March 12, 2024 - Last week, the LSTA hosted an intriguing webinar on the SEC’s 58 1-page final rules (the “Final Rules”) for Special Purpose Acquisition Companies (“SPACs”). The panelists included Derek Dostal of Davis Polk, Christian Nagler of Kirkland & Ellis and Joel Rubinstein of White & Case, each of whom has had extensive experience in the SPAC space for many years. After a brief review of how SPACs work and the nature of the market, the panelists focused on three primary topics: (i) Underwriter Liability under the Final Rules; (ii) the implications of the Final Rules on the characterization of SPACs as Investment Companies; and (iii) new disclosure requirements under the Final Rules around projections.

Underwriter Liability. The panelists noted that the most important takeaway from this part of the Final Rule is that the SEC declined to adopt proposed rule 140a, which would have deemed a SPAC IPO underwriter that “takes steps to facilitate” or “otherwise participates (directly or indirectly)” in a de-SPAC transaction as a statutory underwriter. Instead, the SEC issued guidance to the effect that a de-SPAC transaction is a distribution of securities even though the target company does not sell its securities in the market and that “someone is selling for the issuer or participating in the distribution of securities in the combined company to the SPAC’s investors and the broader public who may be considered a statutory underwriter, depending on the facts and circumstances.”  The panel agreed that the likely outcome is that banks will continue doing IPO-style diligence, including asking for IPO-style deliverables such as 10b-5 disclosure letters from law firms and comfort letters from auditors.

Investment Company Act. The SEC’s original rule proposal would have classified SPACs as investment companies unless they fit within a narrow safe harbor. The SEC was concerned that under certain circumstances the SPAC prior to a de-SPAC transaction could be viewed as actively managing securities. Fortunately, the Final Rule does not contain the safe harbor and instead provides general guidance. Among the factors the SEC would consider in determining whether a SPAC is an investment company are the nature of SPAC and assets (i.e., if more than 40% of assets are held in investment securities other than US. Treasuries; and the duration of the SPAC (while no bright line guidance was given, the SEC cited the 12-month period in ‘40 Act safe harbor and 18-month period in SEC rule 419). The panelists agreed that the law was already well-settled, and that the SEC’s guidance would not change market practice.

Projections.  The panelists engaged in a very robust discussion about how the Final Rule impacts the use and management of projections in SPAC transactions. Contrary to some press reports, the SEC encourages the use of the projections, even in the context of SPACs. The Final Rule requires new disclosure requirements around projections including the purpose for which the projections were prepared and the preparing party, all material bases of, and material assumptions underlying, the projections and any material factors that may affect the assumption, and whether the disclosed projections still reflect the views of the board or management of the SPAC or target company as of the most recent practicable date prior to the date of the disclosure document required to be disseminated to shareholders. 

The panelist spent the last few minutes of the webinar discussing several provisions of the Final Rule including disclosure requirements that are intended to harmonize the reporting rules for de-SPAC transactions and traditional IPOs, including dilution, conflicts of interest, fairness opinions, and information regarding SPAC sponsors. All told, the panelists agreed that the Final Rules should not materially alter market practice for SPAC transactions.  The materials and replay of the webinar are available here.

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