SEC Adopts New Rules for SPACs

On January 24, 2024, the Securities and Exchange Commission adopted a long-awaited set of final rules intended to enhance disclosures and provide additional investor protections in IPOs by SPACs and also in de-SPAC transactions, the subsequent business combination transactions between SPACs and target companies. These rules come nearly two years after they were initially proposed by the SEC on March 30, 2022, and, among other things, require the target company to take on additional liability in de-SPAC transactions, remove the availability of potential defenses around forward-looking statements and require enhanced disclosures of SPAC sponsor compensation, conflicts of interest and dilution and additional information about the target company that is intended to help investors make more informed voting and investment decisions in connection with de-SPAC transactions.

The final rules will take effect 125 days after their publication in the Federal Register.

The SEC’s fact sheet on the final rules can be found here. Below is a summary highlighting key changes from the final rules.

I. Liability

Target Company as Co-Registrant: A target company in a de-SPAC transaction is considered an “issuer” of securities and, therefore, will appear as co-registrant on the cover page of registration statements in connection with de-SPAC transactions, and its principal executive officer, its principal financial officer, its comptroller or principal accounting officer, and the majority of its board of directors must sign the registration statement filed in connection with a de-SPAC transaction. As a result, the target company signatories will have potential Section 11 liability, which means that, in a suit by investors, the target company signatories may now be liable for any material misstatement or omissions in the registration statement filed in connection with the de-SPAC transaction.

PSLRA Safe Harbor No Longer Available: The PSLRA provides companies with a safe harbor for forward-looking statements, protecting a company from liability for forward-looking statements made in a disclosure document, so long as, among other things, the forward-looking statements are identified as such and are accompanied by meaningful cautionary statements. This safe harbor is not available in traditional IPOs and, given the amendment to the definition of “blank check company” under the new rules, this safe harbor is no longer available to SPACs, and forward-looking statements in de-SPAC transactions will now be treated in the same manner as in traditional IPOs. Note, however, the case law derived “bespeaks caution” doctrine remains available for certain forward-looking statements in de-SPAC transactions.

Underwriter Status Clarified: The SEC did not adopt a proposed rule that would have clarified that anyone who acts as an underwriter in a SPAC IPO and participates in the distribution associated with a de-SPAC is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act, and instead provided general guidance regarding statutory underwriter status.

The SEC noted that a de-SPAC transaction is considered a “distribution” of securities since the purpose of a de-SPAC transaction, similar to an IPO, is to provide the target company with capital and access to the public markets. In a de-SPAC transaction, there would be an underwriter present where “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.” The determination of whether a party is a statutory underwriter in a particular transaction will continue to be a facts and circumstances test, with the SEC continuing to interpret the terms “distribution” and “underwriter” “broadly and flexibly.”

II. Projections

The new rules provide for disclosure requirements governing projections, which includes, among other things:

Presentation of Projections: Any projections that are not based on historical financial results or operational history must be “clearly distinguished” from projections that are based on historical financial results or operational history, and it would be misleading to present projections that are based on historical financial results or operational history without presenting such historical measures or operational history with equal or greater prominence. Projections that include non-GAAP financial measures 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.

Projections in de-SPAC transactions: Specific disclosures in the context of de-SPAC transactions of the purpose of the projections, who prepared the projections, the material underlying assumptions of the projections and any factors that may impact these assumptions and whether the projections still reflect the views of the board or management of the SPAC or target company as of the date of the filing.

III. Disclosure Requirements

The new rules also set forth new detailed disclosure requirements applicable to SPACs and in de-SPAC transactions, including, among other things:

Sponsors: Detailed disclosures regarding SPAC sponsors, their affiliates and their promoters (the Sponsor group) that are intended to assist investors in understanding and analyzing a SPAC, including how the rights and interests of the Sponsor group may differ, or conflict with, those of public shareholders, and which could highlight additional motivations for completing a de-SPAC transaction. These disclosures include, among other things, details around the nature and amount of compensation for services performed by the Sponsor group for the SPAC and any reimbursements paid to the Sponsor group by the SPAC upon completion of a de-SPAC transaction, the price and number of securities issued or to be issued to the Sponsor group, arrangements between the Sponsor group and public shareholders related to the redemption of SPAC securities and, in tabular form, the material terms of any agreements or arrangements regarding restrictions on the sale of SPAC securities by the Sponsor group.

Conflicts of Interest: Detailed disclosures regarding material potential or actual conflicts of interest involving the Sponsor group, as well as SPAC and target company directors and officers. These conflicts of interest may arise from, among other things, (i) the nature of the Sponsor group’s compensation or security ownership, which may give rise to financial incentives to pursue a de-SPAC transaction even absent attractive opportunities; (ii) the fact that the Sponsor group may sponsor other SPACs to which they may allocate time and attention; (iii) the fact that the Sponsor group may owe employment, contractual or fiduciary duties to companies other than the SPAC; and (iv) that the SPAC group may seek to engage in a de-SPAC transaction with a target company that they are affiliated with when other, more attractive, target opportunities may be available.

Dilution: Disclosure in tabular form of the impact and sources of potential dilution to (i) purchasers’ equity interests in the case of SPAC IPOs or (ii) non-redeeming shareholders who hold the securities until the consummation of the de-SPAC transaction in the case of a de-SPAC transaction, for example as a result of financing transactions or redemptions, to be included in registration statements.

Prospectus Cover Page and Summary: Key disclosures, in plain English, on the cover page and in the summary of registration statements filed in connection with SPAC IPOs and de-SPAC transactions regarding, among other things, Sponsor group compensation, the impact and sources of dilution to public shareholders of the SPAC or non-redeeming shareholders in a de-SPAC transaction, conflicts of interest, the proposed time frame in which a SPAC intends to complete a de-SPAC transaction, whether the SPAC considers a de-SPAC transaction to be fair and whether the SPAC has received an opinion concerning the fairness of the de-SPAC transaction, the terms of any material financing transactions that have occurred or will occur in connection with the de-SPAC transaction, and the dilutive impact on public shareholders of such financing transactions.

De-SPAC Transaction Background: Centralization of disclosure requirements regarding the background, reasons, material terms and effects of the de-SPAC transaction and any related financing transactions.

Reasons for the Transaction and Fairness Opinions and Other Third-Party Reports: If the law of the SPAC’s jurisdiction of incorporation requires the SPAC board to determine whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders (including the SPAC sponsor), disclosure of that determination, as well as a discussion of a non-exclusive list of factors considered in reaching that determination, including, among other things, valuation of the target company, material financing terms and any third-party reports or opinions. Although there is no requirement for a SPAC board to obtain a fairness opinion, if a fairness opinion or a similar third-party report related to the de-SPAC transaction, including the approval of the de-SPAC transaction or the advisability of a de-SPAC transaction, is received, the new rules require detailed disclosure summarizing the fairness opinion or report, which must also be filed as an exhibit.

Target Company: Disclosure in relation to the target company to be included in the registration statement filed in connection with the de-SPAC transaction (rather than on Form 8-K following consummation of the de-SPAC transaction). These disclosures include, among other things: (i) description of the target company’s business; (ii) description of the target company’s property; (iii) legal proceedings involving the target company; (iv) changes in and disagreements with accountants on accounting and financial disclosure; (v) security ownership of certain beneficial owners and management of the target company, assuming the completion of the de-SPAC transaction and any related financing transaction; and (vi) recent sales of unregistered securities of the target company.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Jeeho Lee, an O’Melveny partner licensed to practice law in California and New York, Noah Kornblith, an O’Melveny partner licensed to practice law in California, Alan Bao, an O’Melveny partner licensed to practice law in California, Tai Vivatvaraphol, an O’Melveny counsel licensed to practice law in New York, and Hayley Wolf, an O’Melveny associate licensed to practice law in New York contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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