. See
supra notes 12 and 13 and accompanying text.
---------------------------------------------------------------------------
The proposed rule may also have the effect of providing more
certainty to SPACs regarding their status under the Investment Company
Act. This in turn, could facilitate capital formation because SPACs
that operate within the boundaries of the safe harbor would be assured
that they would not qualify as investment companies. The rule may also
promote efficiency by providing a clear framework for SPACs to
determine their status under the Investment Company Act.\301\
---------------------------------------------------------------------------
\301\ For these reasons, we believe the safe harbor, subject to
the proposed conditions, would be necessary or appropriate in the
public interest, and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of the
Act. See Section 6(c) of the Investment Company Act [15 U.S.C. 80a-
6(c)]. See also Section 38(a) of the Investment Company Act [15
U.S.C. 80a-37(a)].
---------------------------------------------------------------------------
[[Page 29498]]
3. Boundaries of the Safe Harbor
While a SPAC would not be required to rely on the safe harbor, we
have designed the proposed conditions of the safe harbor to align with
the structures and practices that we preliminarily believe would
distinguish a SPAC that is likely to raise serious questions as to its
status as an investment company under the Investment Company Act from
one that would not. Activities that would raise these concerns include,
solely by way of example and without limitation, if a SPAC were to
invest in securities not permitted by the proposed safe harbor,
actively manage its portfolio, or hold itself out in a manner that
suggests investors should invest to gain exposure to the portfolio it
holds prior to the de-SPAC transaction.
A SPAC would raise similar concerns if it were to invest its assets
in securities, including those permitted by the safe harbor, for a
lengthier period of time without identifying a target company. As
discussed below, we are concerned that, the longer the SPAC operates
with its assets invested in securities and its income derived from
securities, the more likely investors will come to view the SPAC as a
fund-like investment and the more likely the SPAC will appear to be
deviating from its stated business purpose.\302\ Similarly, if a SPAC
did not seek to engage in a business combination but instead sought to
acquire a minority interest in a target company with the intention of
being a passive investor, it is more likely that it will appear to be
an investment company. Investors in SPACs that engage in the activities
discussed above may be at a significantly greater risk of acquiring
SPAC shares expecting a fund-like investment.\303\
---------------------------------------------------------------------------
\302\ See infra Section VI.B.2.b.
\303\ In considering the investment company status of SPACs that
do not comply with the safe harbor, we would use the traditional
framework for evaluating the status of a potential investment
company discussed above.
---------------------------------------------------------------------------
The safe harbor we are proposing only addresses investment company
status under Section 3(a)(1)(A) of the Investment Company Act, commonly
known as the ``subjective test.'' Section 3(a)(1)(C) of the Investment
Company Act provides an alternate ``objective test'' that defines an
``investment company'' as any issuer that is engaged or proposes to
engage in the business of investing, reinvesting, owning, holding, or
trading in securities, and that owns or proposes to acquire investment
securities,\304\ having a value exceeding 40% of the value of the
company's total assets (exclusive of Government securities and cash
items) on an unconsolidated basis. If a SPAC owns or proposes to
acquire 40% or more of investment securities, it would likely need to
register and be regulated as an investment company under the Investment
Company Act.
---------------------------------------------------------------------------
\304\ Section 3(a)(2) of the Investment Company Act generally
defines ``investment securities'' to include all securities except
Government securities, securities issued by employees' securities
companies, and securities issued by majority-owned subsidiaries of
the owner which are not investment companies or certain private
investment companies. 15 U.S.C. 80a-3(a)(2).
---------------------------------------------------------------------------
The safe harbor we are proposing is intended to address the status
of a qualifying SPAC from the time of the SPAC's initial public
offering until it completes its de-SPAC transaction.\305\ For purposes
of the proposed rule, the definitions of SPAC, de-SPAC transaction, and
target company would be the same as those set forth in proposed Item
1601 of Regulation S-K.\306\
---------------------------------------------------------------------------
\305\ The remaining company (or companies) after the de-SPAC
transaction may also raise separate questions of Investment Company
Act status. If a remaining company meets the definition of
``investment company'' following the de-SPAC transaction, that
company would need to register as an investment company or rely on
an appropriate exclusion or exemption under the Investment Company
Act.
\306\ See supra Section II.A.
---------------------------------------------------------------------------
Request for Comment
119. Instead of a safe harbor, should we provide an interpretation
concerning when SPACs would meet the definition of ``investment
company''? Alternatively, should we exempt SPACs that meet the
definition of ``investment company'' from any provisions of the
Investment Company Act, and if so, which provisions? Are there any
changes we should make to the proposed approach that would better
achieve the objectives of the proposed rule? Are there conditions we
should include in addition to those set forth below?
120. We request comment on whether the safe harbor should include
an exemption from Section 3(a)(1)(C), in addition to Section
3(a)(1)(A). If such an expansion is needed, please explain the
circumstances in which a SPAC could meet the definition of ``investment
company'' in Section 3(a)(1)(C) while still complying with the
conditions in the proposed safe harbor.
121. Should the proposed rule incorporate the definitions of de-
SPAC transaction, special purpose acquisition company and target
company as proposed in Item 1601? Should any of these definitions be
different under proposed Rule 3a-10? If so, please identify the
definition, how the definition should be changed, and why.
122. We understand that SPACs typically place most of their assets
in a trust or escrow account as required by the listing standards. In
the event that these accounts may also be ``issuers'' under the
Investment Company Act,\307\ does the safe harbor need to address these
accounts under that Act? Alternatively, should the rule text specify
that assets and activities of the SPAC (as discussed below) include
those of the trust?
---------------------------------------------------------------------------
\307\ See supra note 300.
---------------------------------------------------------------------------
123. As proposed, an existing SPAC that has not completed a de-SPAC
transaction prior to the effective date of the rule would not be
prohibited from relying on the safe harbor if it satisfies the
conditions. Should we permit an existing SPAC to rely on the safe
harbor if it does not have a board resolution but has other
contemporary evidence of its intent and otherwise meets the conditions
of the safe harbor? Alternatively, should we limit reliance on the safe
harbor to SPACs formed after the effective date of the rule? If
proposed Rule 3a-10 is adopted, should the rule's effective date
reflect the possibility that some SPAC's may need to alter their
operations or more quickly complete a de-SPAC transaction in order to
meet the conditions of the rule? If so, should we provide an extended
or delayed effective date? Should we provide a compliance or transition
period, and if so, why?
B. Conditions
The conditions to the safe harbor focus on certain defining
characteristics of SPACs \308\ and are designed to ensure that SPACs
wishing to rely on the safe harbor do not operate, or hold themselves
out, as investment companies.
---------------------------------------------------------------------------
\308\ The conditions are also consistent with our approach with
respect to Rule 419 Accounts. Id.
---------------------------------------------------------------------------
The conditions are discussed in more detail below.
1. Nature and Management of SPAC Assets
In order to rely on the proposed safe harbor, a SPAC's assets \309\
must consist solely of Government securities,\310\ Government money
market funds \311\
[[Page 29499]]
and cash items \312\ prior to the completion of the de-SPAC
transaction.\313\ Thus, all proceeds obtained by the SPAC, including
those from any SPAC offering, cash infusion from the sponsor, or any
interest, dividend, distribution or other such return derived from the
SPAC's underlying assets would need to be held in these assets. We
understand that SPACs typically acquire these assets in part because
they may be easily liquidated to fund any acquisition or other expenses
related to the de-SPAC transaction and investor redemptions and, unlike
the investments of registered investment companies, are not primarily
made to achieve an investment purpose.\314\ This condition reflects the
SPAC's intended business purpose to acquire assets to fund a de-SPAC
transaction and also generally limits the SPAC's assets to those that
may be consistent with cash management practices rather than primarily
investment purposes.\315\
---------------------------------------------------------------------------
\309\ For purposes of the rule, any references to the SPAC's
assets refer to both the assets held in the trust or escrow account
and any assets held by the SPAC directly.
\310\ The term ``Government security'' has the same meaning as
defined in Section 2(a)(16) of the Investment Company Act. 15 U.S.C.
80a-2(a)(16).
\311\ The term ``Government money market fund'' has the same
meaning as defined in paragraph (a)(14) of Rule 2a-7 under the
Investment Company Act. 17 CFR 270.2a-7.
\312\ The Commission has previously included the following as
cash items for purposes of Rule 3a-1: Cash, coins, paper currency,
demand deposits with banks, timely checks of others, cashier checks,
certified checks, bank drafts, money orders, travelers' checks, and
letters of credit. See Proposing Release to Rule 3a-1, supra note
298, at text accompanying n.11. We take the same view here with
respect to the proposed rule.
\313\ Proposed Rule 3a-10(a)(1).
\314\ If a SPAC were to significantly change its asset
composition contrary to its original representations, it would raise
questions whether the initial representations were false and
misleading.
\315\ This limited asset composition would not, on its own,
distinguish a SPAC from an investment company. This provision is
designed to operate together with the other conditions to the safe
harbor, and nothing in this provision is meant to address the status
under Section 3(a)(1)(A) of a company that is not relying on this
safe harbor, including those primarily engaged in the business of
investing in government securities and/or government money market
funds. For example, an issuer that holds these types of assets, but
whose primary business is to achieve investment returns on such
assets would still be an investment company under Section
3(a)(1)(A).
---------------------------------------------------------------------------
Under the proposed rule, a SPAC seeking to rely on the safe harbor
may not acquire any other type of asset, including interests in an
operating company, prior to the completion of a de-SPAC transaction.
Acquiring other types of assets and then transferring such assets to
another entity or to SPAC shareholders would suggest that the SPAC's
primary business is that of investing in securities. Nothing in this
provision, however, is intended to preclude the SPAC from using SPAC
assets to pay expenses related to the operation of the SPAC.
Under the proposed rule, the assets set forth in paragraph (a)(1)
may not at any time be acquired or disposed of for the primary purpose
of recognizing gains or decreasing losses resulting from market value
changes.\316\ Unlike management investment companies, SPACs typically
do not actively manage their portfolios, often holding their Government
securities to maturity. The proposed provision is therefore intended to
allow SPACs the flexibility to hold their assets consistent with cash
management practices yet ensure that SPACs relying on the safe harbor
do not engage in activities that would necessitate the investor
protections of the Investment Company Act, like portfolio management
practices resembling those that management investment companies employ.
---------------------------------------------------------------------------
\316\ Proposed Rule 3a-10(a)(2). This provision is similar to
that found in paragraph (a)(3)(iii) in 17 CFR 270.3a-7 (Rule 3a-7),
and we propose to apply this provision in the same manner in the
proposed rule.
---------------------------------------------------------------------------
Request for Comment
124. Should we allow SPACs seeking to rely on the safe harbor to
invest in Government securities? Alternatively, should we limit these
SPACs to only certain types of Government securities, such as U.S.
Treasury securities?
125. Should we allow SPACs to invest in government money market
funds, as defined in Rule 2a-7? Should we instead limit the type of
money market funds that a SPAC may invest in to money market funds that
only hold U.S. Treasury securities? Conversely, should the provision be
expanded to permit SPACs to invest in all types of money market funds
provided that they rely on Rule 2a-7? \317\
---------------------------------------------------------------------------
\317\ The Commission has taken the position that money market
funds relying on Rule 2a-7 may be treated as cash equivalents for
purposes of Rule 2a-7 for GAAP purposes. See Money Market Fund
Reform; Amendments to Form PF, Release No. IC-31166 (July 23, 2014)
[79 FR 47736 (Aug. 14, 2014)].
---------------------------------------------------------------------------
126. In addition to the questions raised above, as a general
matter, is paragraph (a)(1) too narrow? For example, should the safe
harbor be expanded to include SPACs that acquire investment securities
or other assets (e.g., assets that are not for investment purposes
relevant to the operation of the SPAC)? If yes, please explain which
investment securities and/or assets and why such an expansion of the
safe harbor would be appropriate.
127. Does paragraph (a)(2) provide enough flexibility with respect
to a SPAC's holdings but yet prevent SPACs from engaging in activities
similar to management investment companies?
128. As noted, we understand that SPACs typically place most of
their assets in trust or escrow accounts. Should the rule text address
the manner in which a SPAC holds its assets? For example, should the
rule require SPAC assets to be held in trust or escrow accounts? If
yes, should the safe harbor be conditioned on complying with the terms
of the custody rules under the Investment Company Act as if they
applied to these accounts?
2. SPAC Activities
a. De-SPAC Transactions
The proposed rule would provide a safe harbor only to those SPACs
that seek to complete a single de-SPAC transaction as a result of which
the surviving public entity (the ``surviving company''),\318\ either
directly or through a primarily controlled company,\319\ will be
primarily engaged in the business of the target company or companies,
which is not that of an investment company. Thus, to rely on the rule,
the SPAC must have a business purpose aimed at providing its
shareholders with the opportunity to own interests in a public entity
that, in contrast to an investment company, will either be an operating
company, or will, through a primarily controlled company, operate such
operating company.\320\ In addition, the SPAC would need to seek to
complete a de-SPAC transaction as a result of which the surviving
company would have at least one class of securities listed for trading
on a national securities exchange.\321\
---------------------------------------------------------------------------
\318\ The proposed rule defines the term ``surviving company''
to mean the public company issuer that survives a de-SPAC
transaction and in which the shareholders of the SPAC immediately
prior to the de-SPAC transaction will own equity interests
immediately following the de-SPAC transaction. Proposed Rule 3a-
10(b)(3).
\319\ The proposed rule defines the term ``primarily controlled
company'' to mean an issuer that (i) is controlled within the
meaning of Section 2(a)(9) of the Investment Company Act by the
surviving company following a de-SPAC transaction with a degree of
control that is greater than that of any other person and (ii) is
not an investment company. Proposed Rule 3a-10(b)(2).
\320\ As drafted, the proposed rule would permit a SPAC relying
on the safe harbor to seek to engage in a de-SPAC transaction with
any company other than an investment company. Thus, a SPAC may seek
to engage in a de-SPAC transaction with a target company that is not
considered an investment company under Section 3(a) or that is
excepted or exempted from the definition of investment company by
order under Section 3(b) [15 U.S.C. 80a-3(b)] or by rules or
regulations under Section 3(a).
\321\ Proposed Rule 3a-10(a)(3)(i). The post-business
combination surviving company would have to qualify for listing on a
national securities exchange by meeting initial listing standards
just as any company seeking an exchange listing would have to do. If
the surviving company did not qualify for listing, it could not be
listed for trading on a national securities exchange and delisting
procedures would commence.
---------------------------------------------------------------------------
A SPAC would be able to engage in only one de-SPAC transaction
while relying on the safe harbor, but such
[[Page 29500]]
transaction may involve the combination of multiple target
companies,\322\ provided that the SPAC treats them for all purposes as
part of a single de-SPAC transaction. Such intentions would be
evidenced by the description in any disclosure or reporting documents,
and that the closing with respect to all target companies occurs
contemporaneously and within the required time frames.\323\ We are
imposing this limitation because we are concerned that a SPAC that
makes multiple acquisitions could be engaging in the types of
activities that raise the investor protection concerns addressed by the
Investment Company Act. A SPAC that purchases multiple companies as
part of a single transaction (and complies with the other conditions of
the safe harbor) would not raise these concerns as it would still
appear to be seeking to be primarily engaged in the business of an
operating company or companies after the de-SPAC transaction, and not
to be engaged in investment management activities.
---------------------------------------------------------------------------
\322\ The proposed definitions of ``special purpose acquisition
company'' and ``de-SPAC transaction'' anticipate that a SPAC may
engage in a de-SPAC transaction with more than one target company
contemporaneously. See supra Section II.A.
\323\ See infra Section VI.B.3.
---------------------------------------------------------------------------
While recognizing that de-SPAC transactions may have various
structures and may involve intermediary entities, the proposed safe
harbor is intended to ensure that the SPAC must be seeking a business
combination in which the surviving entity, directly or through a
primarily controlled company,\324\ is primarily engaged in the business
of the target company or companies and not merely seeking an investment
opportunity. ``Primary control'' within the definition of ``primarily
controlled company'' means that the surviving company must have
``control'' \325\ of such company and the degree of that control must
be greater than that of any other person.\326\ The ``primarily
control'' standard, which is similar to that found in other status
rules under the Investment Company Act,\327\ is designed to distinguish
a holding company structure for an operating company from an investment
in securities of an operating company.\328\ As we previously expressed
in a similar context, this level of control is more consistent with an
active role in managing the affairs of a company than if the issuer
owns a lesser controlling interest in such company.\329\ We believe
that a lesser degree of control, or lack of control, would in these
circumstances more closely resemble the activities of an investment
company.\330\
---------------------------------------------------------------------------
\324\ See supra note 319.
\325\ See Section 2(a)(9) of the Investment Company Act for the
definition of ``control''[15 U.S.C. 80a-2(9)].
\326\ See, e.g., paragraph (b)(2) of 17 CFR 270.3a-8 (Rule 3a-8
under the Investment Company Act).
\327\ See, e.g., Rule 3a-8 under the Investment Company Act; 17
CFR 270.3a-1 (Rule 3a-1 under the Investment Company Act).
\328\ See, e.g., Certain Research and Development Companies,
Release No. IC-25835 (Nov. 26, 2002) [67 FR 71915 (Dec. 3, 2002)]
(``Proposing Release to Rule 3a-8'') at nn.57-58 and accompanying
text.
\329\ See Proposing Release to Rule 3a-1, supra note 287, at
n.32. See also Proposing Release to Rule 3a-8, supra note 328, at
text before n.58 (``The Commission traditionally has viewed the fact
that an issuer's degree of control over a company is greater than
that of any other person as strong evidence that the issuer is
engaged in a business through the other company.'').
\330\ Id.
---------------------------------------------------------------------------
In order to rely on the safe harbor, the surviving company must
also have at least one class of securities listed for trading on a
national securities exchange.\331\ This condition recognizes that a
SPAC's business plan is to engage in a de-SPAC transaction, the result
of which is that SPAC shareholders receive the publicly traded shares
of the surviving company.\332\ Similar to the other parts of this
condition, this provision helps to ensure that the SPAC has a business
purpose that is different from engaging primarily in the business of
investing, reinvesting or trading in securities.
---------------------------------------------------------------------------
\331\ Proposed Rule 3a-10(a)(3)(i)(B). As noted in supra note
321, the surviving company would have to apply for and be approved
for listing by meeting the initial listing standards of a national
securities exchange. Otherwise, it could not be listed and traded on
an exchange.
\332\ See supra Section I.
---------------------------------------------------------------------------
b. Evidence of Primary Engagement
The proposed rule would require a SPAC wishing to rely on the safe
harbor to be primarily engaged in the business of seeking to complete a
de-SPAC transaction in the manner and within the time frame set forth
in the rule. Such engagement must be evidenced by the activities of its
officers, directors and employees, its public representations of
policies, and its historical development.\333\ For example, the
officers, directors and employees of a SPAC wishing to rely on this
safe harbor would need to be primarily focused on activities related to
seeking a target company to operate and not on activities related to
the management of its securities portfolio. These conditions
incorporate three of the Tonopah factors and are intended, together
with the other conditions to the safe harbor, to ensure that a SPAC may
only rely on the safe harbor if it is primarily engaged in a business
other than that of investing, reinvesting or trading in securities.
These factors are also similar to those used to determine the primary
engagement of a business in different contexts under the Investment
Company Act.\334\
---------------------------------------------------------------------------
\333\ Proposed Rule 3a-10(a)(5)(i) through (iii). Such evidence
may also include its articles of incorporation or other formation
documents.
\334\ See, e.g., Rule 3a-8 under the Investment Company Act. As
discussed previously, in addition to these factors, the Tonopah
factors also focus on the company's assets and sources of income.
See supra Section VI.A.1. While proposed paragraph (a)(1) addresses
the asset composition of SPACs wishing to rely on the safe harbor,
the proposed safe harbor does not include a separate condition
specifically addressing a SPAC's source of income because the
sources of income are addressed in the proposed rule's limitations
regarding the SPACs' activities and the types of assets it may
acquire.
---------------------------------------------------------------------------
To rely on the safe harbor, the SPAC's board of directors would
also need to adopt an appropriate resolution evidencing that the
company is primarily engaged in the business of seeking to complete a
single de-SPAC transaction as described by the rule, and which is
recorded contemporaneously in its minute books or comparable
documents.\335\ This condition is similar to other exclusionary rules
under the Investment Company Act in which the issuer may only rely on
the safe harbor provided by the rule if the issuer's board of directors
adopts an appropriate resolution evidencing that the company is
primarily engaged in a non-investment business.\336\ Such action serves
to publicly document the intent of management and helps to establish a
shared understanding of shareholders concerning the business purpose of
this issuer.
---------------------------------------------------------------------------
\335\ Proposed Rule 3a-10(a)(5)(iv).
\336\ See 17 CFR 270.3a-2 (Rule 3a-2 under the Investment
Company Act); Rule 3a-8 under the Investment Company Act.
---------------------------------------------------------------------------
A SPAC relying on the proposed rule also may not hold itself out as
being primarily engaged in the business of investing, reinvesting or
trading in securities. Given that SPACs invest in the same types of
securities as certain investment companies, such as money market funds,
a SPAC relying on the rule may not hold itself out, or otherwise
suggest, that the SPAC operates in a manner similar to these types of
investment companies. For example, a SPAC could not market itself as a
means for gaining exposure to U.S. Treasury securities.
Request for Comment
129. Do SPACs engage in other activities that should be expressly
permitted or prohibited by the safe harbor? If yes, please explain
these business activities and why they should be permitted or
prohibited.
[[Page 29501]]
130. As proposed, should the SPAC be required to seek a de-SPAC
transaction in which the surviving company is required either to
directly or through a primarily controlled company be primarily engaged
in the business of the target company? Are the proposed definitions of
``surviving company'' and ``primarily controlled company'' appropriate?
Should the proposed definitions be revised, and if so, how?
131. Should the safe harbor be limited to SPACs that seek de-SPAC
transactions that result in the surviving company having at least a
majority interest in the target company? Conversely, should the safe
harbor permit the SPAC to seek a de-SPAC transaction in which the
surviving company is only required to control the target company? Are
there other approaches, such as requiring the de-SPAC transaction to
result in a consolidation of the SPAC and the target company?
132. As proposed, should we require that the surviving company be
primarily engaged in the business of operating the target company or
companies? Is the use of the term ``primarily engaged'' consistent with
current business practices in this context? Should we instead require
that the surviving company be ``solely'' in the business of the target
company or companies? If so, how should ``solely'' be defined?
Alternatively, should we require that the surviving company be engaged
in the business of the target company (and in activities related or
incidental thereto)? \337\
---------------------------------------------------------------------------
\337\ See generally Rule 3a-7 under the Investment Company Act.
---------------------------------------------------------------------------
133. As proposed, should the SPAC be limited to only one de-SPAC
transaction while relying on the safe harbor? Why or why not?
Similarly, should a SPAC, as proposed, be limited to engaging in a
combination with multiple target companies only if the combination
occurs as part of a single de-SPAC transaction with a single closing?
Why or why not? Should there be a limit on how many target companies
may be part of a single de-SPAC transaction? If so, what should that
limit be and why? For example, would limiting the safe harbor to two
target companies strike an appropriate balance of the relevant
regulatory considerations?
134. As proposed, should we require a SPAC to be ``primarily
engaged'' in the business of seeking to complete a single de-SPAC
transaction? Should we instead require that the SPAC should be
``solely'' in the business of seeking to complete a single de-SPAC
transaction? Why or why not? Alternatively, should we require that the
SPAC be engaged in the business of seeking to complete a single de-SPAC
transaction (and in activities related or incidental thereto)? \338\
---------------------------------------------------------------------------
\338\ Id.
---------------------------------------------------------------------------
135. As drafted, the proposed rule would permit a SPAC relying on
the safe harbor to seek to engage in a de-SPAC transaction with any
company other than an investment company. Should the safe harbor
further limit the types of companies in which a SPAC may seek a de-SPAC
transaction? For example, should a SPAC be precluded from seeking to
engage in a de-SPAC transaction with issuers relying on Section 3(c)(1)
or Section 3(c)(7)? Should a SPAC be precluded from seeking to engage
in a de-SPAC transaction with issuers relying on other exclusions under
Section 3(c)? Should a SPAC be precluded from seeking to engage in a
de-SPAC transaction with issuers otherwise relying on an exclusion or
exemption by order from the definition of ``investment company'' by
Section 3(b) or the rules or regulations under Section 3(a)? If so
please identify which issuers and why?
136. Should the rule include as evidence of the SPAC's business
purpose the SPAC's historical development given the SPAC's short
duration? Should the rule include, as evidence of the SPAC's business
purpose, the SPAC's public representation of policies and the
activities of its officers, directors and employees? Similarly, is it
appropriate to require the board of directors to adopt a resolution
stating that the SPAC is primarily engaged in the business of seeking
to complete a de-SPAC transaction as described by the rule? Should we
require that the SPAC's activities also, or instead, be evidenced by
its articles of incorporation, other formation documents or by-laws? If
so, which documents should be required? If a SPAC's business purpose is
evidenced in its formation documents or by-laws, should we condition
the proposed rule on those provisions being subject to change only with
the approval of shareholders? Should the rule include a separate
condition that addresses the SPAC's sources of income? For example,
should a SPAC's income be limited to that derived from assets in
proposed Rule 3a-10(a)(1)? Are any other conditions necessary to ensure
that SPACs do not convey to investors that they have attributes similar
to investment companies? Given the nature of a SPAC's activities and
the proposed conditions of the safe harbor, should the proposed rule
also include a condition providing that a SPAC must not be a special
situation investment company? \339\
---------------------------------------------------------------------------
\339\ See Proposing Release to Rule 3a-1, supra note 298, at
n.19 and accompanying text. See also In the Matter of United Stores
Corp., 10 SEC. 1145 (Feb. 12, 1942).
---------------------------------------------------------------------------
137. Should we include a condition to the safe harbor that SPACs
must disclose their intention to rely on the safe harbor? Would such a
condition be redundant to the disclosure requirements under the
Securities Act or under the Exchange Act? Should the safe harbor
include a condition that the SPAC's board of directors must adopt a
resolution indicating that the SPAC intends to rely on the safe harbor?
3. Duration Limitations
To rely on the safe harbor, a SPAC would have a limited time period
to announce and complete a de-SPAC transaction. Specifically, the
proposed rule would require a SPAC to file a report on Form 8-K with
the Commission announcing that it has entered into an agreement with
the target company (or companies) to engage in a de-SPAC transaction no
later than 18 months after the effective date of the SPAC's
registration statement for its initial public offering. The SPAC must
then complete the de-SPAC transaction no later than 24 months after the
effective date of its registration statement for its initial public
offering.\340\ Following the completion of the de-SPAC transaction, any
assets that are not used in connection with the de-SPAC transaction
would need to be distributed in cash to investors as soon as reasonably
practicable thereafter.
---------------------------------------------------------------------------
\340\ Proposed Rule 3a-10(a)(3)(ii) and (iii). As we discuss
below, the average time between the announcement by a SPAC of its
intended de-SPAC transaction and the completion of that transaction
is approximately 5 months. See infra Section IX.B.6.
---------------------------------------------------------------------------
The SPAC would also be required to distribute its assets in cash to
investors as soon as reasonably practicable if it does not meet either
the 18-month deadline or the 24-month deadline.\341\ Given that the
time needed for such distribution in either case may be dependent on
facts and circumstances, we are not defining the term ``reasonably
practicable.'' What is reasonably practicable generally would depend
on, among other things, any logistical or legal limitations on an
orderly, immediate return of funds to investors.
---------------------------------------------------------------------------
\341\ Proposed Rule 3a-10(a)(4).
---------------------------------------------------------------------------
We are proposing these duration conditions mindful of the framework
of the Investment Company Act, the rules thereunder, and past
Commission
[[Page 29502]]
positions. The Investment Company Act provides that any issuer that
meets the definition of ``investment company'' must register and be
regulated under that Act unless the issuer can rely on an exclusion or
exemption. The Investment Company Act requires that an issuer will
register and be subject to the Act's regulatory requirements once the
issuer meets the definition.\342\ The Commission, however, has in the
past provided conditional, temporary relief to certain issuers that
meet the definition of ``investment company'' for only a short period
of time. For example, Rule 3a-2 provides a one-year safe harbor to so-
called ``transient investment companies,'' which are issuers that, as a
result of an unusual business occurrence, may be considered an
investment company under the statutory definitions but intend to be
engaged in a non-investment company business.\343\ In addition, as
discussed previously, the Commission took the position that Rule 419
Accounts need not be required to register as an investment company nor
regulated as an investment company under the Investment Company Act in
part because the rule limits the duration of such accounts to 18
months.\344\ The Commission has also at times granted short-term,
conditional exemptive relief under Section 6(c) of the Investment
Company Act \345\ to certain issuers that needed additional time to
restructure their businesses beyond that afforded by Rule 3a-2.\346\
---------------------------------------------------------------------------
\342\ See generally Sections 7(a) and 8(a) of the Investment
Company Act [15 U.S.C. 80a-7(a); 15 U.S.C. 80a-8(a)].
\343\ See Transient Investment Companies, Release No. IC-11552
(Jan. 14, 1981) [46 FR 6882 (Jan. 22, 1981)] (``Adopting Release to
Rule 3a-2''). See Transient Investment Companies, Release No. IC-
10943 (Nov. 16, 1979) [44 FR 67152 (Nov. 23, 1979)], at text
accompany nn.5-6 (``Proposing Release to Rule 3a-2'') (``Examples of
unusual business occurrences include: (1) A `start-up' company's
investing its offering proceeds in securities while arranging to
purchase operating assets; (2) a company's selling a large operating
division and investing the proceeds in securities pending
acquisition of additional operating assets; and (3) a company making
a tender offer to stockholders of a non-investment company and
failing to obtain a majority of the target company's stock.'').
\344\ See 17 CFR 230.419(e)(2)(iv) (``If a consummated
acquisition(s) meeting the requirements [of Rule 419] has not
occurred by a date 18 months after the effective date of the initial
registration statement, funds held in the escrow or trust account
shall be returned [to investors.]'').
\345\ Section 6(c) gives the Commission the broad power to
exempt conditionally or unconditionally any person, security, or
transaction from any provisions of the Act or any rule thereunder,
provided that the exemption is ``necessary or appropriate in the
public interest and consistent with the protection of investors and
the purposes fairly intended by the policy and provisions of [the
Act].'' An applicant requesting such relief must explain in its
application that, given its particular facts and circumstances, the
requested relief would meet the section's standards. See generally
Amendments to Procedures With Respect to Applications Under the
Investment Company Act of 1940, Release No. IC-33921 (July 6, 2020)
[85 FR 57089 (Sept. 15, 2020)].
\346\ See, e.g., General Electric Company and GE Capital
International Holdings Ltd., Release No. IC-32477 (Feb. 13, 2017)
[82 FR 11079 (Feb. 17, 2017)] (notice), Release No. IC-32532 (Mar.
13, 2017) (order).
---------------------------------------------------------------------------
Accordingly, the proposed rule would require a SPAC wishing to rely
on the safe harbor to enter into an agreement with a target company no
later than 18 months after its initial public offering, as evidenced by
its filing a report on Form 8-K.\347\ A SPAC may enter into agreements
with additional target companies \348\ after the 18-month period
provided that the business combination contemplated by such later
agreements are part of the de-SPAC transaction and all of the
transactions close contemporaneously within the 24-month period. The
condition that the de-SPAC transaction close within 24 months is
designed to allow SPACs to complete their stated business purpose while
balancing the risk that investors may come to view a SPAC holding
securities for a prolonged period as a fund-like investment, thereby
necessitating the regulatory protections of the Investment Company Act.
---------------------------------------------------------------------------
\347\ See infra Section IX.B.6. (discussing baseline data
regarding average duration). One press report suggests that the
average period of time between a SPAC's initial public offering and
the signing of its business combination agreement may be decreasing,
with the average such period of time being approximately 7.5 months
for de-SPAC transactions that closed in 2021. See ``De-SPACs Still
Popular But Becoming Harder To Close,'' available at: https://www.law360.com/mergersacquisitions/articles/1464716/de-spacs-still-popular-but-becoming-harder-to-close.
\348\ These additional agreements would need to be evidenced by
the filing of a Form 8-K.
---------------------------------------------------------------------------
This timeframe is longer than the one-year timeframe of Rule 3a-2.
We are proposing a longer time frame under Rule 3a-10 because we
understand that the search for a de-SPAC target frequently takes more
than one year and an issuer relying on Rule 3a-10 would be more
restricted in its business purpose and activities throughout the period
of reliance than an issuer relying on Rule 3a-2.\349\ This proposed
timeframe reflects a consideration of the Tonopah factors, including
the factor that focuses on an issuer's historical development as well
as our position with respect to Rule 419. While an issuer relying on
Rule 3a-10 may have certain characteristics resembling those of an
investment company for a longer period than an issuer relying on Rule
3a-2, its assets, income and purpose, and the activities of its
officers and directors, would be further restricted under the other
conditions of Rule 3a-10. Accordingly, the conditions are designed to
work together to reduce the likelihood that investors will come to view
the SPAC as a fund-like investment. Nevertheless, we stress that the
inability of a SPAC to identify a target and complete a de-SPAC
transaction within the proposed timeframe would raise serious questions
concerning the applicability of the Investment Company Act to that
SPAC.
---------------------------------------------------------------------------
\349\ We stress that, for an issuer satisfying the safeguards
tailored for transient investment companies under Rule 3a-2, a
company's inability to become engaged primarily in a noninvestment
company business within that rule's one year period would continue
to raise serious questions concerning the applicability of the
Investment Company Act to that company. See Adopting Release to Rule
3a-2, supra note 343, at text following n.5. See also infra note 358
and accompanying text (quoting from Proposing Release to Rule 3a-2,
supra note 343).
---------------------------------------------------------------------------
While we understand most SPACs commit to closing a de-SPAC
transaction within 24 months, we also acknowledge that the duration
limits we are proposing are shorter than the actual timeline of some
SPACs that recently completed their de-SPAC transactions.\350\ We
understand that SPACs that choose to rely on the proposed safe harbor
may need to seek to identify and complete de-SPAC transactions on an
accelerated timeline. Nonetheless, we are concerned that, the longer a
SPAC operates with its assets invested in securities and its income
derived from securities, the more likely investors will come to view
the SPAC as a fund-like investment and the more likely the SPAC appears
to be deviating from its stated business purpose.\351\ We have sought
to strike a balance between providing flexibility for the SPAC to
pursue its stated purpose and recognizing that, beyond some horizon,
the SPAC's historical development would become difficult to distinguish
from that of an investment company. While exchange listing rules
contemplate potentially longer SPAC lifespans, those rules were adopted
for a different regulatory purpose.
---------------------------------------------------------------------------
\350\ See infra Section IX.B.6.
\351\ We also note that some SPACs in the past have sought an
extension to their lifespan by obtaining approval of their
shareholders. The proposed rule does not provide for any extensions.
---------------------------------------------------------------------------
The proposed rule would also require that any assets that are not
used in connection with the de-SPAC transaction be distributed in cash
to SPAC shareholders as soon as reasonably practicable after the
completion of the de-SPAC transaction.\352\ Thus, in the event that the
de-SPAC transaction requires fewer assets than are owned by the SPAC,
the
[[Page 29503]]
SPAC would be unable to seek another de-SPAC transaction with its
remaining assets, or otherwise continue to operate as a SPAC, even if
the de-SPAC transaction met the duration conditions. As discussed
previously, a SPAC that is relying on the safe harbor would already be
precluded from engaging in more than one de-SPAC transaction pursuant
to proposed Rule 3a-10(a)(3)(i). This separate condition supplements
that provision and is designed to ensure that a SPAC may not continue
to operate after its single de-SPAC transaction and still qualify for
the safe harbor.
---------------------------------------------------------------------------
\352\ Proposed Rule 3a-10(a)(4)(i).
---------------------------------------------------------------------------
A SPAC seeking to rely on the safe harbor would also be required to
distribute the SPAC's assets in cash to investors in the event that the
SPAC fails to meet either the 18-month or the 24-month deadline.\353\
As proposed, a SPAC would be required to distribute its assets in cash
to investors if the SPAC fails to enter into an agreement with a target
company within 18 months even if it believes that it would complete a
transaction within 24 months. This condition would result in a SPAC
that fails to meet these timing requirements either distributing its
assets as soon as reasonably practicable or registering as an
investment company. In any event, such a SPAC would not be permitted to
continue to rely on the safe harbor.\354\
---------------------------------------------------------------------------
\353\ Proposed Rule 3a-10(a)(4)(ii).
\354\ Once a SPAC has distributed its assets, the SPAC must
cease to operate as a SPAC, and it may not rely on the safe harbor
again.
---------------------------------------------------------------------------
A SPAC would not be able to rely on Rule 3a-2 subsequent to its
reliance on proposed Rule 3a-10 in the event that it fails to meet
either proposed Rule 3a-10's 18-month or 24-month time frame.\355\ A
failure to meet either timeframe would not constitute an unusual
business occurrence under that rule.\356\ In addition, Rule 3a-2
specifically states that the 12-month safe harbor provided under that
rule begins once the issuer acquires specified amounts of
securities.\357\ Generally, the commencement date for reliance on Rule
3a-2 (and the 12 month safe harbor provided under that rule) would have
passed in the event a SPAC wished later to rely on that rule subsequent
to its reliance on proposed Rule 3a-10. Finally, both Rule 3a-2 and
proposed Rule 3a-10 are safe harbors that provide or would provide
temporary relief to certain issuers that may be investment companies,
provided that, among other conditions, they transition to a non-
investment company business in a short period of time. When it was
considering Rule 3a-2, the Commission was concerned that issuers could
circumvent the Investment Company Act by repeatedly relying on the Rule
3a-2 safe harbor, explaining that ``where an issuer's activities would
bring it within the definition of investment company more frequently
than would be permitted by the rule, the investor protection concerns
of the Act would be relevant, the need for shareholder protections
would not be met, and there would be no persuasive public interest from
the standpoint of investors in permitting a non-transient investment
company to avoid complying with the prohibitions and regulatory
provisions of the Act.'' \358\ This concern would also arise if SPACs
were to rely on the Rule 3a-2 safe harbor following reliance on
proposed Rule 3a-10.
---------------------------------------------------------------------------
\355\ The proposed rule would also preclude a SPAC from relying
on proposed Rule 3a-10 after Rule 3a-2, because the time period in
the proposed rule begins on the effective date of its initial
registration statement.
\356\ See supra note 343 and accompanying text.
\357\ Rule 3a-2(b).
\358\ See Proposing Release to Rule 3a-2, supra note 343.
---------------------------------------------------------------------------
Request for Comment
138. Should we require, as proposed, that the SPAC reach an
agreement with at least one target company within 18 months? Should we
require that the SPAC reach an agreement with at least one target
company within 12 months, which would be more consistent with the time
period in Rule 3a-2? Should the time period be even shorter than 12
months (e.g., 6 months)? Should the time period be longer (e.g., 20
months, 24 months, 36 months)? If the time period should be longer,
please explain why such a longer period is necessary and how any such
longer period would be consistent with the framework of the Investment
Company Act, the rules thereunder, and prior Commission positions.
139. Is there an alternative way to limit the duration of the SPAC?
Should we require that such an agreement be evidenced by the filing of
the Form 8-K? Should a SPAC be permitted, as proposed, to enter into
agreements with other target companies after the 18-month period
provided that all transactions close within 24 months?
140. Should we include an option for SPACs that have not identified
a target within 18 months, or completed the de-SPAC transaction within
24 months to extend these deadlines? If so, what would that be and what
conditions should be included? For example, should we provide that a
SPAC can obtain an extra 2, 4 or 6 months and stay within the safe
harbor if it obtains approval from its shareholders? Please explain how
any extensions of these deadlines would be consistent with the
framework of the Investment Company Act, the rules thereunder, and
prior Commission positions.
141. Should we require, as proposed, that the SPAC complete the de-
SPAC transaction within a 24-month period? Should the time period be 18
months, as in Rule 419 or 12 months, as in Rule 3a-2? Should the period
be longer (e.g., 30 months)? If so, how would that longer period be
consistent with the framework of the Investment Company Act, the rules
thereunder, and past Commission positions?
142. The rule proposal requires that any assets of the SPAC that
are not used in connection with the de-SPAC transaction, or in the
event of the SPAC's failure to meet the timelines required for
identification or completion of a de-SPAC transaction, be distributed
in cash to investors as soon as reasonably practicable. Should we allow
distributions ``in-kind''? Are there any other distributions made by
the SPAC that should be covered by the rule? Should the rule text
define the term ``reasonably practicable''? If yes, how should the term
be defined? If the term ``reasonably practicable'' is not defined,
could that potentially result in unnecessarily extended periods of time
before investor assets are returned? Instead of defining the term
``reasonably practicable,'' should we specifically require that such
assets be distributed within a defined time period such as 30 days? 15
days? 7 days? Should we require the SPAC to provide notification to the
Commission, its investors and/or the SPAC's board of directors if the
distribution of cash takes longer than a certain period of time, e.g.,
30 days?
143. The proposed rule would require, following completion of a de-
SPAC transaction, or in the event that the SPAC failed to identify or
complete a de-SPAC transaction, the SPAC to distribute all remaining
assets and cease operating as a SPAC. The proposed rule, however, does
not specifically mandate that the SPAC dissolve. Should we include this
requirement as a condition to the safe harbor? Why or why not?
144. In adopting Rule 3a-2, the Commission identified examples of
companies that may be able to rely on that safe harbor. These examples
did not specifically include SPACs or blank check companies. Are SPACs
currently relying on Rule 3a-2 and, if so, what is the basis for their
reliance? Should the Commission provide guidance concerning, or amend
Rule 3a-2 to address, the ability of SPACs to rely on that safe harbor?
[[Page 29504]]
VII. Additional Requests for Comment
As discussed above, we believe that the proposed new rules and
amendments would enhance the disclosure requirements applicable to
SPACs in initial public offerings and in de-SPAC transactions and
provide important investor protections in connection with de-SPAC
transactions. In considering the SPAC market as a whole, we are
requesting comment on a number of additional matters relating to the
disclosures provided by SPACs, investor protection measures, and the
treatment of companies following a de-SPAC transaction.
145. Are there disclosure requirements that we have not proposed
that would be helpful for investors in SPACs at the initial public
offering stage or at the de-SPAC transaction stage?
146. Should the disclosure requirements and filer status
determinations in a de-SPAC transaction be the same no matter the de-
SPAC structure? Do our proposals accomplish this, or are there other
disclosure requirements and filer status determinations impacted by
transaction structure that we should address?
147. What are the reasons, other than possible reporting outcomes,
why a de-SPAC transaction is structured so that an entity other than
the SPAC is the acquirer and filing the registration statement or proxy
or information statement for the de-SPAC transaction? Are there tax or
other reasons that we should consider in relation to the proposed
amendments in this release and whether the disclosure requirements
should be further aligned across all de-SPAC transaction structures?
148. Should we consider amendments to other registration statement
forms under the Securities Act to require enhanced disclosures for
offerings by SPACs that are similar to those proposed above with
respect to Forms S-1 and F-1? Should we consider similar amendments to
Regulation A and Form 1-A?
149. The periodic reports filed by SPACs under the Exchange Act
generally contain limited information due to the absence of an
operating business. Should some of the disclosure requirements we are
proposing also be required in the periodic reports filed by a SPAC
following its initial public offering? If so, which disclosures? Are
there other disclosures that we should require in the Exchange Act
reports filed by a SPAC?
150. We note that the announcement of a prospective de-SPAC
transaction often results in an immediate and substantial increase in
the trading volume of the securities of the SPAC, based on the terms of
the transaction that have been disclosed and the limited information
publicly available on the private operating company at the time of the
announcement, which is far less extensive than that of a newly public
company after a traditional initial public offering.\359\ Should we
consider requiring additional disclosures, such as more disclosure on
the private operating company or risk factor disclosure, in a Form 8-K
filed pursuant to Item 1.01 of the form disclosing that the parties
have entered into a business combination agreement? If so, what
additional disclosure should we require? Should we amend Item 1.01 of
Form 8-K to require the filing of the business combination agreement as
an exhibit to the Form 8-K filing (as opposed to allowing the agreement
to be filed as an exhibit to a subsequent periodic report)? What other
amendments should we consider in this regard?
---------------------------------------------------------------------------
\359\ According to one study, institutional investors typically
purchase the vast majority of the securities in a SPAC's initial
public offering and are far more likely to redeem their shares
instead of reselling the shares, resulting in limited secondary
market trading of SPAC shares. Klausner, Ohlrogge, and Ruan, supra
note 17.
---------------------------------------------------------------------------
151. Currently, the post-business combination company is required
to file a Form 8-K with Form 10 information within four business days
after the completion of a de-SPAC transaction. Should we require the
filing of this Form 8-K within a shorter time frame in order to reduce
the gap in timing between the completion of the transaction and the
public availability of this information in the Form 8-K?
152. Are there other rule changes the Commission should consider to
enhance investor protections in initial public offerings by SPACs and
in de-SPAC transactions?
We have not proposed requirements for SPAC offerings
comparable to those applicable to blank check companies under Rule 419.
Should we consider requiring SPACs to comply with conditions similar to
those in Rule 419? If so, which conditions?
The shareholders of a SPAC are permitted to vote in favor
of a proposed de-SPAC transaction while redeeming their shares prior to
the closing of the transaction and retaining their warrants, such that
the vote is decoupled from any continuing share ownership in the post-
business combination company (unless and until the warrants are
exercised).\360\ Should the Commission adopt rule changes or other
approaches to address this situation? For example, should the
Commission condition the continued availability of an exclusion from
the requirements of Rule 419 on whether shareholders voting to approve
a de-SPAC transaction retain an economic interest in the combined
company? Should we address this issue through the Commission's
authority under Section 19(c) of the Exchange Act to adopt rules
applicable to national securities exchanges?
---------------------------------------------------------------------------
\360\ See Rodrigues and Stegemoller, supra note 17.
---------------------------------------------------------------------------
153. A post-business combination company following a de-SPAC
transaction is subject to different treatment under various rules based
on its status as a former shell company. For example, a post-business
combination company following a de-SPAC transaction is an ``ineligible
issuer,'' based on its status as a former shell company, which prevents
the company from using free writing prospectuses pursuant to Securities
Act Rules 164 and 433 for a three-year period.\361\ As a former shell
company, the post-business combination company is also ineligible to
file a registration statement on Form S-8 for a 60-day period following
the de-SPAC transaction,\362\ and the safe harbor in Rule 139 for
broker-dealer research reports is not available for research reports on
the post-business combination company for a three-year period.\363\ In
this regard, we note that the treatment of former shell companies under
these rules is based on heightened concerns regarding fraud and other
abuses surrounding many shell company transactions. To better align de-
SPAC transactions with initial public offerings, should we consider
amending these and other rules relating to former shell companies to
treat companies that have become public companies through a de-SPAC
transaction in the same or similar manner as those that have completed
traditional initial public offerings? Should we differentiate SPACs
from other shell companies in applying these rules? If so, on what
basis?
---------------------------------------------------------------------------
\361\ See Securities Act Rule 164(e)(1).
\362\ See General Instruction A.1 to Form S-8.
\363\ See Securities Act Rule 139(a)(1)(ii)(B).
---------------------------------------------------------------------------
154. Are there areas relating to SPACs where additional Commission
guidance would be helpful? For example, would it be useful if the
Commission reiterated or expanded upon the Commission staff's guidance
in 2020 and 2021 regarding SPACs? \364\
---------------------------------------------------------------------------
\364\ See supra note 35.
---------------------------------------------------------------------------
VIII. General Request for Comments
We request and encourage any interested person to submit comments
on any aspect of our proposals, other matters that might have an impact
on
[[Page 29505]]
the proposed amendments, and any suggestions for additional changes.
With respect to any comments, we note that they are of greatest
assistance if accompanied by supporting data and analysis of the issues
addressed in those comments and by alternatives to our proposals where
appropriate.
IX. Economic Analysis
We are mindful of the costs and benefits of these proposed new
rules and amendments. The discussion below addresses the potential
economic effects of the proposed new rules and amendments, including
the likely benefits and costs, as well as the potential effects on
efficiency, competition, and capital formation.\365\ We have analyzed
the expected economic effects of the proposed new rules and amendments
relative to the current baseline, which consists of the existing
regulatory framework of disclosure requirements and liability
provisions, current market practices, and the distribution of
participants by type.
---------------------------------------------------------------------------
\365\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and
Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)], and Section
2(c) of the Investment Company Act [15 U.S.C. 80a-2(c)] require the
Commission, when engaging in rulemaking where it is required to
consider or determine whether an action is necessary or appropriate
in (or, with respect to the Investment Company Act, consistent with)
the public interest, to consider, in addition to the protection of
investors, whether the action will promote efficiency, competition,
and capital formation. Further, Section 23(a)(2) of the Exchange Act
[17 U.S.C. 78w(a)(2)] requires the Commission, when making rules
under the Exchange Act, to consider the impact that the rules would
have on competition, and prohibits the Commission from adopting any
rule that would impose a burden on competition not necessary or
appropriate in furtherance of the Exchange Act.
---------------------------------------------------------------------------
As discussed above, we are proposing new rules and amendments to
existing rules that are intended to enhance investor protections in
SPAC registered offerings, including initial public offerings, and in
de-SPAC transactions. The proposed new rules and amendments would
require disclosures with respect to, among other things, compensation
paid to sponsors, conflicts of interest, dilution, and the fairness of
de-SPAC transactions. The proposed new rules and amendments would also
revise certain rules and forms under the Securities Act and the
Exchange Act to specify their application in the context of de-SPAC
transactions, including, among other things, a proposed rule that a
SPAC and a target company be treated as co-registrants when a SPAC
files a registration statement for a de-SPAC transaction and a proposed
rule that addresses the underwriter status of SPAC IPO underwriters in
any subsequently registered de-SPAC transaction.
Additional proposed rules are intended to align de-SPAC
transactions more closely with initial public offerings. One would
require certain non-financial disclosures regarding the target private
operating company that are typically filed on Form 8-K within 4 days
after the completion of a de-SPAC transaction to be included in the
disclosures that are filed in connection with an anticipated de-SPAC
transaction (Form S-4 or F-4, a proxy or information statement, or a
Schedule TO). The other would require the surviving entity following a
de-SPAC transaction to re-determine its eligibility for smaller
reporting company status within four business days of the completion of
the transaction.
We are also proposing new rules and amendments that would apply to
shell companies more broadly. Proposed Rule 145a would deem any
business combination involving a reporting shell company that is not a
business combination related shell company, and another entity that is
not a shell company, to involve a sale of securities to the reporting
shell company's shareholders. In addition, the proposed amendments to
Regulation S-X are intended to more closely align the financial
statement requirements in business combinations between a shell company
(other than a business combination related shell company) and a non-
shell company with those required on Forms S-1 or F-1 for an initial
public offering.
Furthermore, we are proposing to: (i) Amend Item 10(b) of
Regulation S-K to expand and update our views with respect to
projections used in Commission filings; (ii) require additional
disclosures regarding projections when disclosed in connection with de-
SPAC transactions; and (iii) amend the definition of ``blank check
company'' for purposes of the PSLRA safe harbor for forward-looking
statements, such that the safe harbor would not be available for
projections by blank check companies that are not penny stock issuers,
which would include SPACs and target companies in de-SPAC transactions.
Finally, we are proposing to create a safe harbor from the definition
of ``investment company'' under the Investment Company Act for SPACs
that meet certain conditions.
Overall, we expect the proposed new rules and amendments relating
to SPAC transactions, in particular, and in some cases to shell company
business combinations more broadly, to provide investors \366\ with
improved and, in some instances, potentially earlier \367\ access to
more consistent, comprehensive, and readily comparable information and
to enhance their ability to make more informed investment decisions,
which can lead to more efficient pricing of securities.\368\ Both
public reporting companies seeking to make an acquisition (SPACs or
other shell or blank check companies, in some cases) and target private
operating companies may incur costs related to the production and
public disclosure of the proposed required information; however, these
costs may be mitigated to the extent that either party may already
voluntarily produce or provide such information in response to evolving
market demands.\369\ We further anticipate that addressing the
liability of various parties in de-SPAC transactions or other shell
company business combinations could encourage those parties to exercise
greater care in either the selection of an intended target company or
the preparation and review of the required disclosures. This could
result in more reliable information for investors regarding a private
company target at the time of a transaction, and would further align
the protections afforded to investors with those of an initial public
offering.
---------------------------------------------------------------------------
\366\ Throughout this section, ``investor'' can refer to any
current or a potential shareholder of a company, though it is
generally understood costs and benefits may accrue to such investors
heterogeneously based on size, sophistication, and affiliation.
\367\ See infra Sections IX.C.1.b.7 & IX.C.1.b.8.
\368\ See, e.g., Orie E. Barron & Hong Qu, Information Asymmetry
and the Ex Ante Impact of Public Disclosure Quality on Price
Efficiency and the Cost of Capital: Evidence from a Laboratory
Market, 89 Accounting Rev. 1269 (2014) (high-quality public
disclosure leads to increased price efficiency and decreased cost of
capital); Ulf Br[uuml]ggemann, Aditya Kaul, Christian Leuz, & Ingrid
Werner, The Twilight Zone: OTC Regulatory Regimes and Market
Quality, 31(3) Rev. Fin. Stud. 898, 898-942 (2018) (increased
disclosure regimes lead to increased liquidity and lower crash
risk).
\369\ See SPAC to the Future III, IPO Edge (Nov. 10, 2021)
(remarks of panelist Chris Weekes, Managing Director and Co-Head of
SPACs, Cowen), available at https://ipo-edge.com/join-spac-to-the-future-iii-with-nasdaq-cowen-gallagher-ve-icr-morrow-sodali-morganfranklin-featuring-gigcapital-hennessy-and-switchback/.
---------------------------------------------------------------------------
To the extent that the proposed rules would also provide better,
more readily accessible information about SPACs, they may result in
less adverse selection than might otherwise occur at the de-SPAC
transaction. Overall, we expect the proposals may enhance the
protection of investors, as well as promote market efficiency. We are
mindful that some aspects of this rulemaking may deter some forms of
communications or some transactions
[[Page 29506]]
that might otherwise be efficient or to the economic benefit of issuers
and investors. They also may deter some business combinations that
otherwise would have created value. We discuss these considerations in
more detail below.
In many cases, we are unable to quantify the relative magnitudes of
various economic effects because we lack information to quantify such
effects with a reasonable degree of accuracy. Where we are unable to
quantify the economic effects of the proposed new rules and amendments,
we have provided a qualitative assessment of the potential effects and
encourage commenters to provide data, studies, reports and other
information that would help quantify the benefits, costs, and potential
impacts on efficiency, competition, and capital formation.\370\
---------------------------------------------------------------------------
\370\ For our estimates of the paperwork burdens associated with
the proposed rules and amendments for purposes of the Paperwork
Reduction Act of 1995 (``PRA''), please see Section X below. These
PRA burden estimates pertain to ``collections of information'' as
that term is defined in the PRA, and therefore reflect only the
hours and costs to prepare required disclosures and maintain
records. As a result, these estimates do not reflect the full
economic effects or full scope of economic costs of the proposed
rules and amendments that are discussed in this analysis.
---------------------------------------------------------------------------
A. Broad Economic Considerations
Although a significant level of information asymmetry exists when a
private company ``goes public,'' the traditional initial public
offering process (IPO) has developed mechanisms that can alleviate
adverse selection problems.\371\ Those mechanisms include mandated
public disclosures, staff review of registration statements,\372\ and
the effects of Section 11 liability, which, among other things,
motivates due diligence performed by underwriters, accountants, and
other offering participants. These mechanisms generally lead to lower
levels of information asymmetry, which can improve the security's
pricing and placement efficiency and encourages investor participation
in the IPO market. The traditional IPO process, however, is associated
with costs, which could be significant for certain firms. Those costs
can be direct, in the form of fees, or indirect in the form of
underpricing, as has long been recognized in the academic
literature.\373\
---------------------------------------------------------------------------
\371\ Adverse selection is sometimes described as the `lemons'
problem: When buyers have less information than sellers, their bids
will be lower to reflect this uncertainty. In response, the sellers
of high quality products may exit the market, causing further
decline in buyers' willingness to pay, which could cause a market
failure. See, e.g., George Akerlof, The Market for ``Lemons'':
Quality Uncertainty and the Market Mechanism, 84 Qtr. J. Econ. 488
(1970).
\372\ This review includes benefits such as, for example, the
production of additional valuable information in response to
comments issued by the Commission staff during the filing reviews.
See, e.g., Michelle Lowry, Roni Michaely, & Ekaterina Volkova,
Information Revealed Through the Regulatory Process: Interactions
Between the SEC and Companies Ahead of Their IPO, 33 Rev. Fin. Stud.
5510 (2020).
\373\ See Alexander Ljungqvist, Chapter 7--IPO Underpricing, in
1 Handbook of Empirical Corporate Finance 375 (B. Espen Eckbo ed.,
2007); Kevin Rock, Why New Issues are Underpriced, 15 J. Fin. Econ.
187 (1986); Tim Loughran & Jay Ritter, Why Has IPO Underpricing
Changed Over Time?, 33 Fin. Mgmt. 5 (2004).
---------------------------------------------------------------------------
Alternative ways \374\ of going public have emerged that may allow
companies to avoid some of the costs of the traditional initial public
offering process, though this also might involve forgoing some of the
benefits typically considered desirable by market participants (e.g.,
potentially better pricing due to underwriter help with the placement
of securities as well as more robust due diligence and
disclosure).\375\ While pursuit of these alternatives suggest private
operating companies are interested in accessing the benefits of being
publicly traded, it is not clear that these alternatives represent net
improvements in the mechanism design of the traditional IPO process.
---------------------------------------------------------------------------
\374\ While equity in a private company might also become
publicly traded by participation in a roll-up, because such
transactions typically involve multiple companies and the surviving
entity thus may resemble each of the rolled-up entities less
specifically, individually, we do not consider this a comparable way
of going public for the purposes of our discussion. Additionally, a
handful of companies have listed their shares directly on a national
securities exchange without the use of a traditional underwriter and
without raising capital. As with participation in a roll-up, this
method of accessing the public markets is not frequently used. From
2018 through 2021, only twelve companies went public using this
approach. (This Commission estimate includes 9 direct listings on
NYSE and 3 direct listings on Nasdaq that occurred on or before Dec.
31, 2021.) In December 2020, the Commission issued an order
approving a proposed rule change submitted by New York Stock
Exchange LLC (NYSE) that would allow private companies to list on
the NYSE via a direct listing and raise capital at the same time.
See Release No. 34-90768 (Dec. 22, 2020) [85 FR 85807 (Dec. 29,
2020)] (SR-NYSE-2019-67). In May 2021, the Commission approved a
similar proposed rule change submitted by The Nasdaq Stock Market
LLC. See Release No. 34-91947 (May 19, 2021) [86 FR 28169 (May 25,
2021)] (SR-NASDAQ-2020-057). While, it is possible that the number
of companies that would seek to offer securities via direct listing
will increase following these recent regulatory changes, it is
unclear that future use would become comparable in purpose or scope
to mergers with shell companies as an alternative means to access
the public market. See Release No. 34-94311 (Feb. 24, 2022) [87 FR
11780 (Mar. 2, 2022)] (SR-NASDAQ-2021-045) (order disapproving
proposed rule change to modify certain price limitations in a direct
listing with a capital raise).
\375\ See, e.g., James Brau & Stanley Fawcett, Initial Public
Offerings: An Analysis of Theory and Practice, 61 J. Fin. 399
(2006).
---------------------------------------------------------------------------
One way a private company may become a public reporting company is
via merger with a shell company that has already obtained exchange
listing, quotation, or otherwise registered a class of securities under
the Exchange Act. In recent years, a significant number of private
companies have opted to become a public reporting company via a merger
with a particular kind of shell company, a SPAC. SPACs have been in
existence since the 1990s, and though their use by private companies as
an alternative mechanism for becoming a public reporting company has
varied over time, it has increased dramatically in the past three
years. We estimate that in the past year alone, approximately 200
companies have become listed on an exchange via a de-SPAC transaction,
which is slightly more than a sevenfold increase since 2019 and a
twentyfold increase since 2015.\376\
---------------------------------------------------------------------------
\376\ Staff review of Form 8-K filings identified 28 private
operating companies acquired in calendar year 2019 and 10 in
calendar year 2015 that could be confirmed in the Dealogic M&A
module as a de-SPAC transaction.
---------------------------------------------------------------------------
As with a traditional IPO, becoming a public reporting company
through a de-SPAC transaction might also be subject to adverse
selection given that this type of transaction is associated with
significant information asymmetries between public investors in the
SPAC and the private company that the SPAC intends to acquire. Public
SPAC investors could rely on various mechanisms to overcome the adverse
selection problem in the SPAC context: The contingent nature of sponsor
compensation; the right to vote to approve a de-SPAC transaction or
redeem shares; projections regarding anticipated future performance, to
the extent they improve price formation; potential liability; and any
additional unregistered investments by investors at the de-SPAC
transaction stage.\377\ While in some cases, a private company might
prefer these alternative mechanisms to a traditional IPO, their general
efficacy in resolving the problems or costs of information asymmetry
might, in practice, be limited.\378\
---------------------------------------------------------------------------
\377\ For a detailed description of the SPAC process, see
Section 1.
\378\ In addition to the potentially problematic incentives
embedded in the SPAC structure as described in the following
sections, we further acknowledge that in some cases management and
other insiders in target companies may find that a de-SPAC
transaction is a more attractive option for becoming a public
reporting company than a traditional initial public offering for
reasons that conflict more directly with adequate investor
protections. These reasons may include the lack of a named
underwriter or actionable liability.
---------------------------------------------------------------------------
Some economic theorists have argued that the structure of SPAC
sponsor compensation may efficiently incentivize transactions that
benefit
[[Page 29507]]
investors,\379\ but the effects in practice may be more ambiguous. On
one hand, because almost all of the SPAC sponsor's compensation is
contingent on the completion of a de-SPAC transaction, the sponsors may
therefore have an incentive to select target companies that would
maximize their own, as well as investors', returns at exit. As noted
above, however, there is also a potential conflict of interest for
sponsors precisely because their compensation (e.g., 20% promote) is
dependent on the completion of a de-SPAC transaction.\380\ This could
create an incentive to enter into unfavorable, or less favorable, de-
SPAC transactions than would otherwise be optimal for the SPAC's
unaffiliated shareholders because the sponsor's alternative to a de-
SPAC transaction is to liquidate the SPAC, and return the initial
public offering proceeds, forfeiting their potential promote. While
reputational concerns may be a mitigating source of discipline,
sponsors may also be more likely to prioritize private benefits when
these concerns are less pressing; for example, in periods when the
market is broadly less risk-averse or if the sponsor does not intend to
pursue serial SPAC activities.
---------------------------------------------------------------------------
\379\ See, e.g., Sris Chatterjee, N.K. Chidambaran, Gautam
Goswami, Security design for a non-standard IPO: The case of SPACs,
69 J. Int'l Money & Fin. 151 (2016).
\380\ See supra note 12.
---------------------------------------------------------------------------
In addition, voting rights and redemption rights may protect SPAC
investors, because SPAC investors have the right to vote against a de-
SPAC transaction and may redeem their shares if they believe holding
shares in the combined company is not in their best interest.\381\
However, these rights can also create potential conflicts of interest
between non-redeeming shareholders and shareholders who choose to
redeem shares but continue to hold warrants. When SPAC investors redeem
the shares but retain and later exercise the warrants of the initial
IPO unit, the equity shares of the non-redeeming shareholders are
diluted relative to what they would be absent such exercise. A further
conflict may arise because the value of the warrants is enhanced by
greater volatility of the underlying security. Thus, warrant-holders
may incur greater financial benefits from high-risk mergers in a manner
that may not be aligned with the interests of the non-redeeming SPAC
investors. Additionally, in cases where the SPAC is structured so that
the shareholders are able to vote in favor of a merger but also redeem
their shares, this could present a moral hazard problem, in economic
terms, because these redeeming shareholders would not bear the full
cost of a less than optimal choice of target.
---------------------------------------------------------------------------
\381\ For listed SPACs, existing exchange listing standards, if
a shareholder vote is held, require public shareholders voting
against a de-SPAC transaction to have the right to redeem their
shares if the de-SPAC transaction is approved and consummated. See
infra Section IX.B.1.a. SPACs have often extended this redemption
right to shareholders voting in favor of the de-SPAC transaction as
well.
---------------------------------------------------------------------------
The use of projections regarding the future earnings and
performance of the target company in the de-SPAC transaction may be
another mechanism that helps SPAC investors overcome adverse selection,
insofar as they provide information that could improve price formation.
However, there may also be conflicts of interest associated with those
projections given some features of the SPAC structure. The need to
secure shareholder approval and meet the respective exchange listing's
valuation requirement \382\ to complete the de-SPAC transaction may
imply that it is in the target company's interest to present the most
favorable projections of its future performance. SPAC sponsors'
interests in completing the de-SPAC transaction in order to receive
their compensation could also affect the degree to which they would be
motivated to scrutinize or question a target company's
projections.\383\ Additionally, the basis, source, and support for any
projections may not be adequately disclosed to shareholders, thereby
limiting their value. For example, there may be confusion among some
practitioners as to whether Item 10(b) of Regulation S-K, which states
the Commission's views regarding the reasonableness of projections,
applies to projections regarding the target company's future
performance that may be included in the SPAC's filings.
---------------------------------------------------------------------------
\382\ See infra Section IX.B.1.a.
\383\ See supra note 67 and accompanying text.
---------------------------------------------------------------------------
Applicable liability provisions may also provide some protections
for SPAC investors. For example, SPACs are liable for material
misstatements or omissions in their proxy solicitations under Section
14(a) and Rule 14a-9 of the Exchange Act. However, such liability
generally requires proof of negligence. Similarly, SPAC investors may
be protected by the application of Section 11 and Section 12(a)(2) of
the Securities Act for material misstatements or omissions made in
connection with SPAC transactions involving the filing of a
registration statement. However, as discussed above, there are
potential gaps or inconsistencies in these protections that the
proposed amendments are intended to address.\384\
---------------------------------------------------------------------------
\384\ See supra Sections III.C & III.F.
---------------------------------------------------------------------------
Another mechanism that could help investors overcome the adverse
selection problem is the potential signal of deal quality implied by
the presence of PIPE investors.\385\ These investors, who are generally
institutional investors, are often afforded an opportunity to gain
considerable insight into the details of a de-SPAC transaction and the
future financial prospects of the target company (subject to
confidentiality agreements) for purposes of evaluating whether to
participate in a PIPE that often occurs close in time to a de-SPAC
transaction. Public SPAC investors could benefit from the participation
of PIPE investors in a de-SPAC transaction in a number of ways. At
present, some PIPE investments in connection with de-SPAC transactions
function as a backstop to offset high levels of redemption, thereby
ensuring a de-SPAC transaction does not fail to meet the minimum cash
requirement necessary to complete its intended business combination. In
other cases, PIPE investments enable the SPAC to acquire a larger
target, or one with a higher valuation, giving SPAC IPO investors
access to a different type of target company than they might otherwise
be able to acquire.\386\ On the other hand, the presence of PIPE
investors in a de-SPAC transaction may not benefit public SPAC
investors because they typically invest at a discount. When a de-SPAC
redemption rate is high, the PIPE discount can exacerbate the dilution
of the equity position of the SPAC's non-redeeming shareholders.
Additionally, because PIPEs may, in some cases, involve the purchase of
only warrants, similar misalignments of incentives with respect to a
de-SPAC transaction may occur with this category of warrant-only
holders as those previously discussed in that they may have incentives
to pursue riskier targets than would be optimal for a non-redeeming
SPAC shareholder. As
[[Page 29508]]
such, the PIPE's financial participation in a de-SPAC transaction may
not be a reliable indication that the transaction would benefit
unaffiliated SPAC investors.
---------------------------------------------------------------------------
\385\ See, e.g., Mike Hopkins & Donald G. Ross, Key Drivers of
Private Equity Firm Certification at Initial Public Offering, 16 J.
Private Equity, 69 (2013).
\386\ This role of PIPEs has been more common, historically,
see, e.g., Vijay M. Jog & Chengye Sun, Blank Check IPOs: A Home Run
for Management (SSRN Working Paper, 2007) (``the median value of the
transaction in relation to gross proceeds is approximately 178
percent, meaning that the size of the acquisition is higher than the
proceeds raised through the IPO since many [blank check companies]
raised additional debt to finance the acquisitions''), and could be
a contributing factor to the differences we continue to observe
between average capital raised via SPAC IPO (see infra Section
IX.B.6.a) and PIPE financing (see infra Section IX.B.2.c) and the
average consideration paid per SPAC target (see infra Section
IX.B.2.c).
---------------------------------------------------------------------------
Therefore, while a number of the mechanisms associated with a SPAC
transaction structure could mitigate adverse selection concerns for
investors and could, theoretically, improve the process by which
private companies may become publicly traded, many of their potential
benefits over the traditional IPO process may be mitigated by
countervailing conflicts of interest. As a result of the complexity
inherent in the SPAC structure, investors may lack or otherwise be
unable to readily decipher critical information regarding certain
financial incentives (such as contingent sponsor or IPO underwriter
compensation or the potential dilutive effects of PIPE financing) of
the SPAC, the target company, their respective affiliates, or other
parties in a manner necessary to properly assess the value of an
investment position.
There is also a question of whether investors, particularly retail
investors, fully understand the costs involved in de-SPAC transactions
and how these costs may affect investors' post-de-SPAC transaction
returns on their original investments. Specifically, investors may not
fully anticipate the dilutive effects of sponsor compensation (the
``promote''), PIPE financing, and outstanding warrants following de-
SPAC transactions. In a similar vein, the potential uncertainty
regarding the availability of the PSLRA safe harbor and the
applicability of the guidance of Item 10(b) of Regulation S-K to
projections of a target company in a de-SPAC transaction may result in
the use of unreasonable or aspirational projections in connection with
de-SPAC transactions that may misrepresent the benefits and risks
involved in such transactions. Furthermore, while the SPAC vehicle may
allow a private company to go public without using the traditional IPO
process, the disclosure regarding the private company provided in
connection with a de-SPAC transaction may be less complete or less
reliable than that provided in a traditional IPO for reasons discussed
in the release, including, among other reasons, the lack of due
diligence by traditional gatekeepers, such as underwriters.\387\ By
strengthening investor protection, the proposed rules could increase
investors' confidence in SPAC transactions, while keeping this
alternative route of going public attractive for private companies.
---------------------------------------------------------------------------
\387\ Although as discussed above, a court could find that many
parties to a de-SPAC transaction may meet the definition of
``underwriter,'' all of these issues may be compounded by the lack
of a designated underwriter in de-SPAC transactions that could
perform due diligence and would be subject to liability under
Section 11 of the Securities Act.
---------------------------------------------------------------------------
In addition to the SPAC-specific items that are of central concern
to this proposal, we are also proposing amendments to address further
areas of incongruity in requirements that guide the disclosures and
liabilities in the broader context of shell-company mergers and the use
of projections. For example, proposed Rule 145a would help investors in
reporting shell companies more consistently receive the full
protections of the Securities Act disclosure and liability provisions
in business combinations involving shell companies, regardless of the
transaction structure. Reporting shell companies would have to register
offerings subject to proposed Rule 145a by filing a Securities Act
registration statement unless there is an applicable exemption.
Additionally, we are proposing new Article 15 of Regulation S-X and
amendments to our forms, schedules, and rules to more closely align the
financial statement reporting requirements in business combinations
involving a shell company and a private operating company with those in
traditional initial public offerings. For example, we are proposing to
align the number of fiscal years required to be included in the
financial statements for a private company that will be the
predecessor(s) in a shell company combination with the financial
statements required to be included in a Securities Act registration
statement for an initial public offering of equity securities in
proposed Regulation S-X Rule 15-01(b). Other proposed amendments would
codify certain current staff guidance for transactions involving shell
companies.
In our analysis below, we first discuss the proposed provisions
that pertain to specialized disclosure requirements for SPACs in
registered offerings and for de-SPAC transactions and then address the
proposals concerning liability related to de-SPAC transactions and the
PSLRA safe harbor. We then analyze the impact of the proposed new rules
and amendments that would apply to shell companies and to the use of
projections in Commission filings. Finally, we discuss the proposed
safe harbor for SPACs from being deemed an investment company under the
Investment Company Act. Where appropriate, we discuss the interactions
between the proposed new rules and amendments.
B. Baseline and Affected Parties
To assess the economic impact of the proposed rules, the Commission
uses as its baseline the current regulatory framework and existing
market practices, including Commission staff guidance and other staff
positions. We discuss in this section those parties likely to be
affected by the proposed rules and some of the relevant regulatory and
market baselines. The remainder of the discussion of the regulatory and
market baselines is integrated into our analysis of the benefits and
costs of the proposed rules to aid comprehension and minimize
repetition.\388\
---------------------------------------------------------------------------
\388\ See also supra Sections I-IV for further discussion of
existing regulatory framework and market practices.
---------------------------------------------------------------------------
1. SPAC Initial Public Offerings
The parties most likely to be directly affected by the proposed
rules regarding specialized disclosure requirements for SPACs in
initial public offerings and other registered offerings are existing or
potential sponsors intending to organize a new SPAC, SPACs, prospective
investors in such offerings, and any other market participants whose
service or activities involve analysis of the information, data, and
disclosures related to SPACs and their sponsors in these offerings. In
2021, there were approximately 620 SPAC initial public offerings.
In addition, these proposed amendments would necessarily have
secondary impacts on the prospects or opportunities of private
companies that would be potential targets of such newly organized SPACs
if, as a result of their adoption, a different number or type of SPAC
sponsors and their affiliates participate in the market. Similarly,
given that proposed Rule 140a clarifies the underwriter status of SPAC
IPO underwriters at the de-SPAC transaction stage, this proposed rule
may affect the number and type of potential targets that might be
selected for acquisition by potentially reducing the number of SPAC
IPOs underwriters are willing to support or by potentially deterring
SPAC IPO underwriters from directly or indirectly participating in the
de-SPAC transaction or any related financing transaction.\389\ Other
potentially affected parties include those parties who provide advisory
or other services
[[Page 29509]]
to sponsors of SPACs in connection with these registered offerings.
---------------------------------------------------------------------------
\389\ See Jessica Bai, Angela Ma, and Miles Zheng, Reaching for
Yield in the Going-Public Market: Evidence from SPACs (SSRN Working
Paper, 2021).
---------------------------------------------------------------------------
a. SPAC Initial Public Offerings and Exchange Listing
SPACs initial public offerings on national securities exchanges
have greatly increased in recent years. Moreover, SPAC listings have
migrated from the over-the-counter market to three national securities
exchanges: First NYSE American (formerly AMEX), then Nasdaq and NYSE
(see Table 1).\390\
---------------------------------------------------------------------------
\390\ SPACs first were listed on the AMEX in 2005. The
Commission approved the NYSE's proposed rule change to adopt listing
standards to permit the listing of SPACs on May 6, 2008, and
approved NASDAQ's proposal to adopt listing standards to permit the
listing of SPACs on July 25, 2008. See Release No. 34-57785 (May 6,
2008) [73 FR27597 (May 13, 2008)] (SR-NYSE-2008-17); Release No. 34-
58228 (July 25, 2008) [73 FR 44794 (July 31, 2008)] (SR-NASDAQ-2008-
013). See also Release No. 34-63366 (Nov. 23, 2010) [75 FR 74119
(Nov. 30, 2010)] (SRNYSEAMEX-2010-103) (notice of filing and
immediate effectiveness of proposed rule change to adopt additional
criteria for the listing of SPACs).
[GRAPHIC] [TIFF OMITTED] TP13MY22.000
NYSE, Nasdaq, and NYSE American have rules setting forth listing
requirements for a company whose business plan is to complete an IPO
and engage in a de-SPAC transaction.\391\ Among other things, all three
exchanges permit the initial listing of SPACs only if at least 90% of
the gross proceeds from the IPO and any concurrent sale by the SPAC of
equity securities will be deposited in a trust account.\392\ These
exchanges further require that within three years, for NYSE, or 36
months, for Nasdaq and NYSE American, of the effectiveness of its IPO
registration statement (or such shorter period specified in the
registration statement under Nasdaq and NYSE American rules or its
constitutive documents or by contract under NYSE rules), the SPAC
complete one or more business combinations having an aggregate fair
market value of at least 80% of the value of the net assets in the
account excluding certain costs.\393\ NYSE, Nasdaq, and NYSE American
require that a de-SPAC transaction meeting the 80% requirement be
approved by a majority of the SPAC's independent directors,\394\ and
all three exchanges require, if a shareholder vote is held, that a
majority of the shares voted at the shareholder meeting approve the de-
SPAC transaction meeting the 80% requirement.\395\ In addition, if a
de-SPAC transaction meeting the 80% requirement is approved and
consummated, public shareholders voting against the transaction must
have the right to convert their shares of common stock into a pro rata
share of the aggregate amount then in the trust account net taxes and
working capital disbursements.\396\ If a shareholder vote on a de-SPAC
transaction is not held, the SPAC must provide all shareholders with
the opportunity to redeem all their shares for cash equal to their pro
rata share of the aggregate amount then in the trust account net of
taxes and working capital disbursements, pursuant to Rule 13e-4 and
Regulation 14E under the Exchange Act, which regulate issuer tender
offers.\397\
---------------------------------------------------------------------------
\391\ NYSE Listed Company Manual Section 102.06; Nasdaq Listing
Rule IM-5101-2; NYSE American Company Guide Section 119. The Rules
of the CBOE BZX Exchange, Inc., provide another example of listing
requirements that are substantially similar to those describe in
this section. See CBOE BZX Rule 14.2(b).
\392\ NYSE Listed Company Manual Section 102.06; Nasdaq Listing
Rule IM-5101-2(a); NYSE American Company Guide Section 119(a).
\393\ NYSE Listed Company Manual Section 102.06(e); Nasdaq
Listing Rule IM-5101-2(b); NYSE American Company Guide Section
119(b).
\394\ NYSE Listed Company Manual Section 102.06(d); Nasdaq
Listing Rule IM-5101-2(c); NYSE American Company Guide Section
119(c).
\395\ NYSE Listed Company Manual Section 102.06(a); Nasdaq
Listing Rule IM-5101-2(d); NYSE American Company Guide Section
119(d).
\396\ NYSE Listed Company Manual Section 102.06(b); Nasdaq
Listing Rule IM-5101-2(d); NYSE American Company Guide Section
119(d).
\397\ NYSE Listed Company Manual Section 102.06(c); Nasdaq
Listing Rule IM-5101-2(e); NYSE American Company Guide Section
119(e).
---------------------------------------------------------------------------
b. SPAC Sponsors
Historically, it has been suggested that one reason a SPAC vehicle
might provide a more attractive route to the public markets was the
benefit of the leadership and professional advice by one or more
individuals comprising the SPAC sponsor, including in some cases
[[Page 29510]]
beyond the de-SPAC and into the life of the target as public operating
company.\398\ Although the majority of sponsors are financial
institutions, a sizable fraction (47%) of SPACs are sponsored by
individuals.
---------------------------------------------------------------------------
\398\ See Robert Berger, SPACs: An Alternative Way to Access the
Public Markets, 20 J. Applied Corporate Fin. 68 (2008) (``Though
privately negotiated, tailored transactions, SPACs can provide
companies with access to the public markets in ways that a
traditional IPO cannot. SPAC mergers typically exhibit . . .
specialized SPAC management teams that add experience that is
difficult to replicate.'').
[GRAPHIC] [TIFF OMITTED] TP13MY22.001
c. SPAC IPO Underwriters
During the period 1990-2021, the average number of underwriters
participating in a SPAC IPO was 2.5.\399\ Approximately 99% of these
SPAC IPOs were done via a firm commitment offering.\400\ The average
fee charged by SPAC IPO underwriters during this time was approximately
5.6%.\401\ This reflects a decline from the underwriting fees
associated with the earliest SPACs (approximately 7-7.5%),\402\ when
underwriters typically received their full compensation at the time of
the SPAC IPO.\403\ As mentioned above, a portion of this fee is
typically deferred until, and conditioned upon, the completion of the
de-SPAC transaction.\404\ In a typical SPAC underwriting, this deferred
fee is placed in the SPAC trust or escrow account. During the period
1990-2021, we estimate that the average size of the deferred
underwriter fee was 3.4%.\405\ We do not observe significant
differences in the structure or level of underwriter fees and deferred
fees, as disclosed at the IPO stage, between SPACs that have completed
a de-SPAC transaction and those that have not. We observe that among
SPACs that have completed a de-SPAC transaction the average number of
underwriters was 3.1, which is slightly higher than the average number
of underwriters per SPAC IPO.\406\ SPAC underwriters may provide other
services to the SPAC or its eventual target after the IPO as well. For
example, the SPAC underwriter may help the SPAC identify potential
targets, provide financial advisory services to the SPAC or the target,
or act as a PIPE placement agent.
---------------------------------------------------------------------------
\399\ This estimate is based on staff analysis of data as
described in Table 1, note a.
\400\ SPACs that conduct a firm commitment IPO and raise more
than $5 million in the offering are not subject to the requirements
of Securities Act Rule 419. See supra note 12.
\401\ This estimate is based on staff analysis of data as
described in Table 1, note a.
\402\ See, e.g., Lola Miranda Hale, SPAC: A Financing Tool with
Something for Everyone, 18 J. Corp. Acct. & Fin. 67 (2007) (``The
underwriting discounts are typically around 7-7.5 percent of the
public offering price'').
\403\ See Yochanan Shachmurove & Milos Vulanovic, Specified
Purpose Acquisition Company IPOs, in The Oxford Handbook of IPOs
(Douglas Cumming ed., 2018).
\404\ See supra Section III.E.3.
\405\ This estimate is based on staff analysis of data as
described in Table 1, note a, and may be positively skewed because
the data features a greater proportion of deals occurring between
2019 and 2021.
\406\ Based on staff analysis of data as described in Table 1,
note a. We note that timing differences in where a SPAC might
currently be, relative to its dissolution date, might result in
overestimation of this difference.
---------------------------------------------------------------------------
d. Warrants
SPAC IPOs most often register the offering of a unit composed of a
common share, warrants, or fractions thereof, and--in some cases--
rights.\407\ In their earliest form, SPAC units usually included two
in-the-money
[[Page 29511]]
warrants exercisable for full shares at the later of completion of the
de-SPAC transaction or one year after the effective date of the IPO
registration statement.\408\ These warrants could thus become highly
dilutive to the equity shareholders given that warrants may begin
trading separately from the unit common share once a Form 8-K
containing the balance sheet of IPO proceeds has been filed.\409\
Shareholders could experience equity dilution if redeeming shareholders
retain and later exercise their warrants.
---------------------------------------------------------------------------
\407\ See, e.g. G[uuml]l Okutan Nilsson, Incentive Structure of
Special Purpose Acquisition Companies, 19 Eur Bus Org Law Review
(2018) (``[R]ecent SPACs seem to be experimenting with issuing
certain `rights' [. . .] defined as the `right to receive one-tenth
of a SPAC share upon consummation of the business combination'
Unlike in the case of warrants, shareholders are not required to pay
for receiving these shares. `Rights can also trade separately and
even the shareholders who convert their shares can keep them. If the
business combination cannot be completed, rights expire
worthless.'').
\408\ See, e.g., Hale, supra note 402 (``The typical structure
involves the offering of a unit consisting of common stock and one
or two separate warrants for common stock. In a two-warrant unit,
the unit price is $6, including one share of common stock and two
warrants.[. . .] Typically, each warrant entitles the holder to
purchase one share of common stock at a price of $5 each.''); Carol
Boyer & Glenn Baigent, SPACs as Alternative Investments: An
Examination of Performance and Factors that Drive Prices, 11 J.
Private Equity 8 (2008) (``SPACs typically sell in units that are
priced at $6, and each unit is composed of one common share and two
warrants that give investors the right to buy two more shares for $5
each.'').
\409\ Historically, this typically occurred around 90 days after
the initial public offering. Over the past decade, the usual number
of days has decreased to approximately 60. See, e.g., Anh L. Tran,
Blank Check Acquisitions (SSRN Working Paper, 2010); James S.
Murray, The Regulation and Pricing of Special Purpose Acquisition
Corporation IPOs (SSRN Working Paper, 2014); James S. Murray,
Innovation, Imitation and Regulation in Finance: The Evolution of
Special Purpose Acquisition Corporations, 6 Rev. Integrative Bus. &
Econ. 1 (2017).
[GRAPHIC] [TIFF OMITTED] TP13MY22.002
As SPAC offerings have evolved, however, the highly dilutive
aspects of the warrant component of a SPAC offering unit appear to have
somewhat attenuated. As indicated in Figure 2, many SPACs offer units
with smaller warrant components. The majority of SPACs that have
conducted an IPO in the past three years offered units with fractional
warrants or units where warrants represented only fractional shares.
The dilutive capacity of these warrants is further tempered by the fact
that in current practice, warrants (or fractions thereof) are only
offered at exercise prices higher than the SPAC IPO offering price.
However, the reduced dilution attributable to warrants as a component
of SPAC IPO units does not imply that current SPAC IPOs offer a
security that is inherently less exposed to potential dilution or that
warrants purchased separately from units, such as in sponsor
compensation or PIPE financing transactions, are not still a
significant source of dilution. Furthermore, while warrant features
have in some respects become less dilutive, maximum allowable
redemptions have generally increased, creating the possibility for non-
redeeming shareholders to experience greater dilution albeit from a
different source. The emergent size and significance of PIPE financing
in de-SPAC transactions \410\ has presented yet another potential
source of dilution.
---------------------------------------------------------------------------
\410\ See infra Section IX.B.2.c.
---------------------------------------------------------------------------
e. Time To Complete a De-SPAC Transaction
Because SPACs are not blank check companies issuing penny stock,
they have not been subject to Rule 419's requirements, including the
requirement that an acquisition occur by a date 18 months after the
effective date of the blank check company's initial registration
statement.\411\ Nevertheless, SPACs use, as a matter of practice,
features of Rule 419 that would appear to enhance protections for
investors, including a pre-specified intended lifespan before
dissolution that is communicated to investors at the time of the
initial public offering. Table 2 documents the average proposed
lifespans (in months) that SPACs in each period disclosed in their
initial
[[Page 29512]]
public offering registration materials as well as the average actual
number of months used by those SPACs that successfully completed a de-
SPAC transaction, by cohort. We note that since 2006, the typical SPAC
generally pre-commits to a lifespan at least two months, on average,
longer than the 18-month limit in Rule 419 and approximately 13 months
shorter than the exchange listing 36-month limit.\412\
---------------------------------------------------------------------------
\411\ See supra note 12. See also Rule 419(e)(2)(iv) under the
Securities Act (``If a consummated acquisition(s) meeting the
requirements [of Rule 419] has not occurred by a date 18 months
after the effective date of the initial registration statement,
funds held in the escrow or trust account shall be returned [to
investors.]'').
\412\ See supra Sections VI.B.3 & IX.B.1.a.
[GRAPHIC] [TIFF OMITTED] TP13MY22.003
2. De-SPAC Transactions
The primary parties affected by the proposed disclosure
requirements at the de-SPAC transaction stage include SPACs, sponsors
of SPACs, investors, potential PIPE investors, and target private
operating companies. Additionally, the proposed rules to amend or
otherwise clarify the existing liability framework would affect SPACs,
target companies, investors in SPACs, and the underwriters that SPACs
use at the SPAC IPO and the de-SPAC stages.\413\
---------------------------------------------------------------------------
\413\ See, e.g., Luisa Beltran, SPACs Are Scrambling to Find
Mergers. What That Means for Investors, Barrons, Feb. 24, 2022.
---------------------------------------------------------------------------
We are mindful that parties may be differentially affected for a
number of reasons. For example, to the extent that regulatory changes
we are proposing, if adopted, would become effective while some current
SPACs are in the process of completing a de-SPAC transaction, these
SPACs may incur greater unanticipated transaction costs to comply with
the full set of new requirements. Other SPACs that have not yet found a
target may find themselves ex-post to have inefficiently entered the
market as compared to a SPAC that completes an IPO with knowledge of
the costs associated with the proposed amendments. However, the fact
that some of the proposed amendments may reduce costs or simply codify
existing best practices may offset some of the potentially more costly
elements of other amendments, thus the differential impact of the
proposed amendments affecting parties at the de-SPAC transaction stage
is expected to vary.
Based on staff analysis of SPACs that registered a distribution of
securities between 1990 and 2021, it appears that approximately half of
all SPACs following their initial public offerings have announced a
subsequent de-SPAC transaction, and about one third have completed
their de-SPAC transaction. It is possible that SPACs currently
searching for targets may still identify targets, complete de-SPAC
transactions, and thereby increase the fractions of SPACs with
announcements and completed transactions. However, the overall success
rate of approximately one-third is generally consistent with previous
research findings over more limited historical subsamples,\414\
suggesting that the number or proportion of SPACs and related parties
that would directly incur the costs, or experience the benefits, of our
de-SPAC-related proposals may be smaller than the population of parties
affected by our proposed amendments pertaining to a SPAC's initial
registration and public offering.
---------------------------------------------------------------------------
\414\ Studies performed in 2016 or later reviewing the 2003-2013
cohort of SPACs find that approximately 51.5% of SPACs that had an
initial public offering during the decade successfully complete a
de-SPAC transaction and 21.6% were still publicly traded three years
later in 2016. See, e.g., Milos Vulanovic, SPACs: Post-Merger
Survival, 43 Managerial Fin. 679, 679-699 (2017); Kamal Ghosh Ray &
Sangita Ghosh Ray, Can SPACs Ensure M&A Success?, 16 Advances in
Mergers & Acquisitions 83, 83-97 (2017).
---------------------------------------------------------------------------
Of the SPAC initial public offerings in 2020 and 2021, a majority
have not yet filed a Form 8-K announcing that the SPAC has found a
target company, or else have not filed a Form 8-K that
[[Page 29513]]
would follow within 4 days of a completed a de-SPAC transaction. As of
December 31, 2021, approximately 77 of 248 SPAC IPOs in 2020 (31%) and
an additional 495 of 613 SPAC IPOs in 2021 (81%) had not yet announced
a target or have withdrawn an announced business combination and
resumed searching. Some market participants have opined that, of
recently listed SPACs that have not yet secured a target, a greater
proportion are likely to liquidate without completing an
acquisition.\415\ This may be due to factors such as changing market
conditions (increased volatility, increasing interest or inflation
rates, etc.) and an increasingly limited number of viable target
private companies (particularly companies with valuations in the range
that would match the 80% requirement of most SPACs).
---------------------------------------------------------------------------
\415\ See, e.g., Jemima McEvoy, Take Back The SPAC: More And
More Companies Are Canceling High-Profile Deals To Go Public,
Forbes, Dec. 22, 2021.
[GRAPHIC] [TIFF OMITTED] TP13MY22.004
a. Filings in Connection With a De-SPAC Transaction
Like any merger or acquisition activity pursued by other public
reporting companies, the timing and types of filings that accompany a
de-SPAC transaction are usually a function of the way the business
combination is structured and the form of consideration employed. Such
transactions may require providing existing shareholders information in
advance of a vote. Others may simply require providing shareholders
with information and a specified period of time in which to redeem
shares, if desired. Similarly, such transactions may include an offer
of securities as a part of the merger or exchange offer, and if so, may
require the filing of a registration statement. The cumulative effects
of our proposals would vary in impact on individual de-SPAC
transactions based on their unique deal structure and the disclosures
they would thus already be obligated or otherwise incentivized to
provide.
A recent review of 462 de-SPAC transactions completed in 2020 and
2021 found that approximately 99% of transactions were accompanied by
proxy disclosures and 81.0% involved a related filing of a registration
statement on either Form S-4 or Form F-4.\416\ Of the 81.0% of de-SPAC
transactions that involved the filing of a registration statement,
85.4% were accompanied by a proxy statement on Schedule 14A, and the
remaining 14.6% were accompanied by an information statement on
Schedule 14C as a result of a consent solicitation.\417\
---------------------------------------------------------------------------
\416\ See Michael Levitt, Valerie Jacob, Sebastian Fain, Pamela
Marcogliese, Paul Tiger, & Andrea Basham, 2021 De-SPAC Debrief,
Freshfields (Jan. 24, 2022), available at https://blog.freshfields.us/post/102hgzy/2021-de-spac-debrief. We note that
the scope of this study is limited to 2020 and 2021.
\417\ Id.
---------------------------------------------------------------------------
b. Target Form 10 Information in Connection With De-SPAC Transactions
If a shell company that has Exchange Act reporting obligations,
including a SPAC, acquires a target that is not subject to the
reporting requirements of Section 13(a) or 15(d) of the Exchange Act,
after the business combination, it must file a Form 8-K that includes
the same disclosures about the target company that would have been
provided if the target had instead registered a class of securities
under Section 12 of the Exchange Act on Form 10.\418\ This Form 10
information in a Form 8-K must be filed within four business days after
the completion of a de-SPAC transaction.\419\ Because we are proposing
to require these disclosures to instead be included filings related to
the de-SPAC transaction that occur prior to the consummation of the
proposed business combination, whether in a proxy, information, or
registration statement or Schedule TO, any SPAC that would otherwise
file Form 10 information about its target in a Form 8-K following a de-
SPAC transaction would be affected.
---------------------------------------------------------------------------
\418\ See supra Section III A.
\419\ See Shell Company Adopting Release, supra note 211, at 15-
17, 21 (adopting amendments requiring the entity surviving a merger
with a shell company to file its report on Form 8-K within four
business days after completion of the merger and limiting the use of
Form S-8 to register offerings of securities).
---------------------------------------------------------------------------
[[Page 29514]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.005
As illustrated in Figure 3, staff review of Forms 8-K filed in
connection with approximately 300 de-SPAC transactions completed
between January 1, 2006 and December 31, 2021 found that approximately
47% of combined companies filed the Form 8-K on the fourth business day
after the de-SPAC transaction and approximately 88% of combined
companies filed the Form 8-K within the 4-business day time limit.
However, as discussed below in Section C.1.b.8, some registrants
currently may voluntarily disclose Form 10 information before filing
the Form 8-K given the staff's observations regarding incorporation by
reference of this information into the Form 8-K from filings made in
connection with the de-SPAC transaction.
c. PIPES in Connection With De-SPAC Transactions
PIPEs have supported de-SPAC transactions since their general
increased market presence began in 2005.\420\ However, in some recent
SPACs, PIPEs have played a larger role than they have historically
played, and this has given rise to concern about the potential dilutive
effects of PIPEs and how well those might be understood by other
investors.
---------------------------------------------------------------------------
\420\ See Meghan Leerskov, Shell Mergers and SPACs: A
Statistical Overview of Alternative Public Offering Methods, in The
Issuer's Guide to Pipes: New Markets, Deal Structures, and Global
Opportunities for Private Investments in Public Equity 281 (Steven
Dresner ed., 2015).
---------------------------------------------------------------------------
According to a recent study analyzing the 47 registered de-SPAC
transactions that occurred between January 2019 and June 2020,
approximately 65% of the cash delivered in these merger transactions
was contributed by public investors, and the amount typically
contributed by third-party PIPE investors was approximately 25%, with
the remaining funding provided by the sponsor.\421\ In such cases,
while the equity position of the PIPE investors in the combined company
following a de-SPAC transaction was dilutive, it did not eclipse the
ownership stake of the SPAC IPO shareholders. Because PIPE investors
may receive confidential information with which to make an investment
decision (including one-on-one conversations with the target's
management, which may convey soft information) and may also engage in
extended and detailed due diligence,\422\ their participation has at
times been considered a benefit to SPAC IPO investors, providing a
meaningful indicator of the expected future financial performance of a
proposed de-SPAC transaction.
---------------------------------------------------------------------------
\421\ See Klausner, Ohlrogge, & Ruan, supra note 17. The authors
analyzed data for the 47 SEC-registered SPACs that merged, and
thereby brought companies public, between Jan. 2019 and June 2020.
\422\ Id.
---------------------------------------------------------------------------
As the SPAC market has evolved, so too have the role and the
structure of PIPEs that support, and in some cases enable, de-SPAC
transactions. In 2021, according to one study, approximately 95% of de-
SPAC transactions included PIPE financings and the average and median
amounts raised in PIPE financings (respectively approximately $300
million and $200 million) were similar to the average size of the SPAC
trust account at the time of the IPO.\423\ This may reflect that in
more recent SPACs, in addition to enabling larger deals, some PIPEs may
provide capital to enhance deal certainty.\424\ In this
[[Page 29515]]
alternative role, the financing raised via PIPE investment may ensure
that a deal that otherwise may fail due to a high redemption rate can
proceed to completion. In these cases,\425\ the ownership stake of the
PIPE investors in the combined company may exceed that of the non-
redeeming SPAC investors.\426\
---------------------------------------------------------------------------
\423\ See Levitt et al., supra note 416. The difference between
average and median PIPEs in this sample reflect that the data is
positively skewed, implying that while some deals may involve low or
no additional financing via PIPEs, other deals feature large
investments outside the SPAC IPO process.
\424\ We note that while there may be more instances in which
PIPE financing functions to ensure that the cash requirements of a
de-SPAC transaction are met in recent years, the difference between
the average and median amount of PIPE financing raised (respectively
approximately $300 million and $200 million) and the average and
median consideration paid to target shareholders (respectively
approximately $2 billion and $1.25 billions) suggests that many PIPE
offerings in connections with a de-SPAC transaction still appear to
facilitate larger acquisitions rather than replace SPAC share
redemptions. See Levitt et al., supra note 416.
\425\ This outcome would also occur if the PIPE investments
simply exceeded the size of the SPAC IPO proceeds without
redemptions, but such cases have not been commonly observed.
\426\ In a review of PIPE finance raised in connection with de-
SPAC transactions that occurred between Jan. 2018 and June 2021, the
Commission staff found that while PIPE proceeds ranged, on average
from 60% to 88% of SPAC IPO proceeds, net of redemptions, these
proceeds represented up to 137% on average (in calendar year 2019)
of SPAC IPO proceeds at the consummation of the de-SPAC transaction.
---------------------------------------------------------------------------
PIPE investors may, therefore, come to have a larger stake in the
combined company than SPAC IPO investors may have anticipated when
making an initial investment. As a result, SPAC IPO investors may thus
find that they hold a smaller stake in the combined company than they
would find optimal. Further, they may not be able to purchase an
ownership claim in the combined company at the same price as a PIPE
investor when PIPEs are offered at a discount to the open market price.
Although PIPE discounts may offset differences in the securities'
liquidity, discounts to PIPE investors contribute to the dilution of
SPAC investors.
Staff review of PIPEs in connection with de-SPAC transactions that
occurred between January 2018 and June 2021 found the average and
median discount to PIPE investors were respectively 1.8% and 2.4% when
estimated over all PIPEs and slightly higher (respectively 4.4% and
2.4%) for PIPE offerings without warrants.\427\ These results appear
generally consistent with a recent study that was more narrowly scoped
to the height of the SPAC boom that found, between 2019 and June 2020,
that the median discount received by PIPE investors was 5.5% relative
to the market value of the publicly traded securities, and, in 37% of
SPACs with PIPE deals, the PIPE was at a 10% discount or more.\428\
This level of discount appears to be more broadly consistent with
estimated discounts associated with PIPE financing outside the SPAC
context as, by comparison, a recent study indicates that the average
discount for PIPE investors is 11.2%, and for the subsample of PIPES
that do not include warrants, the average discount is 5.7%.\429\ While
PIPE discounts may, on average, be smaller in the context of SPACs than
in other PIPE financing, it is nevertheless a concern that the dilution
they may cause may not be adequately anticipated by SPAC IPO investors.
---------------------------------------------------------------------------
\427\ These estimates are based on staff analysis of data as
described in Table 1, note a, and additional data from PrivateRaise.
\428\ See Klausner, Ohlrogge, and Ruan, supra note 17.
\429\ See Jongha Lim, Michael Schwert, & Michael Weisbach, The
Economics of PIPEs, 45 J. Fin. Intermediation 100832 (2021). These
results are based on a sample of 3001 PIPE transactions by U.S.
firms listed on NYSE or NASDAQ between 2001 and 2015.
---------------------------------------------------------------------------
d. Use of Projections in Connection With De-SPAC Transactions
Proposed Item 1609 of Regulation S-K would apply to projections
used in de-SPAC transactions. Hence, proposed Item 1609 would
potentially affect preparers and users of financial projections related
to de-SPAC transactions, including SPACs, their sponsors, target
companies, their controlling shareholders and management, and current
and prospective investors.
Three recent papers discuss the use of projections by SPACs and
target private operating companies in de-SPAC transactions. Chapman,
Frankel, and Martin (2021) collected data on 420 SPACs with IPO dates
from 2015 to 2020.\430\ They found that 249 (59.29%) de-SPAC
transactions were accompanied by at least one forecast. Dambra, Even-
Tov, and George (2022) focus on de-SPAC transactions between January 1,
2010, and December 31, 2020. They restrict their sample to de-SPAC
acquisitions with a single target and exclude SPACs that either
delisted before the merger effective date, that traded on the OTC
market, or focused on the biotech industry, yielding a sample of 142
observations.\431\ They identify 128 target private companies (90.1%)
that provided at least one form of forecast (e.g., revenue or net
income) in investor presentations. Blankespoor, Hendricks, Miller, and
Stockbridge (2022) reviewed a sample of 963 SPAC IPOs completed between
January 1, 2000, and July 1, 2021. They removed firms ``that are still
seeking a merger target, have liquidated, are foreign, or have not
publicly filed their roadshow'', and arrived at a sample of 389 SPACs.
Of this sample, 312 (80.21%) SPACs provided a revenue forecast. These
studies suggest that the use of projections is fairly common in the de-
SPAC transactions and may have become increasingly common over time.
---------------------------------------------------------------------------
\430\ See Chapman, Frankel, and Martin, supra note 291.
\431\ See Dambra, supra note 33.
---------------------------------------------------------------------------
e. Use of Fairness Opinions
According to one source, in 2021, only 15% of de-SPAC transactions
disclosed that they were supported by fairness opinions.\432\ In
contrast, a study of mergers and acquisitions more broadly found that
85% of bidders obtain fairness opinions.\433\ The results indicate that
deals in which bidders obtain fairness opinions may be associated with
higher stock price reactions to the deal announcement and also better
post-merger operating performance.\434\ This study suggests that, for
mergers and acquisitions in which a proxy vote is required, a fairness
opinion obtained by the bidder can mitigate information risks and
enhance communications between bidder boards of directors and their
shareholders.\435\
---------------------------------------------------------------------------
\432\ See Levitt, Jacob, Fain, Marcogliese, Tiger, & Basham,
supra note 416.
\433\ This finding is based on deals that occurred between 1995
and 2015, involving a publicly traded bidder that seeks to acquire a
majority of the target's shares. As discussed by the authors, it is
difficult to estimate the fraction of deals that involve a fairness
opinion since the use of fairness opinions is disclosed only if
bidders are required to file proxy statements to solicit a
shareholder vote. They note that listing rules of the NYSE, Amex,
and NASDAQ require a bidder shareholder vote only when the bidder
plans to issue 20% or more new equity to finance a deal. In other
words, if the bidder issues less than 20% equity or uses cash to
finance the deal, the bidder would not be required to disclose the
fairness opinion even if the firm had obtained one. See Tingting
Liu, The Wealth Effects of Fairness Opinions in Takeovers, 53 Fin.
Rev. 533 (2018) (finding positive wealth effects from fairness
opinions after the SEC approved Rule 2290 in Oct. 2007 which
regulates the identification and disclosure of conflicts of interest
of investment banks rendering fairness opinions.)
\434\ Id.
\435\ Id.
---------------------------------------------------------------------------
f. SPAC Filer Status
Figure 4 below shows the proportion of SPACs that claimed smaller
reporting company or EGC status, or both, in their first annual report
after the initial public offering. Since 2016, almost all SPACs in
their initial public offerings have claimed either smaller reporting
company or EGC status, with the majority claiming both. For example, in
2021, 399 SPACs in their initial public offerings claimed both smaller
reporting company and EGC status, while 48 only claimed EGC status.
BILLING CODE 8011-01-P
[[Page 29516]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.006
g. Changes in Jurisdiction of the Combined Company
As we consider the potential economic effects of the proposed new
rules and amendments, we take into consideration elements of the both
the economic and the regulatory baseline, which would include
accounting for variations between the applicable legal frameworks in
the jurisdictions in which SPACs are incorporated or organized. Table 4
presents information on the jurisdiction of incorporation or
organization for each SPAC that conducted its initial public offering
after 1990 and completed a de-SPAC transaction before 2022. The first
two columns state the percentage of SPACs that were originally
incorporated or organized in each of six listed jurisdictions. The
second two columns state--for each originating jurisdiction--the
percentage of combined companies that were incorporated or organized in
the listed jurisdictions following a de-SPAC transaction.
While the majority of SPACs that subsequently consummate a de-SPAC
transaction remain incorporated in the same location, Table 4 indicates
that the jurisdiction of incorporation or organization of the combined
company may change in connection with the de-SPAC transaction. As a
result, SPACs may face changes in prevailing legal standards that arise
from a change in jurisdiction of incorporation or organization. To the
extent that different jurisdictions have different disclosure
requirements and provide differing levels of investor protections, the
baseline regulatory regime will vary across SPACs and may change upon
the de-SPAC transaction.
[[Page 29517]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.007
BILLING CODE 8011-01-C
[[Page 29518]]
3. Blank Check Companies
We are also proposing an amendment to the definition of ``blank
check company'' for purposes of the PSLRA safe harbor provisions.\436\
The proposed amendment would affect SPACs and certain other blank check
companies that may not already be excluded from the PSLRA safe harbor,
as well as investors and other market participants whose access to the
informational content of forward-looking statements, or potential
remedies in the case of material omissions or misstatements, would
otherwise differ.\437\ We estimate that in addition to potentially
affected SPACs, as previously discussed,\438\ approximately 30 non-SPAC
entities that self-identified as blank check companies but did not
self-identify as penny stock issuers may also be affected by the
proposed amendment.\439\ Because such non-SPAC blank check companies
may not be subject to the same limitations on duration as SPACs, the
number of filings or disclosures they might make under the presumed
protections of the safe harbor may be greater. However, due to the
nature of a blank check company as a development stage company with no
specific plan or purpose other than to merge with or acquire an
unidentified company or companies, or other entity, or person,\440\ it
is unlikely that the nature of the forward-looking statements such a
registrant might produce would differ in substance from the
informational content provided by SPACs and therefore should not have a
differential impact on investors or other market participants.
---------------------------------------------------------------------------
\436\ See supra Section III.D.
\437\ Although the PSLRA safe harbor may currently affect
private litigation against some SPAC and blank check companies,
those companies are subject to state and federal enforcement
actions.
\438\ See supra Sections IX.B.1.a & IX.B.2.
\439\ This estimate is based on staff review of all registrants,
by unique CIK, that filed at least one periodic or current report
between 2019 and 2021 and, as of its most recent filing, identifies
its SIC code as 6770. We exclude CIKs that have already been
identified as SPACs and those associated with filings that self-
identify as penny stock issuers under Rule 419. We note that this
estimate may represent an upper bound on the number of additional
affected parties because it is based on registrants' self-reported
SIC and penny stock issuer status. Studies have reported that self-
reported SIC codes may contain errors that could cause a higher
number of issuers to be counted as affected parties than in effect
would be. See, e.g., Murat Aydogdu, Chander Shekar, & Violet Torbey,
Shell Companies as IPO Alternatives: An Analysis of Trading Activity
Around Reverse Mergers, 17 Applied Fin. Econ. 1335 (2007) (``Not all
firms that use SIC [code] 6770 are actually blank checks. For
instance, companies are required to file Form 12 after an
acquisition to notify the SEC of their new SIC code. Many fail to
file as they acquire operations in a business with a more
descriptive SIC code, yet they continue to use 6770.''). Our
estimate does not seek to reclassify potential errors in this case
because we are not able to distinguish when the classification error
would represent a mistake made by a registrant that knows it is not
a blank check company versus when the registrant is mistaken in its
belief that it is a blank check company when it may not be. In the
latter case, even if mistaken about its blank check company status
as a registrant, the party would still be affected by the proposed
amendment because they may currently make, or believe they are able
to make, forward looking statements under the PSLRA safe harbor, and
would not if the proposed amendment is adopted.
\440\ See the definition of ``blank check company'' in Rule
419(a)(2)(i) of the Securities Act.
---------------------------------------------------------------------------
4. Shell-Company Business Combinations
Proposed Securities Act Rule 145a and proposed Article 15 of
Regulation S-X would affect SPACs and other shell companies (other than
business combination related shell companies) involved in business
combination transactions. Proposed Rule 145a would impact the
disclosures reporting shell company investors may receive and potential
sources of liability. Proposed Article 15 of Regulation S-X would
impact the financial statements associated with business combinations
involving shell companies and, thus, would also affect parties that are
typically associated with the preparation, review, and dissemination of
financial statements and the information they contain.\441\ Table 5
below illustrates that the proportion of SPAC to non-SPAC reporting
shell-company business combinations has shifted due to the increasing
number of SPACs entering the market. It also shows that, in 2021, more
than one-third of all targets acquired by a reporting shell company
appear to merge with a non-SPAC entity.
---------------------------------------------------------------------------
\441\ We acknowledge the possibility of a situation in which a
previously non-public shell company files an initial registrant
statement. The financial statements included in the registration
statement would be required to comply with Regulation S-X, including
the proposed amendments in Rule 15-01. As we currently lack the data
necessary to estimate the number of shell companies that are
private, at present, that could be impacted by proposed Article 15,
they are not included in the estimates discussed in this analysis.
However, the extent to which this may impact our conclusions is
limited because, based on staff observation and experience with
common transaction structures, we believe it is unlikely proposed
Article 15 will impact many such shell companies.
[GRAPHIC] [TIFF OMITTED] TP13MY22.008
We estimate that in addition to existing SPACs that have yet to
complete a de-SPAC transaction, approximately 160 additional existing
reporting shell companies may be affected by the proposed
amendments.\442\ Almost all of these non-SPAC reporting shell companies
trade on the OTC market \443\ and tend to be smaller than SPACs in
terms of market capitalization and total assets.\444\ We further
estimate that approximately
[[Page 29519]]
11.0% (18) of these shells would also be affected by the proposed
amendment to redefine the term ``blank check company'' for purposes of
the PSLRA.\445\
---------------------------------------------------------------------------
\442\ This estimate is based on staff review of all registrants'
self-reported status as a shell company on the cover page of the
most recent annual report (Forms 10-K, 20-F, or 40-F) or an
amendment thereto filed in calendar year 2021 by unique CIKs of
entities that are not already identified as SPACs.
\443\ Based on staff review of periodic filings, approximately
72.7% of these shells trade OTC, 26.1% do not trade, and 0.6% each
appear to have traded on Nasdaq Global Market and NYSE Market,
respectively.
\444\ As of yearend 2021, the average market capitalization of
non-SPACs shell companies was $154,731,262.50 while the average
market capitalization of SPACs was $306,204,218.60. Based on the
most recent periodic disclosure filed per registrant before Dec. 31,
2021, the average total asset position of a non-SPAC shell was
$33,666,553.41 while the average of SPAC total assets was
$309,570,778.30.
\445\ This estimate is based on a cross-tabulation, by unique
CIK, of potentially affected parties identified as blank check
companies (see supra note 439) and as shell companies (see supra
note 442).
---------------------------------------------------------------------------
Our estimate of approximately 160 shell companies represents an
upper bound on the number of potentially affected shell companies
because some of these shell companies could engage in transactions
pursuant to an exemption from registration, or otherwise may engage in
transactions that would not require registration. For example, if a
shell company were to acquire another shell company, the acquiring
shell would not be affected by proposed Rule 145a or proposed Article
15. Similarly, a shell company that obtains a fairness determination
from a court or authorized governmental entity might also be
exempt.\446\ Given that a more precise estimate would require us to
make assumptions about what proportion of future shell company mergers
may be exempt or not require registration, we request additional data
or comments that would help inform our expectations about how many
shell companies that are not SPACs would also be involved in
transactions that would be affected by the proposed rules.
---------------------------------------------------------------------------
\446\ See Section 3(a)(10) of the Securities Act; Staff Legal
Bulletin No. 3A (CF) (June 18, 2008), available at https://www.sec.gov/corpfin/staff-legal-bulletin-3a.
---------------------------------------------------------------------------
5. Projections Under Item 10(b) of Regulation S-K
The proposed amendments to Item 10(b) would update the Commission's
view on factors to be considered in formulating and disclosing
financial projections and would specify the application of Item 10(b)
to financial projections prepared by parties other than management. To
the extent that parties elect to follow the updated guidance set forth
in the proposed amendments, it would affect registrants and other
entities providing financial projections in Commission filings, such as
a target firm involved in a business combination with a reporting
registrant. A recent study examined management earnings forecasts by
focusing on public companies from 2000 to 2018.\447\ Drawing management
earnings forecast data from IBES Guidance, they find that management
provides earnings forecasts in 15,295 (30.8%) out of 49,595 firm-years.
The proposed amendments to Item 10(b) would also affect investors and
other users of the financial projections included in Commission
filings, to the extent that parties elect to follow the updated
guidance.
---------------------------------------------------------------------------
\447\ See Claude Francoeur, Yuntian Li, Zvi Singer, & Jing
Zhang. Earnings Forecasts of Female CEOs: Quality and Consequences,
Rev. Acct. Stud. (2022). IBES is a database that includes
quantitative (numeric) company earnings forecasts collected from
press releases and transcripts of corporate events. To the extent
that some of the management earnings forecasts in the IBES database
are not included in SEC filings, these figures may overstate the
activity that would be affected. However, because the study sample
is drawn from a period after the adoption of Regulation FD, we
believe the likelihood an IBES record would not also be present in
an SEC filing is low. It is more likely that these figures may
understate the number of affected projections, because the database
does not include all public reporting companies, and because
management may provide financial projections that are not captured
by the IBES database. See, e.g., Zahn Bozanic, Darren T. Roulstone,
and Andrew Van Buskirk, Management earnings forecasts and other
forward-looking statements, 65 J. Acct & Econ., 1 (2018) (indicating
that approximately 33% of Form 8-K filings of earnings announcements
include at least one quantitative forecast.)
---------------------------------------------------------------------------
6. Investment Company Act Safe Harbor
The proposed safe harbor would affect all current and future SPACs,
sponsors, investors, and potential target companies. For statistics on
these affected parties in the SPAC market, see our discussion
above.\448\ For a description of Section 3(a)(1)(A) of the Investment
Company Act under the Securities Act, see our discussion above.\449\
---------------------------------------------------------------------------
\448\ See supra Sections IX.B.1 and IX.B.2
\449\ See supra Section VI.A.1.
---------------------------------------------------------------------------
a. Nature and Management of SPAC Assets
Most SPACs hold a majority of their assets in a trust (or escrow)
account, which is also required by current listing standards.\450\ For
example, Table 6 shows that, on average, approximately 90% of the
initial offering proceeds raised in a SPAC IPO in 2021 were deposited
in trust accounts.
---------------------------------------------------------------------------
\450\ See supra note 392 and accompanying text.
[GRAPHIC] [TIFF OMITTED] TP13MY22.009
It is also our understanding that SPAC assets, particularly those
held in the trust account, are largely invested in Government
securities or Government money market funds.\451\ We also understand
that SPACs generally disclose in their IPO prospectuses that any income
earned on assets in the trust account will be used toward the de-SPAC
transaction, after possible deductions for tax payments. Some SPACs
also disclose that a portion of the interest income could be used
toward any potential dissolution expenses.
---------------------------------------------------------------------------
\451\ See, e.g., Rodrigues & Stegemoller, supra note 17.
---------------------------------------------------------------------------
[[Page 29520]]
b. SPAC Activities
Currently, the typical SPAC discloses in its IPO prospectuses that
it is formed as a blank check company for the purpose of effecting a
business combination with one or more businesses. In addition, SPACs
usually provide disclosures in their IPO prospectuses indicating that
they believe they do not meet the investment company definition under
Section 3(a). They further typically disclose to prospective investors
that if they are determined to be an investment company in the future,
the costs and logistics of compliance with the Investment Company Act
would be prohibitive.
Current exchange listing standards and SPACs' own disclosures in
their initial public offering registration statements generally require
that SPACs must combine with a target that is unidentified at the time
of their initial public offerings.\452\ As a result of exchange rules
and their own disclosed commitments to investors, SPACs generally have
a limited period to find a target and negotiate the terms of a de-SPAC
transaction agreement.\453\ Because of the incentives provided to
sponsors by the SPAC structure to complete a de-SPAC transaction, the
limited period provided for a SPAC to search for a target and complete
a transaction deal may cause some SPACs to pursue comparatively less
attractive targets as they get closer to their de-SPAC transaction
deadlines.\454\ In addition, the limited period to search for a target
and complete a de-SPAC transaction may increase the bargaining power of
target companies in negotiations with SPACs compared to other potential
buyers that do not face such regulatory or self-imposed time
constraints.
---------------------------------------------------------------------------
\452\ See Nasdaq Listing Rule IM-5101-2 (listing standards for
companies with a business plan to ``engage in a merger or
acquisition with one or more unidentified companies''); NYSE
American Company Guide Section 119 (similar).
\453\ This limited period may go beyond the pre-committed
lifespan SPACs disclose in their IPO registration statements. As we
discuss in infra Section IX.B.6.c, SPACs currently may pre-commit to
hold a vote on a pre-specified extension period, if needed, to
complete a de-SPAC transaction. SPACs may also ask shareholders ex-
post to vote for an extension of the lifespan of the SPAC, even if
they did not pre-commit to such a vote. Based on the sample of SPACs
analyzed in infra Section IX.B.6.c, the vast majority of SPACs
conclude a de-SPAC transaction or liquidate the SPAC within 36
months of their IPO date.
\454\ There is some evidence consistent with such incentives.
See, e.g., Dimitrova, supra note 30 (finding that four-year post-IPO
buy-and-hold abnormal return is on average 8.8% lower if the
acquisition is announced at the end of the (self-imposed) two-year
deadline instead of at the estimated earlier optimal time).
---------------------------------------------------------------------------
Most SPACs tend to pursue only one target company for a de-SPAC
transaction. Of the 483 de-SPAC transactions that occurred over the
1990-2021 period involving SEC registered SPACs, 3.3% (16/483) of
transactions had 2 or more targets (14 transactions had 2 targets, 2
had 3 targets).\455\
---------------------------------------------------------------------------
\455\ Based on data from Dealogic M&A module as of Jan. 2022.
---------------------------------------------------------------------------
c. Duration Statistics: Announcement and Completion of De-SPAC
Transactions
To rely on the proposed safe harbor from Investment Company status,
a SPAC would be required to announce a de-SPAC transaction no later
than 18 months after the effective date of the registration statement
for the SPAC's initial public offering, and complete the transaction no
later than 24 months after the date of the initial public offering. For
the sake of comparison to other current requirements, this is a shorter
period than the 36 months a SPAC can remain listed under current
exchange rules as discussed above.\456\
---------------------------------------------------------------------------
\456\ See supra note 393 and accompanying text.
---------------------------------------------------------------------------
Below we provide statistics on the timing of announcements and
completion of de-SPAC transactions for a sample of SPACs with effective
IPO dates between January 1, 2016 and December 31 2019. We chose
December 31, 2019, as the end date to ensure that at there is at least
a 24-month history available for each SPAC included in the sample in
order to reduce potential reverse survivorship bias in the
estimates.\457\
---------------------------------------------------------------------------
\457\ Note that the number of SPAC IPOs increased significantly
in the 2020-2021 period. To the extent this increase has increased
competition for target companies, it may affect the time it takes
for more recent SPACs to announce or complete a de-SPAC transaction,
or their ability to complete a de-SPAC transaction at all. As of
Dec. 31, 2021, approximately 77 of 248 SPAC IPOs in 2020 (31%) and
an additional 495 of 613 SPAC IPOs in 2021 (81%) had not yet
announced a target or have withdrawn an announced business
combination and resumed searching (see supra Section IX.B.2). See
also supra note 413 and accompanying text.
---------------------------------------------------------------------------
We have data on 152 SPAC initial public offerings between January
1, 2016 and December 31, 2019.\458\ Among these SPACs, all disclosed in
their IPO prospectus that they would be limited to a 24 month lifespan
or less, where almost 59% (89 of 152) disclosed that they would be
limited to a 24-month period, and the rest to a shorter time period, in
some cases as short as 12 months (18, or 12%, of cases). In around 14%
of the SPACs (22 of 152), there was disclosure in their IPO prospectus
about a pre-commitment to hold a vote on an optional extension period
ranging from three to 24 months. There were five cases in which the
combination of the initial lifespan and pre-committed extension period
exceeded a 24-month potential total lifespan for the SPAC. However, we
recognize that SPACs may, and some currently do, ask shareholders to
vote for an extension of the lifespan of the SPAC even if they did not
pre-commit to such a vote or a specified extension period in the event
of a vote.
---------------------------------------------------------------------------
\458\ Based on data from Dealogic M&A module as of Jan. 2022.
---------------------------------------------------------------------------
As of December 31, 2021, approximately 96% (146 of 152) of the
SPACs in the sample had announced an agreement to enter into a de-SPAC
transaction, and approximately 91% had completed a de-SPAC transaction.
Among the 13 cases (9%) in the sample where SPACs had not completed a
de-SPAC transaction at this time, seven SPACs had been formally
liquidated,\459\ whereas six SPACs were still active (four of which had
announced a de-SPAC transaction). As of December 31, 2021, the lifespan
of the six still active SPACs ranged between 25 to 37 months since the
IPO date.
---------------------------------------------------------------------------
\459\ In two of these cases, a de-SPAC transaction was announced
but later withdrawn.
---------------------------------------------------------------------------
Overall, approximately 59% (89 of 152) of the SPACs in the sample
announced an agreement to enter into a de-SPAC transaction no later
than 18-months after the date of the initial public offering, and 88%
(134 of 152) announced a transaction agreement no later than 24 months
after the IPO date. Figure 5 shows the distribution of the timing of
announcements for de-SPAC transaction agreements expressed in event-
time relative to the IPO effective date for the 146 sample SPACs that
had made such an announcement by December 31, 2021. The longest time to
an announcement was 39 months, and the shortest was four months.
BILLING CODE 8011-01-P
[[Page 29521]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.010
Approximately 65% (99 of 152) of the SPACs in the sample had
completed a de-SPAC transaction no later than 24 months after the IPO
date, whereas only 31% (47 of 152) of the SPACs in the sample had
completed a de-SPAC transaction no later than 18 months after the IPO
date. Figure 6 shows the distribution of the timing of de-SPAC
transactions expressed in event-time relative to the IPO effective date
for the 139 SPACs in the sample that completed de-SPAC transactions by
December 31, 2021. The longest time to completion was 43 months, and
the shortest was eight months.
[[Page 29522]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.011
BILLING CODE 8011-01-C
Among the 139 SPACs in the sample that completed a de-SPAC
transaction by December 31, 2021, the average and median times between
the announcement and the completion of the transaction were
respectively 150 days (approximately 5 months) and 142 days
(approximately 4.7 months). The time between announcement and
completion of the merger was less than 6 months in 78% of the cases,
and the shortest time observed in the sample was less than two months
(50 days). For the subsample of 99 SPACs that completed the de-SPAC
transactions in no more than 24 months since the IPO date, the average
and median times between the announcement and the completion of the
transaction were respectively 142 days (approximately 4.7 months) and
125 days (approximately 4.1 months). For this subsample, approximately
79% of the de-SPAC transactions occurred less than 6 months after the
announcement, and there were 12 cases in which the announcement of the
transaction agreement was made more than 18 months after the IPO date.
C. Benefits and Costs of the Proposed Rules
1. Disclosure-Related Proposals
a. SPAC Initial Public Offerings and Other Registered Offerings
1. Definitions (Item 1601)
We are proposing Item 1601 to identify certain parties and
transactions to which the requirements of the subpart, as well as other
parts of this proposal, would apply. Defining the terms ``special
purpose acquisition company,'' ``de-SPAC transaction,'' ``SPAC
sponsor,'' and ``target company'' as proposed would establish the scope
of the issuers and transactions subject to the requirements of Subpart
1600, and thereby provide both registrants and investors with notice of
the associated obligations. The definitions may impose costs if the new
definitions are not consistent with current understanding and
consequently cause confusion for registrants, investors and market
participants. Both the costs and benefits would be small to the extent
that the new definitions are consistent with widely accepted views.
2. Prospectus Cover Page and Prospectus Summary Disclosures (Item 1602)
Proposed Item 1602 would require a prospectus filed in connection
with a SPAC's initial public offering to disclose information on
certain features unique to SPAC offerings and the potential associated
risks, in addition to the information currently required by Item 501
and Item 503 of Regulation S-K, on the prospectus cover page and in the
prospectus summary, respectively, as discussed above.\460\ The proposed
additional disclosures may reduce SPAC investors' information
processing costs and improve their investment decisions. Investors in
SPACs vary in
[[Page 29523]]
financial sophistication and ability to process the information
provided in SPAC IPO prospectuses. We expect that the potential
benefits may especially accrue to investors that are less financially
sophisticated.
---------------------------------------------------------------------------
\460\ See supra Section II.E for more information about current
disclosure requirements.
---------------------------------------------------------------------------
Specifically, because investors are likely to allocate their
attention selectively,\461\ requiring disclosure regarding important
features and associated risks of SPAC investments on the prospectus
cover page (including cross-references to the locations of the more
detailed related disclosures) and prospectus summary may increase the
likelihood that investors pay attention to the information by making it
more salient.\462\ In addition, the proposed additional disclosures in
the prospectus summary may further reduce information processing costs,
particularly for less financially sophisticated investors, by providing
information in plain English about important SPAC features in a concise
format.\463\
---------------------------------------------------------------------------
\461\ See, e.g., George Loewenstein, Cass R. Sunstein, & Russell
Golman, Disclosure: Psychology Changes Everything, 6 Ann. Rev. Econ.
391 (2014).
\462\ Salience detection is a key feature of human cognition
allowing individuals to focus their limited mental resources on a
subset of the available information and can cause them to over-
weight this information in their decision making processes. See,
e.g., Daniel Kahneman, Thinking, Fast and Slow (2013); Susan Fiske &
Shelley E. Taylor, Social Cognition: From Brains to Culture (3d ed.
2017). Moreover, for financial disclosures, research suggests that
increasing signal salience is particularly helpful in reducing
limited attention of individuals with lower education levels and
financial literacy. See, e.g., Victor Stango & Jonathan Zinman,
Limited and Varying Consumer Attention: Evidence from Shocks to the
Salience of Bank Overdraft Fees, 27 Rev. of Fin. Stud. 990 (2014).
\463\ Existing research notes that individuals bear costs in
absorbing information and that the ability of individuals to process
information is not unbounded. See Richard Nisbett & Lee Ross, Human
Inference: Strategies and Shortcomings of Social Judgment (1980);
David Hirshleifer & Siew Hong Teoh, Limited Attention, Information
Disclosure, and Financial Reporting, 36 J. Acct. & Econ. 337 (2003).
Thus, summary disclosure may provide benefits by focusing investors'
attention and reducing information processing costs.
---------------------------------------------------------------------------
Proposed Item 1602(b)(6) would require tabular disclosure in the
prospectus summary regarding the nature and amount of the compensation
received or to be received by the SPAC sponsor, its affiliates and
promoters, and the extent to which this compensation may result in a
material dilution of the purchasers' equity interests. There is
empirical evidence that visualization improves individual perception of
information.\464\ For example, one experimental study shows that
tabular reports can lead to better decision making.\465\ Because
sponsors' compensation may be a material cost to SPAC investors, the
tabular format of these required disclosures may help investors
(especially those that are less financially sophisticated) more easily
process the financial implications of compensation of the SPAC sponsor,
its affiliates and promoters, thereby potentially incrementally
improving their investment decisions.\466\
---------------------------------------------------------------------------
\464\ See John Hattie, Visible Learning: A Synthesis of Over 800
Meta-Analyses Relating to Achievement (2008).
\465\ See Izak Benbasat & Albert Dexter, An Investigation of the
Effectiveness of Color and Graphical Information Presentation Under
Varying Time Constraints, 10-1 MIS Q. 59 (1986).
\466\ See infra Section IX.C.1.a.4 for the discussion of
proposed Item 1602(a)(4), which would require that the prospectus
cover page include a simplified dilution table depicting the
estimated remaining pro forma net tangible book value per share that
would be realized at quartile intervals up to the maximum redemption
threshold.
---------------------------------------------------------------------------
Additionally, the proposed rules and amendments would standardize
this disclosure across all registration statements filed for SPAC
initial public offerings, which may make it easier and less costly for
investors to compare terms across offerings and thereby promote better
investment decisions.
Finally, to the extent the proposed additional disclosures on the
cover page and in the prospectus summary would increase investors'
awareness of sponsors' incentives and potential conflicts of interest,
it may have an incremental disciplining effect on sponsors' behavior.
For example, to the extent sponsors would face potentially greater
scrutiny by more attentive investors, they may take some additional
care in finding and negotiating terms with target companies, or take
steps to mitigate the extent of any disclosed conflict of interests.
The proposed additional disclosures that would be required to be
included on the prospectus cover page and in the prospectus summary may
increase compliance costs for SPACs to the extent that they would need
to provide additional information in their IPO prospectuses than they
currently provide. We believe that SPACs should have this information
readily available and in some cases may already be disclosing it, such
as the time frame for the SPAC to consummate a de-SPAC transaction.
Thus, we expect that any compliance costs resulting from these proposed
items would not be significant.
There could also be some potential costs for investors. In
particular, there is a risk that, by requiring more items to be added
to the cover page and the prospectus summary, the salience of the
current required disclosures may be reduced because they will have to
compete with the new required disclosures for investors' attention
compared to the baseline. In addition, because Item 501(b) of
Regulation S-K limits the information on the outside cover page to one
page, there is a risk that the amount of information required to be
included could generally impair the readability of the cover page. As a
result, some investors may pay less attention to the cover page as a
whole.
3. Sponsors and Conflicts of Interest (Item 1603)
Proposed Item 1603(a) would require disclosure of certain
information regarding a SPAC's sponsor, its affiliates and any
promoters, both at the SPAC initial public offering stage and at the
de-SPAC transaction stage. To the extent that such disclosures are not
already provided or are partially provided, this proposed disclosure
requirement would provide investors with information related to the
experience and incentives (due to characteristics of the compensation
structure, for example) of the sponsor.\467\ Investors may benefit from
such disclosure, as it could allow them to better evaluate the
circumstances that may impact their investment decision in a specific
SPAC. The proposed disclosure is likely to be beneficial to investors
who may consider investing in a SPAC at a point in time that precedes
the existence and disclosure of information about an acquisition
target, or to investors seeking to evaluate a proposed de-SPAC
transaction.\468\
---------------------------------------------------------------------------
\467\ See supra Section II.B for more information about current
disclosure requirements.
\468\ Academic literature provides some evidence that
characteristics of the SPAC sponsor, such as experience or network
may be indicative of its ability to select and execute quality
transactions. See, e.g., Lin, supra note 30.
---------------------------------------------------------------------------
Proposed Item 1603(b) would require disclosure of conflicts of
interest at both the SPAC initial public offering stage and at the de-
SPAC transaction stage. This disclosure would also be required in any
Schedules TO filed in connection with a redemption. We believe that
this proposed disclosure requirement would benefit investors by
enabling them to better assess any actual or potential material
conflicts of interest held by sponsors, its affiliates, officers and
directors of the SPAC, and/or promoters. Such disclosure could allow
investors to more accurately assess the potential risk associated with
the conflicts of interest in a SPAC and thus make better investment
decisions.
Further, disclosure under proposed Item 1603(c) would provide
investors information about the fiduciary duties that a SPAC's officers
and directors owe to other companies. We expect that this
[[Page 29524]]
disclosure would allow the SPAC's shareholders and prospective
investors to assess the extent to which the officers and directors may
face outside obligations, including the possibility that they might be
compelled to act in the interest of another company that compete with
the SPAC. In addition, to the extent that a SPAC's officers and
directors owe fiduciary duties to other companies, these obligations
may limit the attention that they are able to provide to the SPAC. We
expect that these disclosures would benefit investors by allowing them
to better assess the actions of the officers and directors in managing
the SPACs activities, including a proposed de-SPAC transaction.
Proposed Item 1603(a) may increase compliance costs for SPACs,
mainly in the form of collecting, preparing, and filing the required
information for disclosure on sponsors, their affiliates and any
promoters. We do not expect, however, such costs to be substantial
because most of this information should be readily available, and some
of it is currently being provided by SPACs.
With respect to the conflicts of interest disclosures required by
Item 1603(b), SPACs could bear direct costs associated with: (i)
Reviewing and preparing disclosures describing any such conflicts of
interest; (ii) developing and maintaining methods for tracking any such
conflicts of interest; and (iii) seeking legal or other advice. While
the direct costs associated with Item 1603(b) disclosure requirements
would depend on the extent to which a SPAC already provides this
disclosure under current practices, we expect these costs to generally
be low. As a baseline matter, the common practice of a SPAC disclosing
the presence of actual or potential conflicts of interest as a material
risk factor predates SPACs listing on national exchanges.\469\
Therefore, it would appear that most SPACs are generally aware of these
actual or potential conflicts and would therefore only bear costs
insofar as our proposed requirements would involve providing greater
detail or specificity in the disclosures of conflicts of interest.
---------------------------------------------------------------------------
\469\ For examples of such disclosures, see Jog & Sun, supra
note 386.
---------------------------------------------------------------------------
Similarly, we do not expect the disclosures of a SPAC officer or
director's fiduciary duties to other companies, as would be required by
proposed Item 1603(c) to be very costly to prepare. Given the
significance of a fiduciary relationship, it is unlikely that a
director or officer--and, by extension, the SPAC--would not already
know what relationships would require disclosure. The incremental costs
to produce, track, or review records also should be low because signed,
written documents typically accompany the entrance into a relationship
that engenders a fiduciary duty.
4. Dilution (Items 1602(a)(4) and 1602(c))
As discussed above,\470\ SPAC shares may experience dilution from
various transactions by a number of parties or combinations of parties
at various stages of a SPAC's lifecycle. For example, sponsors
typically obtain their ``promote'' at a nominal value (e.g., $25,000)
with most of their compensation typically contingent on the completion
of a de-SPAC transaction. When sponsors receive compensation at the de-
SPAC transaction stage, their compensation comes out of the stakes of
SPAC investors who do not redeem their shares, leading to an
interactive effect between redemptions and the promote that magnifies
the dilution. PIPE investments, due to their typical discount to the
IPO offering price and potential interactive effects with redemptions,
can further dilute non-redeeming SPAC investors. Finally, investors
that redeem their shares typically get to keep their warrants. Future
exercises of these warrants further dilutes non-redeeming SPAC
shareholders' equity. Because most of these potentially dilutive
transactions may occur after the SPAC's initial public offering and
both the direct and indirect dilutive effects can be unique to the
specific SPAC's structure, they may be difficult for prospective
investors and other interested market participants to identify,
anticipate, or adequately assess. In the absence of a more complete
appreciation of these dilutive effects, the decision to invest, vote,
or redeem, or the price at which one might be willing to enter or exit
a position, may lack relevant information and, as a consequence, be
suboptimal. SPAC investors who remain investors in the combined company
absorb the above-mentioned dilution effects. To the extent that
investors may not understand the extent of the dilution, or may exhibit
inertia regarding the decision to redeem, the dilution may not be
reflected in market prices at the time of the target acquisition.\471\
---------------------------------------------------------------------------
\470\ See supra Section II.D for more information about existing
disclosure requirements under Item 506 of Regulation S-K.
\471\ See Gahng, Ritter, & Zhang, supra note 23; Klausner,
Ohlrogge, & Ruan, supra note 17.
---------------------------------------------------------------------------
Proposed Item 1602(c) would require that registration statements
filed by SPACs, other than for de-SPAC transactions, describe all
material potential sources of future dilution following the SPAC's
initial public offering and include tabular disclosure of the amount of
potential future dilution from the public offering price that will be
absorbed by non-redeeming SPAC shareholders, to the extent known and
quantifiable. The proposed rule would benefit investors by providing
them with more detailed information on the potential impact of dilution
on the value of their SPAC shares, thus enabling them to better
understand the effects of dilution on their investments and ultimately
make better investment decisions.
We are further proposing to require that registration statements on
Form S-1 or Form F-1 filed by SPACs, including for an initial public
offering, include a simplified dilution table depicting the estimated
remaining pro forma net tangible book value per share that would be
realized at quartile intervals up to the maximum redemption threshold.
Given the empirical evidence that visualization improves individual
perception of information and that dilution that may occur due to
redemption may be a significant cost to investors,\472\ we expect that
the tabular format of this disclosure will help investors (especially
those that are less financially sophisticated) more easily process the
financial implications of dilution and potentially improve their
investment decisions. Moreover, the tabular presentation may provide
investors with this information in a format that might more accurately
represent the dilution that they might experience if they choose to
invest in the SPAC, as compared to current disclosures.\473\ For
example, Figure 7 shows the average maximum allowable number of shares
eligible to be redeemed prior to the de-SPAC transaction disclosed by
SPACs in their registration statements. As shown, the maximum potential
dilution is fairly stable over time, on average about 90% of net
tangible book value per share.
---------------------------------------------------------------------------
\472\ See Hattie, supra note 464, and Benbasat & Dexter, supra
note 465.
\473\ See supra note 74.
---------------------------------------------------------------------------
[[Page 29525]]
Figure 7 also presents the average realized redemptions in de-SPAC
transactions, which appear to vary considerably over time. Thus,
despite the fact that SPACs are currently disclosing the maximum
potential dilution that may occur as a function of redemptions, this
information may not be as useful for investors as a presentation of the
same information in a scenario table at quartile intervals of
redemption, given that actual redemptions in connection with a de-SPAC
transaction rarely reach the maximum allowable amount. The proposed
amendments would provide investors with more granular information about
potential dilution, which could allow them to better anticipate the
effects of such dilution on future returns.\474\ Additionally, the
tabular format of the disclosure would standardize the dilution
information, allowing investors to more easily analyze it and compare
it across SPACs.
---------------------------------------------------------------------------
\474\ See Klausner, supra note 71.
[GRAPHIC] [TIFF OMITTED] TP13MY22.012
We expect the incremental costs of these proposed disclosure
requirements to be, in most cases, low. First, registrants should
already have the underlying information at their disposal and are
therefore unlikely to incur significant additional costs to procure the
necessary data. Second, while the proposed rules would require
registrants to account for potential future sources of dilution and
analyze several levels of redemption, which may require the services or
input of quantitative specialists (analysts, forecasters, or other
consultants), the material sources and the levels of dilution are
generally common across SPAC offerings (thus a standard approach based
on best practices may emerge, reducing costs over time) and are known
and quantifiable. For example, sources of dilution may include
shareholder redemptions, sponsor compensation, underwriting fees,
outstanding warrants and convertible securities, and PIPE financings.
For proposed Item 1602(a)(4), registrants will be required to analyze
only four levels of redemption (i.e., 25%, 50%, 75%, and maximum
redemption). Third, many initial registration statements filed by SPACs
already include disclosures regarding dilution. Thus, the additional
burden of these disclosures becoming a formal requirement may be
relatively modest. We therefore expect that the proposed disclosure
requirements should benefit the market broadly and investors in
particular, insofar as the enhanced information on potential sources of
dilution improves price formation.
5. Structured Data Requirement (Item 1610)
Proposed Item 1610 would require all disclosures in proposed Items
1601-1609 of Regulation S-K to be tagged in Inline XBRL.\475\ We expect
that this requirement would augment the informational benefits of the
proposed new disclosure requirements by making them more easily
retrievable and usable for aggregation, comparison, filtering, and
other analysis. XBRL requirements for public operating company
financial statement disclosures have been observed to mitigate
information asymmetry by reducing information processing costs, thereby
making the disclosures easier to access and analyze.\476\ This
reduction in information processing cost has been observed to
facilitate the monitoring of companies by external parties, and, as a
result, to influence behavior of
[[Page 29526]]
companies, including their disclosure choices.\477\
---------------------------------------------------------------------------
\475\ See supra Section II.G.
\476\ See, e.g., Joung W. Kim, Jee-Hae Lim, & Won Gyun No, The
Effect of First Wave Mandatory XBRL Reporting Across the Financial
Information Environment, 26 J. Info. Sys. 127, 127-53 (2012)
(finding evidence that ``mandatory XBRL disclosure decreases
information risk and information asymmetry in both general and
uncertain information environments''); Yuyun Huang, Jerry T.
Parwada, Yuan George Shan, & Joey Wenling Yang, Insider
Profitability and Public Information: Evidence From the XBRL Mandate
(SSRN Working Paper, 2020) (finding that XBRL levels the playing
field between insiders and non-insiders, in line with the hypothesis
that ``the adoption of XBRL enhances the processing of financial
information by investors and hence reduces information asymmetry'').
\477\ See, e.g., Jeff Zeyun Chen, Hyun A. Hong, Jeong-Bon Kim, &
Ji Woo Ryou, Information processing costs and corporate tax
avoidance: Evidence from the SEC's XBRL mandate, 40 J. Acct. & Pub.
Policy 106822 (2021) (finding XBRL reporting decreases likelihood of
firm tax avoidance because ``XBRL reporting reduces the cost of IRS
monitoring in terms of information processing, which dampens
managerial incentives to engage in tax avoidance behavior''); Paul
A. Griffin, Hyun A. Hong, Jeong-Bon Kim, & Jee-Hae Lim, The SEC's
XBRL Mandate and Credit Risk: Evidence on a Link between Credit
Default Swap Pricing and XBRL Disclosure (2014 a.m. Acct. Assoc.
Annual Meeting Aug. 6, 2014) (finding XBRL reporting enables better
outside monitoring of firms by creditors, leading to a reduction in
firm default risk); Elizabeth Blankespoor, The Impact of Information
Processing Costs on Firm Disclosure Choice: Evidence from the XBRL
Mandate, 57 J. Acct. Research 919 (2019) (finding ``firms increase
their quantitative footnote disclosures upon implementation of XBRL
detailed tagging requirements designed to reduce information users'
processing costs,'' and ``both regulatory and non-regulatory market
participants play a role in monitoring firm disclosures,''
suggesting ``that the processing costs of market participants can be
significant enough to impact firms' disclosure decisions'').
---------------------------------------------------------------------------
While these observations are specific to operating company
financial statement disclosures and not to disclosures outside the
financial statements, such as the proposed specialized disclosure
requirements applicable to SPACs, they indicate that the proposed
Inline XBRL requirements could directly or indirectly (i.e., through
information intermediaries, such as financial media, data aggregators,
and academic researchers) provide investors with increased insight into
the proposed specialized SPAC disclosures at specific SPACs, and allow
them to compare it to information provided by other SPACs at the time
of their initial public offerings, perhaps through filtering by
criteria, such as offering size or the name of the sponsor.\478\ Also,
like Inline XBRL financial statements (including footnotes), the
proposed SPAC specialized disclosures would include tagged narrative
disclosures in addition to tagged quantitative disclosures.\479\
Tagging narrative disclosures can facilitate analytical benefits, such
as automatic comparison/redlining of these disclosures against that
provided by other SPACs in their initial public offerings and the
performance of targeted assessments of specific SPAC specialized
disclosures.\480\
---------------------------------------------------------------------------
\478\ See, e.g., Nina Trentmann, Companies Adjust Earnings for
Covid-19 Costs, but Are They Still a One-Time Expense?, Wall St. J.,
Sept. 24, 2020 (citing an XBRL research software provider as a
source for the analysis described in the article); Bloomberg Lists
BSE XBRL Data, XBRL.org (2018); Rani Hoitash & Udi Hoitash,
Measuring Accounting Reporting Complexity with XBRL, 93 Acct. Rev.
259, 259-287 (2018).
\479\ For example, proposed Item 1603 would consist largely of
narrative disclosure regarding the SPAC sponsor, but would also
include quantitative disclosure regarding the compensation paid (or
to be paid) to the SPAC sponsor, its affiliates, and any promoters
for all services rendered in all capacities to the SPAC and its
affiliates.
\480\ To illustrate, using the search term ``warrant'' to search
through the text of all SPAC registration statements for initial
public offerings to determine how many such initial public offerings
disclosed the inclusion of warrants within SPAC sponsor compensation
could return many narrative disclosures outside of the discussion
(e.g., disclosures related to warrants offered to investors as part
of the initial public offering).
---------------------------------------------------------------------------
We expect the proposed requirement to tag SPAC specialized
disclosures in Inline XBRL would impose compliance costs on SPACs at an
earlier stage of their life cycle than under the current baseline.
Currently, SPACs are required to tag financial statements (including
footnotes) and cover page information in certain registration
statements and periodic reports in Inline XBRL. However, SPACs are not
obligated to tag any disclosures until they file their first post-IPO
periodic report on Form 10-Q, Form 20-F, or Form 40-F. Various
preparation solutions have been developed and used by operating
companies to fulfill XBRL requirements, and some evidence suggests
that, for smaller companies, XBRL compliance costs have decreased over
time.\481\ Generally, registrants without prior experience using such
compliance solutions often incur initial implementation costs
associated with Inline XBRL tagging, such as costs associated with
licensing Inline XBRL compliance software and training staff to use the
software to tag the disclosures. Because SPACs typically operate as
shell companies with no or nominal operations, it may be more likely
that SPACs outsource their tagging obligations to a third-party service
provider, and thus avoid the aforementioned software licensing and
training costs. They would, however, incur the costs of retaining such
third party services.
---------------------------------------------------------------------------
\481\ An AICPA survey of 1,032 reporting companies with $75
million or less in market capitalization in 2018 found an average
cost of $5,850 per year, a median cost of $2,500 per year, and a
maximum cost of $51,500 per year for fully outsourced XBRL creation
and filing, representing a 45% decline in average cost and a 69%
decline in median cost since 2014. See Michael Cohn, AICPA Sees 45%
Drop in XBRL Costs for Small Companies, Acct. Today (Aug. 15, 2018)
(stating that a 2018 NASDAQ survey of 151 listed registrants found
an average XBRL compliance cost of $20,000 per quarter, a median
XBRL compliance cost of $7,500 per quarter, and a maximum, XBRL
compliance cost of $350,000 per quarter in XBRL costs per quarter),
available at https://www.accountingtoday.com/news/aicpa-sees-45-drop-in-xbrl-costs-for-small-reporting-companies (retrieved from
Factiva database); Letter from Nasdaq, Inc., Mar. 21, 2019, to the
Request for Comment on Earnings Releases and Quarterly Reports;
Release No. 33-10588 (Dec. 18, 2018) [83 FR 65601 (Dec. 21, 2018)].
---------------------------------------------------------------------------
b. De-SPAC Transactions \482\
---------------------------------------------------------------------------
\482\ The benefits of proposed Item 1603 in connection with
disclosures regarding sponsors and conflicts of interest in
connection with a de-SPAC transaction on a proxy, information, or
registration statement or Schedule TO are expected to be largely the
same as the effects of those disclosures made in connection with a
SPAC IPO, though they may be incrementally higher in so far as the
disclosures could also guide voting and redemption decisions at the
de-SPAC transaction stage, which would not occur in connection with
a SPAC IPO. See supra Section IX.C.1.a.3. We would similarly expect
the costs of compliance with Item 1603 to be comparable at the de-
SPAC transaction stage as in connection with a SPAC IPO. However, to
the extent that Item 1603 would require SPACs to disclose certain
information in connection with their IPOs, the costs of making those
same disclosures at the de-SPAC transaction stage should be lower
because the materials necessary would have largely already been
prepared.
---------------------------------------------------------------------------
1. Prospectus Cover Page, Summary, and Disclosure of Dilution (Item
1604)
In connection with a de-SPAC transaction, many SPACs currently
register an offering of securities using a Form S-4 or F-4. We expect
most de-SPAC transactions to include a Securities Act registration
statement going forward. Proposed Items 1604(a) and 1604(b) would
require any prospectus accompanying a registration statement at the de-
SPAC transaction stage to include certain information unique to the de-
SPAC transaction on the cover page and in the summary, in a style and
substance comparable to the additional disclosures that proposed Item
1602 would require at the initial public offering stage.\483\ In
addition, proposed Item 1604(c) would require disclosure in the
prospectus of each material potential source of additional dilution
that non-redeeming shareholders may experience by electing not to
redeem their shares in connection with the de-SPAC transaction, a
sensitivity analysis in tabular format that expresses the amount of
potential dilution under a range of reasonably likely redemption
levels, and a description of the model, methods, assumptions,
estimates, and parameters necessary to understand the sensitivity
analysis disclosure.\484\
---------------------------------------------------------------------------
\483\ See supra Section II.E for more information about the
regulatory baseline.
\484\ See supra Section II.D for more information about the
regulatory baseline.
---------------------------------------------------------------------------
We expect the proposed Items 1604(a) and 1604(b) would have similar
potential direct benefits to investors as those we discussed for
proposed Item 1602 above.\485\ That is, we expect that including the
additional disclosures on the de-SPAC transaction prospectus cover page
and in the prospectus
[[Page 29527]]
summary may increase the likelihood that investors pay attention to and
process this information by making it more salient. Additionally, the
proposed additions to the de-SPAC transaction prospectus summary may
reduce information-processing costs of investors, particularly less
financially sophisticated investors, by providing certain SPAC-specific
disclosures concisely and in plain English. Moreover, like for proposed
Item 1602(b)(6), proposed Item 1604(b)(4) would require tabular
disclosure in the prospectus summary regarding the terms and amount of
the compensation received or to be received by the SPAC sponsor and its
affiliates in connection with the de-SPAC transaction or any related
financing transaction, and whether that compensation has resulted or
may result in a material dilution of the equity interests of
unaffiliated security holders of the SPAC. Presenting this information
in tabular format may further help reduce information-processing costs
for some investors.\486\ Additionally, proposed Items 1604(a) and
1604(b) would standardize the required information across all
registration statements filed for de-SPAC transactions, making it
potentially easier and less costly for investors to compare terms
across transactions. Overall, because of the aforementioned potential
effects on investors' attention and information processing costs, the
proposed additional disclosures on the prospectus cover page and in
prospectus summary may help improve investors' investment decisions.
---------------------------------------------------------------------------
\485\ See discussion in supra Section IX.C.1.a.2.
\486\ See supra notes 464 and 465 and accompanying text.
---------------------------------------------------------------------------
Certain items that proposed Items 1604(a) and 1604(b) would require
SPACs to include on the prospectus cover page and in the summary may
potentially benefit investors through incrementally improved SPAC
governance. For example, the inclusion of disclosures regarding
material potential or actual conflicts of interest could increase
investors' attention to such issues. In turn, this may have an ex ante
disciplining effect on sponsors that would mitigate the potential costs
to investors of conflicts of interests. In addition, the SPAC would be
required to state whether it reasonably believes that the de-SPAC
transaction is fair or unfair to unaffiliated security holders, the
bases for such belief, and whether the SPAC or SPAC sponsor received
any report, opinion, or appraisal from an outside party regarding the
fairness of the de-SPAC transaction. Prominent disclosure of these
items may increase investor attention to the fairness or unfairness of
the transaction, which may incentivize sponsors to avoid transactions
that could potentially be viewed as unfair.\487\
---------------------------------------------------------------------------
\487\ Here we are considering the potential incremental benefits
of the placement of this information on the cover page and in the
summary. For a discussion of the incremental informational value of
these disclosures, see infra Section IX.C.1.b.3.
---------------------------------------------------------------------------
As with proposed Item 1602, the additional items that proposed
Items 1604(a) and 1604(b) would require to be included on the de-SPAC
transaction prospectus cover page and in the prospectus summary may
increase compliance costs for SPACs to the extent that they would need
to provide additional information compared to what they currently
provide. To the extent that SPACs already disclose some of this
information or have most of this information readily available, these
costs would be mitigated.
There could also be some potential costs to investors from proposed
Items 1604(a) and 1604(b). In particular, as with proposed Item 1602,
there is a risk that, by requiring more items to be added to the cover
page and the summary, the salience of the current required disclosures
may be reduced because they will have to compete with the new required
disclosures for investors' attention compared to the baseline. In
addition, because Item 501(b) of Regulation S-K limits the information
on the outside cover page to one page, there is a risk that the amount
of information required to be included could generally impair the
readability of the cover page. As a result, some investors may pay less
attention to the cover page as a whole.
We expect proposed Item 1604(c) would benefit investors by
providing them with detailed information on the potential impact of
dilution on the value of their SPAC shares in connection with the de-
SPAC transaction, thus enabling them to better understand the effects
of dilution on their investments and ultimately make better investment
decisions. Besides requiring disclosure of each material potential
source of future dilution that non-redeeming shareholders may
experience, proposed Item 1604(c) also would require sensitivity
analysis disclosure in tabular format that expresses the amount of
potential dilution under a range of reasonably likely redemption
levels. This sensitivity analysis may provide investors with
information that could more accurately represent the dilution that they
might experience if they choose not to redeem their shares as compared
to current disclosures.\488\ Such more granular information about
potential dilution may allow investors to better anticipate the effects
of the dilution on future returns. In addition, as discussed
above,\489\ we expect that the tabular format of this disclosure will
further help investors (especially those that are less financially
sophisticated) more easily process the financial implications of
dilution.
---------------------------------------------------------------------------
\488\ See supra note 74.
\489\ See supra notes 464 and 465, and accompanying text.
---------------------------------------------------------------------------
We expect some incremental compliance costs of proposed Item
1604(c) to the extent registrants are not already providing disclosures
similar in nature to what is required by the proposed amendment. In
particular, the proposed rules would require registrants to engage in a
sensitivity analysis to account for potential future sources of
dilution and analyze several levels of redemption, which may require
the services or input of quantitative specialists (analysts,
forecasters, or other consultants). However, we expect the compliance
costs of providing this disclosure would be mitigated by several
factors. First, registrants should already have the underlying
information at their disposal and are therefore unlikely to incur
significant additional costs to procure the necessary data. Second,
material sources and the levels of dilution are generally common across
SPAC offerings (thus a standard approach based on best practices may
emerge, reducing costs over time), and are known and quantifiable. For
example, sources of dilution may include shareholder redemptions,
sponsor compensation, underwriting fees, outstanding warrants and
convertible securities, and PIPE financings. Third, although proposed
Item 1604(c) does not specify the number of redemption levels to be
analyzed, the fact that this disclosure could be calculated in a manner
consistent with the methodologies and assumptions used in the
disclosures provided pursuant to Item 506 elsewhere in the prospectus
may reduce incremental costs. Thus, depending on how significant these
mitigating factors are, the additional burden to registrants of this
disclosure may be limited.
2. Background, Material Terms, and Effects of the De-SPAC Transaction
(Item 1605)
Proposed Items 1605(a), (b) and (c) of Regulation S-K would require
disclosure of the background (e.g., description of any contacts,
negotiations, or transactions concerning the transaction), material
terms, and effects of the de-SPAC transaction and
[[Page 29528]]
any related financing transaction. In addition, proposed Item 1605(d)
would require disclosure of any material interests of a SPAC's sponsor,
officers, and directors in a de-SPAC transaction or any related
financing transaction, including fiduciary or contractual obligations
to other entities and any interest in, or affiliation with, the target
company.\490\ Such disclosure would benefit investors by providing them
with more detailed information about significant aspects of de-SPAC
transactions, thereby enabling them to make more informed decisions.
For example, some of the proposed disclosures may enable investors to
better assess whether the de-SPAC transaction or any related financing
transaction has been structured in a manner that would benefit, for
example, the SPAC's sponsor to the detriment of unaffiliated security
holders of the SPAC.
---------------------------------------------------------------------------
\490\ See supra Section II.F.1 for information about the
regulatory baseline.
---------------------------------------------------------------------------
Proposed Item 1605(e) would require disclosure as to whether or not
security holders are entitled to any redemption or appraisal rights,
and if so, a summary of the redemption or appraisal rights. These
disclosures would help investors to better assess the impact of any
redemption or appraisal rights on a proposed de-SPAC transaction,
including whether the existence of such rights might lead some
investors to redeem their securities after voting in favor of a de-SPAC
transaction.
The proposed disclosures could increase the compliance costs for
de-SPAC transactions. The magnitude of these costs would depend on the
amount of information that SPACs and target companies are already
disclosing in connection with de-SPAC transactions. To the extent that
registrants already disclose some of this information or have most of
this information readily available, these costs would be mitigated.
3. Fairness of the De-SPAC Transaction and Reports, Opinions,
Appraisals and Negotiations (Items 1606 and 1607)
Proposed Item 1606(a) would require a statement from a SPAC as to
whether it reasonably believes that the de-SPAC transaction and any
related financing transaction are fair or unfair to the SPAC's
unaffiliated security holders, as well as disclosures regarding whether
any director voted against or abstained from voting on, approval of the
de-SPAC transaction or any related financing transaction. In addition,
proposed Item 1606(b) would require a discussion of the material
factors upon which the statement as to the fairness or unfairness of
the transaction is based. Proposed Items 1606(c) through 1606(e) would
provide additional information about the de-SPAC transaction and any
related financing transaction, including whether a majority of
unaffiliated security holders is required to approve the
transaction(s), the involvement of any unaffiliated representative
acting on behalf of unaffiliated shareholders, and whether the
transaction(s) were approved by a majority of directors of the SPAC who
are not employees of the SPAC. These proposed rules could allow
investors to better evaluate potential conflicts of interest and
misaligned incentives in connection with the decision to proceed with a
de-SPAC transaction, which in turn would assist them in assessing the
fairness of a particular de-SPAC transaction and any related financing
transaction to unaffiliated security holders.\491\
---------------------------------------------------------------------------
\491\ See supra Sections II.F.2 and II.F.3 for additional
information about the regulatory baseline.
---------------------------------------------------------------------------
As discussed in the baseline, SPACs rarely report the use of a
fairness opinion when evaluations of prospective target are disclosed
in de-SPAC-related filings.\492\ A recent review of de-SPAC
transactions in 2021 reported that approximately 85% did not disclose
that a fairness opinion was obtained in connection with a de-SPAC
transaction.\493\ To the extent that the proposed required disclosures
with respect to the fairness or unfairness of the proposed business
combination would increase the use of fairness opinions, the cost of
obtaining such services would present a new cost to the transaction
that would likely be passed along to shareholders. The average costs
for fairness opinions obtained by SPAC acquirers where such information
was presented in an itemized format in SEC filings was approximately
$270,000.00.\494\
---------------------------------------------------------------------------
\492\ See supra Section IX.B.2.e.
\493\ See Levitt, Jacob, Fain, Marcogliese, Tiger, & Basham,
supra note 416.
\494\ As calculated over the observations in the baseline sample
(reference first table in de-SPAC baseline (or its footnotes)) where
data is available in the Dealogic M&A module or SDC Platinum
database.
---------------------------------------------------------------------------
Thus, SPACs may incur additional costs associated with proposed
Item 1606(a) to the extent that, in response to this proposed item,
SPACs newly seek to obtain fairness opinions. In addition, there is
some potential for indirect costs to SPACs if they respond by providing
for approval by unaffiliated security holders or directors, or retain
an unaffiliated representative to act on behalf of unaffiliated
security holders for purposes of negotiating the terms of a de-SPAC
transaction of any related financing transaction. However, some costs
to collecting or producing the newly required disclosures may be
mitigated by other components of the regulatory baseline, which in this
case includes the requirements imposed by self-regulatory organizations
such a listing standards and FINRA rules.\495\
---------------------------------------------------------------------------
\495\ For example, see existing FINRA Rule 5150 requirements for
disclosures required of a broker-dealer when providing a fairness
opinion in the role of financial advisor.
---------------------------------------------------------------------------
In particular, if the SPAC obtained its fairness opinion from a
FINRA member, some of the disclosures responsive to proposed Item
1606(a) may already be prepared and provided to the SPAC because of
existing FINRA requirements. Specifically, FINRA Rule 5150 requires its
members (i.e., broker-dealers or underwriters) to provide specified
disclosures in a fairness opinion if it knows, or has reason to know,
that the opinion will be provided to shareholders.\496\ Some of the
information that is required to be disclosed includes the following:
(1) Whether the FINRA member will receive any additional significant
payment or compensation contingent on the completion of the merger
transaction; \497\ (2) if the FINRA member independently verified
information provided by the company requesting the opinion, a
description of the information that was verified; \498\ and (3) whether
or not the fairness opinion addresses the fairness of the compensation
to be received by the company's officers, directors or employees
relative to the compensation to the public shareholders of the
company.\499\
---------------------------------------------------------------------------
\496\ Id.
\497\ FINRA Rule 5150(a)(2).
\498\ FINRA Rule 5150(a)(4).
\499\ FINRA Rule 5150(a)(6).
---------------------------------------------------------------------------
Proposed Item 1607(a) would require disclosure about whether or not
the SPAC or its sponsor has received any report, opinion, or appraisal
obtained from an outside party relating to the consideration or the
fairness of the consideration to be offered to security holders or the
fairness of the de-SPAC transaction or any related financing
transaction to the SPAC, the sponsor or security holders who are not
affiliates. Proposed Item 1607(c) would require any such report,
opinion, or appraisal to be filed as an exhibit to the Form S-4, Form
F-4, and Schedule TO for the de-SPAC transaction or included in the
Schedule 14A or 14C for the transaction, as applicable. In addition,
under proposed Item 1607(b), investors would receive information
regarding, among
[[Page 29529]]
other things, the outside party, including its qualifications and
certain material relationships with the SPAC, its sponsors and their
affiliates. We expect that these disclosures would benefit investors by
providing relevant information about the fairness of a de-SPAC
transaction and any related financing transaction. In addition, by
providing more information to investors, these disclosures may lead to
improved market participation, liquidity, and price efficiency. We
expect that these disclosures would increase the costs associated with
the de-SPAC transaction. However, those costs should be mitigated
because the disclosure requirement does not require preparation of
additional reports, appraisals and opinions, rather, it requires
disclosure of documents that were obtained by management.
4. Proposed Item 1608 of Regulation S-K
We are proposing Item 1608 of Regulation S-K to codify a staff
position that a Schedule TO filed in connection with a de-SPAC
transaction should contain substantially the same information about a
target private operating company that is required under the proxy rules
and clarify that a SPAC must comply with the procedural requirements of
the tender offer rules when conducting the transaction for which the
Schedule TO is filed.\500\ For example, proposed Item 1608 would
clarify that SPACs that file a Schedule TO for a redemption must comply
with the procedural requirements of Rule 13e-4 and Regulation 14E, such
as the requirement to keep the redemption period open for at least 20
business days.
---------------------------------------------------------------------------
\500\ See supra Section II.F.4
---------------------------------------------------------------------------
We expect that both the benefits and costs associated with this
proposal to present modest changes from current practice, if any,
because, historically, relatively few de-SPAC transactions have
involved the filing of a Schedule TO alone and because, due to the
staff position, most of the proposed disclosures are currently already
provided. Between 2000 and 2021, of the approximately 575 registrants
that filed a proxy statement on Schedule 14A, an information statement
on Schedule 14C, a Schedule TO, or a registration statement on Form S-4
or F-4 that could relate to a de-SPAC transaction, a small portion of
those registrants (approximately 7.1% or 41) filed a Schedule TO.\501\
A smaller portion of these Schedule TO filings (approximately 20% or 8)
occurred alone (i.e., without the concurrent filing of a proxy
statement, information statement, or registration statement that would
provide additional disclosures regarding the de-SPAC transaction) (see
Figure 8). However, given that the staff has historically expressed the
view that a Schedule TO should include the same information about the
target company that would be required in a Schedule 14A, in view of the
requirements of Item 11 of Schedule TO and Item 1011(c) of Regulation
M-A and the importance of this information in making a redemption
decision, the proposed rule is unlikely to result in a meaningful
difference in the nature or amount of information provided by
registrants.\502\
---------------------------------------------------------------------------
\501\ Staff review of SPACs that conducted an IPO between 2000
and 2021 and subsequently filed any type of potential de-SPAC
transaction related filing (SC TO, SC13E4F, PRE 14A, PRE 14C,
DEFA14A, DEFA14C, DEFM14A, DEFM 14C, DEF 14A, DEF 14C, S-4, or F-4)
found that only approximately 7.1% of such SPACs, by unique CIK,
filed a Schedule TO. It appears that the historic use of a Schedule
TO in connection with a de-SPAC transaction corresponds to a period
when share redemption was more limited and de-SPAC transactions were
more commonly targeted by hedge funds engaged in `greenmailing.'
See, e.g., Lucian Bebchuk, Alon Brav, Wei Jiang, Thomas Keusch,
Dancing with Activists, 137 J. Fin. Econ. 1 (2020) (describing
`greenmail' as an event in which a company targeted by an activist
shareholder such as a hedge fund, purchases shares from the activist
at a premium to the market price). In the SPAC context, the
activists were most commonly hedge funds that would threaten to
prevent an acquisition by voting against a de-SPAC transaction and
redeeming a large enough block of shares to cross the SPAC's
redemption threshold if the SPAC refused to buy back its shares at a
premium. See, e.g., Leerskov, supra note 420 (``Many of these funds
are arbitrage investors . . . turning a profit by voting against an
acquisition, therefore recouping their initial investment while
holding the associated warrants against any possible upside from a
successful acquisition. Additionally, more investors began
threatening to veto potential SPAC mergers in 2006 and 2007 unless
they received deal sweeteners. Mostly, investors asked to be bought
out at a premium in exchange for their votes in favor of a
merger.''). This activity decreased, as did the use of a Schedule TO
in connection with a de-SPAC transaction, as SPAC redemption
thresholds increased in the early 2000s from approximately 20% on
average to approximately 80% on average. See, e.g., Milan Lakicevic,
Yochana Shachmrove, & Milos Vulanovic, Institutional Changes of
Specified Purpose Acquisition Companies (SPACs), 28 N. Am. J. Econ.
& Fin. 149 (2014) (20.47% to 84.24% from 2003-2006 to 2009-2012);
Rodrigues, supra note 67 (20.0% to 74.4% from 2003-2011); Vulanovic,
supra note 414 (20% to 81.52% from 2003-2013). As such, historic use
may be a poor predictor for estimates of future usage.
\502\ See supra note 103.
---------------------------------------------------------------------------
[[Page 29530]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.013
Finally, of the registrants that filed only a Schedule TO, 75% were
foreign private issuers that originally registered an offering of
shares via a Form F-1, while the remaining 25% were registrants
incorporated or organized in a foreign jurisdiction that originally
registered an offering of shares using a Form S-1. It is possible that,
holding all else constant, any benefits or costs accruing as the result
of proposed Item 1608 would do so to SPACs that are similar to these
entities that may either not hold a shareholder vote or else hold a
vote that is not subject to federal proxy rules. However, it is unclear
what proportion of future SPACs would be of this type, since in the
event proposed Rule 145a is also adopted, the number of SPACs may be
less likely to file Schedules TO.
5. Enhanced Projections Disclosure Requirements (Item 1609)
Proposed Item 1609 complements the proposed amendments to Item
10(b) of Regulation S-K,\503\ and pertains to projections made in
connection with an anticipated de-SPAC transaction.\504\ Proposed Item
1609 would require a registrant to disclose who prepared the
projections and the purposes for which the projections were prepared.
It would also require a discussion of all material bases of the
disclosed projections and all material assumptions underlying
projections, and any factors that may impact such assumptions.
Furthermore, the proposed rule would require the board or management of
the SPAC or target company to confirm at the date of the filing whether
the projections reflect their current view, and if not, the purpose of
disclosing the projections and the reasons for any continued reliance
by management or the board on the projections.
---------------------------------------------------------------------------
\503\ See supra Section V.B.1; infra Section IX.C.4.
\504\ See supra Section III.D & Section VI. For additional
information about the regulatory baseline for Item 1609, see supra
Section V.B.2.
---------------------------------------------------------------------------
In general, we expect that proposed Item 1609 would allow investors
to better evaluate and use projections in connection with de-SPAC
transactions. The required disclosure of preparers' identity and
purposes for which the projections were prepared would help reveal
potential conflicts of interest and the qualifications of the
preparers' projection ability. The requirement to discuss material
assumptions and underlying rationales would also inform investors about
the verifiability of the projections. The proposed requirement to
disclose whether the projections still reflect the views of management
or the board should provide investors with further insight into the
reliability and utility of those projections. Overall, the proposed
disclosure under Item 1609 should benefit investors by helping them
assess whether and to what extent they should rely on projections used
in a de-SPAC transaction in making voting, redemption, and investment
decisions.\505\
---------------------------------------------------------------------------
\505\ D. Eric Hirst, Lisa Koonce, & Shankar Venkatram, How
Disaggregation Enhances the Credibility of Management Earnings
Forecasts, 45 J. Acct. Research 811 (2007), experimentally show that
disaggregated forecasts, which include forecasts of individual
income statement line items, e.g., revenue and costs, are more
credible to investors than aggregated forecasts that provide only
the bottom-line earnings forecasts. Furthermore, Zahn Bozanic,
Darren T. Roulston, & Andrew Van Buskirk, Management Earnings
Forecasts and Other Forward-looking Statements, 65 J. Acct. & Econ.
1 (2018), demonstrate that non-earnings-forecast forward-looking
statements can generate significant responses from both investors
and analysts. Their findings indicate that the forward-looking
statements, even statements unrelated to earnings, can provide
value-relevant information to the capital market participants.
---------------------------------------------------------------------------
Proposed Item 1609, by requiring projection providers to identify
themselves and related parties to confirm their reliance on the
projections, would likely also increase the preparers' sense of
accountability, and potentially increase their incentives to make
reliable projections.\506\ In turn,
[[Page 29531]]
investors could benefit from potentially improved projections in their
investment decisions. The enhanced disclosure transparency about
projections and the plausible improved projection accuracy would, in
turn, facilitate more efficient allocation of capital.\507\
---------------------------------------------------------------------------
\506\ Auditing literature provides evidence that audit quality
increases and misreporting decreases when engaging partners are
required to sign the audit report or when their identities are
disclosed. Joseph V. Carcello & Chan Li, Costs and Benefits of
Requiring an Engagement Partner Signature: Recent Experience in the
United Kingdom, 88 Acct. Rev. 1511 (2013), document evidence that
audit quality and audit fees increase in the first year when
engaging partners are required to sign the audit report in the
United Kingdom. Allen D. Blay, Eric S. Gooden, Mark J. Mellon, &
Douglas E. Stevens, Can Social Norm Activation Improve Audit
Quality? Evidence from an Experimental Audit Market, 156 J. Bus.
Ethics 513 (2019), experimentally demonstrate that PCAOB's
requirement of disclosing engaging partners' identity can reduce
misreporting.
\507\ See Amy P. Hutton, Gregory S. Miller, & Gregory S.
Skinner, The Role of Supplementary Statements with Management
Earnings Forecasts, 41 J. Acct. Research 867, 867-890 (2003). They
find that good news earnings forecasts are positively associated
with investor reaction (i.e., have information content) only when
the forecasts are accompanied by verifiable supplementary forward-
looking disclosures.
---------------------------------------------------------------------------
We do not expect the direct compliance costs to be substantial
since companies should have the required information (e.g., the party
that provides the projections and the assumptions of growth rates or
discount multiples) readily available at their disposal. To the extent
that proposed Item 1609 increases contextual information related to
SPAC projections, investors would incur incremental costs in processing
the added information.\508\ Potentially heightened accountability under
proposed Item 1609 may also dampen the willingness of the managements
and boards of SPACs and target companies to provide projections, which
may decrease the amount of forward-looking information made available
to investors and thus increases valuation uncertainty. To the extent
that proposed Item 1609 dampens the willingness to provide projections,
it would likely reduce projections without reasonable bases more than
those with reasonable bases. Thus, the incremental costs of proposed
Item 1609 would likely be justified by the incremental benefit of
increased investor protection against materially misleading or
speculative projections in connection with de-SPAC transactions.
---------------------------------------------------------------------------
\508\ See Elizabeth Blankespoor, Ed deHaan, & Iv[aacute]n
Marinovic, Disclosure Processing Costs, Investors' Information
Choice, and Equity Market Outcomes: A review, 70 J. Acct. & Econ. 1,
1-46 (2020). They suggest that it is costly to process firms'
disclosures, even for the most sophisticated investors, and they
conceptualize processing costs as awareness cost, acquisition cost,
and integration cost.
---------------------------------------------------------------------------
6. Structured Data Requirement
As with the proposed specialized disclosure requirements applicable
to SPACs at the IPO stage as discussed above, proposed Item 1610 would
also require that the proposed disclosures prepared in compliance with
respective sections of Regulation S-K Subpart 1600 applicable to de-
SPAC transactions be tagged in Inline XBRL.\509\ For the same reasons
discussed above, we expect that the tagging requirement for de-SPAC
transaction disclosures would augment the informational benefits to
investors resulting from the proposed new disclosure requirements.\510\
For example, tagging the disclosure of terms and amounts of the
compensation received or to be received by a SPAC's sponsor and its
affiliates in connection with a de-SPAC transaction, and the potential
dilutive effects related to such compensation, could allow investors to
make quantitative and qualitative comparisons to similar disclosure in
other de-SPAC transactions or make it easier to compare these
disclosures--including numeric values--to those presented at the SPAC's
IPO stage.\511\
---------------------------------------------------------------------------
\509\ See supra Section II.G.
\510\ See supra Section IX.C.1.a.5.
\511\ See proposed Item 1604(a)(3) of Regulation S-K.
---------------------------------------------------------------------------
Unlike the proposed Inline XBRL tagging requirement for SPAC
specialized disclosures which would apply to registration statements
for initial public offerings, the proposed tagging requirement for de-
SPAC transaction disclosures would not impose a tagging obligation on
registrants that were not previously subject to tagging obligations,
because SPACs are already subject to Inline XBRL tagging obligations as
of their first periodic report on Form 10-Q, Form 20-F, or Form 40-
F.\512\ As such, the Inline XBRL tagging requirement for de-SPAC
transaction disclosures would be limited to the cost of selecting,
applying, and reviewing Inline XBRL tags to a new set of disclosures,
or paying a third party to do so. As previously noted, there is some
indication that these costs have trended downward in the years since
the initial adoption of XBRL requirements for SEC filings.\513\
---------------------------------------------------------------------------
\512\ See supra note 110 and accompanying text.
\513\ See supra note 481 and accompanying text.
---------------------------------------------------------------------------
7. Minimum Dissemination Period
The proposed minimum dissemination period for prospectuses and
proxy and information statements filed in connection with de-SPAC
transactions is designed to ensure that SPAC shareholders have adequate
time to review the information disclosed therein before making voting,
investment and redemption decisions. To the extent that this would
provide investors with more time than they would otherwise have because
the SPAC's jurisdiction of incorporation or organization does not
provide for a minimum dissemination period before a shareholder meeting
or action by consent, or has a minimum dissemination period of fewer
than 20 calendar days, this may allow them to make more informed
choices. Relative to the current baseline, this proposal is likely to
provide its greatest potential benefits to SPAC shareholders in de-SPAC
transactions involving SPACs that do not incorporate by reference any
information about the SPAC or the target, and are not incorporated in
Delaware, or do not file a Schedule TO.\514\ While Delaware General
Corporation Law only requires that due notice of an upcoming meeting be
provided 20 days prior to the event, and does not mandate a minimum
period for dissemination of proxy statements or joint prospectus/proxy
statements required by the federal securities laws,\515\ we believe,
based on staff experience reviewing filings, that the notices of the
meeting mandated by Delaware law are often included in the proxy
statement or joint prospectus/proxy statements, with many companies
then delivering the proxy statements or joint prospectus/proxy
statements in time to meet the Delaware notice requirement.\516\
---------------------------------------------------------------------------
\514\ Because a Schedule TO filed in connection with a de-SPAC
transaction must already be filed 20 business days in advance of the
close of the redemption period, the proposed 20 calendar day minimum
dissemination period would not have an incremental effect.
Similarly, there would be no incremental effect on the dissemination
of Forms S-4 or F-4 in connection with a de-SPAC transaction if the
registration incorporates any information about the registrant or
its target by reference because a similar 20 business day
requirement applies. See supra note 127. Further, in the event that
proposed Rule 145a is adopted, we anticipate the majority of de-SPAC
transactions would be accompanied by an S-4 or F-4 in which
incorporation by reference is highly likely to occur.
\515\ See supra Section II.F.5
\516\ See supra Section III.B for more information about the
regulatory baseline.
---------------------------------------------------------------------------
While we recognize that the additional time we propose to provide
to shareholders for review of de-SPAC transaction related disclosures
may in effect shorten the time a SPAC may otherwise have to pursue a
business combination within its limited time before dissolution, the
incremental costs of formalizing a minimum review period should in most
cases be low based on the existing requirements and practices discussed
above and market-specific incentives. For example, as retail ownership
of its shares increases, a SPAC may face increasing pressure to
communicate with its investors earlier, more extensively, and with
greater frequency to ensure that a quorum will be present at the
shareholder meeting to approve a de-SPAC transaction and that a
sufficiently high number of votes are cast in favor of the transaction.
[[Page 29532]]
Notwithstanding this, we acknowledge that any costs associated with
this proposal would likely increase as the dissolution date approaches,
because, under such conditions, unique logistical costs like expedited
printing and delivery would accrue. It is plausible that a de-SPAC
transaction would not be able to proceed due to these proposed timing
requirements, which could result in negative consequences (e.g.,
forgone returns) for sponsors and SPAC shareholders. Given the
significance of a de-SPAC transaction to SPACs and targets, however, we
think it is more likely that SPACs and targets will account for the
proposed dissemination period in establishing a timeline for their
business combination. Another potential cost of the minimum
dissemination period is that it could cause SPACs to enter into sub-
optimal deals earlier in the process to avoid the risk of failing to
acquire a company later in the window. However, given the state of
current market practices as discussed above, we expect the incremental
costs on this aspect of deal-formation uniquely attributable to the
proposed minimum dissemination period are minimal.
8. Aligning Non-Financial Disclosures in De-SPAC Disclosure Documents
We are proposing that, if the target company in a de-SPAC
transaction is not subject to the reporting requirements of Section
13(a) or 15(d) of the Exchange Act, the registration statement or
schedule filed in connection with the de-SPAC must include disclosures
relating to the target company that would be provided in a Form S-1 or
F-1 for an initial public offering.\517\ Currently, this information is
required to be included in a Form 8-K with Form 10 information that
must be filed within 4 business days after the completion of a de-SPAC
transaction. In contrast, the proposed disclosure requirements would
require that target company information be provided to shareholders
before they make voting, investment, or redemption decisions in
connection with the de-SPAC transaction. This could reduce potential
opportunities to engage in regulatory arbitrage, minimize differences
in informational content, timing, and presentation, and potentially
provide investors with more information about the target company when
making such decisions. The benefits of such alignment to unaffiliated
investors would depend on the ability of investors to otherwise procure
such information prior to the filing of the Form 8-K with Form 10
information.
---------------------------------------------------------------------------
\517\ See supra Section III A.
---------------------------------------------------------------------------
We expect that a SPAC or its sponsors would absorb the related
costs if the proposed additional information necessitates earlier or
increased information production and dissemination, although a portion
of these costs may accrue to non-redeeming shareholders if costs are
paid from the trust or escrow account of the SPAC. Generally, we expect
that such costs will be low to the extent that SPACs disclose this
information about the target company prior to the completion of the de-
SPAC transaction; however, we recognize that some items may be more
costly to disclose earlier than others.
The costs and benefits of these proposed disclosures depend on the
baseline level of information available that is required to be
disclosed in the Form 8-K with Form 10 information that is currently
disclosed in advance of the filing of the Form 8-K. To assess the
extent to which registrants may already disclose Form 10 information
about the target company in a different Commission filing before filing
the Form 8-K, the staff examined the frequency and scope of
incorporation by reference in such 8-K filings, finding that 95% of the
8-K filers incorporated at least one of the required Form 10 items by
reference.\518\ Most of the Form 8-K filings that incorporated items by
reference referred to disclosures previously filed in a proxy or
information statement (88% of filers), and 46% of these filings
incorporated disclosures from a registration statement filed in
connection with the de-SPAC transaction.\519\
---------------------------------------------------------------------------
\518\ Items 2.01(f), 5.01(a)(8), and 9.01(c) of Form 8-K each
provide that if any required disclosure under these items has been
previously reported, the registrant may, in lieu of including that
disclosure in the Form 8-K, identify the filing in which that
disclosure is included.
\519\ Because some filers incorporate disclosure by reference
from more than one source, the total percentage of usage across
sources exceeds 100%.
---------------------------------------------------------------------------
[[Page 29533]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.014
Figure 9 shows the information that is incorporated by reference in
the Forms 8-K filed in connection with de-SPAC transactions, as
identified by the item requirement of Regulation S-K. Disclosures
pursuant to Items 101 (description of business), Item 102 (description
of property), and Item 103 (legal proceedings) of Regulation S-K are
most commonly incorporated by reference. Less frequently incorporated
by reference are disclosures pursuant to Item 304 (changes in and
disagreements with accountants on accounting and financial disclosure),
Item 403 (security ownership of certain beneficial owners and
management, assuming the completion of the de-SPAC transaction and any
related financing transaction), and Item 701 (recent sales of
unregistered securities) of Regulation S-K.\520\ Thus, to the extent
that registrants already provide this information in the proxy
statements, information statements, registration statements, and
Schedules TO filed in connection with the de-SPAC transaction, the
benefits and costs of compliance with this proposed rule may be
mitigated.
---------------------------------------------------------------------------
\520\ While these items are less frequently incorporated by
reference, their absence may not indicate missing information. For
example, filers may not have provided Item 304 or Item 701
disclosures in earlier filings because there were no changes in and
disagreements with accountants or recent sales of unregistered
securities to report. When disclosures are presented in the Form 8-
K, Item 304 disclosures are incorporated by reference in
approximately 32% of filings and newly disclosed in 68% of filings.
Similarly, for Item 701 disclosures, the proportions of Forms 8-K
that incorporate by reference and include new disclosure, are
respectively approximately 35% and 65%.
---------------------------------------------------------------------------
As a result of this proposed rule, investors may obtain disclosure
required by Item 403 of Regulation S-K regarding the target company's
beneficial ownership structure before making a voting, redemption, or
investment decision in connection with the de-SPAC transaction, which
could, in some cases, represent a meaningful change to the
informational environment in advance of the completion of a de-SPAC
transaction, particularly when this information may be critical to an
investor's ability to evaluate potential conflicts of interest. In
addition, the disclosures may allow investors to identify potential
misalignments of interests between non-redeeming shareholders and other
parties to the de-SPAC transaction. This proposed requirement therefore
may provide increased investor protections and generally improve the
information environment for investors to make a voting, redemption, or
investment decision in connection with the de-SPAC transaction.
Because a SPAC and its intended target should have access to this
information in advance of a de-SPAC transaction, we do not anticipate
significant costs to preparing such information and incorporating it
into disclosures disseminated at an earlier stage in the de-SPAC
transaction process.
We believe that the proposed additional information is unlikely to
impose significant changes to the information that a SPAC would
otherwise disclose or the costs for incremental changes relative to
current market practice. To the extent that these requirements may lead
to the production and dissemination of information that would not be
disclosed until after the completion of the de-SPAC transaction, the
availability of this information in the registration statement or
schedule filed in connection with the de-SPAC transaction may improve
investor decision-making.
9. Re-Determination of Smaller Reporting Company Status
The main benefit from the proposed amendment to re-determine
smaller reporting company status of a post-
[[Page 29534]]
business combination company following a de-SPAC transaction would be
to reduce regulatory arbitrage by requiring a target company going
public through a de-SPAC transaction to provide similar information to
investors as a comparable company conducting a traditional initial
public offering.\521\ For larger target companies, this would require
providing more comprehensive and more detailed disclosure to investors
soon after the de-SPAC transaction. Overall, we expect this amendment
to increase investor protection by allowing investors to assess the
combined company more thoroughly and sooner. Large target companies may
also reap the benefit of reduced cost of capital insofar as providing
additional historical periods of financial statement data might further
reduce information asymmetries or otherwise improve price
formation.\522\
---------------------------------------------------------------------------
\521\ See infra Section III.C for more information on the
regulatory baseline.
\522\ See supra note 368.
---------------------------------------------------------------------------
The proposed amendment would increase compliance costs compared to
the current baseline for large target companies that, after combining
with the SPAC, do not meet the smaller reporting company definition as
of the proposed new re-determination date. Those companies may need to
provide more detailed disclosure to investors soon after the de-SPAC
transaction. We note, however, that some of these companies that meet
the definition of emerging growth company could avail themselves of the
accommodations associated with EGC reporting requirements, which could
mitigate some of the disclosure costs required by the proposed
amendment. We do not expect the proposed amendment to impose any costs
on post-business combination companies when, at the time of the de-SPAC
transaction, neither the SPAC nor the target company meet the smaller
reporting company definition.
2. Liability-Related Proposals
In addition to the proposals discussed above pertaining to
disclosures, we are proposing to clarify and amend the existing
liability framework in an effort to resolve certain ambiguities and
protect investors. In this section, we discuss the potential costs and
benefits of the proposed amendment to Form S-4 and Form F-4 to require
that the SPAC and the target company be treated as co-registrants when
these registration statements are filed by the SPAC in connection with
a de-SPAC transaction. In addition, we discuss the proposed amendment
to the definition of ``blank check company'' for purposes of the PSLRA
to remove the ``penny stock'' condition, and proposed Rule 140a that
would clarify the underwriter status of SPAC IPO underwriters in
registered de-SPAC transactions.
a. Private Operating Company as Co-Registrant to Form S-4 and Form F-4
When a de-SPAC transaction is registered on a Form S-4 or F-4, the
party that files a registration statement currently depends on the
structure of the merger or acquisition. While the result of any de-SPAC
transaction involving a registered offering would be that the target
company becomes a public reporting company, the liability it and its
officers and directors face for disclosures in the registration
statement that inform investors' decisions regarding the de-SPAC
transaction is largely a function of how the transaction is structured.
For example, when the de-SPAC transaction is structured such that the
SPAC registers the offering of its shares to target shareholders and
the target merges into the SPAC, the SPAC would typically sign the
registration statement as the registrant and the SPAC and certain
officers and directors of the SPAC that sign the registration statement
would incur liability for disclosures in the registration statement.
Alternatively, a de-SPAC transaction can be structured so that the
target registers the offering of its shares to SPAC shareholders, such
that the target would typically be the registrant, and the target and
certain officers and directors of the target would sign the
registration statement and incur liability for disclosures in the
registration statement.\523\
---------------------------------------------------------------------------
\523\ See supra Section III.C for more information about the
regulatory baseline.
---------------------------------------------------------------------------
We are proposing to amend Form S-4 and Form F-4 to require that the
SPAC and the target company be treated as co-registrants when a
registration statement is filed by the SPAC in connection with a de-
SPAC transaction. As a result, both the SPAC and the target, and
certain officers and directors of the SPAC and target, would be
required to sign the registration statement and incur potential
liability for statements and omissions therein. Treating the target as
a co-registrant in this situation is intended to provide similar
investor protections as if the target had entered the public market
through a traditional IPO (or a de-SPAC transaction structure in which
a Securities Act registration statement is filed by the target, rather
than the SPAC).
The liability associated with being a co-registrant could
incentivize the target company's directors and management to exercise
greater care in the preparation and presentation of material
information about the company, its financial condition, and its future
prospects; perform more robust due diligence with respect to materials
it obtains from third-party sources in connection with the de-SPAC
transaction; and more closely monitor disclosures in the registration
statement. Thus, the proposed requirement could improve the reliability
of the disclosure provided to investors about the target company,
reduce the instances of misstatements and omissions, and generally
improve investors' decision making with regard to these transactions.
The proposed co-registrant requirement would increase compliance
costs for targets compared to the baseline in cases where the target
would not already have been the registrant at the time of the de-SPAC
transaction. Under the proposed rule, a target and its signing officers
and directors would be liable to investors for the accuracy of the
disclosures in such a registration statement. This increase in
potential liability from the current baseline for targets and their
signing officers and directors could impact the decision of a private
company to go public via a de-SPAC transaction. It is possible that,
due to some of the ways the proposed rules would alter differences,
actual or perceived, between the disclosure requirements and
liabilities associated with becoming a public reporting company via a
traditional IPO versus being acquired by a SPAC, some targets could
reconsider a traditional initial public offering instead. It is also
possible that other potential targets may determine that the liability
costs (including, but not limited to, increased litigation risk and the
potential need for new insurance coverage or higher premiums for
existing coverage) associated with being a co-registrant would be too
high and elect not to go public. Given the multifaceted benefits of
being a public company, however, it is unclear that the costs of being
a co-registrant would be the determining factor that would discourage a
target from going public through a de-SPAC transaction or outweigh
other factors that typically drive the going public decision such as
liquidity for company insiders and the lower cost of capital.
b. PSLRA Safe Harbor
Defining the term ``blank check company'' for purposes of the PSLRA
as proposed, would make the PSLRA safe harbor unavailable for forward-
looking
[[Page 29535]]
statements made in connection with an offering by a blank check company
that is not issuing ``penny stock'' as defined in Exchange Act Rule
3a51-1, including an offering of securities by a SPAC in connection
with a de-SPAC transaction.\524\ As noted above, many commentators have
raised concerns about the use of forward-looking statements that they
believe to be unreasonable in de-SPAC transactions.\525\ By providing
greater clarity regarding the availability of the PSLRA safe harbor,
the proposed amendment should strengthen the incentives for a blank
check company that is not issuing penny stock, including a SPAC, to
avoid potentially unreasonable and potentially misleading forward-
looking statements, and to expend more effort or care in the
preparation and review of forward-looking statements.\526\ For example,
if less time and effort is required to produce meaningful cautionary
statements than to produce careful and robust forward-looking
statements, absent the proposed changes, market participants may have
an incentive to underinvest in the production of reliable forward-
looking statements. By increasing the potential costs to companies of
making forward-looking statements, the proposed changes are expected to
increase the incentives for blank check companies that are not issuing
penny stock to exercise more care in making any such statements.
Similar investor protection benefits may apply to registered securities
offerings of non-SPAC registrants that would meet the current
definition of a ``blank check company'' but for the ``penny stock''
condition.
---------------------------------------------------------------------------
\524\ See supra Section IX.B.3. See also supra Section III.E for
more information about the regulatory baseline.
\525\ See supra note 33.
\526\ See supra note 279.
---------------------------------------------------------------------------
The net economic effect of this proposed amendment, however, would
depend on, among other things: (1) The extent to which practitioners
currently are willing to advise their clients that the PSLRA safe
harbor is available for forward-looking statements made by blank check
companies that are not issuing penny stock that otherwise meet the
conditions of the safe harbor; (2) the extent to which the market does
not already discount the informational value of forward-looking
statements; and (3) the costs associated with valuable information that
may no longer be provided due to any perceived increase in the risk of
potential litigation.
While amending the definition of ``blank check company'' in this
manner would clarify that the statutory safe harbor in the PSLRA is not
available for forward-looking statements made in connection with
offerings by SPACs or other blank check companies that are not penny
stock issuers, it could impose costs on any such companies that
currently attempt to rely upon the safe harbor to communicate value-
relevant information to investors through forward-looking statements.
For such companies, this proposed amendment could increase the
perceived risk of litigation and dissuade them from including such
forward-looking information. This information could be valuable in
offerings involving business combinations with private operating
companies given that less historical information regarding private
companies is likely otherwise available.\527\ In addition, we note
that, while there is no prohibition on the use of forward-looking
statements in connection with an initial public offering, the fact that
the express terms of the PSLRA provide that the safe harbor is
unavailable for such statements, and the concomitant heightened
litigation risks associated with providing forward-looking statements,
may have created a chilling effect given that, in staff experience,
projections are almost never provided to the public in connection with
an IPO. The proposed amendments similarly may lead to fewer forward-
looking statements in connection with offerings by SPACs or other blank
check companies that are not penny stock issuers. This effect would
likely be stronger for blank check companies affected by the proposal
that are considering whether to include forward-looking statements
about younger target companies with fewer observable periods of profit
historically, as most of their value typically comes in the form of
future growth options. Such blank check companies that are not penny
stock issuers might otherwise be the most likely to use forward-looking
statements to communicate the potential for future value creation to
investors at the time of a business combination.
---------------------------------------------------------------------------
\527\ See Vijay Jog & Bruce J. McConomy, 30 J. Bus. Fin. &
Adver. 125 (2003) (finding that the voluntary provision of earnings
forecasts in connection with Canadian IPOs (subject to a two-year
horizon maximum and accompanied by a statement of opinion by a
public accountant) had incremental value beyond other methods of
signaling firm quality such as the use of a highly reputable
underwriter or auditor, including ``a favorable and noticeable
impact on the degree of underpricing and the post-issue return
performance'' and that benefits are most pronounced for ``small
firms and those making conservative forecasts.'').
---------------------------------------------------------------------------
Additionally, if the proposed amendment reduces the amount of
potentially relevant information presented to investors in connection
with a de-SPAC transaction or other business combination involving a
blank check company that is not a penny stock issuer due to perceived
litigation risk, this may negatively affect investors' ability to
accurately value these companies and allocate their investments
accordingly. For blank check companies that are SPACs, such costs could
be mitigated if some of the other amendments that we are concurrently
proposing are adopted and improve the flow of relevant information to
investors at the de-SPAC transaction stage. Similar costs may also be
mitigated for investors in non-SPAC blank check companies not issuing
penny stock that would be subject to proposed Rule 145a as reporting
shell-companies.\528\ Because reporting shell company shareholders may,
under proposed Rule 145a, receive registration statement disclosures in
connection with a reporting shell company's merger activity, the
proposed rule could result in incremental information about the target
company being provided to reporting shell company shareholders, to the
extent that those investors would not otherwise receive such
information.
---------------------------------------------------------------------------
\528\ See supra Section IX.B.4 and note 445.
---------------------------------------------------------------------------
c. Underwriter Status and Liability in Securities Transactions
Proposed Rule 140a would clarify that a person who has acted as an
underwriter in a SPAC IPO and participates in the distribution by
taking steps to facilitate the de-SPAC transaction, or any related
financing transaction, or otherwise participates (directly or
indirectly) in the de-SPAC transaction will be deemed to be engaged in
the distribution of the securities of the surviving public entity in a
de-SPAC transaction within the meaning of Section 2(a)(11) of the
Securities Act. The statutory definition of an ``underwriter'' under
the Securities Act is broad and does not include an element of intent;
as a result, a person could perform functions that would cause the
person to meet the statutory definition of an ``underwriter'' within
the meaning of Section 2(a)(11) of the Securities Act without
appreciating that they are doing so. This may in turn lead to both
deal-specific and market-wide economic inefficiencies such as
underinvestment in diligence or screening. For example, an investment
banker, or financial
[[Page 29536]]
advisor providing services in connection with a de-SPAC transaction may
not adequately fulfill their role as a gatekeeper for disclosures in a
de-SPAC transaction registration statement if they are unaware that
they are an underwriter and face potential liability as such.\529\
---------------------------------------------------------------------------
\529\ See supra Section III.E.3 for more regulatory baseline
information.
---------------------------------------------------------------------------
A key benefit from proposed Rule 140a would be the incentives that
it would create for SPAC IPO underwriters that may be subject to
Section 11 liability for registered de-SPAC transactions to perform due
diligence to ensure the accuracy of the disclosures in these
transactions. Improved due diligence would enhance investor protection
by allowing investors to better evaluate the target company and, in
turn, potentially make better investment decisions. We expect that
clarifying the application of underwriter liability, combined with the
disclosures of proposed Subpart 1600 of Regulation S-K, could
significantly improve the ability of SPAC shareholders to evaluate the
target company. This may allow these investors to better price the
securities of the combined company and decrease the likelihood that
they overvalue the target company under consideration. Additionally,
more clearly defined Section 11 liability may enhance shareholders'
ability to pursue a remedy, if needed.
Potential Section 11 liability may deter a SPAC IPO underwriter
from participating in the de-SPAC transaction or any related financing
transactions by increasing their costs. The extent to which proposed
Rule 140a would impose new costs on SPAC IPO underwriters would depend
heavily on the extent to which they do not already perform due
diligence that would be sufficient to perfect such a defense in
connection with the de-SPAC transaction or a related financing
transaction. If SPAC IPO underwriters decide not to provide services in
connection with the de-SPAC transaction or a related financing
transaction due to proposed Rule 140a, the SPAC may incur greater
monetary and non-monetary costs related to identifying, negotiating
with, and hiring financial advisors. Also, because a significant
portion of SPAC IPO underwriting fees (typically 3.5% of IPO proceeds)
is usually deferred until, and conditioned upon, the completion of the
de-SPAC transaction, SPAC IPO underwriters that decide not to
participate in the de-SPAC transaction as a result of this proposal may
revise their compensation agreements so that they would be paid only at
the time of the SPAC initial public offering. Such a change in the
timing of compensation may increase the up-front transaction costs of
the initial public offering for SPAC investors and sponsors. It is
possible, however, that underwriter compensation may decrease if
underwriters would not be expected to provide any services in
connection with the de-SPAC transaction or any related financing
transaction.
Alternatively, proposed Rule 140a may cause SPAC IPO underwriters
to demand higher compensation for their participation in the de-SPAC
transaction or any related financing transaction given the potential
exposure to Section 11 liability. The fees that SPAC IPO underwriters
currently charge for their efforts in connection with a SPAC initial
public offering generally range between 5% and 5.5% of the initial
public offering proceeds, with potentially additional merger advising
fees charged at the de-SPAC transaction stage. It is difficult to
predict whether these fees would increase to incentivize SPAC
underwriters to participate in de-SPAC transactions or the amount of
any such increase. For comparison, the underwriter fees in the
traditional initial public offering process, where underwriters have
Section 11 liability, are, on average, 7% of the IPO proceeds.\530\ It
is possible, however, that SPAC IPO underwriters could demand higher
fees for potentially bearing Section 11 liability in connection with
the de-SPAC transaction or any related financing transaction. Any
increase in the compensation of SPAC IPO underwriters would increase
the transaction costs to investors and sponsors, potentially lowering
their returns on their investment.
---------------------------------------------------------------------------
\530\ See, e.g., Hsuan-Chi Chen & Jay Ritter, The Seven Percent
Solution, 55 J. Fin. 1105 (2000).
---------------------------------------------------------------------------
Finally, to the extent that SPAC IPO underwriters decide not to
participate in the de-SPAC transaction or any related financing
transaction due to potential Section 11 liability, investors would not
have the protection of any due diligence that SPAC IPO underwriters may
have performed in connection with such transactions. However, if SPAC
IPO underwriters are able and willing to absorb some of the costs
associated with potential Section 11 liability (e.g., because of other
benefits, such as revenues from future repeat business with sponsors),
the potential cost increase for SPAC shareholders and sponsors may be
small.
3. Shell-Company Related Proposals
a. Proposed Rule 145a
Proposed Rule 145a would deem any business combination of a
reporting shell company (that is not a business combination related
shell company) involving an entity that is not a shell company to
involve a sale of securities under the Securities Act to the reporting
shell company's shareholders. Proposed Rule 145a is intended to address
concerns regarding the use of reporting shell companies generally as a
means by which private unregistered companies access the U.S. capital
markets. One reason for these concerns is that reporting shell company
shareholders may not receive the Securities Act protections (including
disclosure and liability) they receive in a traditional IPO because of
transaction structure. Under the proposed rule, SPACs and other
reporting shell companies would have to register these deemed sales by
filing a Securities Act registration statement unless there is an
applicable exemption.\531\
---------------------------------------------------------------------------
\531\ See supra Section IV.A.2 for more information about the
regulatory baseline.
---------------------------------------------------------------------------
Proposed Rule 145a would potentially provide shareholders in a
reporting shell company, engaged in a business combination involving a
non-shell company, with more consistent Securities Act protections,
regardless of the structure used for the business combination.
Currently, if a reporting shell company buys a target by issuing its
shares as consideration for the interests of the target shareholders,
and the reporting shell company is the surviving entity, reporting
shell company investors are unlikely to receive a registration
statement in connection with the transaction. In this example, the
reporting shell company shareholders would not receive the protections
afforded by the Securities Act, including any enhanced disclosure or
liability that would be available if the transaction were registered
under the Securities Act.
Proposed Rule 145a is intended to address potential disparities in
the types of disclosure and liability protections available to
reporting shell company shareholders depending on the transaction
structure used in a reporting shell company business combination, and
thus, is expected to bolster investor protection for reporting shell
company shareholders. This could be of particular benefit to
shareholders in reporting shell companies that may not otherwise
receive information about the intended target, or potentially even
notification that a specific business combination
[[Page 29537]]
will be entered into, until after the transaction has occurred.
Additionally, receipt of registration materials may provide a
beneficial nudge to reporting shell company shareholders who might
otherwise be vulnerable to inertia by calling attention to the nature
in which their investment would be transformed should they continue to
hold their securities.\532\ However, these informational benefits to
affected reporting shell company shareholders may be mitigated to the
extent that the reporting shell company is able to rely on an exemption
from registration and shareholders do not receive offering materials in
connection with the deemed sale. Because it is unclear the extent to
which reporting shell company shareholders may be able to anticipate
which disclosure and liability protections will be available to them at
the time of a business combination (as a function of whether an
exemption would be available), the extent to which proposed Rule 145a
might improve price or capital formation is also unclear.
---------------------------------------------------------------------------
\532\ Investor inertia refers to the tendency to avoid trading.
See, e.g., Laurent E. Calvert, John Y. Campbell, & Paolo Sodini,
Fight or Flight? Portfolio Rebalancing by Individual Investors, 124
Q. J. Econ. 301 (2009) (``observing little aggregate rebalancing in
the financial portfolio of participants'').
---------------------------------------------------------------------------
As a result of proposed Rule 145a, reporting shell companies,
including SPACs, would be required to register the deemed sale of their
securities to their shareholders at the time of certain business
combinations, unless there is an available exemption. Costs would
increase to the extent that a business combination is not already
structured in a manner that otherwise would have been considered a sale
to the reporting shell company shareholders under the securities laws.
This would include all costs associated with conducting a registered
offering of securities, such as preparing a Securities Act registration
statement, if no exemption is available. The proposed rule may also
introduce opportunity costs in the form of transactions that might
otherwise have occurred, but would be disincentivized under the new
requirements. For example, under current rules, a business combination
involving a reporting shell company can be structured to avoid
registration, such as through the use of cash, rather than stock, as
consideration. Because proposed Rule 145a would deem such a transaction
to involve a sale to reporting shell company shareholders that would
need to be registered unless there is an applicable exemption, affected
parties may opt not to pursue such a transaction rather than incur the
new transaction costs involved. There may also be financial-exclusion
related costs if reporting shell companies are increasingly
incentivized to pursue exemptions from registration and as a
consequence pre-emptively seek to place their securities with only
certain types of investors such as accredited investors or non-
accredited sophisticated investors.
To the extent that this proposal would apply the strict liability
standard of Section 11 to transaction-related disclosures to which it
would not otherwise apply, we expect there to be extra costs associated
with greater care in preparation and review of any reporting shell
company registration statement.\533\ Also, there could be some costs
associated with timing issues generated by SEC staff review of any
registration statement. Some of these costs may be mitigated to the
extent that the reporting shell company or target is already preparing
disclosure documents, particularly Securities Act registration
statements, in connection with a business combination that would be
covered by proposed Rule 145a. For example, in a de-SPAC transaction,
the SPAC and/or target company may already be preparing a Schedule 14A,
14C, or TO, or a Form S-4 or F-4. Reporting shell companies and SPACs
also typically prepare Forms 8-K containing Form 10 disclosures that
are filed shortly after the business combination.
---------------------------------------------------------------------------
\533\ See generally supra Section IX.C.2 discussion on costs of
increased liability.
---------------------------------------------------------------------------
b. Financial Statement Requirements in Business Combination
Transactions Involving Shell Companies
Proposed Article 15 of Regulation S-X and related amendments aim to
align more closely the financial statement reporting requirements in
business combinations involving a shell company and a private operating
company with those in traditional initial public offerings. These
amendments may reduce the potential for regulatory arbitrage by private
companies that go public through a business combination with a shell
company rather than a traditional initial public offering. Furthermore,
the proposed disclosure and audit requirements (e.g., proposed Rule 15-
01(a)) may reduce information asymmetry surrounding shell company
business combinations, including de-SPAC transactions, which may in
turn benefit private operating companies going public by reducing the
cost of capital.\534\ The proposed rules and amendments that clarify
applicable definitions and streamline compliance processes (e.g., Rule
15-01(b), (c), (d), (e)), are expected to reduce ambiguity and
facilitate compliance.
---------------------------------------------------------------------------
\534\ See Michael Minnis, The Value of Financial Statement
Verification in Debt Financing: Evidence from Private U.S. Firms, 49
J. Acct. Research 457, 457-506 (2010). Using a large sample of
privately held U.S. firms, the author found that audited firms enjoy
a lower interest rate than unaudited firms, and that lenders place
more weight on audited financial information in setting the interest
rate. See also Mathieu Luypaert & Tom Van Caneghem, Can Auditors
Mitigate Information Asymmetry in M&As? An Empirical Analysis of the
Method of Payment in Belgian Transactions, 33 Auditing 57, 57-91
(2014). This study finds that audits can mitigate information
asymmetry about the target's value, reducing the need for a
contingent payment.
---------------------------------------------------------------------------
The proposed rules and amendments may allow investors to more
readily locate and process relevant information, reduce processing
costs, and increase their confidence in the reporting provided by
entities involved in these business combinations.\535\ In turn, the
proposed rules and amendments may help investors to more efficiently
make voting, redemption, and investment decisions. In addition, many of
the proposed rules and amendments would codify existing staff guidance
or financial reporting practices. Thus, to the extent that registrants
are already preparing statements and reports consistent with the
proposed rules and amendments, the incremental benefits and costs would
be limited. Below, we discuss the potential benefits and costs of each
individual item under proposed Rule 15-01 of Regulation S-X and the
other amendments.\536\
---------------------------------------------------------------------------
\535\ See supra note 508.
\536\ See supra Section IV.B for additional regulatory baseline
information.
---------------------------------------------------------------------------
1. Rule 15-01(a) Audit Requirements of Predecessor
Proposed Rule 15-01(a) would align the level of audit assurance
required for the target private operating company in merger
transactions involving a shell company with the audit requirements for
an initial public offering of equity securities. The proposed rule
would codify existing staff guidance that financial statements of the
business, i.e., target private operating company, in a transaction
involving a shell company should be audited to the same extent as a
registrant in an initial public offering; that is, an examination of
the financial statements by an independent accountant in accordance
with the standards of the PCAOB for the purpose of expressing an
opinion thereon.
Proposed Rule 15-01(a) should benefit investors by requiring
assurance over financial statements consistent with a traditional
IPO.\537\ To the extent
[[Page 29538]]
that audited financial statements may have more predictive power of
future cash flows, the proposed rule also may benefit shell companies
and target private operating companies by lowering their cost of
capital.\538\ The proposed amendment may, however, increase the
compliance costs (e.g., audit costs) of the business combination. To
the extent that target private operating companies are, in practice,
already including financial statements audited under PCAOB standards,
the above incremental benefits and costs likely would be limited.
---------------------------------------------------------------------------
\537\ See Phillip Lamoreaux, Does PCAOB Inspection Access
Improve Audit Quality? An Examination of Foreign Firms Listed in the
United States, 61 J. Acct. & Econ. 313, 313-337 (2016). The author
documented that PCAOB-inspected auditors, compared to auditors not
subject to PCAOB inspections, provide higher quality audits, which
are reflected by more going concern opinions, more reported material
weaknesses, and less earnings management.
\538\ See Michael Minnis, The Value of Financial Statement
Verification in Debt Financing: Evidence from Private U.S. Firms, 49
J. Acct. Research 457, 457-506 (2010) (finding that audited
financial statements have more predictive power for future cash
flows, which may explain lower cost of capital as well as greater
reliance by lenders).
---------------------------------------------------------------------------
2. Rule 15-01(b) Number of Years of Financial Statements
Under proposed Rule 15-01(b), a shell company registrant would be
permitted to include in its Form S-4/F-4/proxy or information statement
two years of statements of comprehensive income, changes in
stockholders' equity, and cash flows for the private operating company
for all transactions involving an EGC shell company and a private
operating company that would qualify as an EGC, and this determination
would not be dependent on whether the shell company has filed or was
already required to file its annual report or not.
For such transactions, registrants may benefit from reduced cost of
producing audited financial statements because this rule would
potentially reduce the number of years of financial statements required
from three years to two years. For those transactions, this proposed
rule would cause some information loss for investors. However, at least
two years' of statements of comprehensive income, changes in
stockholders' equity, and cash flows for the private operating company
would be provided, the same amount that would be required for an
initial public offering.
3. Rule 15-01(c) Age of Financial Statements of the Predecessor
Proposed Rule 15-01(c) would provide that the age of financial
statements for a private operating company that would be the
predecessor to a shell company in a registration statement or proxy
statement would be based on whether the private operating company would
qualify as a smaller reporting company if it were filing its own
initial registration statement. Because we believe that this proposed
amendment would be consistent with existing practice, we do not expect
it to have significant economic effects for registrants or investors.
This proposed rule also should help maintain consistency in disclosure
requirements across the different routes of going-public, which may
reduce compliance uncertainty for registrants and their predecessors
and increase investor confidence.
4. Rule 15-01(d) Acquisitions of Businesses by a Shell Company
Registrant or Its Predecessor That Are Not or Will Not Be the
Predecessor
Proposed Rule 15-01(d) would require application of Rules 3-05 or
8-04 (or Rule 3-14 as it relates to a real estate operation), the
Regulation S-X provisions related to financial statements of an
acquired business, to acquisitions of businesses by a shell company
registrant, or its predecessor, that are not or will not be the
predecessor to the registrant. Given our understanding that this
proposed amendment codifies current market practices, we believe that
the incremental benefits and costs should be limited.
We also are proposing to amend Rule 1-02(w) of Regulation S-X to
require that the significance of the acquired business be calculated
using the private operating company's financial information as the
denominator instead of that of the shell company registrant. The
current use of the shell company registrant, which has nominal
activity, for the denominator results in limited to no sliding scale
for business acquisitions, including those made by the private
operating company that will be the predecessor to the shell company
because every acquisition would be significant and thus require
financial statements. Therefore, the proposed amendment may alleviate
registrants' compliance burden to the extent that it would not result
in disclosure related to insignificant acquisitions. Although, the
proposed amendment may reduce the information available to investors
about business acquisitions by the private operating company that will
be the predecessor to the shell company, it may also reduce investors'
information processing costs by focusing on financial statements of
acquired businesses that are significant rather than all acquired
businesses.
This proposed amendment to Rule 11-01(d) may change the application
of Rule 11-01(b)(3) such that subsequent business acquisitions may be
tested against pro forma amounts that combine the SPAC and the private
operating company. This may result in fewer subsequent acquisitions
being significant because the denominator of the significance tests,
including the combined total assets of the private operating company
and SPACs, are larger than only the private company's total assets.
Accordingly, registrants' compliance burden would likely be reduced. We
also believe any potential costs to investors as a result of decreases
in disclosure may be mitigated by the fact that registrants must
otherwise disclose material information about the acquisition that is
necessary to make the required statements not misleading.
Proposed Rule 15-01(d)(2) would require a shell company that omits
from a registration statement or proxy statement the financial
statements of a recently acquired business that is not or will not be
its predecessor pursuant to Rule 3-05(b)(4)(i) file those financial
statements in an Item 2.01(f) Form 8-K. The proposed amendment would
alleviate any ambiguity regarding the timing in which these financial
statements are required to be filed, which would facilitate compliance
for the registrant. This amendment also should help ensure that
investors receive predictable and timely disclosure about the acquired
business.
5. Rule 15-01(e) Financial Statements of a Shell Company Registrant
After the Combination With Predecessor
Proposed Rule 15-01(e) would allow a registrant to exclude the pre-
acquisition financial statements of a shell company (including a SPAC)
for periods prior to the acquisition once the following conditions have
been met: (1) The financial statements of the shell company have been
filed for all required periods through the acquisition date, and (2)
the financial statements of the registrant include the period in which
the acquisition was consummated. The proposed rule could reduce
disclosure that may no longer be relevant or meaningful to investors
when the pre-business combination financial statements of the shell
company are included in previous filings and the historical financial
statements of the shell company likely are no longer representative of
the combined company. Thus, this proposed rule should reduce compliance
costs related to filing previous year financial statements of a shell
company. Investors may also benefit from the increased
[[Page 29539]]
efficiency in processing business combination filings.
6. Other Amendments
We are proposing additional amendments to Regulation S-X, as well
as an amendment to Form 8-K.\539\ The proposed amendment to Rule 11-
01(d) would state that a SPAC is a business for purposes of the rule,
which may cause an issuer that is not a SPAC to be required to file
financial statements of the SPAC in a resale registration statement on
Form S-1. This proposed amendment may facilitate the compliance process
for companies engaging in an acquisition with a SPAC and alleviate
their compliance burden. Investors also would likely benefit from
having the financial statements of the SPAC, particularly when they
underpin adjustments to pro forma financial information in a
transaction when an operating company is the legal acquirer of a SPAC.
As a result of the proposed amendment, a registrant may incur
additional compliance costs if it is required to provide financial
statements of the SPAC in a resale registration statement. However, any
additional costs should be mitigated to the extent that financial
statements of the SPAC were previously prepared, audited, and filed
with the Commission.
---------------------------------------------------------------------------
\539\ See supra Section IV.B.6 for additional regulatory
baseline information.
---------------------------------------------------------------------------
The proposed revision to Item 2.01(f) of Form 8-K, which would
apply to all shell companies, clarifies that the information provided
in the Form 8-K should relate to the ``acquired business'' and not the
``registrant,'' as currently stated in the Form. The proposed amendment
is intended to eliminate any potential misunderstanding as to the
entity for which Item 2.01(f) disclosure is necessary. The increased
clarity may reduce registrants' compliance costs to the extent there is
currently any confusion. In turn, investors may also benefit from the
timely disclosure of information about ``acquired businesses'' due to
registrants' more consistent application of Item 2.01(f).
We are also proposing amendments to Rules 3-01, 8-02, and 10-
01(a)(1) of Regulation S-X to clarify that the requirement of
``financial statements'' would apply to both the registrant and its
predecessors rather than only to the registrant alone, as the existing
rules may unintentionally imply for the balance sheet in Rules 3-01 and
8-02 and financial statements for Rule 10-01(a)(1). Because these
proposed amendments would codify existing financial reporting
practices, they should not impact registrants' compliance costs.
4. Enhanced Projections Disclosure (Amendments to Item 10(b) of
Regulation S-K)
Item 10(b) of Regulation S-K sets forth the Commission's views on
important factors to be considered in formulating and disclosing
projections in certain filings with the Commission. The proposed
amendments would update this guidance.\540\ More specifically, the
proposed amendments would state that the guidelines also apply to
projections of future economic performance of persons other than the
registrant, such as the target company in a business combination
transaction, that are included in the registrant's filings. The
proposed amendments to Item 10(b) would also state that projections
that are not based on historical financial results or operational
history should be clearly distinguished from projected measures based
on historical financial results or operational history. In addition,
the proposed amendments would state that it generally would be
misleading to present projections that are based on historical
financial results or operational history without presenting such
historical financial measure or operational history with equal or
greater prominence. Finally, for projections based on a non-GAAP
measure, the proposed amendments to Item 10(b) would state that the
presentation should include a clear definition or explanation of the
non-GAAP measure, a description of the most closely related GAAP
measure, and an explanation why the non-GAAP measure was selected
instead of a GAAP measure. To the extent that registrants conform
projections included in Commission filings to some or all of the
proposed amendments to the guidance set forth in Item 10(b), investors
would have additional information to evaluate the reasonableness of the
projections and make more informed investment decisions. For example,
the proposals related to historical financial results or operational
history could inform investors about potential biases in assumptions
underlying different financial projections and help them more
efficiently process the underlying assumptions of the financial
projections in making their investment decisions.\541\ These benefits
would be mitigated to the extent that registrants are already providing
this information, or include projections of future economic performance
that do not follow some or all of the proposed amendments.
---------------------------------------------------------------------------
\540\ See supra Section V.B.1 for additional regulatory baseline
information.
\541\ See Anne Beyer, Daniel A. Cohen, Thomas Z. Lys, & Beverly
R. Walther, The Financial Reporting Environment: Review of the
Recent Literature, 50 J. Acct. & Econ. 296, 296-343 (2010) (By
employing a sample from 1994 to 2007, this article shows management
forecasts providing over half of accounting-based information to the
market. In summary, the management forecast literature suggests that
earnings projections and realizations both provide value-relevant
information to the market.).
---------------------------------------------------------------------------
In addition, to the extent that registrants have not previously
applied the Commission's guidance in Item 10(b) to third-party
projections included in the registrant's filings, and choose to do so
as a result of the proposed amendments, investors may benefit from
improved care and presentation with respect to any third-party
projections in a registrant's filing. These benefits would be mitigated
to the extent that registrants already follow the Commission's guidance
set forth in Item 10(b) for third party projections included in their
filings, or choose not to do so. To the extent that registrants follow
the guidance in the proposed amendments to Item 10(b), the incremental
compliance costs are likely to be limited. Registrants should already
have information about historical financial results or operational
history and GAAP financial measures, and should be able to easily
obtain this information in connection with any included third-party
estimates. Moreover, potential liability for false or misleading
projections is likely to shape disclosure practices with respect to
third-party projections in addition to the existing guidance in Item
10(b).
The proposed amendments to Item 10(b) could discourage registrants
from including projections in their filings, which would provide
investors with less information for their investment decisions. In
addition, the proposed additional contextual disclosure, to the extent
included by registrants, could increase investors' processing cost of
any included financial projections.
5. Investment Company Act Safe Harbor
As discussed above, whether a SPAC meets the definition of
investment company under Section 3(a)(1)(A) of the Investment Company
Act in the period between its IPO and either the completion of its de-
SPAC transaction or its dissolution is a question of facts and
circumstances.\542\ Currently, SPACs typically provide disclosures
indicating that they believe they do not meet the investment company
definition under Section 3(a). They further typically disclose to
prospective investors that if they are determined to be an investment
[[Page 29540]]
company in the future, the costs and logistics of compliance with the
Investment Company Act would be prohibitive. We are, however, concerned
that SPACs may fail to recognize when their activities raise the
investor protection concerns addressed by the Investment Company Act.
To assist SPACs in focusing on, and appreciating when, they may be
subject to investment company regulation, we are proposing Rule 3a-10,
which would provide a safe harbor from the definition of ``investment
company'' under Section 3(a)(1)(A) of the Investment Company Act that
we believe would enhance investor protection.\543\
---------------------------------------------------------------------------
\542\ See supra Section VI.A.
\543\ See supra Section VI.
---------------------------------------------------------------------------
We have designed the proposed conditions of the safe harbor to
align with the structures and practices that we preliminarily believe
would distinguish a SPAC that is likely to raise investor protection
concerns under the Investment Company Act from those that we believe
generally do not.\544\ Specifically, the proposed rule would promote
investor protection by highlighting to SPACs and their sponsors the
potential Investment Company Act concerns that SPAC activities may
raise, such that investors would benefit from a reduced risk that the
SPACs they invest in will engage in activities typically associated
with investment companies but without the investor protections provided
by the Investment Company Act. This may, in turn, reduce the
possibility for regulatory arbitrage, which may be used by some SPACs
in an attempt to operate like an investment company without investment
company registration.\545\ A reduction of the possibility of regulatory
arbitrage would also reduce costs related to potential uncertainty
about a SPAC's legal status and promote confidence in the SPAC market
among market participants. Finally, a reduction in the possibility of
regulatory arbitrage would potentially promote competition among all
companies engaging in investment management activities regulated by the
Investment Company Act.
---------------------------------------------------------------------------
\544\ See supra note 295 for a description of investor
protection concerns addressed by the Investment Company Act.
\545\ The significant compliance costs of investment company
registration under the Investment Company Act may give some SPACs an
incentive to try to engage in such regulatory arbitrage.
---------------------------------------------------------------------------
In terms of expected investor protection benefits for investors in
SPACs that would rely on the proposed safe harbor, the safe harbor
conditions are designed to ensure that SPACs do not engage in
activities that would make them investment companies. For example, the
proposed conditions on the nature and management of SPAC assets are
designed to ensure that a SPAC relying on the safe harbor would not
engage in portfolio management practices resembling those that
management investment companies employ.\546\
---------------------------------------------------------------------------
\546\ See supra Section VI.B.1.
---------------------------------------------------------------------------
In addition, the proposed conditions for SPAC activities are
designed to ensure that SPACs relying on the safe harbor would have a
business purpose aimed at completing a single de-SPAC transaction,
after which the surviving company would be primarily engaged in the
business of the target company or companies and have at least one class
of exchange listed securities.\547\ As a result, a SPAC relying on the
safe harbor would not be engaging in activities that raise investor
protection concerns addressed by the Investment Company Act.
---------------------------------------------------------------------------
\547\ See supra Section VI.B.2.
---------------------------------------------------------------------------
Finally, the proposed duration conditions are designed to ensure
that a SPAC relying on the safe harbor would have a limited time period
to announce and complete a de-SPAC transaction before being required to
distribute the SPACs assets in cash to investors.\548\ The proposed 18-
month condition for the announcement of a de-SPAC agreement and
condition that the de-SPAC transaction close within 24 months would
potentially reduce the risk that investors may come to view a SPAC
holding securities for a prolonged period as a fund-like investment,
thereby necessitating the regulatory protections of the Investment
Company Act. We recognize that most SPACs are listed on a national
securities exchange and as such are subject to exchange listing
standards requiring that the SPAC completes a de-SPAC transaction
within 36-months (or three years) of the effectiveness of its IPO
registration statement.\549\ For such SPACs the proposed safe harbor
duration condition would have reduced benefits since the exchange rules
already provide a limit on the duration of the SPAC, albeit 12 months
longer that the proposed limit.
---------------------------------------------------------------------------
\548\ See supra Section VI.B.3.
\549\ See supra note 393 and accompanying text.
---------------------------------------------------------------------------
Beyond providing investor protection benefits, we expect that the
proposed safe harbor could reduce compliance costs for some market
participants. Specifically, because registering as an investment
company and complying with the associated Investment Company Act
requirements would be potentially cost-prohibitive for most SPACs, we
expect registrants, sponsors, and investors would all benefit from the
additional certainty regarding a SPAC's status to the extent it meets
the conditions of the safe harbor. Such benefits would directly accrue
for SPACs that already meet the conditions of the proposed safe harbor,
or for future SPACs that would meet the conditions even in the absence
of the proposed safe harbor. Because of the compliance costs and
significant operational changes involved with investment company
registration, we expect that most SPACs that do not presently meet the
conditions of the proposed safe harbor would seek to fall within the
safe harbor by making changes to their operations in order to meet the
safe harbor conditions. However, for some SPACs that currently do not
meet such conditions, there may be potentially meaningful costs related
to bringing the operations in line with the new safe harbor (discussed
in more detail below).\550\ We also expect that most future SPACs that
would otherwise under the baseline have run operations not meeting the
safe harbor conditions would take advantage of the legal certainty
conferred by the proposed safe harbor and elect to meet the conditions.
In addition, because SPACs that operate within the boundaries of the
safe harbor would be assured that they would not qualify as investment
companies, there may also be an increased propensity for sponsors to
launch new SPACs operating within the safe harbor conditions to the
extent that they might not have otherwise chosen to create a SPAC due
to the uncertainty of the Investment Company Act status. Thus, the
reduced uncertainty regarding the legal status of SPACs operating
within the proposed safe harbor could facilitate capital formation.
Finally, the proposed safe harbor would also promote efficiency of a
SPAC's compliance process by providing a clear framework for SPACs to
determine their status under the Act.
---------------------------------------------------------------------------
\550\ As discussed in more detail below, such SPACs may
alternatively seek to operate outside the safe harbor without making
any operational changes or make other changes to their operations in
order to avoid meeting the definition of an investment company under
Section 3(a)(1)(A) of the Investment Company Act, including, for
example, by avoiding investing, reinvesting or trading in
securities.
---------------------------------------------------------------------------
To the extent the potential benefits to investors of current and
future SPACs operating under the new safe harbor would be significant,
we may see an increase in investor demand for SPACs that could
potentially lower the cost of capital for SPACs. In turn, a lower cost
of capital could increase the size and number of SPAC IPO offerings and
thereby promote capital formation.
[[Page 29541]]
For current or future SPACs that would meet the safe harbor
conditions absent the proposed rule, we do not expect any direct costs
from the proposed safe harbor. By contrast, for SPACs currently not
meeting the proposed safe harbor conditions, or for future SPACs that
would otherwise not meet the safe harbor conditions, there may be costs
related to SPACs changing their operations to meet the conditions or to
make other changes to their operations in order to avoid falling under
the definition of an investment company under Section 3(a)(1)(A) of the
Investment Company Act.
In terms of potential costs of bringing SPAC operations in line
with the proposed safe harbor conditions, we do not expect that the
proposed safe harbor conditions with respect to the nature and
management of SPAC assets would impose significant costs on SPACs and
their sponsors and investors, as it is our understanding that most
SPACs' assets are already held as government securities, government
money-market funds, or cash items.\551\ We also understand that SPACs
generally are not actively managing these assets, most of which are
held in an escrow or trust account.\552\ To the extent there are some
SPACs that are currently holding other types of assets, they would have
to liquidate such assets and move them into an allowable asset class
prior to completion of the de-SPAC transaction to rely on the proposed
safe harbor, and would thereby incur some transactions costs and
possibly also realize some capital losses depending on how market
conditions for such assets have changed.
---------------------------------------------------------------------------
\551\ See supra Section IX.B.6.a.
\552\ Id.
---------------------------------------------------------------------------
With respect to the proposed safe harbor conditions for SPAC
activities, we do not expect the condition that SPACs have to seek to
complete a single de-SPAC transaction to impose any significant costs
on SPAC operations under the baseline. It is our understanding that
almost all current SPACs seek to complete one single de-SPAC
transaction, albeit such a transaction may involve multiple target
companies, which would still be feasible under this proposed safe
harbor condition.
We also do not expect the proposed condition that a SPAC wishing to
rely on the safe harbor to be primarily engaged in the business of
seeking to complete a de-SPAC transaction would impose any significant
incremental costly constraints on SPAC activities under the baseline.
It is our understanding that most SPACs presently communicate to
investors their sole intent to seek a target company to operate and
that they do not intend to act as an investment company under the
Investment Company Act.\553\
---------------------------------------------------------------------------
\553\ See supra Section IX.B.6.b.
---------------------------------------------------------------------------
Adherence to the proposed duration conditions under the safe harbor
is likely to impose costs on SPACs that would seek to avail themselves
of the proposed safe harbor by limiting the time they have to search
for a target company and complete a de-SPAC transaction compared to the
baseline. The option of waiting to invest can be valuable, and to the
extent that SPACs would have to shorten the duration of their search
for an appropriate target company and complete a de-SPAC transaction in
order to take advantage of the safe harbor, the proposed duration
conditions would potentially reduce the value of this option for
SPACs.\554\ Additionally, to the extent an expected value-increasing
de-SPAC transaction would not occur under the proposed duration
conditions, but it could have under the baseline, the proposed rules
may lead to forced liquidation of the SPAC and impose associated costs
on both investors and sponsors (in particular, the loss of their
respective portions of the expected value increase). However, because
of the typical compensation structure of SPAC sponsors, they have
strong incentives to complete a de-SPAC transaction rather than
liquidating the SPAC and returning the proceeds in the trust or escrow
account to the SPAC's shareholders. Therefore, SPACs that are seeking
to meet the proposed safe harbor conditions may in some cases
compromise on the quality of the type of targets pursued to speed up
their search, or offer to pay more for the target to complete a de-SPAC
transaction sooner, compared to under the baseline.\555\ In some
circumstances, the duration conditions may give sponsors of SPACs
seeking to avail themselves of the proposed safe harbor increased
incentives to complete a de-SPAC transaction even if liquidation would
be the better choice for investors. That is, the duration conditions
may increase the agency costs of the sponsors' managerial control.
However, such agency costs would be mitigated by other provisions of
this proposal, such as the proposed specialized disclosure and
procedural requirements in de-SPAC transactions and the proposed
amendments aligning de-SPAC transactions with traditional initial
public offerings.\556\
---------------------------------------------------------------------------
\554\ The value of the option to wait derives from the fact that
whereas the choice to wait is generally reversible, the choice to
invest now rather than later is generally irreversible. See, e.g.,
Robert McDonald & Daniel Siegel, The Value of Waiting to Invest, 101
Q. J. Econ. 707, 707-27 (1986).
\555\ See supra note 454 for some evidence of such behavior
under SPAC's current self-imposed duration limitations.
\556\ See supra Sections II.F and III.
---------------------------------------------------------------------------
Based on the data presented above for recent SPACs that have at
least a 24-month history,\557\ approximately 65% completed a de-SPAC
transaction no later than 24 months after the IPO date. Thus, the
proposed 24-month condition for completion of a de-SPAC transaction may
be a binding constraint for a significant percentage of SPACs. For the
same sample of SPACs, the condition that a SPAC would need to announce
a de-SPAC transaction agreement in a Form 8-K filing no later than 18
months after the IPO date would have been met by approximately 59% of
the SPACs.\558\ Therefore, unconditionally, the 18-month announcement
condition is potentially binding for a larger percentage of SPACs than
the 24-month de-SPAC transaction completion condition. The data also
show that if a sample SPAC had met the 24-month transaction completion
condition, around 12% of such SPACs (12 of 99 cases) would not have met
the 18-month announcement condition. Conversely, among the sample SPACs
meeting the 18 month announcement condition, only approximately 2.2% of
such SPACs (2 cases of 89) would not have met the 24 month condition.
Among all sample SPACs, around 57% (87 of 152) would have met both the
18-month and the 24-month deadlines. Thus, we expect that the combined
effect of the two proposed duration conditions would be to force a
significant proportion of SPACs that would seek to take advantage of
the safe harbor to conclude their search for a target sooner than they
would have under the baseline or forgo a de-SPAC transaction, either of
which could potentially impose costs on SPACs and their investors and
sponsors, as discussed above.
---------------------------------------------------------------------------
\557\ See supra Section IX.B.6.c.
\558\ Id.
---------------------------------------------------------------------------
A SPAC that seeks to rely on the proposed safe harbor would also be
required to distribute its assets in cash to investors as soon as
reasonably practicable if it does not meet either the 18 month deadline
or the 24 month deadline. Because a SPAC would be required to hold only
liquid assets such as cash items, government securities, or government
money market funds, to rely on the proposed safe harbor, we do not
expect SPACs to incur significant incremental cost from this condition
in terms of direct transaction costs. Moreover, a SPAC already must
plan for
[[Page 29542]]
the distribution of its assets back to the investors if not used in a
de-SPAC transaction. Therefore, this condition should also not impose a
new significant burden on a SPAC.
The proposed duration conditions may lead SPACs to complete less
profitable de-SPAC transactions, or fail to complete a de-SPAC
transaction at all. To the extent investors anticipate this, there may
be a reduction in investor demand that leads to fewer SPAC initial
public offerings and/or less capital being raised in these offerings,
which could potentially reduce capital formation depending on the type
of investments SPAC investors would shift their funds to instead. In
addition, an increase in SPACs that liquidate without a de-SPAC
transaction and/or a reduction of capital raised through SPACs may
ultimately result in fewer publicly traded operating companies and
therefore a reduced investment opportunity set for investors. Such
negative investment opportunity effects may be mitigated to the extent
potential SPAC targets would instead go public through initial public
offerings without SPAC involvement.
The proposed duration conditions may also affect the bargaining
environment in de-SPAC transactions. Knowing that SPACs would face a
regulatory imposed deadline for when to announce an agreement in order
to qualify for the safe harbor, target companies may deliberately
prolong negotiations so that they can attempt to extract better terms
as the regulatory imposed deadlines approaches. Such strategic behavior
by targets may reduce returns to SPAC investors further, but may not be
an economic loss per se if the transaction is still completed, as the
immediate effect in such a case would be a pure wealth transfer from
SPAC investors to target company owners. The potential for an increase
in target bargaining power would be mitigated by the fact that most
SPACs' securities are listed on a national securities exchange and
therefore already subject to the exchanges' required deadlines (36
months or 3 years) for completion of a business combination. However,
to the extent target company bargaining power would increase and lead
to worse terms in de-SPAC transactions for investors it could
potentially reduce ex ante demand among investors for SPAC investments,
which could reduce the number of operating companies ultimately being
traded in public markets, all else being equal. However, such effects
would be mitigated if potential target operating companies instead
access public capital markets in alternative ways.
Any SPAC that would find the proposed safe harbor conditions too
costly to comply with could seek to not rely on the safe harbor and
instead choose to bear the legal uncertainty of operating outside of
it. Besides the direct compliance costs associated with being an
investment company, a SPAC that operates as an investment company would
also potentially be subject to delisting, as current exchange rules do
not appear to provide for SPACs to operate as an investment company and
maintain their listing.
As an alternative to relying on the proposed safe harbor, it is
possible that current or future SPACs would seek to avoid being
considered an investment company under the Investment Company Act by
holding different assets than are commonly held today. However, holding
different assets (such as cash items) may provide a lower return than
holding the types of assets permitted under the safe harbor conditions.
Thus, the possibility of switching assets to cash items to avoid being
an investment company may not fully mitigate the potential costs
imposed on the SPAC market from the proposed safe harbor
conditions.\559\
---------------------------------------------------------------------------
\559\ As indicated in supra note 314, if a SPAC were to
significantly change its asset composition contrary to its original
representations, it would raise questions whether the initial
representations were false and misleading.
---------------------------------------------------------------------------
D. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
The proposed rules and amendments would enhance and standardize
disclosure about specific aspects inherent to the SPAC structure at
both the SPAC initial public offering stage and the de-SPAC transaction
stage. Requiring the SPAC and the target company to provide such
disclosure may in some cases afford market participants greater access
to information relevant to voting, redemption, and investment
decisions. By increasing the standardization and comparability of
disclosures, the proposed rules may make it easier for investors to
properly and efficiently process information about SPACs and for market
prices to reflect such information. In addition, invested capital may
be more likely to be more efficiently deployed.
Additionally, the proposed rules would increase the incentives for
issuers and underwriters to exercise the care necessary to ensure
accuracy in disclosures by affirming the underwriter status of SPAC IPO
underwriters in connection with de-SPAC transactions and proposing a
new definition of ``blank check company'' for purposes of the PSLRA
safe harbor. In addition, the proposed rules regarding shell company
business combination transactions would make certain disclosures and
liabilities more consistent with traditional IPOs, which could benefit
investors and potentially decrease the cost of capital for shell
companies. To the extent that disclosure accuracy is improved,
investors would have access to more reliable information when making
their investing decisions, which would lead to an increase in market
efficiency.
2. Competition
By improving the informational environment at the SPAC initial
public offering and the de-SPAC stages through changes in disclosure
requirements and the scope of liability, the proposed rules and
amendments could encourage greater competition between SPAC sponsors
and SPAC underwriters, in both SPAC IPO and de-SPAC activities. For
example, by standardizing and increasing the comparability between the
disclosures provided by SPACs, the proposed rules and amendments may
lead to improved investor awareness and more efficient information
processing. To the extent that the proposed rules and amendments lead
to an increase in competition between shell company mergers, including
de-SPAC transactions, and traditional initial public offerings, they
may bring down the costs of capital raising through these approaches.
If the proposed rules and amendments create significant costs that
lead to a reduction in shell company mergers and overall initial public
offering activity in the SPAC market, this could reduce competition for
investment opportunities. Such a reduction could result in higher fees
in both the traditional IPO and SPAC markets. Additionally, if some of
the proposed new rules and amendments disincentivize underwriters and
PIPE investors from participating in de-SPAC transactions and related
financings, it could reduce competition among service and capital
providers in the SPAC market and lead to higher fees.
To the extent that the proposed safe harbor from the Investment
Company Act would reduce the costs of compliance, it may encourage
additional sponsor participation in the SPAC market and thus encourage
competition among SPACs. However, for potential SPACs that would not
meet the safe harbor conditions, the proposed safe harbor may increase
the costs of sponsoring a SPAC, and thus the
[[Page 29543]]
proposed rule may have an adverse effect on competition among SPACs.
3. Capital Formation
Enhanced disclosure at both the SPAC initial public offering and
the de-SPAC stages, combined with a stronger incentive to perform
better due diligence in the de-SPAC transaction stage, would likely
improve investor protection at both stages. In addition, the proposed
rules and amendments for shell company mergers would likely improve
investor protection. For example, proposed Rule 145a would help
shareholders of reporting shell companies more consistently receive the
full protections of the Securities Act disclosure and liability
provisions in business combinations involving reporting shell
companies, regardless of the transaction structure. Increased
protections could incentivize more investors to invest in shell
companies, including SPACs, thus enhancing capital formation. In
addition, to the extent that the proposed safe harbor from the
Investment Company Act reduces regulatory uncertainty and thus
encourages participation in SPACs, it may also lead to an increase in
capital formation.\560\
---------------------------------------------------------------------------
\560\ As discussed in supra Section IX.C.5, an increase in
investor demand for SPACs could potentially lower the cost of
capital for SPAC, which may increase the size and number of SPAC IPO
offerings.
---------------------------------------------------------------------------
If the proposed rules and amendments create significant costs for
shell companies, including SPACs, this may limit the number of private
companies that go public through shell companies, including a de-SPAC
transaction mechanism, or at all.\561\ Given the potential increase in
the cost of going public through a shell company merger such as a de-
SPAC transaction compared to the current baseline, it is possible that
some private companies could consider the traditional initial public
offering channel a more viable alternative. We are not able to estimate
how many companies would consider using a traditional initial public
offering mechanism if the cost of the overall SPAC transaction
structure increases. It is possible, however, that a significant
increase in the cost of shell company mergers and de-SPAC transactions
could deter some private companies from going public, and thus
potentially reduce overall initial public offering activity and capital
formation.
---------------------------------------------------------------------------
\561\ For example, as discussed in more detail in supra Section
IX.C.5, for SPACs that would take advantage of the proposed
Investment Company Act Safe Harbor, the duration requirements could
potentially lead investors to anticipate less profitable de-SPAC
transactions or a lower likelihood of completion of de-SPAC
transactions, which, in turn, could reduce investor demand for SPAC
initial public offerings. Moreover, an increase in SPACs that
liquidate without a de-SPAC transaction and/or a reduction of
capital raised through SPACs may ultimately result in fewer publicly
traded operating companies and therefore a reduced investment
opportunity set for investors.
---------------------------------------------------------------------------
E. Reasonable Alternatives
1. Disclosure-Related Proposals
a. Require Disclosure of Policies and Procedures That Address Conflicts
of Interest
As an alternative to Item 1603 as proposed, we could include a
complementary requirement to describe any policies and procedures used
or to be used by a SPAC to minimize potential or actual conflicts of
interest related to disclosures provided in response to proposed Items
1603(b) and 1603(c). Such information could assist investors in gauging
the economic significance, or lack thereof, of the various conflicts of
interest given the presence, absence and likely degree of effectiveness
of the policies and procedures designed to address or ameliorate them.
On the other hand, requiring this information would increase compliance
costs for SPACs and may cause some of these companies to adopt policies
and procedures that would not be efficient or cost-effective given
their particular organizational structure. In this regard, we note that
there could be incentives to provide such disclosure voluntarily, as it
would indicate to investors the degree to which conflicts of interest
may be ameliorated.
b. Certain Reports, Opinions, or Appraisals
We are proposing to require the filing of reports, opinions, or
appraisals provided to the SPAC or its sponsor relating to valuation
and/or fairness of a de-SPAC transaction or related financing
transactions (Item 1607) as exhibits to registration statements and
schedules provided in connection with a de-SPAC transaction. We are
also proposing to require disclosures summarizing the negotiation,
report, opinion, or appraisal and certain additional disclosures, such
as for example, information about who prepared the report, opinion, or
appraisal, and how they were selected. As an alternative, we could
require disclosure of only a summary of the reports, opinions,
appraisals, and negotiations. This could reduce some of the costs of
compliance to the extent that it is more costly to obtain a report that
will become public. At the same time, this alternative would reduce the
benefits of the disclosure, as investors and market participants would
have less information available to assess the quality and robustness of
the analysis underlying such report, opinion, or appraisal.
c. Require a Fixed Re-Determination Date To Measure Public Float for
Smaller Reporting Company Status
When re-determining a post-business combination company's
eligibility for smaller reporting company status, instead of requiring
the public float threshold to be measured as of a date within four days
after the consummation of the de-SPAC transaction, we could
alternatively require the re-determination to occur on a fixed date,
such as the consummation date or on the fourth day after consummation.
A fixed re-determination date would have the benefit of establishing a
consistent date for all post-business combination companies to use and
remove any management judgment in the selection of a re-determination
date, while still requiring that the re-determination of smaller
reporting company status occur before the post-business combination
company makes its first filing. However, reduced flexibility regarding
the time frame within which the required re-determination must be made
could increase costs for post-business combination companies without
substantial additional benefits for investors.
d. Re-Determine Smaller Reporting Company Status of a Post-Business
Combination Company Without a Public Float Test
As another alternative, we considered whether the re-determination
for smaller reporting company status of the combined company following
a de-SPAC transaction should require only a re-measurement of the
revenue component of smaller reporting company test and not its public
float component. Generally, smaller reporting company status is re-
determined on an annual basis based on the issuer's public float as
well as annual revenues. Revenues of the combined company may be more
relevant to smaller reporting company status than public float because,
generally, the target company has generated revenue while the SPAC has
not done so. Accordingly, the revenue test may be the more
determinative factor than the public float test in determining whether
the combined company following de-SPAC transaction remains a smaller
reporting company because, based on staff experience, the public float
of most SPACs and subsequent combined companies typically is between
$250
[[Page 29544]]
and $700 million, which exceeds the public float threshold for smaller
reporting company status. Also, the public float component of this test
is measured as of the last business day of the issuer's most recently
completed second fiscal quarter. Given that the public float re-
measurement likely would not occur at the end of the second fiscal
quarter when the annual public float measurement occurs, the combined
company may have to measure its public float more than one time during
the same fiscal year, which may impose additional burdens for the
company.
However, compared to public float, revenue, if used as a sole basis
of the significance test, may be subject to a greater degree of
managerial discretion.\562\ Also, using revenue alone may expose a
large number of investors to business-specific risks because SPAC
targets may represent nascent industries that could feature extended
pre- or low-revenue periods but, as indicated above, may have a public
float following a de-SPAC transaction that would exceed the threshold
for smaller reporting company status. Thus, we believe it is
appropriate that these companies should take the public float into
account in re-determining smaller reporting company status following
the consummation of a de-SPAC transaction.
---------------------------------------------------------------------------
\562\ See Jenny Zha Giedt, Modelling Receivables and Deferred
Revenues to Detect Revenue Management, 54 (2) Abacus 181, 181-209
(2018) (focusing on the SEC Accounting and Auditing Enforcement
Releases, i.e., AAER, from 1982 to 2016, and documenting that forty-
seven percent of all financial misstatements are related to
revenue).
---------------------------------------------------------------------------
e. Structured Data Requirement
We could change the scope of the proposed Inline XBRL tagging
requirements for the proposed SPAC disclosures, such as by excluding
certain subsets of registrants or disclosures. For example, the tagging
requirements could exclude the SPAC initial public offering
disclosures. Under such an alternative, SPACs would submit initial
public offering disclosures in unstructured HTML or ASCII and would not
incur Inline XBRL compliance costs until their first periodic filing on
Form 10-Q, 20-F, or 40-F.\563\ This could make it incrementally easier
for SPACs to consummate an initial public offering. However, narrowing
the scope of the proposed tagging requirements, whether based on
filing, offering size, or other criteria, would diminish the extent of
any informational benefits that would accrue as a result of the
proposed disclosure requirements by making the excluded disclosures
comparatively costlier to process and analyze.
---------------------------------------------------------------------------
\563\ The Commission's EDGAR electronic filing system generally
requires filers to use ASCII or HTML for their document submissions,
subject to certain exceptions. See EDGAR Filer Manual (Volume II)
version 61 (Mar. 2022), at 5-1; 17 CFR 232.301 (incorporating EDGAR
Filer Manual into Regulation S-T). See also 17 CFR 232.101 (setting
forth the obligation to file electronically on EDGAR).
---------------------------------------------------------------------------
As another alternative, we could require only the quantitative
SPAC-related disclosures to be tagged in Inline XBRL. Excluding
qualitative disclosures from the tagging requirements could provide
some incremental cost savings for registrants compared to the proposal,
because incrementally less time would be required to select and review
the particular tags to apply to quantitative disclosures. However, we
expect these incremental cost savings would be low, because SPACs would
be subject to similar Inline XBRL requirements, including requirements
to tag quantitative and qualitative disclosures, in other Commission
filings.\564\ Moreover, narrowing the scope of tagging requirements to
exclude qualitative information would diminish the extent of
informational benefits that would accrue to investors by inhibiting the
efficient extraction and searching of narrative SPAC-related
disclosures (e.g., disclosures regarding conflicts of interest,
fairness determinations, and financial projections), thus creating the
need to manually review search results drawn from entire documents to
find these disclosures.\565\ Such an alternative would also inhibit the
automatic comparison of narrative disclosures against prior periods. It
also may be harder for investors to perform a targeted assessment of a
filing for particular types of narrative SPAC-related disclosures
because they would need to assess the entire filing for relevant
information.
---------------------------------------------------------------------------
\564\ See supra Section IX.C.1.a.5.
\565\ To illustrate, without Inline XBRL, using a search string
such as ``dilution'' to search through the text of all de-SPAC
filings, so as to determine the extent to which dilutive effects are
among the material factors being considered by SPACs at arriving at
fairness determinations, could return many narrative disclosures
outside of the fairness determination disclosure that would be
required by proposed Item 1606(b) of Regulation S-K, such as
disclosures in the risk factors section or in the description of
stock incentive plans. However, if Inline XBRL is used, it would
enable a user to search for the term ``dilution'' exclusively within
the proposed fairness determination disclosure, thereby likely
reducing the number of irrelevant results.
---------------------------------------------------------------------------
2. Liability-Related Proposals
a. PSLRA Safe Harbor
As an alternative to addressing the use of projections in de-SPAC
transactions and other business combinations involving blank check
companies that are not penny stock issuers by proposing to amend the
``blank check company'' definition, we could have issued interpretive
guidance stating that the PSLRA safe harbor for forward-looking
statements is not available because business combinations with shell
companies that are not penny stock issuers are ``initial public
offerings'' by target private operating companies for purposes of the
PSLRA. This alternative would avoid some of the complexity associated
with defining blank check companies for purposes of the PSLRA, but
issuing guidance rather than a rule may result in weaker incentives for
SPACs or target companies to take greater care in preparing forward-
looking statements, such as projections, in de-SPAC transactions and
thus result in fewer investor protection benefits than the proposed
rule.
b. Issuing Guidance on Underwriter Status
Instead of proposing Rule 140a, the Commission could issue guidance
that would describe the factors that should be considered in
determining underwriter status in connection with de-SPAC transactions,
which could potentially be relevant for parties other than SPAC IPO
underwriters. Issuing guidance rather than designating an underwriter
by rule within the context of these transactions might prompt the full
range of parties involved in facilitating de-SPAC transactions to
consider their potential liability and thus take greater care in
performing their designated functions. This could result in more robust
investor protections overall. On the other hand, compared to the
proposed rule, this alternative would rely on the judgment of de-SPAC
participants to apply the guidance and may result in weaker incentives
for those parties that are potentially subject to Section 11 liability
to perform robust due diligence. As a result of such weaker incentives,
there could be a reduced impact on the accuracy of the disclosure in
de-SPAC transactions and investor protection benefits.
3. Expanding Disclosure in Reporting Shell Company Business
Combinations
Proposed Rule 145a would deem any business combination of a
reporting shell company (that is not a business combination-related
shell company) involving another entity that is not a shell company to
involve a sale of securities to the reporting shell company's
shareholders. As an alternative, instead of deeming all such
transactions to be a sale that would need
[[Page 29545]]
to be registered under the Securities Act, absent an applicable
exemption, we could expand the disclosure requirements applicable to
reporting shell company business combinations such that the disclosure
requirements would be the same as what would have been required if the
transaction was registered under the Securities Act. Under this
alternative, regardless of the document that is filed with the
Commission (e.g., proxy or information statement, Schedule TO, or Form
8-K), the set of disclosures investors receive would be the same as
they would receive had a registration statement been filed for the
transaction. This would ensure that the reporting shell company's
shareholders receive the same information regardless of how the
transaction is structured and would reduce regulatory arbitrage
opportunities stemming from different disclosure requirements in
different documents that may be filed with the Commission to report a
shell company business combination. As a registration statement would
not necessarily be required in all transaction structures, the costs of
such an alternative would also be less that the costs of liability
associated with the purchase and sale of securities and potential
Securities Act registration of shell company business combinations
under proposed Rule 145a, to the extent no exemption is available for
the transaction.
However, merely expanding the set of disclosures investors receive
regardless of transaction structure does not provide investors with the
same level of protection because the liability standards differ based
on the type of filing that is required. Only by deeming the transaction
to be a sale would investors necessarily receive the protections that
apply in connection with a purchase and sale of securities under the
federal securities laws, such as the availability of private actions
under Section 10(b) and Rule 10b-5. In addition, to the extent there is
not an available exemption for the reporting shell company business
combination, only with Securities Act registration do investors receive
the full panoply of available protections under that Act that they
would receive in a traditional IPO, such as a private right of action
under Section 11.
4. Enhanced Projections Disclosures
The proposed amendments to Item 10(b) of Regulation S-K present our
updated views on projected performance measures and include a statement
that projections based on a non-GAAP financial measure should include a
clear definition or explanation of the non-GAAP measure, and a
description of the GAAP financial measure to which it is most closely
related. As an alternative to this guidance, we could adopt a rule
requiring firms, when providing projections, to present a
reconciliation of projections based on a non-GAAP measure to those
based on the nearest GAAP measure. While the reconciliation would
further help investors understand the bases of projections involving
non-GAAP measures, it would likely also increase compliance costs and
in turn might reduce the provision of otherwise useful projections.
5. Investment Company Act Safe Harbor
a. Shorter Duration Limitations
As an alternative, we considered shorter duration limitations by
instead requiring a SPAC to announce a transaction no later than 12-
months from the IPO registration date, and to complete a de-SPAC
transaction or liquidate the SPAC no later than 18-months after the IPO
registrations date. The benefit of this alternative is that it would
further decrease the possibility of regulatory arbitrage. It would also
reduce the risk that investors may come to view a SPAC holding
securities as a fund-like investment, and the related risk of investor
protection concerns. We expect this alternative would impose the same
type of costs we discussed above for the proposed duration conditions,
but at a greater magnitude. Based on a sample of SPACs with effective
IPO dates from January 1, 2016 to June 30, 2020 (i.e., a sample of
SPACs with at least an 18-month history since the IPO date as of
December 31, 2021; 189 SPACs in total), we find that approximately 36%
of the SPACs in the sample announced a transaction agreement no later
than 12-months after the date of the initial public offering and 40% of
the SPACs had completed a de-SPAC transaction no later than 18-months
after the date of the initial public offering. The proportion of SPACs
in the sample that both announced a de-SPAC transaction by 12-months
and completed the de-SPAC transaction by 18-months was approximately
33%, which is a significantly lower proportion compared to 57% of
sample SPACs that would have managed to meet both of the proposed
duration conditions, as discussed above. Thus, we expect that costs
would be greater under this alternative by forcing a greater proportion
of SPACs to conclude their search for a target or liquidate earlier
than they may otherwise do. In addition, because of the tighter
deadlines this alternative would impose, those SPACs that would be at
risk of not being able to meet the proposed longer duration conditions
would likely be at comparatively greater risk of not meeting the
deadlines under this alternative, which may also increase the costs
such SPACs would face in trying to meet these alternative duration
conditions.
b. No Announcement Condition
We also considered an alternative that would keep the 24-month
condition for completion of a de-SPAC transaction, but remove the
duration condition for the announcement of a transaction. This
alternative would increase the proportion of SPACs meeting the duration
condition to 65% compared to 57% under the proposal. The benefit of
this alternative would thus be to increase the proportion of SPACs not
having to potentially sub-optimally come to a merger agreement earlier
(or, in some circumstances, potentially inefficiently liquidating the
SPAC), while still imposing a firm 24-month maximum lifespan for SPACs
seeking to take advantage of the proposed safe harbor. However, by not
imposing an 18-month announcement condition investors would lose any
investor protection benefits that may be associated with an earlier
signal of a SPAC's intent to complete a de-SPAC transaction than they
might receive under this alternative.
c. Longer Duration Limitations
As an alternative, we could require a longer duration before a SPAC
would have to complete a de-SPAC transaction. For example, if we
increase this duration to no later than 36 months after the IPO date
(with no announcement condition), less than 4% of the sample SPACs that
completed a de-SPAC transition would not have met such a condition. As
discussed above, the national securities exchanges already require
SPACs to complete a de-SPAC transaction within 36 months (or 3 years).
Thus, based on both the recent evidence and the current exchange rules
for SPACs, we expect that this alternative would not impose the
potential costs of a truncated search period for a target company for
most SPACs, in particular SPACs with exchange-traded securities.
However, as discussed above, the longer the SPAC operates with its
assets invested in securities and its income derived from securities,
the more likely investors will come to view the SPAC as a fund-like
investment and the more likely the SPAC appears to be deviating from
its
[[Page 29546]]
stated business purpose. In turn, this may raise investor protection
concerns and increase the possibility of regulatory arbitrage compared
to the proposed duration conditions.
F. Requests for Comment
155. Because of the potential for one or more of the proposed
amendments to have interactive effects, we are requesting public input
on the extent to which such interactive effects are likely to conflict
with the overall aims of this rulemaking, if adopted as proposed.
156. Have we correctly characterized the benefits and costs from
the proposed new disclosure requirements at the SPAC IPO stage? Are
there any other benefits or costs that should be considered? Please
provide supportive data to the extent available.
157. Our analysis suggests the proposed rules and amendments would
generally strengthen the investor protection in SPAC transactions at
the initial public offering stage. Are there any significant costs or
benefits associated with adopting these rules and amendments that we
have not considered that would lead to a different characterization?
Please provide supportive data to the extent available.
158. Have we correctly characterized the benefits and costs from
the proposed new disclosure requirements at the de-SPAC transaction
stage and the alignment of disclosure requirements in the de-SPAC
disclosure documents with IPOs? Are there any other benefits or costs
that should be considered? Please provide supportive data to the extent
available.
159. Our analysis suggests the proposed rules and amendments would
generally strengthen investor protection in de-SPAC transactions. Are
there any significant costs or benefits associated with adopting these
rules and amendments that we have not considered that would lead to a
different characterization? Please provide supportive data to the
extent available.
160. Have we correctly characterized the benefits and costs from
proposed Item 1608 holding all other aspects of the proposed amendments
constant? Have we correctly characterized the benefits and costs that
would accrue given the potential interactive effects with proposed Rule
145a? Are there other interactive effects with respect to other
proposed items that, had we considered, would substantially alter our
assessment of the associated costs, benefit, or anticipated effects on
efficiency, competition, or capital formation?
161. Have we correctly characterized the benefits and costs from
the proposed amendments to the enhanced projections disclosure
requirements (Item 1609 of Regulation S-K)? Are there any other
benefits and costs that should be considered? Please provide supportive
data to the extent available.
162. Would the effects of the proposed amendments related to the
PSLRA safe harbor have significant interactive effects with proposed
Item 1609 of Regulation S-K such that our estimates of the incremental
costs and benefits of adopting Item 1609 should be revised? Please
provide either qualitative or quantitative data to the extent
available.
163. How, and to what extent, would investors benefit from the
proposed requirement to tag the SPAC specialized disclosures in Inline
XBRL? What would be the costs of the proposed requirement to
registrants? Should we consider alternative tagging requirements for
the proposed SPAC disclosures? If so, what would be their benefits and
costs?
164. Have we correctly characterized the benefits and costs from
the proposed re-determination of smaller reporting company status? Are
there any other benefits and costs that should be considered? Please
provide supportive data to the extent available.
165. For the re-determination of a post-business combination
company's smaller reporting company status, what would be the benefits
and costs of requiring a fixed date to measure public float? If the
benefits outweigh the costs of requiring a fixed date, do the relative
benefits and costs of different possible fixed dates indicate that one
approach would be preferential?
166. What would be the costs and benefits of relying solely on
revenues to re-determine a post-business combination company's smaller
reporting company status rather than including the public float?
167. Have we correctly characterized the benefits and costs from
the proposal to require target companies to be co-registrants to Form
S-4 and F-4? Are there any other benefits and costs that should be
considered? Please provide supportive data to the extent available.
168. Would the relative benefits and costs associated with the
proposed amendments related to de-SPAC-transaction disclosures and
liability have additional effects on the calculus of pursuing a de-SPAC
business combination versus a traditional IPO that we have not
considered? In terms of the market choice to utilize a de-SPAC
transaction versus a traditional IPO, would the change in relative
benefits and costs associated with the proposed rules and amendments be
beneficial or detrimental in terms of their effects on efficiency,
competition and capital formation? Please provide supportive evidence
or data to the extent available.
169. Have we correctly characterized the benefits and costs from
the proposed amendments related to the PSLRA safe harbor? Are there any
other benefits and costs that should be considered? Please provide
supportive data to the extent available.
170. With respect to the proposed changes to the definition of
``blank check company'' for purposes of the PSLRA safe harbor, are
there any additional benefits and costs that would apply primarily to
blank check companies that are not penny stock issuers and not SPACs?
Please provide supportive data to the extent available.
171. Have we correctly characterized the benefits and costs of the
underwriter status and liability proposals? Are there any other
benefits and costs for SPACs, SPAC IPO underwriters, target companies
and investors that should be considered? Please provide supportive data
to the extent available.
172. Have we correctly characterized the scope and scale of both
SPAC and non-SPAC shell companies that would be affected by proposed
Rule 145a? Please provide data or analysis to the extent available.
173. Have we correctly characterized the benefits and costs of
proposed Rule 145a? Are there any other benefits and costs that should
be considered? Are there any additional benefits and costs that would
apply primarily to non-SPAC shell companies that are not business-
combination related shell companies? Please provide supportive data to
the extent available.
174. As noted above, we are unable to estimate the number of shell
companies that are currently private that could be impacted by proposed
Article 15 of Regulation S-X. We request data on the number of these
entities that may be impacted by the proposed rule. Would analysis of
the economic effects on these currently private entities broadly impact
the balance of costs and benefits to adopting Article 15 of Regulation
S-X as proposed?
175. Have we correctly characterized the benefits and costs of
proposed new Article 15 of Regulation S-X and the related proposed
amendments? Are there any other benefits and costs that should be
considered? Please provide supportive data to the extent available.
176. Have we correctly characterized the benefits and costs to
proposed Rule 15-01(b)? Are there additional costs,
[[Page 29547]]
particularly to investors, of permitting a shell company registrant to
include in its Form S-4/F-4/proxy or information statement two (rather
than three) years of statements of comprehensive income, changes in
stockholders' equity, and cash flows for the private operating company
for all transactions involving an EGC shell company and a private
operating company that would qualify as an EGC that would affect our
assessment of the likely effects of this proposed rule on investor
protection?
177. Have we correctly characterized the benefits and costs of the
enhanced projection guidance (amendments to Item 10(b) of Regulation S-
K)? Are there any other benefits and costs that should be considered?
Please provide supportive data to the extent available.
178. Have we correctly characterized the benefits and costs of the
proposed Investment Company Act safe harbor? Are there any other
benefits and costs that should be considered? Please provide supportive
data to the extent available.
179. Is it feasible for SPACs to hold most of their assets in cash
accounts rather than Government securities or Government money market
funds? What would be the costs to SPACs of holding their assets in
cash? How costly would it be for SPACs that are currently invested in
Government securities or Government funds to switch to cash? Please
provide supportive data or estimates to the extent available.
180. Have we correctly characterized the effects on efficiency,
competition and capital formation from the proposed rules and
amendments? Are there any effects that should be considered? Please
provide supportive data to the extent available.
X. Paperwork Reduction Act
A. Summary of the Collections of Information
Certain provisions of our rules, schedules, and forms that would be
affected by the proposed new rules and amendments contain ``collection
of information'' requirements within the meaning of the PRA.\566\ We
are submitting the proposed new rules and amendments to the Office of
Management and Budget (``OMB'') for review and approval in accordance
with the PRA and its implementing regulations.\567\ The hours and costs
associated with preparing, filing and sending the schedules and forms,
and retaining records constitute reporting and cost burdens imposed by
each collection of information.\568\ An agency may not conduct or
sponsor, and a person is not required to comply with, a collection of
information requirement unless it displays a currently valid OMB
control number. The titles for the collections of information are:
---------------------------------------------------------------------------
\566\ 44 U.S.C. 3501 et seq.
\567\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
\568\ The paperwork burdens for Regulation S-X, Regulation S-K,
Regulation C, Regulation 12B, and Regulation S-T are imposed through
the forms, schedules and reports that are subject to the
requirements in these regulations and are reflected in the analysis
of those documents.
---------------------------------------------------------------------------
Regulation 14A (Commission Rules 14a-1 through 14a-21 and
Schedule 14A) (OMB Control No. 3235-0059);
Regulation 14C (Commission Rules 14c-1 through 14c-7 and
Schedule 14C) (OMB Control No. 3235-0057);
Schedule TO (OMB Control No. 3235-0515);
Form S-1 (OMB Control No. 3235-0065);
Form S-4 (OMB Control No. 3235-0324);
Form F-1 (OMB Control No. 3235-0258);
Form F-4 (OMB Control No. 3235-0325);
Form 10-K (OMB Control No. 3235-0063);
Form 10-Q (OMB Control No. 3235-0070); and
Rule 3a-10 under the Investment Company Act (a proposed
new collection of information).\569\
---------------------------------------------------------------------------
\569\ We estimate that there would be a negligible or no change
in burden to Form 20-F and Form 8-K as a result of the proposed
amendments to Regulation S-X, in that these proposed amendments
would be codifying existing interpretations of existing rules.
Accordingly, we are not making any revisions to the PRA burden
estimates for Form 20-F and Form 8-K at this time.
---------------------------------------------------------------------------
The forms, schedules, and regulations listed above were adopted
under the Securities Act, the Exchange Act, and/or the Investment
Company Act. These regulations, schedules, and forms set forth the
disclosure requirements for registration statements, annual and
quarterly reports, current reports, proxy and information statements,
and tender offer statements filed by registrants to provide investors
with information to make informed investment, voting, and redemption
decisions. In addition, we are proposing a new requirement that certain
entities adopt a board resolution in order to rely on the safe harbor
provided by proposed Rule 3a-10 of the Investment Company Act.
Compliance with these information collections is mandatory to the
extent applicable to each registrant.\570\ Other than the proposed new
collection of information (Rule 3a-10 under the Investment Company
Act), responses to these information collections are not kept
confidential, and there is no mandatory retention period for the
information disclosed. Responses to the information collection under
the Investment Company Act are kept confidential, subject to the
provisions of applicable law.
---------------------------------------------------------------------------
\570\ Registrants claiming smaller reporting company status have
the option to comply with the scaled disclosures available to them
on an item-by-item basis. In addition, if an entity determines not
to rely on the safe harbor provided in Rule 3a-10 of the Investment
Company Act, it would not be required to adopt the board resolution
contemplated in that proposed rule.
---------------------------------------------------------------------------
A description of the proposed new rules and amendments, including
the need for the information and its use, as well as a description of
the likely respondents, can be found in Sections II through VI above,
and a discussion of the economic effects of the proposed new rules and
amendments can be found in Section IX above.
B. Estimates of the Effects of the Proposed New Rules and Amendments on
the Collections of Information
The following Table 1 summarizes the estimated effects of the
proposed new rules and amendments on the paperwork burdens associated
with the affected forms and schedules.
BILLING CODE 8011-01-P
[[Page 29548]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.015
[[Page 29549]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.016
[[Page 29550]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.017
[[Page 29551]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.018
In addition, we are proposing to require that a post-business
combination company re-determine whether it is a smaller reporting
company (SRC) following a de-SPAC transaction. As proposed, the post-
business combination company would be required to reflect this re-
determination in its first periodic report after the de-SPAC
transaction and in Commission filings thereafter until its next annual
re-determination of SRC status. We estimate that the proposed re-
determination of SRC status would result in increased burdens in filing
Forms 10-K, Forms 10-Q, Schedules 14A, Schedules 14C, and Forms S-1 for
those post-business combination companies that would lose SRC status,
which takes into account the increased incremental burden in providing
disclosures pursuant to non-SRC disclosure requirements. The following
Table 2 sets forth our estimates regarding the increase in compliance
burden when a post-business combination company loses SRC status:
[[Page 29552]]
[GRAPHIC] [TIFF OMITTED] TP13MY22.019
C. Incremental and Aggregate Burden and Cost Estimates
We estimate below the incremental and aggregate increase in
paperwork burden as a result of the proposed new rules and amendments.
These estimates represent the average burden for all respondents, both
large and small. In deriving our estimates, we recognize that the
burdens will likely vary among individual respondents based on a number
of factors, including the size and complexity of their business. These
estimates include the time and the cost of preparing and reviewing
disclosure, filing documents, and retaining records. We believe that
some registrants will experience costs in excess of this average and
some registrants will experience less than the average costs. Our
methodologies for deriving these estimates are discussed below.
Our estimates represent the burden for all SPACs that file
registration statements with the Commission for registered offerings
and all registrants that file disclosure documents in connection with a
de-SPAC transaction or a business combination involving a shell company
or a reporting shell company.\571\ Additionally, our estimates take
into account an expected increase in the number of Securities Act
registration statements as a result of proposed Rule 145a. Based on a
review of Commission filings during the period 2011-2021 and an
analysis of the effects of the proposed new rules and amendments,\572\
the staff estimates that:
---------------------------------------------------------------------------
\571\ Throughout this release and as stated earlier, we use
``shell company'' and ``reporting shell company'' in lieu of the
phrases ``shell company, other than a business combination related
shell company'' and ``reporting shell company, other than a business
combination related shell company.''
\572\ We based our estimates, in part, on a review of Commission
filings over a 10-year period because we believe that this longer
timeframe would more accurately reflect the average number of
registration statements filed by SPACs and disclosure documents for
de-SPAC transactions in a given year.
---------------------------------------------------------------------------
SPACs will file an average of 90 registration statements
each year for registered offerings on Form S-1 and 8 registration
statements on Form F-1, other than for de-SPAC transactions;
An average of 30 registration statements on Form S-4 and 4
registration statements on Form F-4, 30 definitive proxy statements on
Schedule 14A, 4 definitive information statements on Schedule 14C, and
2 tender offer statements on Schedule TO will be filed each year in
connection with de-SPAC transactions; and
An average of 20 registration statements on Form S-4 and 2
registration statements on Form F-4 will be filed each year for
business combination transactions involving a reporting shell company
and a non-shell company, other than de-SPAC transactions.\573\
---------------------------------------------------------------------------
\573\ This estimate represents the upper bound of the estimated
number of Forms S-4 and F-4 filed for these transactions.
---------------------------------------------------------------------------
[[Page 29553]]
For purposes of the PRA, the burden is allocated between internal
burden hours and outside professional costs. The portion of the burden
carried by outside professionals is reflected as a cost, while the
portion of the burden carried by the company internally is reflected in
hours. The following Table 3 sets forth the percentage estimates we use
for the burden allocation for each form and schedule, consistent with
current OMB estimates and recent Commission rulemakings. We estimate
that the average cost of retaining outside professionals is $400 per
hour.\574\
---------------------------------------------------------------------------
\574\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This is the rate we
typically estimate for outside legal services used in connection
with public company reporting.
---------------------------------------------------------------------------
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP13MY22.020
[[Page 29554]]
The following Table 4 summarizes the estimated effects of the
proposed new rules and amendments, other than Rule 145a, on the
paperwork burdens associated with the affected forms, schedules, and
records:
[GRAPHIC] [TIFF OMITTED] TP13MY22.021
[[Page 29555]]
The following Table 5 summarizes the estimated effects of proposed
Rule 145a on the paperwork burdens associated with the affected forms:
[GRAPHIC] [TIFF OMITTED] TP13MY22.022
In addition, we estimate that an average of 50 fewer post-business
combination companies following a de-SPAC transaction will qualify as
smaller reporting companies than under the current rules until the next
annual re-determination date.\575\ While we cannot predict with
certainty the number of these post-business combination companies, we
estimate for purposes of our PRA calculations that currently all post-
business combination companies qualify as SRCs following de-SPAC
transactions in which the SPAC is the legal acquirer and that 80% of
these companies that are eligible to use the scaled SRC disclosure
provisions do so.\576\ We estimate that these registrants would file,
on average, one Form 10-K, 1.5 Forms 10-Q, one Schedule 14A, and one
registration statement on Form S-1 prior to the next re-determination
of SRC status.
---------------------------------------------------------------------------
\575\ This estimate is based, in part, on our estimate of the
number of de-SPAC transactions in which the SPAC is the legal
acquirer.
\576\ This estimated realization rate is based on the same
methodology and data set forth in Release No. 33-10513, Section V.D.
Though the estimated realization rate in Release No. 33-10513
preceded the effective date of the amendments to the smaller
reporting company definition in 2018, we expect that the current
realization rate for eligible companies using the scaled SRC
disclosure provisions to be generally consistent with the estimated
realization rate in 2018.
---------------------------------------------------------------------------
[[Page 29556]]
The following Table 6 summarizes the estimated effects of the
proposed re-determination of SRC status on the paperwork burdens
associated with the affected forms and schedules:
[GRAPHIC] [TIFF OMITTED] TP13MY22.023
[[Page 29557]]
The following Table 7 summarizes the requested paperwork burden
changes to existing information collections, including the estimated
total reporting burdens and costs, under the proposed new rules and
amendments.
[GRAPHIC] [TIFF OMITTED] TP13MY22.024
BILLING CODE 8011-01-C
D. Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
Evaluate whether the proposed changes to the collections
of information are necessary for the proper performance of the
functions of the Commission, including whether the information will
have practical utility;
Evaluate the accuracy of our estimates of the additional
burden hours that would result from adoption of the proposed new rules
and amendments;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collections of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed new rules and amendments
would have any effects on any other collection of information not
previously identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the U.S. Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to, Vanessa A. Countryman,
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File No. S7-13-22.
Requests for materials submitted to OMB by the Commission with regard
to the collection of information should be in writing, refer to File
No. S7-13-22 and be submitted to the U.S. Securities and Exchange
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC
20549-2736. OMB is required to make a decision concerning the
collections of information between 30 and 60 days after publication of
this release. Consequently, a comment to OMB is best assured of having
its full effect if the OMB receives it within 30 days of publication.
XI. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (``SBREFA''),\577\ the Commission must advise the OMB as to
whether a proposed regulation constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in:
---------------------------------------------------------------------------
\577\ Public Law 104-121, Tit. II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------
An annual effect on the economy of $100 million or more
(either in the form of an increase or a decrease);
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment or
innovation.
[[Page 29558]]
If a rule is ``major,'' its effectiveness will generally be delayed for
60 days pending Congressional review.
We request comment on whether our proposed amendments would be a
``major rule'' for purposes of SBREFA. We solicit comment and empirical
data on:
The potential effect on the U.S. economy on an annual
basis;
Any potential increase in costs or prices for consumers or
individual industries; and
Any potential effect on competition, investment or
innovation.
We request those submitting comments to provide empirical data and
other factual support for their views to the extent possible.
XII. Initial Regulatory Flexibility Analysis and Certification
The Regulatory Flexibility Act \578\ requires an agency, when
issuing a rulemaking proposal, to prepare and make available for public
comment an Initial Regulatory Flexibility Analysis (``IRFA'') that
describes the impact of the proposed rule on small entities, unless the
Commission certifies that the rule, if adopted, would not have a
significant economic impact on a substantial number of small
entities.\579\ This IRFA has been prepared in accordance with the
Regulatory Flexibility Act. It relates to the proposed new rules and
amendments described in Sections II through VI above.
---------------------------------------------------------------------------
\578\ 5 U.S.C. 601 et seq.
\579\ 5 U.S.C. 603(a); 5 U.S.C. 605(b).
---------------------------------------------------------------------------
A. Reasons for, and Objectives of, the Proposed Action
As discussed throughout the release, we are proposing new Subpart
1600 of Regulation S-K and amendments to existing forms and schedules
to require specialized disclosures in registered offerings by SPACs,
including initial public offerings, and in disclosure documents for de-
SPAC transactions with respect to, among other things, compensation
paid to sponsors, conflicts of interest, and dilution. For de-SPAC
transactions, we are also proposing to require disclosure of a fairness
determination, additional disclosures on the target private operating
company, a re-determination of smaller reporting company status
following the completion of a de-SPAC transaction, and a minimum
dissemination period for certain disclosure documents in these
transactions. These proposed rules and amendments would be applicable
to, depending on the circumstances, registration statements on Forms S-
1, F-1, S-4 and F-4 filed under the Securities Act and Schedules 14A,
14C and TO under the Exchange Act. The proposed rules would also
clarify the underwriter status of SPAC IPO underwriters in connection
with de-SPAC transactions and would require that the target company be
named as a co-registrant in a Form S-4 or F-4 filed by a SPAC for a de-
SPAC transaction. Further, we are proposing to amend the definition of
``blank check company'' for purposes of the PSLRA such that the safe
harbor under the PSLRA for forward-looking information would not be
available to SPACs and certain other blank check companies; to update
and expand our guidance in Item 10(b) of Regulation S-K regarding the
use of projections in Commission filings; \580\ and to require
additional disclosure when projections are disclosed in connection with
de-SPAC transactions.
---------------------------------------------------------------------------
\580\ Item 10(b) sets forth guidelines representing the
Commission's views on important factors to be considered in
formulating and disclosing management's projections of future
economic performance in Commission filings.
---------------------------------------------------------------------------
In regard to business combination transactions involving a
reporting shell company,\581\ we are proposing Securities Act Rule 145a
to deem these transactions with a non-shell company to involve a sale
of securities to the shell company's shareholders. In addition, we are
proposing amendments to the financial statement reporting requirements
for transactions involving shell companies in Regulation S-X. Finally,
we are proposing a new safe harbor, Rule 3a-10, under the Investment
Company Act that would provide that a SPAC that satisfies the
conditions of the safe harbor would not be an investment company and
therefore would not be subject to regulation as an investment company
under the Investment Company Act.
---------------------------------------------------------------------------
\581\ Throughout this release and as stated earlier, we use
``shell company'' and ``reporting shell company'' in lieu of the
phrases ``shell company, other than a business combination related
shell company'' and ``reporting shell company, other than a business
combination related shell company.''
---------------------------------------------------------------------------
The need for and objectives of the proposed rules and amendments
are discussed in more detail in Sections II-VI above. We discuss the
economic impact, including the estimated costs and burdens, of the
proposed rules and amendments on all registrants, including small
entities, in Sections IX and X above.
B. Legal Basis
We are proposing the new rules and rule amendments under the
authority set forth in Sections 6, 7, 10, 19(a), and 28 of the
Securities Act; Sections 3, 12, 13, 14, 15, 23(a), and 36 of the
Exchange Act; and Sections 6(c) and 38(a) of the Investment Company
Act.
C. Regulatory Flexibility Act Certification
Pursuant to Section 605(b) of the Regulatory Flexibility Act, the
Commission hereby certifies that proposed Rule 3a-10 under the
Investment Company Act would not, if adopted, have a significant
economic impact on a substantial number of small entities.\582\ Based
on information available to the Commission, there were 861 initial
public offerings conducted by SPACs in 2020 and 2021, of which 6 were
for SPACs that sold $50 million or less in units.\583\ As a result, we
believe that approximately 0.7% of SPACs directly affected by proposed
Rule 3a-10 would be small entities.\584\ Accordingly, the Commission
believes that proposed Rule 3a-10 would not, if adopted, have a
significant economic impact on a substantial number of small entities.
---------------------------------------------------------------------------
\582\ The definition of ``small entity'' is set forth in Section
XII.D below.
\583\ Based on data from Dealogic M&A module as of Jan. 2022.
\584\ While no SPAC would be required to rely on proposed Rule
3a-10, for purposes of this analysis, we assume that all SPACs
conducting an initial public offering subsequent to adoption of the
proposed rule would rely on proposed Rule 3a-10.
---------------------------------------------------------------------------
D. Small Entities Subject to the Proposed Rules and Amendments
The proposed rules and amendments would apply to registrants that
are small entities. The Regulatory Flexibility Act defines ``small
entity'' to mean ``small business,'' ``small organization,'' or ``small
governmental jurisdiction.'' \585\ 17 CFR 230.157 (Securities Act Rule
157) defines an issuer, other than an investment company, to be a
``small business'' or ``small organization'' for purposes of the
Regulatory Flexibility Act if it had total assets of $5 million or less
on the last day of its most recent fiscal year and is engaged or
proposing to engage in an offering of securities not exceeding $5
million. 17 CFR 240.0-10(a) (Exchange Act Rule 0-10(a)) defines an
issuer, other than an investment company, to be a ``small business'' or
``small organization'' if it had total assets of $5 million or less on
the last day of its most recent fiscal year. An investment company is a
small entity if, together with other investment companies in the same
group of related investment companies, it has net assets of $50 million
or less as of the end of its most recent fiscal year.\586\
---------------------------------------------------------------------------
\585\ 5 U.S.C. 601(6).
\586\ See 17 CFR 270.0-10(a).
---------------------------------------------------------------------------
[[Page 29559]]
The proposed specialized disclosure and other requirements
applicable to SPACs would not apply to issuers that raise less than $5
million at the time of their initial public offerings.\587\ However, we
acknowledge that there may be instances where a SPAC may be a small
entity at the time of a subsequent registered offering or at the time
of a de-SPAC transaction.\588\ While we are not aware to date of any
such instances, we request comment on the number of these small
entities. In addition, due to data limitations, we are unable to
estimate the number of potential target private operating companies in
de-SPAC transactions that may be small entities; \589\ therefore, we
request comment on the number of these small entities.
---------------------------------------------------------------------------
\587\ See supra note 12 and the discussion of the proposed
definition of ``special purpose acquisition company'' in Section
II.A.
\588\ As noted above, the vast majority of initial public
offerings by SPACs in 2020 and 2021 raised more than $50 million. In
2020, the smallest amount raised in an initial public offering by a
SPAC was $40 million, and, in 2021, the smallest amount raised in an
initial public offering by a SPAC was $44 million. When viewed over
a 10-year period, we do not expect the outcome to be different due
to how SPACs are structured to address Rule 419. See supra note 12.
Further, with respect to proposed Rule 140a, we do not expect any
underwriters in SPAC initial public offerings to be small entities.
\589\ In this regard, we note that exchange listing requirements
and provisions in the governing instruments of many SPACs, along
with how SPACs are structured to avoid the application of Rule 419,
make it less likely that SPACs would merge with or acquire a small
entity. See supra notes 12 and 13.
---------------------------------------------------------------------------
In regard to proposed Rule 145a and the proposed amendments to
Regulation S-X, we estimate that there are 163 reporting shell
companies that are small entities.\590\ However, due to data
limitations, we are unable to estimate the number of private operating
companies and private shell companies that are small entities that may
engage in a business combination transaction.\591\ We request comment
on the number of these small entities.
---------------------------------------------------------------------------
\590\ This estimate does not include business combination
related shell companies.
\591\ We believe that it is unlikely that a reporting company
would engage in a business combination transaction with a shell
company such that it would be subject to proposed Rule 145a.
Therefore, we are not estimating the number of reporting companies
for purposes of this analysis.
---------------------------------------------------------------------------
E. Reporting, Recordkeeping, and Other Compliance Requirements
We expect that the proposed specialized disclosure and other
requirements applicable to SPACs and target private operating companies
would have an incremental effect on reporting, recordkeeping and other
compliance burdens for registrants, including small entities. These
proposed requirements would increase compliance costs for registrants,
and compliance with these proposed requirements would require the use
of professional skills, including accounting, legal, and technical
skills. We generally expect that the nature of any benefits and costs
associated with the proposed rules and amendments to be similar for
large and small entities. We also anticipate that the economic benefits
and costs likely could vary among small entities based on a number of
factors, such as the nature and conduct of their businesses, which
makes it difficult to project the economic impact on small entities
with precision.\592\ The proposed rules and amendments are discussed in
detail in Sections II-VI above. We discuss the economic effect,
including the estimated costs and burdens, of the proposed rules and
amendments on all registrants, including small entities, in Section IX
above.
---------------------------------------------------------------------------
\592\ We do not expect the proposed re-determination of smaller
reporting company status following a de-SPAC transaction to have any
effect on small entities because we do not expect any small entities
to lose smaller reporting company following this re-determination,
based on the public float and revenue thresholds in the smaller
reporting company definition.
---------------------------------------------------------------------------
Proposed Rule 145a, in deeming certain business combination
transactions involving a reporting shell company to involve a sale of
securities to the reporting shell company's shareholders, may impose
reporting, recordkeeping, or compliance requirements and related costs
on small entities that are reporting shell companies to the extent such
a deemed sale of securities would require such a small entity to
register the transaction under the Securities Act or comply with an
exemption from registration. These costs could also include the costs
associated with the proposed amendments to Regulation S-X, which would
require an issuer in a business combination transaction involving a
shell company to comply with financial statement reporting requirements
that would align with those applicable in traditional initial public
offerings. The proposed changes to the financial statement requirements
would increase compliance costs for small entities when these
transactions are registered under the Securities Act, although we do
not expect the increase in incremental compliance costs resulting from
the proposed amendments to be significant because the proposed
amendments would codify existing staff guidance on financial statement
requirements for these transactions.
F. Duplicative, Overlapping or Conflicting Federal Rules
The proposed disclosure requirements in Subpart 1600 may partially
duplicate and overlap with a number of existing disclosure requirements
under Regulation S-K that are currently applicable to SPAC registered
offerings and in de-SPAC transactions. To the extent that the
disclosure requirements in proposed Subpart 1600 overlap with these
existing disclosure requirements, the requirements of proposed Subpart
1600 would be controlling. Other than these proposed disclosure
requirements, the Commission believes that the proposed new rules and
amendments would not duplicate, overlap or conflict with other federal
rules.
G. Significant Alternatives
The Regulatory Flexibility Act directs us to consider alternatives
that would accomplish our stated objectives, while minimizing any
significant adverse impact on small entities. Accordingly, we
considered several alternatives, including the following:
Establishing different compliance or reporting
requirements or timetables that take into account the resources
available to small entities;
Clarifying, consolidating or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.
The proposed specialized disclosure and other requirements with
respect to SPAC registered offerings and de-SPAC transactions are
intended to improve the usefulness and clarity of the information
provided to investors so that they can make better informed decisions
as to whether to purchase securities in SPAC registered offerings, or
in secondary trading markets, and in voting, investment and redemption
decisions in connection with de-SPAC transactions. They are also
intended to enhance investor protections as well as provide additional
clarity regarding the legal obligations of target companies and others
in connection with a de-SPAC transaction. We believe that these
proposed requirements are equally appropriate for SPACs of all sizes
that are engaged in a registered offering and for SPACs and target
private operating companies that are engaged in a de-SPAC transaction.
As a result, we do not believe that it is appropriate to propose
different compliance or reporting requirements for small entities;
clarify, consolidate or simplify compliance and
[[Page 29560]]
reporting requirements for small entities; or to exempt small entities
from these requirements. As noted above, in our view, a private
operating company's method of becoming a public company should not
negatively impact investor protection.
With respect to using performance rather than design standards,
these proposed requirements use primarily design standards in order to
promote uniform compliance requirements for all registrants. Further,
we believe that the proposed requirements would be more beneficial to
investors if there are specific disclosure requirements that apply to
all registrants, regardless of size, for the reasons discussed above.
Proposed Rule 145a would deem business combinations involving a
reporting shell company and a non-shell company to involve a sale of
securities to the reporting shell company's shareholders. Given that
proposed Rule 145a is intended to address potential disparities in the
disclosure and liability protections available to reporting shell
company shareholders, we do not believe that it is appropriate to
propose different compliance or reporting requirements for small
entities; clarify, consolidate or simplify compliance and reporting
requirements for small entities; or to exempt small entities from the
proposed rule.
The proposed amendments to Regulation S-X would generally codify
existing staff guidance on financial statement requirements for certain
business combinations involving shell companies, and, based on staff
analysis of disclosures in these transactions, we believe that most
companies already report consistent with this staff guidance. Further,
the amendments are not expected to have any significant adverse effect
on small entities (and are, in fact, expected to relieve burdens for
some of these entities). Accordingly, we do not believe that it is
necessary to exempt small entities from all or part of the proposed
amendments to Regulation S-X; establish different compliance or
reporting requirements for such entities; or clarify, consolidate or
simplify compliance and reporting requirements for small entities.
Likewise, while we primarily use design standards to promote
consistency, we do not believe it is necessary to use performance
standards in connection with this aspect of the proposed rules.
H. Request for Comment
We encourage the submission of comments with respect to any aspect
of this IRFA and certifications. In particular, we request comments
regarding:
The number of small entities that may be affected by the
proposed rules and amendments;
The existence or nature of the potential impact of the
proposed rules and amendments on small entities discussed in the
analysis;
How the proposed amendments could further lower the burden
on small entities; and
How to quantify the impact of the proposed rules and
amendments.
Commenters are asked to describe the nature of any impact and
provide empirical data supporting the extent of the impact. Comments
will be considered in the preparation of the Final Regulatory
Flexibility Analysis, if the proposed rules and amendments are adopted,
and will be placed in the same public file as comments on the proposed
rules and amendments themselves.
Statutory Authority and Text of Proposed Rule and Form Amendments
We are proposing the rule and form amendments contained in this
document under the authority set forth in Sections 6, 7, 10, 19(a), and
28 of the Securities Act; Sections 3, 12, 13, 14, 15, 23(a), and 36 of
the Exchange Act; and Sections 6(c) and 38(a) of the Investment Company
Act.
List of Subjects
17 CFR Parts 210
Accountants, Accounting, Banks, Banking, Employee benefit plans,
Holding companies, Insurance companies, Investment companies, Oil and
gas exploration, Reporting and recordkeeping requirements, Securities,
Utilities.
17 CFR Parts 229, 230, 232, 239, 240, and 249
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 270
Investment companies, Reporting and recordkeeping requirements,
Securities.
In accordance with the foregoing, we are proposing to amend title
17, chapter II of the Code of Federal Regulations as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
0
1. The authority citation for part 210 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n,
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30,
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c),
Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.
0
2. Amend Sec. 210.1-02 by revising paragraph (d) and paragraph (w)(1)
introductory text to read as follows:
Sec. 210.1-02 Definitions of terms used in Regulation S-X (17 CFR
part 210).
* * * * *
(d) Audit (or examination). The term audit (or examination), when
used in regard to financial statements of issuers as defined by Section
2(a)(7) of the Sarbanes-Oxley Act of 2002, means an examination of the
financial statements by an independent accountant in accordance with
the standards of the Public Company Accounting Oversight Board (United
States) (``PCAOB'') for the purpose of expressing an opinion thereon.
See Sec. 210.15-01(a) for definition of an audit when used in regard
to financial statements of a company that will be a predecessor to an
issuer that is a shell company (other than a business combination
related shell company). When used in regard to financial statements of
entities that are not issuers as defined by Section 2(a)(7) of the
Sarbanes-Oxley Act of 2002, the term means an examination of the
financial statements by an independent accountant in accordance with
either the standards of the PCAOB or U.S. generally accepted auditing
standards (``U.S. GAAS'') as specified or permitted in the regulations
and forms applicable to those entities for the purpose of expressing an
opinion thereon. The standards of the PCAOB and U.S. GAAS may be
modified or supplemented by the Commission.
* * * * *
(w) * * *
(1) The term significant subsidiary means a subsidiary, including
its subsidiaries, which meets any of the conditions in paragraph
(w)(1)(i), (ii), or (iii) of this section; however if the registrant is
a registered investment company or a business development company, the
tested subsidiary meets any of the conditions in paragraph (w)(2) of
this section instead of any of the conditions in this paragraph (w)(1).
In either an acquisition by a shell company (other than a business
combination related shell company) of a business that is not the
predecessor or an acquisition by the shell company's predecessor, use
the predecessor's financial statements instead of the registrant and
the subsidiaries
[[Page 29561]]
consolidated in applying the significance tests in paragraphs
(w)(1)(i), (ii), and (iii) of this section.
* * * * *
0
3. Amend Sec. 210.3-01 by revising paragraph (a) to read as follows:
Sec. 210.3-01 Consolidated balance sheets.
(a) There shall be filed, for the registrant and its subsidiaries
consolidated and for its predecessors, audited balance sheets as of the
end of each of the two most recent fiscal years. If the registrant has
been in existence for less than one fiscal year, there shall be filed
an audited balance sheet as of a date within 135 days of the date of
filing the registration statement.
* * * * *
0
4. Amend Sec. 210.3-05 by revising paragraph (b)(4)(ii) to read as
follows:
Sec. 210.3-05 Financial statements of businesses acquired or to be
acquired.
* * * * *
(b) * * *
(4) * * *
(ii) A registrant, other than a foreign private issuer required to
file reports on Form 6-K (Sec. 249.306 of this chapter) or a shell
company (other than a business combination related shell company), that
omits from its initial registration statement financial statements of a
recently consummated business acquisition pursuant to paragraph
(b)(4)(i) of this section must file those financial statements and any
pro forma information specified by Sec. Sec. 210.11-01 through 210.11-
03 (Article 11) under cover of Form 8-K (Sec. 249.308 of this chapter)
no later than 75 days after consummation of the acquisition. A shell
company (other than a business combination related shell company) that
acquires a business, which is not or will not be its predecessor, that
omits from a registration statement or proxy statement the financial
statements of that recently consummated business acquisition pursuant
to (b)(4)(i) of this section shall refer to Sec. 210.15-01(d)(2).
* * * * *
0
5. Amend Sec. 210.3-14 by revising paragraph (b)(3)(ii) to read as
follows:
Sec. 210.3-14 Special instructions for financial statements of real
estate operations acquired or to be acquired.
* * * * *
(b) * * *
(3) * * *
(ii) A registrant, other than a foreign private issuer required to
file reports on Form 6-K (Sec. 249.306 of this chapter) or shell
company (other than a business combination related shell company), that
omits from its initial registration statement financial statements of a
recently consummated acquisition of a real estate operation pursuant to
paragraph (b)(3)(i) of this section must file those financial
statements and any pro forma information specified by Sec. Sec.
210.11-01 through 210.11-03 (Article 11) under cover of Form 8-K (Sec.
249.308 of this chapter) no later than 75 days after consummation of
the acquisition. A shell company (other than a business combination
related shell company) that acquires a real estate operation, which is
not or will not be its predecessor that omits from a registration
statement or proxy statement the financial statements of a recently
consummated business acquisition pursuant to (b)(4)(i) of this section
shall refer to Sec. 210.15-01(d)(2).
* * * * *
0
6. Amend Sec. 210.8-02 by revising it to read as follows:
Sec. 210.8-02 Annual financial statements.
Smaller reporting companies shall file an audited balance sheet for
the registrant and for its predecessors as of the end of each of the
most recent two fiscal years, or as of a date within 135 days if the
issuer has existed for a period of less than one fiscal year, and
audited statements of comprehensive income, cash flows and changes in
stockholders' equity for each of the two fiscal years preceding the
date of the most recent audited balance sheet (or such shorter period
as the registrant has been in business).
0
7. Amend Sec. 210.10-01 by revising paragraph (a)(1) to read as
follows:
Sec. 210.10-01 Interim financial statements.
(a) * * *
(1) Interim financial statements required by this rule need only be
provided as to the registrant and its subsidiaries consolidated and its
predecessors and may be unaudited. Separate statements of other
entities which may otherwise be required by this regulation may be
omitted.
* * * * *
0
8. Amend Sec. 210.11-01 by revising paragraph (d) introductory text to
read as follows:
Sec. 210.11-01 Presentation requirements.
* * * * *
(d) For purposes of this rule, the term business should be
evaluated in light of the facts and circumstances involved and whether
there is sufficient continuity of the acquired entity's operations
prior to and after the transactions so that disclosure of prior
financial information is material to an understanding of future
operations. A presumption exists that a separate entity, a subsidiary,
or a division is a business. A special purpose acquisition company, as
defined in Sec. 229.1601(a), is a business for purposes of this rule.
However, a lesser component of an entity may also constitute a
business. Among the facts and circumstances which should be considered
in evaluating whether an acquisition of a lesser component of an entity
constitutes a business are the following:
* * * * *
0
9. Add an undesignated center heading and Sec. 210.15-01 to read as
follows:
Acquisitions of Businesses by a Shell Company (Other Than a Business
Combination Related Shell Company)
Sec. 210.15-01 Acquisitions of businesses by a shell company (other
than a business combination related shell company).
(a) Audit requirements of predecessor. The term audit (or
examination), when used in regard to financial statements of a business
that is or will be a predecessor to a shell company (other than a
business combination related shell company), means an examination of
the financial statements by an independent accountant in accordance
with the standards of the PCAOB for the purpose of expressing an
opinion thereon.
(b) Financial statements. When the registrant is a shell company
(other than a business combination related shell company) and the
financial statements of a business that will be a predecessor to the
registrant are required in a registration statement or proxy statement,
the registrant must file financial statements of the business in
accordance with Sec. Sec. 210.3-01 through 210.3-12 and 210.10-01
(Articles 3 and 10 of Regulation S-X) as if the filing were a
Securities Act registration statement for the initial public offering
of the business's equity securities. The financial statements of the
business may be filed pursuant to Sec. Sec. 210.8-01 through 210.8-08
(Article 8) when that business would qualify to be a smaller reporting
company based on its annual revenues as of the most recently completed
fiscal year, if it were filing a registration statement itself.
(c) Age of financial statements of the predecessor. The financial
statements of a business that will be a predecessor to a shell company
(other than a business combination related shell company) shall comply
with the requirements in Sec. 210.3-12 (Sec. 210.8-08 when that
business would qualify to be a smaller reporting company based on its
annual revenues as of the most recently completed fiscal year, if it
were filing a registration statement itself) in determining the age of
financial
[[Page 29562]]
statements of the predecessor business in the registration statement or
proxy statement of the registrant.
(d) Acquisitions of businesses by a shell company or its
predecessor that are not or will not be the predecessor. Registrants
shall apply Sec. 210.3-05 (Sec. 210.8-04 when that business would
qualify to be a smaller reporting company based on its annual revenues
as of the most recently completed fiscal year if it were filing a
registration statement itself) to acquisitions of businesses by a shell
company (other than a business combination related shell company) or
its predecessor that are not or will not be the predecessor to the
registrant.
(1) See Sec. 210.1-02(w)(1) for rules on applying the significance
tests to acquisitions of businesses by a shell company (other than a
business combination related shell company) or its predecessor that are
not or will not be the predecessor.
(2) A shell company (other than a business combination related
shell company) that omits from a registration statement or proxy
statement the financial statements of a recently acquired business that
is not or will not be its predecessor pursuant to Rule 3-05(b)(4)(i) of
Regulation S-X (Sec. 210.1-02(b)(4)(i)) must file those financial
statements in its Form 8-K filed pursuant to Item 2.01(f).
(e) Financial statements of shell company. After a shell company
(other than a business combination related shell company) acquires a
business that is its predecessor, the financial statements of the shell
company for periods prior to consummation of the acquisition are not
required to be included in a filing once the financial statements of
the predecessor have been filed for all required periods through the
acquisition date and the financial statements of the registrant include
the period in which the acquisition was consummated.
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
0
10. The authority citation for part 229 continues to read as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c),
80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 1350;
sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec.
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
0
11. Amend Sec. 229.10 by:
0
a. Revising paragraph (b); and
0
b. Adding paragraph (f)(2)(iv).
The revisions and additions read as follows.
Sec. 229.10 (Item 10) General.
* * * * *
(b) Commission policy on projections. The Commission encourages the
use in documents specified in Rule 175 under the Securities Act (Sec.
230.175 of this chapter) and Rule 3b-6 under the Exchange Act (Sec.
240.3b-6 of this chapter) of management's projections of future
economic performance that have a reasonable basis and are presented in
an appropriate format. The guidelines set forth herein represent the
Commission's views on important factors to be considered in formulating
and disclosing such projections. These guidelines also apply to
projections of future economic performance of persons other than the
registrant, such as the target company in a business combination
transaction, that are included in the registrant's Commission filings.
(1) Basis for projections. The Commission believes that management
must have the option to present in Commission filings its good faith
assessment of a registrant's future performance. Management, however,
must have a reasonable basis for such an assessment. Although a history
of operations or experience in projecting may be among the factors
providing a basis for management's assessment, the Commission does not
believe that a registrant always must have had such a history or
experience in order to formulate projections with a reasonable basis.
An outside review of management's projections may furnish additional
support for having a reasonable basis for a projection. If management
decides to include a report of such a review in a Commission filing,
there also should be disclosure of the qualifications of the reviewer,
the extent of the review, the relationship between the reviewer and the
registrant, and other material factors concerning the process by which
any outside review was sought or obtained. Moreover, in the case of a
registration statement under the Securities Act, the reviewer would be
deemed an expert and an appropriate consent must be filed with the
registration statement.
(2) Format for projections. (i) In determining the appropriate
format for projections included in Commission filings, consideration
must be given to, among other things, the financial items to be
projected, the period to be covered, and the manner of presentation to
be used. Although traditionally projections have been given for three
financial items generally considered to be of primary importance to
investors (revenues, net income (loss) and earnings (loss) per share),
projection information need not necessarily be limited to these three
items. However, management should take care to assure that the choice
of items projected is not susceptible of misleading inferences through
selective projection of only favorable items. Revenues, net income
(loss) and earnings (loss) per share usually are presented together in
order to avoid any misleading inferences that may arise when the
individual items reflect contradictory trends. There may be instances,
however, when it is appropriate to present earnings (loss) from
continuing operations in addition to or in lieu of net income (loss).
It generally would be misleading to present sales or revenue
projections without one of the foregoing measures of income. The period
that appropriately may be covered by a projection depends to a large
extent on the particular circumstances of the company involved. For
certain companies in certain industries, a projection covering a two or
three year period may be entirely reasonable. Other companies may not
have a reasonable basis for projections beyond the current year.
Accordingly, management should select the period most appropriate in
the circumstances. In addition, management, in making a projection,
should disclose what, in its opinion, is the most probable specific
amount or the most reasonable range for each financial item projected
based on the selected assumptions. Ranges, however, should not be so
wide as to make the disclosures meaningless. Moreover, several
projections based on varying assumptions may be judged by management to
be more meaningful than a single number or range and would be
permitted.
(ii) The presentation of projected measures that are not based on
historical financial results or operational history should be clearly
distinguished from projected measures that are based on historical
financial results or operational history.
(iii) It generally would be misleading to present projections that
are based on historical financial results or operational history
without presenting such historical financial measure or operational
history with equal or greater prominence.
[[Page 29563]]
(iv) The presentation of projections that include non-GAAP
financial measures should include a clear definition or explanation of
those financial measures, a description of the Generally Accepted
Accounting Principles (GAAP) financial measure to which it is most
closely related, and an explanation why the non-GAAP measure was
selected instead of a GAAP measure.
* * * * *
(f) * * *
* * * * *
(2) * * *
(iv) Upon the consummation of a de-SPAC transaction, as defined in
Item 1601(a) of Regulation S-K (17 CFR 229.1601(a)), an issuer must re-
determine its status as a smaller reporting company pursuant to the
thresholds set forth in paragraph (f)(1) of this section prior to its
first filing, other than pursuant to Items 2.01(f), 5.01(a)(8), and/or
9.01(c) of Form 8-K, following the de-SPAC transaction and reflect this
re-determination in its next periodic report.
(A) Public float is measured as of a date within four business days
after the consummation of the de-SPAC transaction and is computed by
multiplying the aggregate worldwide number of shares of its voting and
non-voting common equity held by non-affiliates as of that date by the
price at which the common equity was last sold, or the average of the
bid and asked prices of common equity, in the principal market for the
common equity; and
(B) Annual revenues are the annual revenues of the target company,
as defined in Item 1601(d) of Regulation S-K (17 CFR 229.1601(d)), as
of the most recently completed fiscal year reported in the Form 8-K
filed pursuant to Items 2.01(f), 5.01(a)(8), and/or 9.01(c) of Form 8-
K.
* * * * *
0
12. Amend Sec. 229.601 by adding paragraph (b)(101)(i)(D) to read as
follows:
Sec. 229.601 (Item 601) Exhibits.
* * * * *
(b) * * *
(101) * * *
(i) * * *
(D) Any filing that is subject to the exceptions listed in
paragraphs (A), (B), or (C), and contains any disclosure required by
subpart 229.1600 of this part, must include an Interactive Data File
consisting solely of that disclosure.
* * * * *
0
13. Amend part 229 by adding subpart 229.1600 to read as follows:
Subpart 229.1600--Special Purpose Acquisition Companies
Sec.
229.1601 (Item 1601) Definitions.
229.1602 (Item 1602) Registered offerings by special purpose
acquisition companies.
229.1603 (Item 1603) SPAC sponsor; conflicts of interest.
229.1604 (Item 1604) De-SPAC transactions.
229.1605 (Item 1605) Background of and reasons for the de-SPAC
transaction; terms of the de-SPAC transaction; effects.
229.1606 (Item 1606) Fairness of the de-SPAC transaction and any
related financing transaction.
229.1607 (Item 1607) Reports, opinions, appraisals and negotiations.
229.1608 (Item 1608) Tender offer filing obligations in de-SPAC
transactions.
229.1609 (Item 1609) Financial projections in de-SPAC transactions.
229.1610 (Item 1610) Structured data requirement.
Subpart 229.1600--Special Purpose Acquisition Companies
Sec. 229.1601 (Item 1601) Definitions.
For the purposes of this subpart 229.1600:
(a) De-SPAC transaction. The term de-SPAC transaction means a
business combination such as a merger, consolidation, exchange of
securities, acquisition of assets, or similar transaction involving a
special purpose acquisition company and one or more target companies
(contemporaneously, in the case of more than one target company).
(b) Special purpose acquisition company (SPAC). The term special
purpose acquisition company means a company that has indicated that its
business plan is to:
(1) Register a primary offering of securities that is not subject
to the requirements of Sec. 230.419 (Rule 419 under the Securities
Act);
(2) Complete a de-SPAC transaction within a specified time frame;
and
(3) Return all remaining proceeds from the registered offering and
any concurrent offerings to its shareholders if the company does not
complete a de-SPAC transaction within the specified time frame.
(c) SPAC sponsor. The term SPAC sponsor means the entity and/or
person(s) primarily responsible for organizing, directing or managing
the business and affairs of a special purpose acquisition company,
other than in their capacities as directors or officers of the special
purpose acquisition company as applicable.
(d) Target company. The term target company means an operating
company, business or assets.
Sec. 229.1602 (Item 1602) Registered offerings by special purpose
acquisition companies.
(a) Forepart of registration statement and outside cover page of
the prospectus. In addition to the information required by Sec.
229.501 (Item 501 of Regulation S-K), provide the following information
on the outside front cover page of the prospectus in plain English as
required by Sec. 230.421(d) of this chapter:
(1) State the time frame for the special purpose acquisition
company to consummate a de-SPAC transaction and whether this time frame
may be extended.
(2) State whether security holders will have the opportunity to
redeem the securities offered and whether the redemptions will be
subject to any limitations.
(3) State the amount of the compensation received or to be received
by the SPAC sponsor and its affiliates, and whether this compensation
may result in a material dilution of the purchasers' equity interests.
Provide a cross-reference, highlighted by prominent type or in another
manner, to the locations of related disclosures in the prospectus.
(4) Disclose in the tabular format specified below the estimated
remaining pro forma net tangible book value per share at quartile
intervals up to the maximum redemption threshold, consistent with the
methodologies and assumptions used in the disclosure provided pursuant
to Sec. 229.506 (Item 506 of Regulation S-K), and provide a cross-
reference, highlighted by prominent type or in another manner, to the
locations of related disclosures in the prospectus:
[[Page 29564]]
Table 1 to Paragraph (a)(4)
----------------------------------------------------------------------------------------------------------------
Remaining pro forma net tangible book value per share
-----------------------------------------------------------------------------------------------------------------
25% of maximum 50% of maximum 75% of maximum
Offering price of __ redemption redemption redemption Maximum redemption
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Instruction 1 to Item 1602(a)(4). If the offering includes an over-
allotment option, include separate rows in the tabular disclosure
showing remaining pro forma net tangible book value per share with and
without the exercise of the over-allotment option.
(5) State whether there may be actual or potential conflicts of
interest between the SPAC sponsor or its affiliates or promoters and
purchasers in the offering. Provide a cross-reference, highlighted by
prominent type or in another manner, to the locations of related
disclosures in the prospectus.
(b) Prospectus summary. The information required by Sec.
229.503(a) (Item 503(a) of Regulation S-K) shall include, but not be
limited to, a brief description of the following in plain English as
required by Sec. 230.421(d) of this chapter:
(1) The manner in which the special purpose acquisition company
will identify and evaluate potential business combination candidates
and whether it will solicit shareholder approval for the de-SPAC
transaction;
(2) The material terms of the trust or escrow account and the
amount or percentage of the gross offering proceeds that the special
purpose acquisition company will place in the trust or escrow account;
(3) The material terms of the securities being offered, including
redemption rights, and whether the securities are the same class as
those held by the SPAC sponsor and its affiliates;
(4) The period of time in which the special purpose acquisition
company intends to consummate a de-SPAC transaction and its plans in
the event that it does not consummate a de-SPAC transaction within this
time period, including whether, and if so, how, it may extend the time
period; any limitations on extensions, including the number of times;
the consequences to the SPAC sponsor of not completing an extension of
this time period; and whether security holders will have voting or
redemption rights with respect to such an extension;
(5) Any plans to seek additional financings and how the terms of
additional financings may impact unaffiliated security holders;
(6) In a tabular format, the nature and amount of the compensation
received or to be received by the SPAC sponsor, its affiliates and
promoters, and the extent to which this compensation may result in a
material dilution of the purchasers' equity interests; and
(7) Any material actual or potential conflicts of interest between
the SPAC sponsor or its affiliates or promoters and purchasers in the
offering, including those that may arise in determining whether to
pursue a de-SPAC transaction.
(c) Dilution. In addition to the disclosure required by Sec.
229.506 (Item 506 of Regulation S-K), describe material potential
sources of future dilution following the registered offering by the
special purpose acquisition company. Disclose in tabular format the
amount of future dilution from the public offering price that will be
absorbed by purchasers of the securities being offered, to the extent
known and quantifiable.
Sec. 229.1603 (Item 1603) SPAC sponsor; conflicts of interest.
(a) SPAC sponsor, its affiliates and promoters. Provide the
following information about the SPAC sponsor, its affiliates and
promoters of the special purpose acquisition company:
(1) State the SPAC sponsor's name and describe the SPAC sponsor's
form of organization.
(2) Describe the general character of the SPAC sponsor's business.
(3) Describe the experience of the SPAC sponsor, its affiliates and
any promoters in organizing special purpose acquisition companies and
the extent to which the SPAC sponsor, its affiliates and the promoters
are involved in other special purpose acquisition companies.
(4) Describe the material roles and responsibilities of the SPAC
sponsor, its affiliates and any promoters in directing and managing the
special purpose acquisition company's activities.
(5) Describe any agreement, arrangement or understanding between
the SPAC sponsor and the special purpose acquisition company, its
executive officers, directors or affiliates in determining whether to
proceed with a de-SPAC transaction.
(6) Disclose the nature (e.g., cash, shares of stock, warrants and
rights) and amounts of all compensation that has or will be awarded to,
earned by, or paid to the SPAC sponsor, its affiliates and any
promoters for all services rendered in all capacities to the special
purpose acquisition company and its affiliates. In addition, disclose
the nature and amounts of any reimbursements to be paid to the SPAC
sponsor, its affiliates and any promoters upon the completion of a de-
SPAC transaction.
(7) Identify the controlling persons of the SPAC sponsor. Disclose,
as of the most recent practicable date, the persons who have direct and
indirect material interests in the SPAC sponsor, as well as the nature
and amount of their interests. Provide an organizational chart that
shows the relationship between the special purpose acquisition company,
the SPAC sponsor, and the SPAC sponsor's affiliates.
(8) Describe any agreement, arrangement or understanding, including
any payments, between the SPAC sponsor and unaffiliated security
holders of the special purpose acquisition company regarding the
redemption of outstanding securities of the special purpose acquisition
company.
(9) Disclose, in a tabular format to the extent practicable, the
material terms of any agreement, arrangement or understanding regarding
restrictions on whether and when the SPAC sponsor and its affiliates
may sell securities of the special purpose acquisition company,
including the date(s) on which the agreement, arrangement or
understanding may expire; the natural persons and entities subject to
such an agreement, arrangement or understanding; any exceptions under
such an agreement, arrangement or understanding; and any terms that
would result in an earlier expiration of such an agreement, arrangement
or understanding.
[[Page 29565]]
(b) Conflicts of interest. Describe any actual or potential
material conflict of interest, including any material conflict of
interest in determining whether to proceed with a de-SPAC transaction
and any material conflict of interest arising from the manner in which
the special purpose acquisition company compensates the SPAC sponsor,
executive officers and directors or the manner in which the SPAC
sponsor compensates its executive officers and directors, between:
(1) The SPAC sponsor or its affiliates or the special purpose
acquisition company's officers, directors, or promoters; and
(2) Unaffiliated security holders.
(c) Briefly describe the fiduciary duties of each officer and
director of the special purpose acquisition company to other companies
to which they have fiduciary duties.
Sec. 229.1604 (Item 1604) De-SPAC transactions.
(a) Forepart of registration statement and outside cover page of
the prospectus. In addition to the information required by Sec.
229.501 (Item 501 of Regulation S-K), provide the following information
on the outside front cover page of the prospectus in plain English as
required by Sec. 230.421(d) of this chapter:
(1) State whether the special purpose acquisition company
reasonably believes that the de-SPAC transaction is fair or unfair to
unaffiliated security holders, and whether the special purpose
acquisition company or the SPAC sponsor has received a report, opinion
or appraisal from an outside party regarding the fairness of the
transaction.
(2) Describe briefly any material financing transactions that have
occurred since the initial public offering of the special purpose
acquisition company or will occur in connection with the consummation
of the de-SPAC transaction.
(3) State the amount of the compensation received or to be received
by the SPAC sponsor, its affiliates and promoters in connection with
the de-SPAC transaction or any related financing transaction, and
whether this compensation may result in a material dilution of the
equity interests of non-redeeming shareholders who hold the securities
until the consummation of the de-SPAC transaction. Provide a cross-
reference, highlighted by prominent type or in another manner, to the
locations of related disclosures in the prospectus.
(4) State whether there may be material actual or potential
conflicts of interest between the SPAC sponsor or its affiliates or
promoters and unaffiliated security holders in connection with the de-
SPAC transaction. Provide a cross-reference, highlighted by prominent
type or in another manner, to the locations of related disclosures in
the prospectus.
(b) Prospectus summary. The information required by Sec.
229.503(a) (Item 503(a) of Regulation S-K) shall include, but not be
limited to, a brief description of the following in plain English as
required by Sec. 230.421(d) of this chapter:
(1) The background and material terms of the de-SPAC transaction;
(2) Whether the special purpose acquisition company reasonably
believes that the de-SPAC transaction is fair or unfair to unaffiliated
security holders, the bases for such belief, and whether the special
purpose acquisition company or the SPAC sponsor has received any
report, opinion or appraisal from an outside party concerning the
fairness of the de-SPAC transaction;
(3) Any material actual or potential conflicts of interest between
the SPAC sponsor or its affiliates or promoters and unaffiliated
security holders in connection with the de-SPAC transaction;
(4) In a tabular format, the terms and amount of the compensation
received or to be received by the SPAC sponsor and its affiliates in
connection with the de-SPAC transaction or any related financing
transaction, and whether that compensation has resulted or may result
in a material dilution of the equity interests of unaffiliated security
holders of the special purpose acquisition company;
(5) The material terms of any financing transactions that have
occurred or will occur in connection with the consummation of the de-
SPAC transaction, the anticipated use of proceeds from these financing
transactions and the dilutive impact, if any, of these financing
transactions on unaffiliated security holders; and
(6) The rights of security holders to redeem the outstanding
securities of the special purpose acquisition company and the potential
impact of redemptions on the value of the securities owned by non-
redeeming shareholders.
(c) Dilution. Describe each material potential source of future
dilution that non-redeeming shareholders may experience by electing not
to tender their shares in connection with the de-SPAC transaction.
(1) Provide sensitivity analysis disclosure in tabular format that
expresses the amount of potential dilution under a range of reasonably
likely redemption levels. At each redemption level in the sensitivity
analysis, quantify the dilutive impact on non-redeeming shareholders of
each source of dilution, such as the amount of compensation paid or to
be paid to the SPAC sponsor, the terms of outstanding warrants and
convertible securities, and underwriting and other fees. For each
redemption level in the sensitivity analysis, state the company
valuation at or above which the potential dilution results in the
amount of the non-redeeming shareholders' interest per share being at
least the initial public offering price per share of common stock.
(2) Provide a description of the model, methods, assumptions,
estimates, and parameters necessary to understand the sensitivity
analysis disclosure.
Sec. 229.1605 (Item 1605) Background of and reasons for the de-SPAC
transaction; terms of the de-SPAC transaction; effects.
(a) Furnish a summary of the background of the de-SPAC transaction.
Such summary shall include, but not be limited to, a description of any
contacts, negotiations or transactions that have occurred concerning
the de-SPAC transaction.
(b) State the material terms of the de-SPAC transaction, including
but not limited to:
(1) A brief description of the de-SPAC transaction;
(2) A brief description of any related financing transaction,
including any payments from the SPAC sponsor to investors in connection
with the financing transaction;
(3) A reasonably detailed discussion of the reasons for engaging in
the de-SPAC transaction and for the structure and timing of the de-SPAC
transaction and any related financing transaction;
(4) An explanation of any material differences in the rights of
security holders of the combined company as a result of the de-SPAC
transaction after the completion of the de-SPAC transaction;
(5) A brief statement as to the accounting treatment of the de-SPAC
transaction, if material; and
(6) The Federal income tax consequences of the de-SPAC transaction,
if material.
(c) Describe the effects of the de-SPAC transaction and any related
financing transaction on the special purpose acquisition company and
its affiliates, the SPAC sponsor and its affiliates, the target company
and its affiliates, and unaffiliated security holders of the special
purpose acquisition company. The description must include a
[[Page 29566]]
reasonably detailed discussion of both the benefits and detriments of
the de-SPAC transaction and any related financing transaction to the
special purpose acquisition company and its affiliates, the SPAC
sponsor and its affiliates, the target company and its affiliates, and
unaffiliated security holders. The benefits and detriments of the de-
SPAC transaction and any related financing transaction must be
quantified to the extent practicable.
(d) Disclose any material interests in the de-SPAC transaction or
any related financing transaction held by the SPAC sponsor and the
special purpose acquisition company's officers and directors, including
fiduciary or contractual obligations to other entities as well as any
interest in, or affiliation with, the target company.
(e) State whether or not security holders are entitled to any
redemption or appraisal rights. If so, summarize the redemption or
appraisal rights. If there are no redemption or appraisal rights
available for security holders who object to the de-SPAC transaction,
briefly outline any other rights that may be available to security
holders.
Sec. 229.1606 (Item 1606) Fairness of the de-SPAC transaction and any
related financing transaction.
(a) Fairness. State whether the special purpose acquisition company
reasonably believes that the de-SPAC transaction and any related
financing transaction are fair or unfair to unaffiliated security
holders of the special purpose acquisition company. If any director
voted against, or abstained from voting on, approval of the de-SPAC
transaction or any related financing transaction, identify the
director, and indicate, if known, after making reasonable inquiry, the
reasons for the vote against the transaction or abstention.
(b) Factors considered in determining fairness. Discuss in
reasonable detail the material factors upon which the belief stated in
paragraph (a) of this section is based and, to the extent practicable,
the weight assigned to each factor. Such factors shall include, but not
be limited to, the valuation of the target company, the consideration
of any financial projections, any report, opinion or appraisal
described in Sec. 229.1607 (Item 1607 of Regulation S-K), and the
dilutive effects described in Sec. 229.1604(c) (Item 1604(c) of
Regulation S-K).
(c) Approval of security holders. State whether or not the de-SPAC
transaction or any related financing transaction is structured so that
approval of at least a majority of unaffiliated security holders is
required.
(d) Unaffiliated representative. State whether or not a majority of
directors who are not employees of the special purpose acquisition
company has retained an unaffiliated representative to act solely on
behalf of unaffiliated security holders for purposes of negotiating the
terms of the de-SPAC transaction or any related financing transaction
and/or preparing a report concerning the fairness of the de-SPAC
transaction or any related financing transaction.
(e) Approval of directors. State whether or not the de-SPAC
transaction or any related financing transaction was approved by a
majority of the directors of the special purpose acquisition company
who are not employees of the special purpose acquisition company.
Instruction 1 to Item 1606: A statement that the special purpose
acquisition company has no reasonable belief as to the fairness or
unfairness of the de-SPAC transaction or any related financing
transaction to unaffiliated security holders will not be considered
sufficient disclosure in response to paragraph (a) of this section.
Sec. 229.1607 (Item 1607) Reports, opinions, appraisals and
negotiations.
(a) Report, opinion or appraisal. State whether or not the special
purpose acquisition company or SPAC sponsor has received any report,
opinion or appraisal from an outside party relating to the
consideration or the fairness of the consideration to be offered to
security holders or the fairness of the de-SPAC transaction or any
related financing transaction to the special purpose acquisition
company, SPAC sponsor or security holders who are not affiliates.
(b) Preparer and summary of the report, opinion or appraisal. For
each report, opinion or appraisal described in response to paragraph
(a) of this section or any negotiation or report described in response
to Sec. 229.1606(d) (Item 1606(d) of Regulation S-K) concerning the
terms of the transaction:
(1) Identify the outside party and/or unaffiliated representative;
(2) Briefly describe the qualifications of the outside party and/or
unaffiliated representative;
(3) Describe the method of selection of the outside party and/or
unaffiliated representative;
(4) Describe any material relationship that existed during the past
two years or is mutually understood to be contemplated and any
compensation received or to be received as a result of the relationship
between:
(i) The outside party, its affiliates, and/or unaffiliated
representative; and
(ii) The special purpose acquisition company, the SPAC sponsor and/
or their respective affiliates,
(5) State whether the special purpose acquisition company or SPAC
sponsor determined the amount of consideration to be paid to the target
company or its security holders, or the valuation of the target
company, or whether the outside party recommended the amount of
consideration to be paid or the valuation of the target company; and
(6) Furnish a summary concerning the negotiation, report, opinion
or appraisal. The summary must include, but need not be limited to, the
procedures followed; the findings and recommendations; the bases for
and methods of arriving at such findings and recommendations;
instructions received from the special purpose acquisition company or
SPAC sponsor; and any limitation imposed by the special purpose
acquisition company or SPAC sponsor on the scope of the investigation.
Instruction 1 to Item 1607(b): The information called for by
paragraphs (b)(1), (2), and (3) of this section must be given with
respect to the firm that provides the report, opinion, or appraisal
rather than the employees of the firm that prepared the report.
(c) All reports, opinions or appraisals referred to in paragraph
(a) of this section shall be, as applicable, filed as exhibits to the
registration statement or schedule or included in the schedule if the
schedule does not have exhibit filing requirements.
Sec. 229.1608 (Item 1608) Tender offer filing obligations in de-SPAC
transactions.
If the special purpose acquisition company files a Schedule TO
(Sec. 240.14d-100) pursuant to Sec. 240.13e-4(c)(2) (Rule 13e-
4(c)(2)) for any redemption of securities offered to security holders,
such Schedule TO must provide the information required by General
Instruction L.2. to Form S-4, General Instruction I.2. to Form F-4, and
Item 14(f) of Schedule 14A, as applicable, in addition to the
information otherwise required by Schedule TO. Such redemption shall be
conducted in compliance with all other provisions of Rule 13e-4 and
Regulation 14E.
Sec. 229.1609 (Item 1609) Financial projections in de-SPAC
transactions.
(a) With respect to any projections disclosed in the filing,
disclose the purpose for which the projections were prepared and the
party that prepared the projections.
[[Page 29567]]
(b) Disclose all material bases of the disclosed projections and
all material assumptions underlying the projections, and any factors
that may impact such assumptions. The disclosure referred to in this
section should include a discussion of any material growth rates or
discount multiples used in preparing the projections, and the reasons
for selecting such growth rates or discount multiples.
(c) If the projections relate to the performance of the special
purpose acquisition company, state whether the projections reflect the
view of the special purpose acquisition company's management or board
about its future performance as of the date of the filing. If the
projections relate to the target company, disclose whether the target
company has affirmed to the special purpose acquisition company that
its projections reflect the view of the target company's management or
board about its future performance as of the date of the filing. If the
projections no longer reflects the views of the special purpose
acquisition company's or the target company's management or board
regarding the future performance of their respective companies as the
date of the filing, state the purpose of disclosing the projections and
the reasons for any continued reliance by the management or board on
the projections.
Sec. 229.1610 (Item 1610) Structured data requirement.
Provide the disclosure required by this subpart 229.1600 in an
Interactive Data File in accordance with Rule 405 of Regulation S-T and
the EDGAR Filer Manual.
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
14. The general authority citation for part 230 continues to read as
follows:
Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h,
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Public Law 112-106, sec. 201(a), sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
15. Revise Sec. 230.137(d)(1) to read as follows:
Sec. 230.137 Publications or distributions of research reports by
brokers or dealers that are not participating in an issuer's registered
distribution of securities.
* * * * *
(d) * * *
(1) A blank check company issuing penny stock, as defined in Sec.
230.405 (Rule 405);
* * * * *
0
16. Revise Sec. 230.138(a)(4)(i) to read as follows:
Sec. 230.138 Publications or distributions of research reports by
brokers or dealers about securities other than those they are
distributing.
(a) * * *
(4) * * *
(i) A blank check company issuing penny stock, as defined in Sec.
230.405 (Rule 405);
* * * * *
0
17. Revise Sec. 230.139(a)(1)(ii)(A) to read as follows:
Sec. 230.139 Publications or distributions of research reports by
brokers or dealers distributing securities.
(a) * * *
(1) * * *
(ii) * * *
(A) A blank check company issuing penny stock, as defined in Sec.
230.405 (Rule 405);
* * * * *
0
18. Add Sec. 230.140a to read as follows:
Sec. 230.140a Definition of ``distribution'' in section 2(a)(11) for
certain parties.
A person who has acted as an underwriter of the securities of a
special purpose acquisition company and takes steps to facilitate the
de-SPAC transaction, or any related financing transaction, or otherwise
participates (directly or indirectly) in the de-SPAC transaction will
be deemed to be engaged in the distribution of the securities of the
surviving public entity in a de-SPAC transaction within the meaning of
section 2(a)(11) of the Act. Terms used in this subsection have the
same definitions as in Item 1601 of Regulation S-K (17 CFR 229.1601).
0
19. Add Sec. 230.145a to read as follows:
Sec. 230.145a Business combinations with reporting shell companies.
With respect to a reporting shell company's shareholders, any
direct or indirect business combination of a reporting shell company
that is not a business combination related shell company involving
another entity that is not a shell company, as those terms are defined
in Sec. 230.405, is deemed to involve an offer, offer to sell, offer
for sale, or sale within the meaning of section 2(a)(3) of the Act. For
purposes of this rule, a reporting shell company is a company other
than an asset-backed issuer as defined in Item 1101(b) of Regulation AB
(Sec. 229.1101(b) of this chapter), that has:
(1) No or nominal operations;
(2) Either:
(i) No or nominal assets;
(ii) Assets consisting solely of cash and cash equivalents; or
(iii) Assets consisting of any amount of cash and cash equivalents
and nominal other assets; and
(3) an obligation to file reports under Section 13 (15 U.S.C. 78m)
or Section 15(d) (15 U.S.C. 78o(d)) of the Securities Exchange Act of
1934 (15 U.S.C. 78a et seq.).
* * * * *
0
20. Amend Sec. 230.163A by:
0
a. Removing the preliminary note;
0
b. Adding an introductory paragraph; and
0
c. Revising paragraph (b)(3)(i).
The revision and addition read as follows:
Sec. 230.163A Exemption from section 5(c) of the Act for certain
communications made by or on behalf of issuers more than 30 days before
a registration statement is filed.
Attempted compliance with this section does not act as an exclusive
election and the issuer also may claim the availability of any other
applicable exemption or exclusion. Reliance on this section does not
affect the availability of any other exemption or exclusion from the
requirements of section 5 of the Act.
* * * * *
(b) * * *
(3) * * *
(i) A blank check company issuing penny stock, as defined in Sec.
230.405 (Rule 405);
* * * * *
0
21. Amend Sec. 230.164 by:
0
a. Removing the preliminary notes;
0
b. Adding an introductory paragraph; and
0
c. Revising paragraph (e)(2)(i).
The revision and addition read as follows:
Sec. 230.164 Post-filing free writing prospectuses in connection
with certain registered offerings.
This section is not available for any communication that, although
in technical compliance with this section, is part of a plan or scheme
to evade the requirements of section 5 of the Act. Attempted compliance
with this section does not act as an exclusive election and the person
relying on this section also may claim the availability of any other
applicable exemption or exclusion. Reliance on this section does not
affect the availability of any other exemption or exclusion from the
requirements of section 5 of the Act.
* * * * *
(e) * * *
(2) * * *
[[Page 29568]]
(i) A blank check company issuing penny stock, as defined in Sec.
230.405 (Rule 405);
* * * * *
0
22. Amend Sec. 230.174 by revising the heading and paragraph (g) to
read as follows:
Sec. 230.174 Delivery of prospectus by dealers; exemptions under
section 4(a)(3) of the Act.
* * * * *
(g) If the registration statement relates to an offering of
securities of a blank check company issuing penny stock, as defined in
Rule 405 (Sec. 230.405), the statutory period for prospectus delivery
specified in section 4(a)(3) of the Act shall not terminate until 90
days after the date funds and securities are released from the escrow
or trust account pursuant to Rule 419 under the Act (17 CFR 230.419).
* * * * *
0
23. Amend Sec. 230.405 by:
0
a. Adding the definition for ``blank check company'' in alphabetical
order;
0
b. Adding the definition for ``blank check company issuing penny
stock'' in alphabetical order;
0
c. Revising paragraph (1)(ii)(A) in the definition for ``ineligible
issuer''; and
0
d. Adding paragraph (3)(iv) to the definition for ``smaller reporting
company''.
The additions and revisions read as follows:
Sec. 230.405 Definitions of terms.
* * * * *
Blank check company. The term blank check company means a company
that has no specific business plan or purpose or has indicated that its
business plan is to engage in a merger or acquisition with an
unidentified company or companies, or other entity or person.
* * * * *
Blank check company issuing penny stock. The term blank check
company issuing penny stock means a company that is subject to Sec.
230.419 of this chapter.
* * * * *
Ineligible issuer. (1) * * *
(ii) * * *
(A) A blank check company issuing penny stock (as defined in Sec.
230.405);
* * * * *
Smaller reporting company. * * *
(3) * * *
(iv) Upon the consummation of a de-SPAC transaction, as defined in
Sec. 229.1601(a) (Item 1601(a) of Regulation S-K), an issuer must re-
determine its status as a smaller reporting company pursuant to the
thresholds set forth in paragraphs (1) and (2) of this definition prior
to its first filing, other than pursuant to Items 2.01(f), 5.01(a)(8),
and/or 9.01(c) of Form 8-K, following the de-SPAC transaction and
reflect this re-determination in its next periodic report.
(A) Public float is measured as of a date within four business days
after the consummation of the de-SPAC transaction and is computed by
multiplying the aggregate worldwide number of shares of its voting and
non-voting common equity held by non-affiliates as of that date by the
price at which the common equity was last sold, or the average of the
bid and asked prices of common equity, in the principal market for the
common equity; and
(B) Annual revenues are the annual revenues of the target company,
as defined in Sec. 229.1601(d) (Item 1601(d) of Regulation S-K), as of
the most recently completed fiscal year reported in the Form 8-K filed
pursuant to Items 2.01(f), 5.01(a)(8), and/or 9.01(c) of Form 8-K.
* * * * *
0
24. Amend Sec. 230.419 by:
0
a. Revising the heading;
0
b. Revising paragraph (a)(1);
0
c. Removing paragraph (a)(2);
0
d. Redesignating paragraph (a)(3) as paragraph (a)(2); and
0
e. Revising paragraph (b)(1)(i).
The revisions read as follows:
Sec. 230.419 Offerings by blank check companies issuing penny stock.
(a) * * *
(1) The provisions of this section shall apply to every
registration statement filed under the Act relating to an offering by a
blank check company that:
(i) Is a development stage company; and
(ii) Is issuing ``penny stock,'' as defined in Sec. 240.3a51-1 of
this chapter (Rule 3a51-1) under the Securities Exchange Act of 1934
(``Exchange Act'').
* * * * *
(b) * * *
(1) * * *
(i) Except as otherwise provided in this section or prohibited by
other applicable law, all securities issued in connection with an
offering by a blank check company subject to this section and the gross
proceeds from the offering shall be deposited promptly into:
* * * * *
0
25. Revise Sec. 230.430B(b)(2)(iv)(A) to read as follows:
Sec. 230.430B Prospectus in a registration statement after effective
date.
(b) * * *
(2) * * *
(iv) * * *
(A) A blank check company issuing penny stock, as defined in Sec.
230.405 (Rule 405);
* * * * *
0
26. Revise Sec. 230.437a(a)(1) to read as follows:
Sec. 230.437a Written consents.
(a) * * *
(1) Are not a blank check company issuing penny stock, as defined
in Sec. 230.405 (Rule 405); and
* * * * *
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
0
27. The general authority citation for part 232 continues to read in
part as follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3,
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c),
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350,
unless otherwise noted.
* * * * *
0
28. Amend Sec. 232.405 by:
0
a. Revising the introductory text and paragraphs (a)(2) and (4);
0
b. Removing ``and'' from the end of the paragraph (b)(1)(i);
0
c. Removing the period and adding in its place ``; and'' in paragraph
(b)(1)(ii);
0
d. Adding paragraph (b)(1)(iii);
0
e. Adding paragraph (b)(4); and
0
f. Revising Note 1 to Sec. 232.405.
The revisions and additions read as follows:
Sec. 232.405 Interactive Data File Submissions.
This section applies to electronic filers that submit Interactive
Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101)
of Regulation S-K), paragraph (101) of Part II--Information Not
Required to be Delivered to Offerees or Purchasers of Form F-10 (Sec.
239.40 of this chapter), Note D.5 of Exchange Act Rule 14a-101 (Sec.
240.14a-101 of this chapter), General Instruction L of Exchange Act
Rule 14d-100 (240.14d-100 of this chapter), paragraph 101 of the
Instructions as to Exhibits of Form 20-F (Sec. 249.220f of this
chapter), paragraph B.(15) of the General Instructions to Form 40-F
(Sec. 249.240f of this chapter), paragraph C.(6) of the General
Instructions to Form 6-K (Sec. 249.306 of this chapter), General
Instruction C.3.(g) of Form N-1A (Sec. Sec. 239.15A and 274.11A of
this chapter), General Instruction I of Form N-2 (Sec. Sec. 239.14 and
274.11a-1 of this chapter), General Instruction C.3.(h) of Form N-3
(Sec. Sec. 239.17a and 274.11b of
[[Page 29569]]
this chapter), General Instruction C.3.(h) of Form N-4 (Sec. Sec.
239.17b and 274.11c of this chapter), General Instruction C.3.(h) of
Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter), and General
Instruction C.4 of Form N-CSR (Sec. Sec. 249.331 and 274.128 of this
chapter) specify when electronic filers are required or permitted to
submit an Interactive Data File (Sec. 232.11), as further described in
note 1 to this section. This section imposes content, format, and
submission requirements for an Interactive Data File, but does not
change the substantive content requirements for the financial and other
disclosures in the Related Official Filing (Sec. 232.11).
(a) * * *
(2) Be submitted only by an electronic filer either required or
permitted to submit an Interactive Data File as specified by Sec.
229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K),
paragraph (101) of Part II--Information Not Required to be Delivered to
Offerees or Purchasers of Form F-10 (Sec. 239.40 of this chapter),
Note D.5 of Exchange Act Rule 14a-101 (Sec. 240.14a-101 of this
chapter), General Instruction L of Exchange Act Rule 14d-100 (240.14d-
100 of this chapter), paragraph 101 of the Instructions as to Exhibits
of Form 20-F (Sec. 249.220f of this chapter), paragraph B.(15) of the
General Instructions to Form 40-F (Sec. 249.240f of this chapter),
paragraph C.(6) of the General Instructions to Form 6-K (Sec. 249.306
of this chapter), General Instruction C.3.(g) of Form N-1A (Sec. Sec.
239.15A and 274.11A of this chapter), General Instruction I of Form N-2
(Sec. Sec. 239.14 and 274.11a-1 of this chapter), General Instruction
C.3.(h) of Form N-3 (Sec. Sec. 239.17a and 274.11b of this chapter),
General Instruction C.3.(h) of Form N-4 (Sec. Sec. 239.17b and 274.11c
of this chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.
239.17c and 274.11d of this chapter), or General Instruction C.4 of
Form N-CSR (Sec. Sec. 249.331 and 274.128 of this chapter), as
applicable;
* * * * *
(4) Be submitted in accordance with the EDGAR Filer Manual and, as
applicable, Item 601(b)(101) of Regulation S-K (Sec. 229.601(b)(101)
of this chapter), paragraph (101) of Part II--Information Not Required
to be Delivered to Offerees or Purchasers of Form F-10 (Sec. 239.40 of
this chapter), Note D.5 of Exchange Act Rule 14a-101 (Sec. 240.14a-101
of this chapter), General Instruction L of Exchange Act Rule 14d-100
(240.14d-100 of this chapter), paragraph 101 of the Instructions as to
Exhibits of Form 20-F (Sec. 249.220f of this chapter), paragraph
B.(15) of the General Instructions to Form 40-F (Sec. 249.240f of this
chapter), paragraph C.(6) of the General Instructions to Form 6-K
(Sec. 249.306 of this chapter), General Instruction C.3.(g) of Form N-
1A (Sec. Sec. 239.15A and 274.11A of this chapter), General
Instruction I of Form N-2 (Sec. Sec. 239.14 and 274.11a-1 of this
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec. 239.17a
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4
(Sec. Sec. 239.17b and 274.11c of this chapter), General Instruction
C.3.(h) of Form N-6 (Sec. Sec. 239.17c and 274.11d of this chapter);
or General Instruction C.4 of Form N-CSR (Sec. Sec. 249.331 and
274.128 of this chapter).
* * * * *
(b) * * *
(1) * * *
(iii) The disclosure set forth in paragraph (4) of this section.
* * * * *
(4) The disclosure provided under Regulation S-K (17 CFR 229) and
related provisions that is required to be tagged, including, as
applicable:
(a) The information required by Subpart 1600 of Regulation S-K
(Sec. 229.1601 through Sec. 229.1610 of this chapter).
* * * * *
Note 1 to Sec. 232.405: Section 229.601(b)(101) of this
chapter (Item 601(b)(101) of Regulation S-K) specifies the
circumstances under which an Interactive Data File must be submitted
and the circumstances under which it is permitted to be submitted,
with respect to Sec. 239.11 of this chapter (Form S-1), Sec.
239.13 of this chapter (Form S-3), Sec. 239.25 of this chapter
(Form S-4), Sec. 239.18 of this chapter (Form S-11), Sec. 239.31
of this chapter (Form F-1), Sec. 239.33 of this chapter (Form F-3),
Sec. 239.34 of this chapter (Form F-4), Sec. 249.310 of this
chapter (Form 10-K), Sec. 249.308a of this chapter (Form 10-Q), and
Sec. 249.308 of this chapter (Form 8-K). Note D.5 of Section
240.14a-101 of this chapter (Note D.5 of Exchange Act Rule 14a-101)
specifies the circumstances under which an Interactive Data File
must be submitted with respect to Sec. 240.14a-101 of this chapter
(Schedule 14A). General Instruction L of Section 240.14d-100 of this
chapter (General Instruction L) of Exchange Act Rule 14d-100)
specifies the circumstances under which an Interactive Data File
must be submitted with respect to Sec. 240.14d-100 of this chapter
(Schedule TO). Paragraph (101) of Part II--Information not Required
to be Delivered to Offerees or Purchasers of Sec. 239.40 of this
chapter (Form F-10) specifies the circumstances under which an
Interactive Data File must be submitted and the circumstances under
which it is permitted to be submitted, with respect to Form F-10.
Paragraph 101 of the Instructions as to Exhibits of Sec. 249.220f
of this chapter (Form 20-F) specifies the circumstances under which
an Interactive Data File must be submitted and the circumstances
under which it is permitted to be submitted, with respect to Form
20-F. Paragraph B.(15) of the General Instructions to Sec. 249.240f
of this chapter (Form 40-F) and Paragraph C.(6) of the General
Instructions to Sec. 249.306 of this chapter (Form 6-K) specify the
circumstances under which an Interactive Data File must be submitted
and the circumstances under which it is permitted to be submitted,
with respect to Sec. 249.240f of this chapter (Form 40-F) and Sec.
249.306 of this chapter (Form 6-K). Section 229.601(b)(101) (Item
601(b)(101) of Regulation S-K), paragraph (101) of Part II--
Information not Required to be Delivered to Offerees or Purchasers
of Form F-10, paragraph 101 of the Instructions as to Exhibits of
Form 20-F, paragraph B.(15) of the General Instructions to Form 40-
F, and paragraph C.(6) of the General Instructions to Form 6-K all
prohibit submission of an Interactive Data File by an issuer that
prepares its financial statements in accordance with 17 CFR 210.6-01
through 210.6-10 (Article 6 of Regulation S-X). For an issuer that
is a management investment company or separate account registered
under the Investment Company Act of 1940 (15 U.S.C. 80a et seq.) or
a business development company as defined in Section 2(a)(48) of the
Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), General
Instruction C.3.(g) of Form N-1A (Sec. Sec. 239.15A and 274.11A of
this chapter), General Instruction I of Form N-2 (Sec. Sec. 239.14
and 274.11a-1 of this chapter), General Instruction C.3.(h) of Form
N-3 (Sec. Sec. 239.17a and 274.11b of this chapter), General
Instruction C.3.(h) of Form N-4 (Sec. Sec. 239.17b and 274.11c of
this chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.
239.17c and 274.11d of this chapter), and General Instruction C.4 of
Form N-CSR (Sec. Sec. 249.331 and 274.128 of this chapter), as
applicable, specifies the circumstances under which an Interactive
Data File must be submitted.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
29. The general authority citation for part 239 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-
3, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a),
78ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24,
80a-26, 80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106,
126 Stat. 312, unless otherwise noted.
* * * * *
0
30. Amend Form S-1 (referenced in Sec. 239.11) by adding General
Instruction VIII to read as follows:
Note: The text of Form S-1 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form S-1
* * * * *
General Instructions
* * * * *
[[Page 29570]]
VIII. Offering by a Special Purpose Acquisition Company
If a registration statement on this Form S-1 is being used to
register an offering of securities of a special purpose acquisition
company, as defined in Item 1601(b) of Regulation S-K (17 CFR
229.1601(b)), other than in connection with a de-SPAC transaction, as
defined in Item 1601(a) of Regulation S-K (17 CFR 229.1601(a)), the
registrant must furnish in the prospectus the information required by
Items 1602 and 1603 of Regulation S-K (17 CFR 229.1602 and 229.1603),
in the manner set forth by the structured data provision of Item 1610
of Regulation S-K (17 CFR 229.1610), in addition to the Items that are
otherwise required by this Form. If the securities to be registered on
this Form will be issued in a de-SPAC transaction, attention is
directed to the requirements of Form S-4 applicable to de-SPAC
transactions, including, but not limited to, General Instruction L.
0
31. Amend Form S-4 (referenced in Sec. 239.25) by:
0
a. Adding General Instruction L;
0
b. Revising paragraph (b)(7) introductory text of Item 17 and
Instruction 1 of paragraph (b)(7) of Item 17; and
0
c. Revising Instruction 1 to the signature block.
The addition and revisions read as follows:
Note: The text of Form S-4 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form S-4
* * * * *
General Instructions
* * * * *
L. De-SPAC Transactions
1. If securities to be registered on this Form will be issued in a
de-SPAC transaction, as defined in Item 1601(a) of Regulation S-K (17
CFR 229.1601(a)), then the disclosure provisions of Items 1603 through
1607 and 1609 of Regulation S-K (17 CFR 229.1603 through 229.1607 and
229.1609), as well as the structured data provision of Item 1610 of
Regulation S-K (17 CFR 229.1610), shall apply in addition to the
provisions of this Form. To the extent that the applicable disclosure
requirements of Subpart 229.1600 are inconsistent with the disclosure
requirements of this Form, the requirements of Subpart 229.1600 are
controlling. If the securities to be registered on this Form will be
issued by a special purpose acquisition company, as defined in Item
1601(b) of Regulation S-K (17 CFR 229.1601(b)), in a de-SPAC
transaction, the term ``registrant'' for purposes of the disclosure
requirements of this Form shall mean the special purpose acquisition
company.
2. If the target company, as defined in Item 1601(d) of Regulation
S-K (17 CFR 229.1601(d)), in a de-SPAC transaction is not subject to
the reporting requirements of either Section 13(a) or 15(d) of the
Exchange Act, provide the following additional information with respect
to the target company:
a. Item 101 of Regulation S-K (Sec. 229.101 of this chapter),
description of business;
b. Item 102 of Regulation S-K (Sec. 229.102 of this chapter),
description of property;
c. Item 103 of Regulation S-K (Sec. 229.103 of this chapter),
legal proceedings;
d. Item 304 of Regulation S-K (Sec. 229.304 of this chapter),
changes in and disagreements with accountants on accounting and
financial disclosure;
e. Item 403 of Regulation S-K (Sec. 229.403 of this chapter),
security ownership of certain beneficial owners and management,
assuming the completion of the de-SPAC transaction and any related
financing transaction; and
f. Item 701 of Regulation S-K (Sec. 229.701 of this chapter),
recent sales of unregistered securities.
If the target company is a foreign private issuer, as defined in
Rule 405 (Sec. 230.405 of this chapter), information with respect to
the target company may be provided in accordance with Items 3.C, 4,
6.E, 7.A, 8.A.7, and 9.E of Form 20-F, in lieu of the information
specified above.
3. If securities to be registered on this Form will be issued in a
de-SPAC transaction, as defined in Item 1601(a) of Regulation S-K (17
CFR 229.1601(a)), the prospectus must be distributed to security
holders no later than the lesser of 20 calendar days prior to the date
on which action is to be taken or the maximum number of days permitted
for disseminating the prospectus under the applicable laws of the
jurisdiction of incorporation or organization.
* * * * *
Item 17. Information With Respect to Companies Other Than S-3 Companies
* * * * *
(7) Financial statements that would be required in an annual report
sent to security holders under Rules 14a-3(b)(1) and (b)(2) (Sec.
240.14b-3 of this chapter), if an annual report was required. In a de-
SPAC transaction, provide the financial statements required by Sec.
240.15-01 (Rule 15-01 of Regulation S-X). If the registrant's security
holders are not voting, the transaction is not a roll-up transaction
(as described by Item 901 of Regulation S-K (Sec. 229.901 of this
chapter)), and:
* * * * *
Instructions
1. The financial statements required by paragraph for the latest
fiscal year need be audited only to the extent practicable. The
financial statements for the fiscal years before the latest fiscal year
need not be audited if they were not previously audited. If the company
being acquired will be a predecessor to a registrant that is a shell
company, see Sec. 210.15-01(a).
* * * * *
Signatures
* * * * *
Instructions
1. The registration statement shall be signed by the registrant,
its principal executive officer or officers, its principal financial
officer, its controller or principal accounting officer, and by at
least a majority of the board of directors or persons performing
similar functions. If the registrant is a foreign person, the
registration statement shall also be signed by its authorized
representative in the United States. Where the registrant is a limited
partnership, the registration statement shall be signed by a majority
of the board of directors of any corporate general partner signing the
registration statement. If the securities to be registered on this Form
will be issued by the special purpose acquisition company in a de-SPAC
transaction, as such terms are defined in Items 1601(b) and (a) of
Regulation S-K, the term ``registrant'' for purposes of this
instruction shall mean the special purpose acquisition and the target
company, as such term is defined in Item 1601(d) of Regulation S-K.
* * * * *
0
32. Amend Form F-1 (referenced in Sec. 239.31) by adding General
Instruction VII to read as follows:
Note: The text of Form F-1 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form F-1
* * * * *
General Instructions
* * * * *
[[Page 29571]]
VII. Offering by a Special Purpose Acquisition Company
If a registration statement on this Form F-1 is being used to
register an offering of securities of a special purpose acquisition
company, as defined in Item 1601(b) of Regulation S-K (17 CFR
229.1601(b)), other than in connection with a de-SPAC transaction, as
defined in Item 1601(a) of Regulation S-K (17 CFR 229.1601(a)), the
registrant must furnish in the prospectus the information required by
Items 1602 and 1603 of Regulation S-K (17 CFR 229.1602 and 229.1603),
in the manner set forth by the structured data provision of Item 1610
of Regulation S-K (17 CFR 229.1610), in addition to the Items that are
otherwise required by this Form. If the securities to be registered on
this Form will be issued in a de-SPAC transaction, attention is
directed to the requirements of Form F-4 applicable to de-SPAC
transactions, including, but not limited to, General Instruction I.
* * * * *
0
33. Amend Form F-4 (referenced in Sec. 239.34) by:
0
a. Adding General Instruction I;
0
b. Revising Instruction 1 to paragraph (b)(5) of Item 17; and
0
c. Revising the Instructions to paragraph (b)(5) and (b)(6) of Item 17;
and
0
d. Revising Instruction 1 to the signature block.
The addition and revisions read as follows:
Note: The text of Form F-4 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form F-4
* * * * *
General Instructions
* * * * *
I. De-SPAC Transactions
1. If securities to be registered on this Form will be issued in a
de-SPAC transaction, as defined in Item 1601(a) of Regulation S-K (17
CFR 229.1601(a)), then the disclosure provisions of Items 1603 through
1607 and 1609 of Regulation S-K (17 CFR 229.1603 through 229.1607 and
1609), as well as the structured data provision of Item 1610 of
Regulation S-K (17 CFR 229.1610), shall apply in addition to the
provisions of this Form. To the extent that the disclosure requirements
of Subpart 229.1600 are inconsistent with the disclosure requirements
of this Form, the requirements of Subpart 229.1600 are controlling. If
the securities to be registered on this Form will be issued by a
special purpose acquisition company, as defined in Item 1601(b) of
Regulation S-K (17 CFR 229.1601(b)), in a de-SPAC transaction, the term
``registrant'' for purposes of the disclosure requirements of this Form
shall mean the special purpose acquisition company.
2. If the target company, as defined in Item 1601(d) of Regulation
S-K (17 CFR 229.1601(d)), in a de-SPAC transaction is not subject to
the reporting requirements of either Section 13(a) or 15(d) of the
Exchange Act, provide the following additional information with respect
to the company:
a. Item 101 of Regulation S-K (Sec. 229.101 of this chapter),
description of business;
b. Item 102 of Regulation S-K (Sec. 229.102 of this chapter),
description of property;
c. Item 103 of Regulation S-K (Sec. 229.103 of this chapter),
legal proceedings;
d. Item 403 of Regulation S-K (Sec. 229.403 of this chapter),
security ownership of certain beneficial owners and management,
assuming the completion of the de-SPAC transaction and any related
financing transaction; and
e. Item 701 of Regulation S-K (Sec. 229.701 of this chapter),
recent sales of unregistered securities.
If the target company is a foreign private issuer, as defined in
Rule 405 (Sec. 230.405 of this chapter), information with respect to
the target company may be provided in accordance with Items 3.C, 4,
6.E, 7.A, 8.A.7, and 9.E of Form 20-F, in lieu of the information
specified above.
3. If securities to be registered on this Form will be issued in a
de-SPAC transaction, as defined in Item 1601(a) of Regulation S-K (17
CFR 229.1601(a)), the prospectus must be distributed to security
holders no later than the lesser of 20 calendar days prior to the date
on which action is to be taken or the maximum number of days permitted
for disseminating the prospectus under the applicable laws of the
jurisdiction of incorporation or organization.
* * * * *
Part I
* * * * *
Item 17. Information With Respect to Foreign Companies Other Than F-3
Companies
* * * * *
Instructions
1. The financial statements required by this paragraph for the
latest fiscal year need be audited only to the extent practicable. The
financial statements for the fiscal years before the latest fiscal year
need not be audited if they were not previously audited. If the foreign
company being acquired will be a predecessor to a registrant that is a
shell company, see Sec. 210.15-01(a).
* * * * *
Instructions to Paragraph (b)(5) and (b)(6)
If the financial statements required by paragraphs (b)(5) and
(b)(6) are prepared on the basis of a comprehensive body of accounting
principles other than U.S. GAAP, provide a reconciliation to U.S. GAAP
in accordance with Item 18 of Form 20-F (Sec. 249.220f of this
chapter) if the foreign business being acquired will be a predecessor
to the issuer that is a shell company or, in all other circumstances,
with Item 17 of Form 20-F (Sec. 249.220f of this chapter) unless a
reconciliation is unavailable or not obtainable without unreasonable
cost or expense. At a minimum, provide a narrative description of all
material variations in accounting principles, practices and methods
used in preparing the non-U.S. GAAP financial statements from those
accepted in the U.S. when the financial statements are prepared on a
basis other than U.S. GAAP.
Signatures
* * * * *
Instructions
1. The registration statement shall be signed by the registrant,
its principal executive officer or officers, its principal financial
officer, its controller or principal accounting officer, at least a
majority of the board of directors or persons performing similar
functions and its authorized representative in the United States. Where
registrant is a limited partnership, the registration statement shall
be signed by a majority of the board of directors of any corporate
general partner signing the registration statement. If the securities
to be registered on this Form will be issued by the special purpose
acquisition company in a de-SPAC transaction, as such terms are defined
in Items 1601(b) and (a) of Regulation S-K, the term ``registrant'' for
purposes of this instruction shall mean the special purpose acquisition
and the target company, as such term is defined in Item 1601(d) of
Regulation S-K.
* * * * *
[[Page 29572]]
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
34. The general authority citation for part 240 continues to read as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and sec. 503 and 602,
Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
35. Amend Sec. 240.12b-2 by adding paragraph (3)(iv) to the definition
of ``smaller reporting company'' to read as follows:
Sec. 240.12b-2 Definitions.
* * * * *
Smaller reporting company. * * *
(3) * * *
(iv) Upon the consummation of a de-SPAC transaction, as defined in
Item 1601(a) of Regulation S-K (17 CFR 229.1601(a)), an issuer must re-
determine its status as a smaller reporting company pursuant to the
thresholds set forth in paragraphs (1) and (2) of this definition prior
to its first filing, other than pursuant to Items 2.01(f), 5.01(a)(8),
and/or 9.01(c) of Form 8-K, following the de-SPAC transaction and
reflect this re-determination in in its next periodic report.
(A) Public float is measured as of a date within 4 business days
after the consummation of the de-SPAC transaction and is computed by
multiplying the aggregate worldwide number of shares of its voting and
non-voting common equity held by non-affiliates as of that date by the
price at which the common equity was last sold, or the average of the
bid and asked prices of common equity, in the principal market for the
common equity; and
(B) Annual revenues are the annual revenues of the target company,
as defined in Item 1601(d) of Regulation S-K (17 CFR 229.1601(d)), as
of the most recently completed fiscal year reported in the Form 8-K
filed pursuant to Items 2.01(f), 5.01(a)(8), and/or 9.01(c) of Form 8-
K.
* * * * *
0
36. Amend Sec. 240.14a-6 by adding paragraph (q) to read as follows:
Sec. 240.14a-6 Filing requirements.
* * * * *
(q) De-SPAC transactions. If a transaction is a de-SPAC
transaction, as defined in Sec. 229.1601(a) of this chapter (Item
1601(a) of Regulation S-K), the proxy statement of the special purpose
acquisition company as defined in Sec. 229.1601(b) of this chapter
(Item 1601(b) of Regulation S-K) must be distributed to security
holders no later than the lesser of 20 calendar days prior to the date
on which the meeting of security holders is held or action is taken, or
the maximum number of days permitted for disseminating the proxy
statement under the applicable laws of the jurisdiction of
incorporation or organization.
0
37. Amend Sec. 240.14a-101 by adding paragraph D.5 to the Notes and
paragraph (f) to Item 14 to read as follows:
* * * * *
Sec. 240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
Notes * * *
D. * * *
5. Interactive Data File. An Interactive Data File must be included
in accordance with Sec. 232.405 of this chapter (Rule 405 of
Regulation S-T) and the EDGAR Filer Manual where applicable pursuant to
Item 14(f) of this Schedule and Sec. 229.1610 of this chapter (Item
1610 of Regulation S-K).
* * * * *
Item 14. * * *
* * * * *
(f) De-SPAC transactions. (1) If the transaction is a de-SPAC
transaction, as defined in Sec. 229.1601(a) (Item 1601(a) of
Regulation S-K), then the disclosure provisions of Sec. Sec. 229.1603
through 229.1607 and 229.1609 (Items 1603 through 1607 and 1609 of
Regulation S-K), as well as the structured data provision of Sec.
229.1610 (Item 1610 of Regulation S-K), shall apply to the transaction
in addition to the provisions of this schedule. To the extent that the
disclosure requirements of Subpart 229.1600 are inconsistent with the
disclosure requirements of this schedule, the requirements of Subpart
229.1600 are controlling.
(2) Provide the following additional information for the target
company:
(i) Information required by Sec. 229.101 of this chapter (Item 101
of Regulation S-K), description of business;
(ii) Information required by Sec. 229.102 of this chapter (Item
102 of Regulation S-K), description of property;
(iii) Information required by Sec. 229.103 of this chapter (Item
103 of Regulation S-K), legal proceedings;
(iv) Section 229.304 of this chapter (Item 304 of Regulation S-K),
changes in and disagreements with accountants on accounting and
financial disclosure;
(v) Information required by Sec. 229.403 of this chapter (Item 403
of Regulation S-K), security ownership of certain beneficial owners and
management, assuming the completion of the de-SPAC transaction and any
related financing transaction;
(vi) Information required by Sec. 229.701 of this chapter (Item
701 of Regulation S-K), recent sales of unregistered securities; and
(vii) If any directors are appointed without action by the security
holders of the special purpose acquisition company, Sec. Sec.
229.103(c)(2), 229.401, and 229.404(a) and (b) of this chapter (Items
103(c)(2), 401, and 404(a) and (b) of Regulation S-K).
* * * * *
0
38. Amend Sec. 240.14c-2 by adding paragraph (e) to read as follows:
Sec. 240.14c-2 Distribution of information statement.
* * * * *
(e) If a transaction is a de-SPAC transaction, as defined in Sec.
229.1601(a) of this chapter (Item 1601(a) of Regulation S-K), the
information statement of the special purpose acquisition company as
defined in Sec. 229.1601(b) (Item 1601(b) of Regulation S-K) must be
distributed to security holders no later than the lesser of 20 calendar
days prior to the date on which the meeting of security holders is held
or action is taken, or the maximum number of days permitted for
disseminating the information statement under the applicable laws of
the jurisdiction of incorporation or organization.
0
39. Amend Sec. 240.14d-100 by:
0
a. Redesignating General Instruction K as General Instruction M; and
0
b. Adding new General Instructions K and L.
The additions read as follows:
* * * * *
Sec. 240.14d-100 Schedule TO. Tender offer statement under section
14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934.
* * * * *
General Instructions:
* * * * *
K. De-SPAC Transactions. If the filing relates to a de-SPAC
transaction, as defined in Sec. 229.1601(a) of this chapter (Item
1601(a) of Regulation S-K), then the disclosure provisions of
Sec. Sec. 229.1603 through 229.1609 of this chapter (Items 1603
through 1609 of Regulation S-K), as well as the structured data
provision of Sec. 229.1610 of this chapter (Item 1610
[[Page 29573]]
of Regulation S-K), shall apply to the transaction in addition to the
provisions of this statement. To the extent that the disclosure
requirements of Subpart 229.1600 of this chapter are inconsistent with
the disclosure requirements of this filing, the requirements of Subpart
229.1600 of this chapter are controlling.
L. Interactive Data File. An Interactive Data File must be included
in accordance with Sec. 232.405 of this chapter (Rule 405 of
Regulation S-T) and the EDGAR Filer Manual where applicable pursuant to
Item 14(f) of Sec. 240.14a-101 of this chapter (Schedule 14A) and
Sec. 229.1610 of this chapter (Item 1610 of Regulation S-K).
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
40. The authority citation for part 249 continues to read, in part, as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001,
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
Section 249.220f is also issued under secs. 3(a), 202, 208, 302,
306(a), 401(a), 401(b), 406 and 407, Pub. L. 107-204, 116 Stat. 745,
and secs. 2 and 3, Pub. L. 116-222, 134 Stat. 1063.
* * * * *
Section 249.308 is also issued under 15 U.S.C. 80a-29 and 80a-
37.
* * * * *
0
41. Amend Form 20-F (referenced in Sec. 249.220f) by adding
Instruction 4 to Item 8 to read as follows:
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 20-F
* * * * *
Item 8. Financial Information
* * * * *
Instructions to Item 8:
* * * * *
4. When the issuer is a shell company that will acquire a business
that will be its predecessor, provide the information required by Sec.
240.15-01 (Rule 15-01 of Regulation S-X).
* * * * *
0
42. Amend Form 8-K (referenced in Sec. 249.308) by revising paragraph
(f) of Item 2.01 by removing the phrase ``the registrant were filing a
general form for registration of securities on Form 10'' and adding in
its place ``the acquired business were filing a general form for
registration of securities on Form 10''. The revision reads as follows:
Note: The text of Form 8-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 8-K
* * * * *
Item 2.01 Completion of Acquisition or Disposition of Assets
* * * * *
(f) if the registrant was a shell company, other than a business
combination related shell company, as those terms are defined in Rule
12b-2 under the Exchange Act (17 CFR 240.12b-2), immediately before the
transaction in which the registrant acquired a business, disclose the
information that would be required if the acquired business were filing
a general form for registration of securities on Form 10 under the
Exchange Act reflecting all classes of the registrant's securities
subject to the reporting requirements of Section 13 (15 U.S.C. 78m) or
Section 15(d) (15 U.S.C. 78o(d)) of such Act upon consummation of the
transaction. Notwithstanding General Instruction B.3. to Form 8-K, if
any disclosure required by this Item 2.01(f) is previously reported, as
that term is defined in Rule 12b-2 under the Exchange Act (17 CFR
240.12b-2), the registrant may identify the filing in which that
disclosure is included instead of including that disclosure in this
report.
* * * * *
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
0
43. The authority citation for part 270 continues to read in part as
follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
and Pub. L. 111-203, sec. 939A, 124 Stat. 1376, unless otherwise
noted.
0
44. Add Sec. 270.3a-10 to read as follows:
Sec. 270.3a-10 Special Purpose Acquisition Companies.
(a) Notwithstanding section 3(a)(1)(A) of the Act, a special
purpose acquisition company (``SPAC'') will not be deemed to be an
investment company; provided that:
(1) The SPAC's assets consist solely of Government securities,
securities issued by government money market funds as defined in Sec.
270.2a-7(a)(14), and cash items prior to completion of the de-SPAC
transaction;
(2) The assets set forth in paragraph (a)(1) of this section are
not at any time acquired or disposed of for the primary purpose of
recognizing gains or decreasing losses resulting from market value
changes;
(3) The SPAC:
(i) Seeks to complete a single de-SPAC transaction as a result of
which:
(A) The surviving company, either directly or through a primarily
controlled company, will be primarily engaged in the business of the
target company or companies, which business is not that of an
investment company, and
(B) The surviving company will have at least one class of
securities listed for trading on a national securities exchange;
(ii) Files a Form 8-K with the Commission, no later than 18 months
after the effective date of its initial registration statement,
disclosing an agreement to engage in the de-SPAC transaction with at
least one target company; and
(iii) Completes the de-SPAC transaction no later than 24 months
after the effective date of its initial registration statement.
(4) Any assets of the SPAC:
(i) That are not used in connection with the de-SPAC transaction;
or
(ii) In the event of a failure of the SPAC to file a Form 8-K
within the time frame set forth in paragraph (a)(3)(ii) of this section
or complete a de-SPAC transaction within the time frame set forth in
paragraph (a)(3)(iii) of this section will be distributed in cash to
investors as soon as reasonably practicable thereafter;
(5) The SPAC is primarily engaged in the business of seeking to
complete a single de-SPAC transaction, as set forth in paragraphs
(a)(3) of this section and evidenced by:
(i) The activities of its officers, directors and employees;
(ii) Its public representations of policies;
(iii) Its historical development; and
(iv) An appropriate resolution of its board of directors, which
resolution or action has been recorded contemporaneously in its minute
books or comparable documents; and
(6) The SPAC does not hold itself out as being primarily engaged in
the business of investing, reinvesting or trading in securities.
(b) For purposes of this section:
(1) Initial registration statement means the registration statement
that the SPAC filed under the Securities Act of 1933 for its initial
public offering.
(2) Primarily controlled company means an issuer that:
(i) Is controlled within the meaning of section 2(a)(9) of the Act
by the
[[Page 29574]]
surviving company following a de-SPAC transaction with a degree of
control that is greater than that of any other person; and
(ii) Is not an investment company.
(3) Surviving company means the public company issuer that survives
a de-SPAC transaction and in which the shareholders of the SPAC
immediately prior to the de-SPAC transaction will own equity interests
immediately following the de-SPAC transaction.
(4) De-SPAC transaction has the same meaning as defined in Sec.
229.1601(a) of this chapter (Item 1601(a) of Regulation S-K).
(5) Special purpose acquisition company has the same meaning as
defined in Sec. 229.1601(b) of this chapter (Item 1601(b) of
Regulation S-K).
(6) Target company has the same meaning as defined in Sec.
229.1601(d) of this chapter (Item 1601(d) of Regulation S-K).
By the Commission.
Dated: March 30, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-07189 Filed 5-9-22; 11:15 am]
BILLING CODE 8011-01-P