On March 30, 2022, the U.S. Securities and Exchange Commission (the “Commission”) released proposed rules and amendments (the “Release”), available here, regarding special purpose acquisition companies, or “SPACs.” Below, we summarize key provisions of the proposed rules, which include new and amended disclosure requirements around potential conflicts, new rules around projections, and provisions explicitly intended to make a de-SPAC transaction more like a traditional IPO.

Significantly, the Release takes the position that these new requirements would apply to existing SPACs, such that, for example, new rules around increased disclosures in connection with a de-SPAC transaction would apply to SPACs currently looking for a target.

The public comment period on the proposed rules will remain open for 60 days following the publication of the Release on the SEC’s website.

I. Additional and Amended Disclosure Requirements in Regulation S-K

The Release proposes adding both a new proposed section of SPAC-specific disclosures to Regulation S-K and amending Item 10(b) of current Regulation S-K to address perceived concerns about projections by SPACs.

A. Proposed Additional Disclosures Regarding the Sponsor, Potential Conflicts, and Dilution

The Commission proposes to add disclosure requirements for SPAC transactions through a new subpart 1600 to Regulation S-K. As shown in the table below, the new proposed subpart includes disclosures relating to the sponsor, potential conflicts of interest, and dilution, and, in connection with a de-SPAC transaction, would require a fairness determination:

Item	Summary Description	Principal Objective(s)	Applicable forms and schedules
Item 1601, Definitions	Definitions for the terms “special purpose acquisition company,” “de-SPAC transaction,” “target company,” and “SPAC sponsor.”	Establish the scope of the issuers and transactions subject to the requirements of Subpart 1600.	Forms S-1, F-1, S-4, and F-4; Schedules 14A, 14C, and TO
Item 1602, Registered offerings by special purpose acquisition companies	Require certain information on the prospectus cover page and in the prospectus summary of registration statements for offerings by SPACs other than de-SPAC transactions. Require enhanced dilution disclosure in these registration statements.	Enhance the clarity and readability of prospectuses in SPAC initial public offerings and the disclosures relating to dilution in these prospectuses.	Forms S-1 and F-1
Item 1603, SPAC sponsor; conflicts of interest	Require certain disclosure regarding the sponsor and its affiliates and any promoters of SPACs and disclosure regarding conflicts of interest between the sponsor or its affiliates or promoters and unaffiliated security holders.	Provide investors with a more complete understanding of the role of sponsors and their conflicts of interest.	Forms S-1, F-1, S-4, and F-4; Schedules 14A, 14C and TO
Item 1604, De-SPAC transactions	Require certain information on the prospectus cover page and in the prospectus summary of registration statements for de-SPAC transactions. Require enhanced dilution disclosure in these registration statements.	Enhance the clarity and readability of prospectuses in de-SPAC transactions and disclosures relating to dilution in these prospectuses.	Forms S-4 and F-4; Schedules 14A, 14C, and TO
Item 1605, Background of and reasons for the de-SPAC transaction; terms of the de-SPAC transaction; effects	Require disclosure on the background, material terms and effects of a proposed de-SPAC transaction.	Provide investors with a more complete understanding of the background of and motivations behind a proposed de-SPAC transaction.	Forms S-4 and F-4; Schedules 14A, 14C, and TO
Item 1606, Fairness of the de-SPAC transaction and any related financing transaction	Require disclosure on whether a SPAC reasonably believes that a de-SPAC transaction and any related financing transactions are fair or unfair to investors, as well as a discussion of the bases for this reasonable belief.	Provide investors with additional information regarding a proposed de-SPAC transaction and address concerns regarding potential conflicts of interest and misaligned incentives.	Forms S-4 and F-4; Schedules 14A, 14C, and TO
Item 1607, Reports, opinions, appraisals and negotiations	Require disclosure on whether a SPAC or its sponsor has received a report, opinion or appraisal from an outside party regarding the fairness of a de-SPAC transaction or any related financing transaction.	Provide investors with additional information underlying a fairness determination by a SPAC.	Forms S-4 and F-4; Schedules 14A, 14C, and TO
Item 1608, Tender offer filing obligations in de-SPAC transactions	Require additional disclosures in a Schedule TO filed in connection with a de-SPAC transaction.	Align the information provided in such a Schedule TO with the information provided in other filings in connection with a de-SPAC transaction.	Schedule TO
Item 1609, Financial projections in de-SPAC transactions	Require additional disclosures regarding financial projections disclosed in a disclosure document for a de-SPAC transaction.	Provide investors with additional information regarding the use of projections in connection with a de-SPAC transaction.	Forms S-4 and F-4; Schedules 14A, 14C, and TO
Item 1610, Structured data requirement	Require information disclosed pursuant to Subpart 1600 to be tagged in a structured, machine-readable data language.	Provide investors and other market participants with information that is more readily available and more easily accessible for aggregation, comparison, filtering, and other analysis.	Forms S-1, F-1, S-4, and F-4; Schedules 14A, 14C, and TO

 

B. Proposed Expanded and Updated Projections Disclosure

In addition to new subpart 1600, the Commission has also proposed amending Item 10(b) of Regulation S-K to address what it sees as a concern about the use of projections by SPACs. Note this proposed amendment is in addition to proposed Item 1609, which also deals with projections made in connection with a de-SPAC. In proposing this double-barreled approach, the Commission voiced “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” and also noted the limited operating history of many SPAC targets. The Release amends Item 10(b) of Regulation S-K 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;


• 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, and an explanation why the non-GAAP financial measure was used instead of a GAAP measure.

The Commission has justified these proposed amendments by saying they would increase the level of care SPACs apply when preparing projections. However, this would also lead to increased costs for preparing projections in anticipation of a SPAC IPO or de-SPAC transaction. Importantly, under the proposed amendments, projections for financial items considered to be of primary importance to investors should be made, such as revenue, net income, and earnings. The time period covered for these protections is largely dependent on the particular circumstances of a SPAC, but management should include a time period in which they have a reasonable basis for making these projections.

II. Expanded View of “Underwriter” and registrants in connection with the de-SPAC

The Commission also proposes taking an expansive view of who is an “underwriter” and who is required to sign a registration statement in connection with the de-SPAC transaction. The explicit purpose of these proposals, discussed more below, is to expose the SPAC IPO underwriters and the target company’s officers and directors to potential liability for misstatements or omissions in a de-SPAC registration statement under the stringent provisions of Section 11 of the Securities Act of 1933, and, thereby, it is argued, better incentivize accurate disclosures, particularly regarding the target company.

A. Proposed Extension of Underwriter Status for de-SPAC Transactions

The Release contains a proposed rule that would deem underwriters in a SPAC IPO to be underwriters in a subsequent de-SPAC transaction when certain conditions are met. Specifically, the proposed rule states that:

“a person who has acted as an underwriter in a SPAC initial public offering 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.”

As such, this rule would make a SPAC IPO underwriter a “statutory underwriter” for purposes of the de-SPAC, thereby exposing it to potential Section 11 liability for misstatements or omissions in the registration statement. Section 11, however, also contains a due-diligence affirmative defense, and the new rule could mean that underwriters would need to conduct the same level of due diligence on the de-SPAC registration statement as they would perform on a traditional IPO’s registration statement. This Release is consistent with recent views expressed by SEC Chair Gensler in other fora that underwriters, like lawyers and accountants, are “gatekeepers” in the securities markets and therefore imbued with particular responsibility for preventing fraud and other misconduct. If the proposed rule is adopted, underwriters will potentially need to evaluate their role and efforts in the de-SPAC transaction if they wish to avoid “participating” in the de-SPAC transaction.

B. Proposal to Make the Target Company a Co-Registrant in the de-SPAC

In addition, the Release proposes that the private operating company, or “target company,” be a co-registrant when a SPAC files a registration statement on Form S-4 or Form F-4 for a de-SPAC transaction. This proposal also tries to bring the target company’s officers and directors within the ambit of potential Section 11 defendants for misstatements or omissions in the registration statement (and notably, the due diligence defense discussed above is not available to issuers).

III. Safe Harbors: One Up, One Down?

A. Proposed Addition of a Safe Harbor Under the Investment Company Act

The Release also seeks to create safe harbor under the Investment Company Act for SPACs to avoid investment company status if certain requirements are met. Of course, a premise of this Release is that, absent the safe harbor, SPACs are investment companies under the Investment Company Act—an issue that, is at best, not settled and that many market participants disagree with.

Under the Release, to fall within the safe harbor, a SPAC must:

• Maintain assets comprising only cash items, government securities, and certain money market funds;


• Seek to complete a de-SPAC transaction after which the surviving entity will be primarily engaged in the business of the target company; and


• Enter into an agreement with a target company to engage in a de-SPAC transaction within 18 months after its initial public offering and complete its de-SPAC transaction within 24 months of such offering.

As proposed, the first two safe harbor requirements would not create any additional burdens on SPAC, since their assets already comprise of cash, government securities or other money market funds, and almost all SPACs engage in the primary business of the target company during a de-SPAC transaction. However, the third requirement would shorten the timeframe in which a SPAC can enter into an agreement with a target company and limit the SPACs ability to receive an extension outside of that period. Although 24 months from IPO is a typical timeframe for SPACs to complete a de-SPAC transaction, currently, national securities exchange rules set a 36-month time period in which to enter into an agreement with a target company and allow extension periods beyond that window. Further, most SPACs negotiate by contract for a 24-month period in which to complete a de-SPAC transaction, which time period can be extended by amending the charter. This typically occurs when a merger agreement is signed but not yet closed by the end of the 24-month period. The proposed safe harbor would limit SPACs to sign an agreement with a target company within 18 months and close the de-SPAC transaction within 24 months.

B. Proposed Removal of Forward-Looking Statements Safe Harbor

At the same time, the Commission also proposes measures intended to prevent SPACs from taking advantage of the safe-harbor for forward-looking statements under the Private Securities Litigation Reform Act (“PSLRA”). In its current state, the PSLRA provides a safe harbor for defendants in private securities litigation for forward-looking statements when, among other things, the statement is labelled as a forward-looking statement and couched with other cautionary statements. However, certain entities, including “blank check” companies are excluded from the PSLRA safe harbor, and the Commission now proposes expanding the definition of “blank-check company” to make clear it includes SPACs, hence also excluding SPACs from the safe harbor. It bears noting, however, that SPACs will still be able to use forward-looking projections, but may need to be more cautious in making such projections to protect themselves from liability. In addition, even if the statutory safe harbor does not apply, SPACs would still be able to use the similar, judicially-created “bespeaks caution” rule to argue that an incorrect projection cannot be a basis for liability because the projection was couched with tailored, specific cautionary language.

IV. Proposed Revisions to Registration Requirements for De-SPAC Transactions

The Release includes additional revisions to the registration requirements for de-SPAC transactions intended to address purported disparities in the disclosure and liability protections available between a de-SPAC transaction and traditional IPO. Regarding a de-SPAC transaction, the Release would:

• Deem by rule that a business combination transaction involving a reporting shell company and another entity that is not a shell company constitutes a sale of securities to the reporting shell company’s shareholders for purposes of the Securities Act; and


• Make the required financial statements of private operating companies in transactions involving shell companies akin to those required in registration statements for initial public offerings.

Under the proposed revisions, de-SPAC transactions would likely require the filing of a Form S-4 or Form F-4, as opposed to a proxy statement. Additionally, the Release reduces the number of years of audited financials from three to two for target companies that would constitute emerging growth companies.

Further, the Proposal would require that the reporting company re-determine its smaller reporting company (“SRC”) status within four days following the consummation of a de-SPAC transaction. This would mean that the surviving corporation cannot avail itself of the SRC’s scaled disclosure benefits, when SRC status would otherwise be determined on its next annual determination date.

V. Conclusion and Public Comment Period

If approved as proposed, the Release would cut back on many of the features that made SPACs attractive for private companies looking to enter the public capital markets. By heightening disclosure requirements, increasing liability, and shortening the time period in which a SPAC must complete a de-SPAC transaction, the Release walks back many of the advantages market participants see in SPACs. As a result, the Release would increase the time, cost, and paperwork involved with SPACs. Further, the Release would likely increase the cost for Directors and Officers liability insurance, which, in the current market, is already costly and increasingly hard to obtain.

The Commission will accept comments on the issues raised in the Release for 60 days following the publication of the Release on the SEC’s website.

If you have questions regarding the matters contained in this publication, please contact one of the lawyers listed below or consult your regular Baker Botts contact.

ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.