Structure for SPACs: SEC Publishes Final Rules

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Mark Brod, Joe Kaufman and Rajib Chanda are Partners at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Brod, Mr. Kaufman, Mr. Chanda, Partner John Ericson, Counsel Jamie Hahn, and Associate Arielle Katzman. Related research from the Program on Corporate Governance includes SPAC Law and Myths (discussed on the Forum here) by John C. Coates, IV.

Overview

On January 24, 2024, the U.S. Securities and Exchange Commission (SEC) published its much anticipated rules to regulate initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and subsequent business combination transactions between SPACs and target companies (de-SPAC transactions). The SEC issued the nearly 600-page release just prior to the second anniversary of their issuance of the related proposed rules, which we discussed in our prior memo. In that interim period, the volume of SPAC IPOs and de-SPAC transactions have declined meaningfully for a variety of reasons. Market practice related to SPACs also continued to evolve in response to financial market developments, SEC Staff comments on SPAC SEC filings, Staff statements on accounting and disclosure matters, new Staff guidance in the form of Compliance and Disclosure Interpretations (C&DIs), judicial jurisprudence and, significantly, regulatory uncertainty surrounding the matters covered in the proposed rule. The SEC adopted most of the rules proposed in 2022 with some modification, but decided not to adopt its proposed rules regarding underwriter liability or a safe harbor from the definition of “investment company” under Section 3(a)(1)(A) of the Investment Company Act of 1940, as amended (1940 Act), opting instead to issue informal guidance on these topics in the text of the adopting release.

In the SEC’s announcement of the new rules, SEC Chair Gary Gensler underscored the objective of enhanced investor protection and articulated a three-prong approach covering disclosure, the use of projections by issuers and issuer obligations. Beyond a new formal definition of a “Special Purpose Acquisition Company (SPAC),[1]” the final rules, which go into effect 125 days after publication in the Federal Register,[2] focus on the following topics:

Set forth below is a summary of each of these key aspects of the proposal, along with considerations and potential implications.

Better Alignment of the Regulatory Treatment of Projections in De-SPAC Transactions With Those Issued in Traditional IPOs Under the PSLRA

Update: The new rules increased disclosure requirements for projections for all issuers, whether or not they are SPACs, with special requirements for SPAC issuers.

Furthermore, in connection with de-SPAC transactions, the rules: