[Federal Register Volume 89, Number 38 (Monday, February 26, 2024)]
[Rules and Regulations]
[Pages 14158-14327]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01853]
[[Page 14157]]
Vol. 89
Monday,
No. 38
February 26, 2024
Part II
Securities and Exchange Commission
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17 CFR Parts 210, 229, 230, 232, 239, 240, and 249
Special Purpose Acquisition Companies, Shell Companies, and
Projections; Final Rule
Federal Register / Vol. 89 , No. 38 / Monday, February 26, 2024 /
Rules and Regulations
[[Page 14158]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 230, 232, 239, 240, and 249
[Release Nos. 33-11265; 34-99418; IC-35096; File No. S7-13-22]
RIN 3235-AM90
Special Purpose Acquisition Companies, Shell Companies, and
Projections
AGENCY: Securities and Exchange Commission.
ACTION: Final rules; guidance.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting rules intended to enhance investor protections in initial
public offerings by special purpose acquisition companies (commonly
known as SPACs) and in subsequent business combination transactions
between SPACs and private operating companies (commonly known as de-
SPAC transactions). Specifically, we are adopting disclosure
requirements with respect to, among other things, compensation paid to
sponsors, conflicts of interest, dilution, and the determination, if
any, of the board of directors (or similar governing body) of a SPAC
regarding whether a de-SPAC transaction is advisable and in the best
interests of the SPAC and its security holders. We are adopting rules
that require a minimum dissemination period for the distribution of
security holder communication materials in connection with de-SPAC
transactions. We are adopting rules that require the re-determination
of smaller reporting company (``SRC'') status in connection with de-
SPAC transactions. We are also adopting rules that address the scope of
the safe harbor for forward-looking statements under the Private
Securities Litigation Reform Act of 1995. Further, we are adopting a
rule that would deem any business combination transaction involving a
reporting shell company, including a SPAC, to be a sale of securities
to the reporting shell company's shareholders and are adopting
amendments to a number of financial statement requirements applicable
to transactions involving shell companies. In addition, we are
providing guidance on the status of potential underwriters in de-SPAC
transactions and adopting updates to our guidance regarding the use of
projections in Commission filings as well as requiring additional
disclosure regarding projections when used in connection with business
combination transactions involving SPACs. Finally, we are providing
guidance for SPACs to consider when analyzing their status under the
Investment Company Act of 1940.
DATES: Effective date: The final rules are effective on July 1, 2024.
Compliance date: The compliance date for the final rules, other
than 17 CFR 229.1610, is July 1, 2024. The compliance date for 17 CFR
229.1610 is June 30, 2025.
FOR FURTHER INFORMATION CONTACT: Mark Saltzburg, Office of Rulemaking,
Division of Corporation Finance, at (202) 551-3430; with respect to 17
CFR 230.145a (Rule 145a under the Securities Act of 1933), the Office
of Chief Counsel, Division of Corporation Finance, at (202) 551-3500;
with respect to 17 CFR 210.15-01 (Rule 15-01 of Regulation S-X), Ryan
Milne, Office of Chief Accountant, Division of Corporation Finance, at
(202) 551-3400; with respect to 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 guidance under the Investment Company Act of 1940,
Rochelle Kauffman Plesset, Seth Davis, or Taylor Evenson, Senior
Counsels; or Lisa Reid Ragen, Branch Chief, 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 adopting new 17 CFR
210.15-01, new 17 CFR 229.1601 through 229.1610 (Item 1600 series of
Regulation S-K), and new 17 CFR 230.145a. We are also adopting
amendments to:
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Commission reference CFR citation (17 CFR)
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Securities Act of 1933
Rule 405.............................. Sec. 230.405.
Form S-1.............................. Sec. 239.11.
Form F-1.............................. Sec. 239.31.
Form S-4.............................. Sec. 239.25.
Form F-4.............................. Sec. 239.34.
Securities Exchange Act of 1934
Rule 12b-2............................ Sec. 240.12b-2.
Rule 14a-6............................ Sec. 240.14a-6.
Rule 14c-2............................ Sec. 240.14c-2.
Schedule 14A.......................... Sec. 240.14a-101.
Schedule TO........................... Sec. 240.14d-100.
Form 20-F............................. Sec. 249.220f.
Form 8-K.............................. Sec. 249.308.
Regulation S-K............................ Sec. Sec. 229.10 through
229.1406.
Item 10............................... Sec. 229.10.
Item 601.............................. Sec. 229.601.
Regulation S-T............................ Sec. Sec. 232.10 through
232.903.
Rule 405.............................. Sec. 232.405.
Regulation S-X............................ Sec. Sec. 210.1-01
through 210.13-02.
Rule 1-02............................. Sec. 210.1-02.
Rule 3-01............................. Sec. 210.3-01.
Rule 3-05............................. Sec. 210.3-05.
Rule 3-14............................. Sec. 210.3-14.
Rule 8-02............................. Sec. 210.8-02.
Rule 10-01............................ Sec. 210.10-01.
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Table of Contents
I. Introduction
II. New Subpart 1600 of Regulation S-K
A. Definitions
1. Proposed Definition: ``De-SPAC Transaction''
2. Comments: Definition of ``De-SPAC Transaction''
3. Final Definition: ``De-SPAC Transaction''
4. Proposed Definition: ``Special Purpose Acquisition Company
(SPAC)''
5. Comments: Definition of ``Special Purpose Acquisition Company
(SPAC)''
6. Final Definition: ``Special Purpose Acquisition Company
(SPAC)''
7. Proposed Definition: ``SPAC Sponsor''
8. Comments: Definition of ``SPAC Sponsor''
9. Final Definition: ``SPAC Sponsor''
10. Proposed Definition: ``Target Company''
11. Comments: Definition of ``Target Company''
12. Final Definition: ``Target Company''
B. Sponsors
1. Proposed Rules
2. Comments
3. Final Rules
C. Conflicts of Interest
1. Proposed Rules
2. Comments
3. Final Rules
D. Dilution
1. Proposed Rules
2. Comments
3. Final Rules
E. Prospectus Cover Page and Prospectus Summary Disclosure
1. Proposed Rules
2. Comments
3. Final Rules
F. De-SPAC Transactions: Background, Reasons, Terms, and Effects
1. Proposed Item 1605
2. Comments: Item 1605
3. Final Item 1605
G. Board Determination About the De-SPAC Transaction; Reports,
Opinions, Appraisals, and Negotiations
1. Proposed Item 1606(a)
2. Comments: Item 1606(a)
3. Final Item 1606(a)
4. Proposed Item 1606(b)
5. Comments: Item 1606(b)
6. Final Item 1606(b)
7. Proposed Items 1606(c) Through (e)
8. Comments: Items 1606(c) Through (e)
9. Final Items 1606(c) Through (e)
10. Proposed Item 1607
11. Comments: Item 1607
12. Final Item 1607
H. Tender Offer Filing Obligations
1. Proposed Item 1608
2. Comments: Item 1608
3. Final Item 1608
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I. Structured Data Requirement
1. Proposed Item 1610
2. Comments
3. Final Item 1610 and Tagging Compliance Date
III. Disclosures and Liability in De-SPAC Transactions
A. Non-Financial Disclosures in De-SPAC Disclosure Documents
1. Proposed Rules
2. Comments
3. Final Rules
B. Minimum Dissemination Period
1. Proposed Rules
2. Comments
3. Final Rules
C. Private Operating Company as Co-Registrant
1. Proposed Rules
2. Comments
3. Final Rules
D. Re-Determination of Smaller Reporting Company (SRC) Status
1. Proposed Rules
2. Comments
3. Final Rules and Guidance
E. PSLRA Safe Harbor
1. Proposed Rules
2. Comments
3. Final Rules
F. Underwriter Status and Liability in Securities Transactions
1. Proposed Rule
2. Comments
3. Declining To Adopt Proposed Rule 140a; Commission Guidance on
Underwriter Status in De-SPAC Transactions
IV. Business Combinations Involving Shell Companies
A. Shell Company Business Combinations and the Securities Act of
1933
1. Proposed Rule
2. Comments
3. Final Rule
B. Financial Statement Requirements in Business Combination
Transactions Involving Shell Companies
1. Proposed Rule 15-01(a), Rule 1-02(d), and Form Instructions:
Audit Requirements
2. Comments: Rule 15-01(a), Rule 1-02(d), and Form Instructions:
Audit Requirements
3. Final Rule 15-01(a), Rule 1-02(d), and Form Instructions:
Audit Requirements
4. Proposed Rule 15-01(b): Number of Years of Financial
Statements
5. Comments: Rule 15-01(b): Number of Years of Financial
Statements
6. Final Rule 15-01(b): Number of Years of Financial Statements
7. Proposed Rule 15-01(c): Age of Financial Statements
8. Comments: Rule 15-01(c): Age of Financial Statements
9. Final Rule 15-01(c): Age of Financial Statements
10. Proposed Rules: 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-
14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by
a Predecessor
11. Comments: Rules 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-
14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by
a Predecessor
12. Final Rules 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-
14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by
a Predecessor
13. Proposed Rule 15-01(e): Financial Statements of a Shell
Company Registrant After the Combination With Predecessor
14. Comments: Rule 15-01(e): Financial Statements of a Shell
Company Registrant After the Combination With Predecessor
15. Final Rule 15-01(e): Financial Statements of a Shell Company
Registrant After the Combination With Predecessor
16. Proposed Rule 11-01(d)
17. Comments: Rule 11-01(d)
18. Decline to Adopt Rule 11-01(d)
19. Proposed Item 2.01(f) of Form 8-K
20. Comments: Item 2.01(f) of Form 8-K
21. Final Item 2.01(f) of Form 8-K
22. Proposed Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of
Predecessors
23. Comments: Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of
Predecessors
24. Final Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of
Predecessors
25. Other Shell Company Matters
V. Enhanced Projections Disclosure
A. Proposed Items 10(b) and 1609 of Regulation S-K
1. Proposed Rules
2. Comments
3. Final Rules
VI. The Status of SPACs Under the Investment Company Act
A. Background
B. SPAC Activities
1. The Nature of SPAC Assets and Income
2. Management Activities
3. Duration
4. Holding Out
5. Merging With an Investment Company
C. Conclusion
VII. Other Matters
VIII. Economic Analysis
A. Baseline and Affected Parties
1. SPAC Initial Public Offerings
2. De-SPAC Transactions
3. Blank Check Companies
4. Shell Company Business Combinations
B. Benefits and Costs of the Adopted Rules
1. Disclosure-Related Rules
2. Liability-Related Rules
3. Shell Company-Related Rules
4. Enhanced Projections Disclosure (Amendments to Item 10(b) of
Regulation S-K)
C. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
D. Reasonable Alternatives
1. Disclosure-Related Rules
2. PSLRA Safe Harbor Guidance
3. Expanding Disclosure in Reporting Shell Company Business
Combinations
4. Enhanced Projections Disclosure
IX. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Estimates of the Effects of the Final Rules on the
Collections of Information
C. Incremental and Aggregate Burden and Cost Estimates
1. Current Inventory Update To Reflect $600 Per Hour Rather Than
$400 Per Hour Outside Professional Costs Rate
2. PRA Burden and Cost Estimates Resulting From the Final Rules
X. Final Regulatory Flexibility Analysis
A. Need for, and Objectives of, the Final Rules
B. Significant Issues Raised by Public Comments
C. Small Entities Subject to the Final Rules
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
E. Duplicative, Overlapping or Conflicting Federal Rules
F. Agency Action To Minimize Effect on Small Entities
Statutory Authority
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I. Introduction
Special purpose acquisition companies, or SPACs, first began to
emerge in the 1990s as an alternative to blank check companies after
blank check companies began to be regulated more strictly pursuant to
17 CFR 230.419 (``Rule 419'' \1\ under the Securities Act of 1933
(``Securities Act'')),\2\ a rule the Commission adopted following the
enactment of the Securities Enforcement Remedies and Penny Stock Reform
Act of 1990 (``Penny Stock Reform Act'').\3\ SPACs are shell companies
\4\ organized and managed by a sponsor for the purpose of merging with
or acquiring one or more unidentified private operating companies,
commonly known as a de-SPAC transaction, within a certain time
frame.\5\ The de-SPAC transaction is a hybrid transaction that contains
elements of both an initial public offering (``IPO'') and a merger and
acquisition (``M&A'') transaction.\6\ While structured as an M&A
transaction, the de-SPAC transaction also is the functional equivalent
of the private target company's IPO, because it results in the target
company becoming part of a combined company that is a reporting company
and provides the private target company with access to cash proceeds
that the SPAC had previously raised from the public. As part of this
process, the shareholders of the SPAC go from owning shares in a shell
company to owning shares in a combined company that conducts the
business of the private target. As a result, the de-SPAC transaction
implicates disclosure and liability concerns associated with both IPOs
and M&A transactions. Additionally, parties involved in the SPAC
process, such as the SPAC sponsor, may have incentives to consummate a
de-SPAC transaction that are not present in a traditional IPO or M&A
transaction. Further, as discussed in the Proposing Release,\7\ the
shareholders and management of a private operating company may believe
there to be certain advantages of combining with a SPAC compared with
conducting an underwritten IPO.
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\1\ The regulation at 17 CFR 230.419(a)(2) defines the term
``blank check company'' 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 (``Rule 3a51-1'' under the
Securities Exchange Act of 1934).
\2\ 15 U.S.C. 77a et seq.
\3\ Public Law 101-429, 104 Stat. 931 (Oct. 15, 1990). See Blank
Check Offerings, Release No. 33-6932 (Apr. 13, 1992) [57 FR 18037
(Apr. 28, 1992)]. A SPAC is not a ``blank check company'' because,
given that it raises more than $5 million in a firm commitment
underwritten initial public offering, it is not selling ``penny
stock.'' See Penny Stock Definition for Purposes of Blank Check
Rule, Release No. 33-7024 (Oct. 25, 1993) [58 FR 58099 (Oct. 29,
1993)]. To that end, SPACs often have provisions in their governing
instruments that prohibit them from being ``penny stock'' issuers.
\4\ 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.
\5\ The descriptions included in this release of common features
and fees currently seen in SPACs and SPAC transaction structures are
based, in part, on reviews by the Commission staff of SPAC filings
with the Commission. Based on review by the Commission staff of SPAC
filings, in the majority of transactions, SPACs typically combine
with private operating companies. In some cases, however, SPACs may
combine with other public companies. See, e.g., Bailey Lipschultz,
Re-SPACs Gain Steam as Arrival Finds New Sponsor, Bloomberg News
(Apr. 10, 2023), available at https://news.bloomberglaw.com/mergers-and-acquisitions/re-spacs-gain-steam-as-arrival-shares-sink-new-sponsor-steps-up.
\6\ We use the terms ``initial public offering'' or ``IPO'' to
refer 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 Securities Exchange Act of 1934
immediately prior to the registration.
\7\ Special Purpose Acquisition Companies, Shell Companies, and
Projections, Release No. 33-11048 (Mar. 30, 2022) [87 FR 29458 (May
13, 2022)] (``Proposing Release''), at 29461, nn.22-25 and
accompanying text. See infra section VIII.A.1.ii.
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To have the necessary context for the concerns unique to SPACs and
de-SPAC transactions, it is critical to understand the structure and
lifecycle of a SPAC. Once formed, a SPAC will conduct its IPO in the
form of a firm commitment underwritten IPO of $5 million or more in
units consisting of redeemable shares and of warrants. The underwriting
fees for a SPAC IPO typically approximate 5% to 5.5% of the offering
proceeds, and a significant portion of those fees (around 3% of the IPO
proceeds) are conditioned on the completion of a de-SPAC
transaction.\8\ The SPAC sponsor is usually compensated through a
``promote'' or ``founder's shares''--i.e., discounted SPAC shares
received prior to the SPAC's IPO that generally only have value if a
de-SPAC transaction occurs.\9\
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\8\ See infra section VIII.A.1.iii.
\9\ The sponsor's compensation usually amounts to around 20% of
the total shares of a SPAC after its IPO.
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Following its IPO, a SPAC places all or substantially all of the
IPO proceeds into a trust or escrow account. The SPAC typically
registers its shares and warrants under section 12(b) of the Securities
Exchange Act of 1934 (``Exchange Act'') \10\ and lists the units
(typically consisting of a common share and a fraction of a warrant)
for trading on a national securities exchange.\11\
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\10\ 15 U.S.C. 78a et seq.
\11\ 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 at a price that is higher (often
$11.50) than the IPO price for common shares (which is often $10)
upon the later of the passage of a certain time period following the
SPAC's IPO (often one year) or a certain time period following the
completion of a de-SPAC transaction (often 30 days). Many warrants
have limitations on their potential upside as a result of the right
of the issuer to call the warrant under certain conditions, which
commonly include a condition that the underlying common stock have
traded at or above a certain price (often $18) for a specified
period of time. The redemption price in those call situations can
vary based on the specific warrant agreement provisions, so
investors commonly pay close attention to those pricing provisions.
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Next, the SPAC seeks to identify a target company for a de-SPAC
transaction within the time frame specified in its governing
documents.\12\ If the SPAC does not complete a de-SPAC transaction
within that time frame, it may seek an extension (often requiring
approval from its shareholders) or dissolve and liquidate.\13\ If the
SPAC enters into a business combination agreement with a target
company, the SPAC files a Form 8-K (or Form 6-K if the SPAC is a
foreign private issuer (``FPI'') that reports on Form 20-F) \14\
announcing the transaction that includes certain information on the
material terms of the business combination agreement.\15\ The parties
structure the de-SPAC transaction in different forms that may have tax
or other regulatory advantages.\16\ Prior to the closing of the de-SPAC
transaction, the shareholders of the SPAC typically have the
[[Page 14161]]
opportunity to either: (1) require the SPAC to redeem their shares
prior to the de-SPAC transaction \17\ and receive a pro rata share of
the amount in the IPO proceeds and related assets subject to the trust
or escrow arrangements (including interest thereon and commonly less
amounts released to pay income and franchise taxes), or (2) remain a
shareholder of the surviving company after the business
combination.\18\ To offset shareholder redemptions or 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.\19\
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\12\ The governing documents often provide for a time frame of
24 months, but it can be as long as 36 months. Exchange listing
rules generally require a SPAC to complete a business combination
within three years (or such shorter period specified in its
registration statement or applicable governing documents). See,
e.g., NYSE Listed Company Manual Section 102.06 and Nasdaq Listing
Rule IM-5101-2.
\13\ SPAC shareholders typically also have a redemption right in
connection with any votes to extend the duration of the SPAC.
\14\ See definition of ``foreign private issuer,'' infra note
442.
\15\ 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.
\16\ Three examples of common de-SPAC transaction structures
are: (i) the SPAC is the surviving company in a merger and the
target company merges into the SPAC, (ii) the target company is the
surviving company in a merger and the SPAC merges into the target
company, and (iii) a new holding company is created and the SPAC and
target company merge into that new holding company. The holding
company structure referred to in (iii) above includes ``double-
dummy'' structure transactions.
\17\ Until they become exercisable, warrants issued by the SPAC
do not typically provide a right to require the redemption of the
warrant by any party.
\18\ De-SPAC transactions often result in the former SPAC
shareholders owning a minority interest in the combined company.
According to one study of the 47 de-SPAC transactions that occurred
between Jan. 2019 and June 2020, SPAC shareholders, including the
SPAC sponsor, held a median of 35% of the combined company after a
de-SPAC transaction and the sponsor alone held a median of 12% of
the combined company. Michael Klausner, Michael Ohlrogge & Emily
Ruan, A Sober Look at SPACs, 39 Yale J. Reg., 228, 239-240 (2022).
\19\ 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.
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Regardless of its form, a de-SPAC transaction often is accompanied
by the need to attain shareholder approval for certain items (e.g.,
amendments to the governing documents of the SPAC, or authorization of
additional securities for issuance), and, in such cases, a SPAC
provides its shareholders with a proxy statement on Schedule 14A or an
information statement on Schedule 14C.\20\ If the SPAC, the target
company, or a holding company \21\ must register the offer and sale of
its securities to be issued in the de-SPAC transaction, the entity
typically files a registration statement on Form S-4 or F-4 to do
so.\22\ If no registration statement or proxy or information statement
is required, the SPAC may disseminate a tender offer statement (i.e., a
Schedule TO) for the redemption offer to its security holders with
information about the target company.\23\
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\20\ 17 CFR 240.14a-2; Exchange Act Rule 14c-2. The regulation
at 17 CFR 240.3a12-3(b) provides an exemption from the proxy and
information statement rules for FPIs, providing that ``[s]ecurities
registered by a foreign private issuer, as defined in Rule 3b-4. .
., shall be exempt from sections 14(a), 14(b), 14(c), 14(f) and 16
of the Act.''
\21\ In certain de-SPAC structures, a holding company is formed
to acquire both the private operating company and the SPAC.
\22\ As noted above, SPACs currently 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, (2) the entity that
will have a continuing Exchange Act reporting obligation following
the transaction, and (3) the disclosures provided in connection with
the transaction.
\23\ The Commission has promulgated rules under the Exchange Act
setting forth filing, disclosure, and dissemination requirements in
connection with tender offers. See, e.g., 17 CFR 240.14d-1 through
240.14d-103, 17 CFR 240.14e-1 through 240.14e-8 (``Regulation 14E''
under the Exchange Act), and 17 CFR 240.13e-4 (``Rule 13e-4'' under
the Exchange Act). When an issuer conducts a tender offer, the
issuer may be required to file and disseminate a Schedule TO
pursuant to Rule 13e-4. Because the redemption rights in a SPAC
context generally have indicia of a tender offer, such as a limited
period of time for the SPAC security holders to request redemption
of their securities, SPACs will generally file a Schedule TO in
circumstances where, in connection with a de-SPAC transaction, the
parties are neither soliciting votes or consents nor registering the
offer or sale of securities. The Commission staff has not objected
if a SPAC does not comply with the tender offer rules when the SPAC
files a required 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 17 CFR 240.14a-1 through 240.14b-2 (``Regulation
14A'' under the Exchange Act) or 240.14c-1 through 240.14c-101
(``Regulation 14C'' under the Exchange Act), 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 to a SPAC that does not
file a required Schedule 14A or 14C in connection with the de-SPAC
transaction or an extension. In these circumstances, SPACs have
generally filed and disseminated Schedules TO, and 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.H for a
discussion of 17 CFR 229.1608 (``Item 1608'' of Regulation S-K) that
we are adopting in this release and section IV.A for a discussion of
Rule 145a under the Securities Act that we are adopting in this
release, which will affect when a SPAC may be required to file a
registration statement in connection with a de-SPAC transaction. For
exchange-listed SPACs, exchange rules may require a SPAC to file
tender offer documents with the Commission in some circumstances.
See, e.g., Nasdaq Listing Rule IM-5101-2; NYSE Listed Company Manual
Section 102.06. The staff position discussed in this footnote and
any other staff guidance or statements referenced in this release,
including staff legal bulletins, staff compliance and disclosure
interpretations, and the Division of Corporation Finance's Financial
Reporting Manual (``FRM''), 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 views reflected
in these staff positions or the content of these staff statements
and, like all staff positions or 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.
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Finally, after the completion of the de-SPAC transaction, the
combined company must file a Form 8-K within four business days that
includes information about the target company equivalent to the
information that a new reporting company would be required to provide
when filing a Form 10 under the Exchange Act.\24\
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\24\ 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. If the
shell company is an FPI then a Form 20-F should be filed no later
than four business days after the consummation of the acquisition
that includes all of the information for the target company that
Form 20-F requires for registration of securities. By the time the
Form 8-K with Form 10 information is filed, the securities of the
combined company have often already begun trading on a national
securities exchange with a new ticker symbol because the securities
of the SPAC generally trade on an exchange until the consummation of
the de-SPAC transaction and the securities of the combined company
generally commence trading on the following business day.
---------------------------------------------------------------------------
In recent years, the U.S. securities market experienced a
significant increase in the number of SPAC IPOs, as shown in Table 1
\25\ below.
---------------------------------------------------------------------------
\25\ Estimates of SPAC IPO and IPO data in Table 1 are based on
SPAC Analytics, SPAC and US IPO Activity, available at https://www.spacanalytics.com. Estimates of de-SPAC transactions in Table 1
are based on data from Dealogic for SPACs registered with the
Commission and where year is based on M&A Completion Date.
Table 1--Number of SPAC IPOs in the U.S. Securities Market From 2012-2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Offerings
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPAC IPOs............................................... 9 10 12 20 13 34 46 59 248 613 86 31
IPOs (including SPAC IPOs).............................. 147 220 258 173 111 189 225 213 450 968 118 72
Percentage from SPACs................................... 6% 5% 5% 12% 12% 18% 20% 28% 55% 63% 73% 43%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Total Proceeds (in billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
SPAC IPOs............................................... 0.5 1.4 1.8 3.9 3.5 10.0 10.8 13.6 83.4 162.5 13.4 3.8
IPOs (including SPAC IPOs).............................. 50.1 70.8 93.0 39.2 25.8 50.3 63.9 72.2 179.4 334.7 22.9 25.1
[[Page 14162]]
Percentage from SPACs................................... 1% 2% 2% 10% 14% 20% 17% 19% 46% 49% 59% 15%
Number of Completed De-SPAC Transactions................ 6 11 5 10 9 13 23 28 64 199 101 89
--------------------------------------------------------------------------------------------------------------------------------------------------------
As shown above in Table 1, SPAC IPOs represent a significant share
of the U.S. IPO market in recent years. While we recognize that, like
overall IPO activity, the SPAC IPO market has declined recently, SPAC
IPOs nonetheless constituted over half of all U.S. IPOs respectively in
2020, 2021, and 2022, and constituted 43% of all U.S. IPOs in 2023.\26\
The number of de-SPAC transactions has also been significant relative
to the number of non-SPAC U.S. IPOs.
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
A similar trend has occurred when considering total proceeds for
SPAC IPOs as a percentage of total proceeds raised in all U.S. IPOs
over this period. SPAC IPO proceeds represented 46%, 49%, and 59% of
total proceeds raised in all U.S. IPOs respectively in 2020, 2021, and
2022. This percentage declined to 15% in 2023.\27\
---------------------------------------------------------------------------
\27\ Id.
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During the years of increase in SPAC IPOs, many market observers
raised concerns about various aspects of the SPAC structure and the
hybrid nature of the de-SPAC transaction.\28\ Among other things,
commentators expressed concerns about SPAC sponsor compensation and
other costs that can have a dilutive effect on a SPAC's
shareholders,\29\ potential conflicts of interest in the SPAC structure
and de-SPAC transactions (e.g., the SPAC sponsors' compensation being
contingent on the completion of the de-SPAC transaction could lead
sponsors to enter into de-SPAC transactions that are unfavorable to
unaffiliated shareholders),\30\ and SPAC governing documents and stock
exchange listing rules under which SPAC shareholders can vote in favor
of a proposed de-SPAC transaction yet redeem their shares prior to the
closing of the transaction.\31\
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\28\ 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.
In addition, as discussed in the Proposing Release, the Commission's
Investor Advisory Committee issued recommendations and expressed
certain concerns regarding SPACs. See Proposing Release, supra note
7, at 29462, nn.36-38 and accompanying text.
\29\ 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, Wall St. J. (Apr. 25, 2021).
\30\ See, e.g., Klausner, Ohlrogge & Ruan, supra note 18; Usha
Rodrigues & Michael A. Stegemoller, Redeeming SPACs (2021), U. of
Ga. Sch. of L. Legal Stud. Res. Paper No. 2021-09, available at
https://ssrn.com/abstract=3906196 or http://dx.doi.org/10.2139/ssrn.3906196 (in the Proposing Release, a working paper of this
article was cited as Usha R. Rodrigues and Michael Stegemoller,
SPACs: Insider IPOs (SSRN Working Paper, 2021), with the short form
citation ``Rodrigues and Stegemoller''); Minmo Gahng, Jay R. Ritter
& Donghang Zhang, SPACs, 36 The Rev. of Financial Stu. 3463 (2023),
available at https://doi.org/10.1093/rfs/hhad019; 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.
\31\ See Mira Ganor, The Case for Non-Binary, Contingent,
Shareholder Action, 23 U. Pa. J. Bus. L. 390 (2021); Rodrigues &
Stegemoller, supra note 30. 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''). In April 2022, the Commission's Investor Advocate
issued a recommendation to the NYSE and Nasdaq that their respective
listing standards should prohibit consummation of a business
combination when public SPAC shareholders exercise their conversion
rights for a majority of the shares. See Memorandum, dated April 21,
2022, from Rick A. Fleming, Investor Advocate, U.S. Securities and
Exchange Commission, to Adena T. Friedman, President & Chief
Executive Officer, and John Zecca, EVP & Global Chief Legal and
Regulatory Officer, Nasdaq, Inc., available at https://www.sec.gov/about/offices/investorad/recommendation-of-the-investor-advocate-nasdaq-spac-listing-standards-042122.pdf; and Memorandum, dated
April 21, 2022, from Rick A. Fleming, Investor Advocate, U.S.
Securities and Exchange Commission, to Lynn Martin, President, and
Jaime L. Klima, Chief Regulatory Officer, The NYSE Group, Inc.,
available at https://www.sec.gov/about/offices/investorad/recommendation-of-the-investor-advocate-nyse-spac-listing-standards-042122.pdf.
---------------------------------------------------------------------------
Some commentators have expressed concerns regarding the adequacy of
the disclosures provided to investors in SPAC IPOs and de-SPAC
transactions \32\ in terms of explaining the potential risks and
effects for investors related to these transactions and the potential
benefits for the SPAC sponsor and other affiliates of the SPAC.\33\ For
example, even though the de-SPAC transaction essentially serves as the
IPO of the target company in the form of an M&A transaction, investors
may not receive the same information about the target company as they
would in a registration statement for a traditional IPO, because a
filing for an M&A transaction has different disclosure
requirements.\34\
---------------------------------------------------------------------------
\32\ Throughout this release, when we discuss ``SPAC
transactions,'' we are referencing both SPAC IPOs and de-SPAC
transactions.
\33\ 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 Commission actions have highlighted disclosures about the
private operating company that are allegedly materially misleading,
among other things. 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) (settled
order); In the Matter of Nikola Corp., Release No. 33-11018, 34-
93838 (Dec. 21, 2021) (settled order); SEC v. Akazoo S.A., Case No.
1:20-cv-e08101 (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).
\34\ For example, a traditional IPO requires a more
comprehensive description of the business of a prospective
registrant than is required of a private target operating company in
an M&A transaction. Compare Item 11(a) of Form S-1, with Item
17(b)(1) of Form S-4, and Item 14(b)(3) of Schedule 14A.
Additionally, a description of property and material legal
proceedings is required for a prospective registrant in a
traditional IPO, but these disclosure requirements do not apply to a
private target operating company in an M&A transaction. See Item
11(b)-(c) of Form S-1.
---------------------------------------------------------------------------
There are also additional disclosure and liability concerns that
stem from the hybrid nature of the de-SPAC transaction. For example,
some 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 and have expressed concern that some SPACs have taken
the
[[Page 14163]]
position that the Private Securities Litigation Reform Act of 1995
(``PSLRA'') \35\ safe harbor applies to forward-looking statements made
by SPACs in connection with de-SPAC transactions.\36\ The target
company also is often not required to sign a registration statement
filed for a de-SPAC transaction (except in transaction structures where
the target company survives the de-SPAC transaction) and, by extension,
would not take on section 11 liability even though, similar to a
traditional IPO, reliable information about the business of the target
company is critical to investors when deciding whether to approve the
transaction and to invest in the combined company through their
redemption decision. Finally, commentators have noted that, unlike a
traditional IPO, a registered de-SPAC transaction lacks a named
underwriter that would typically perform traditional gatekeeping
functions, such as due diligence on the target company, and would be
subject to liability under section 11 of the Securities Act for the
registration statement.\37\
---------------------------------------------------------------------------
\35\ Public Law 104-67, 109 Stat. 737 (1995).
\36\ See, e.g., Michael Dambra, Omri Even-Tov & Kimberlyn
George, Should SPAC Forecasts Be Sacked? (SSRN Working Paper, 2022),
available at https://www.utah-wac.org/2022/Papers/even-tov_UWAC.pdf;
AFR Letter; Park Testimony; Rodrigues & Stegemoller, supra note 30;
see also Heather Somerville & Eliot Brown, SPAC Startups Made Lofty
Promises. They Aren't Working Out., Wall St. J., Feb. 25, 2022.
\37\ See AFR Letter; Deane Testimony; Rodrigues Testimony. For a
general discussion of the role of gatekeepers in securities markets,
see also John C. Coffee Jr., Gatekeeper Failure and Reform: The
Challenge of Fashioning Relevant Reforms, 84 B. U. L. Rev. 301
(2004); John C. Coffee, Jr., Gatekeepers: The Professions and
Corporate Governance (2006).
---------------------------------------------------------------------------
In response to a number of these and other concerns, the Commission
staff provided guidance relating to SPACs on five occasions between
December 2020 and April 2021.\38\ Then, in March 2022, the Commission
proposed new rules and rule amendments to enhance existing disclosure
requirements and investor protections in SPAC IPOs and in de-SPAC
transactions.\39\ On July 13, 2022, the U.S. Securities and Exchange
Commission Small Business Capital Formation Advisory Committee (``Small
Business Capital Formation Advisory Committee'') issued recommendations
related to this proposal.\40\
---------------------------------------------------------------------------
\38\ 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); 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).
\39\ In this release, unless otherwise indicated, comment
letters cited refer to comment letters received in response to the
Proposing Release, and are available at https://www.sec.gov/comments/s7-13-22/s71322.htm. On March 30, 2022, the Commission
published the Proposing Release on its website. The comment period
for the Proposing Release was open for 30 days from publication in
the Federal Register and ended on June 13, 2022. Four commenters
stated that the comment period was inadequate and/or recommended
extending the comment period. See letters from Christopher
Iacovella, Chief Executive Officer, American Securities Association
(June 7, 2022) (``American Securities Association''); Jennifer
Schulp, Director of Financial Regulation Studies, Center for
Monetary and Financial Alternatives, Cato Institute (June 13, 2022)
(``Cato Institute''); Bobby Franklin, President & CEO, National
Venture Capital Association (June 13, 2022); Rod Miller, Chair,
Securities Regulation Committee, New York City Bar Association (June
13, 2022) (``NYC Bar''). In Oct. 2022, the Commission reopened the
comment period for the Proposing Release and other rulemakings
because certain comments on the Proposing Release and other
rulemakings were potentially affected by a technological error in
the Commission's internet comment form. See Resubmission of Comments
and Reopening of Comment Periods for Several Rulemaking Releases Due
to a Technological Error in Receiving Certain Comments, Release No.
33-11117 (Oct. 7, 2022) [87 FR 63016 (Oct. 18, 2022)] (``Reopening
Release''). The Reopening Release was published on the Commission's
website on Oct. 7, 2022, and in the Federal Register on Oct. 18,
2022, and the reopened comment period ended on Nov. 1, 2022. We have
considered all comments received since Mar. 30, 2022, and do not
believe an additional extension of the comment period is necessary.
\40\ The Small Business Capital Formation Advisory Committee
recommendations on the Proposing Release are available at https://www.sec.gov/spotlight/sbcfac/sbcfac-spac-recommendation-050622.pdf.
The Small Business Capital Formation Advisory Committee made the
following five recommendations, in summary: (1) SPACs should remain
a viable path for companies to pursue as a means of getting access
to public market capital and the committee is concerned the proposed
rules, as written, might render SPACs unusable as an alternative to
IPOs, (2) the committee is generally supportive of improving
disclosures for SPACs, particularly in the period of time between
the announcement of the merger and the closing of the de-SPAC
transaction, (3) the Commission should clearly identify which
participants would have underwriter liability and participants
should be held accountable to the same extent they would be in
traditional IPOs, (4) projections in de-SPAC transactions should be
covered by the liability safe harbor provisions of the PSLRA,
because management projections are an important part of the
rationale for companies in determining whether to engage in a merger
with a SPAC and they are necessary when financial intermediaries
provide fairness opinions related to de-SPAC transactions, and (5)
the Commission should expand or eliminate the 18-month and 24-month
timelines provided in the Investment Company Act safe harbor for
SPACs, because the requirement to engage in a de-SPAC transaction
within 18 months after a SPAC IPO and complete a de-SPAC transaction
within 24 months could incentivize SPAC sponsors to engage in
riskier acquisitions to complete the merger process within
artificially short periods. With respect to the Small Business
Capital Formation Advisory Committee's first recommendation--that
SPACs remain a viable path to access public market capital--we do
not believe the final rules will vitiate this access or render SPACs
unusable as an alternative to IPOs. On the contrary, we believe the
final rules will support the SPAC market by enhancing SPAC
disclosures and enhancing investor protection in ways that help
investor decision-making and increase investor confidence that they
have the necessary information to invest in the SPAC market. With
respect to the Small Business Capital Formation Advisory Committee's
second recommendation--supporting improved disclosures for SPACs,
particularly in the period of time between the announcement of the
merger and the closing of the de-SPAC transaction--we believe the
final rules collectively will enhance such disclosure. We address
the other specific recommendations of the Small Business Capital
Formation Advisory Committee in the specific sections of this
release related to those recommendations.
---------------------------------------------------------------------------
While we recognize that the number of SPAC IPOs has declined since
2021, the investor protection concerns regarding SPACs and the hybrid
nature of the de-SPAC transaction identified in the Proposing Release
do not depend on market fluctuations. In addition, as noted above,
notwithstanding the recent decline, SPAC transactions have become a
much larger part of the U.S. securities markets over the last decade
and could continue to grow as macroeconomic and other factors change.
Accordingly, after considering comments received on the proposal, we
are adopting final rules that will provide for greater transparency and
more robust investor protections in SPAC IPOs and de-SPAC transactions.
The final rules will enhance the completeness, usefulness, and
comparability of the disclosures provided by SPACs and target companies
at the SPAC IPO and de-SPAC transaction stages and will provide other
important protections for investors in this market, all of which may
promote market efficiency. Further, given that the de-SPAC transaction
essentially is an IPO of the target company in the form of an M&A
transaction, the final rules also will ensure that investors receive
similar information about the target company and similar protections as
in a traditional IPO in connection with the de-SPAC transaction. The
final rules also will provide investors with information about, and
protections with respect to, the M&A elements of de-SPAC transactions,
particularly regarding the transaction approval process and conflicts
of interest.
To these ends, we are adopting new subpart 229.1600 of 17 CFR part
229 (``subpart 1600'' of Regulation S-K) that sets forth specialized
disclosure requirements for SPAC IPOs and de-SPAC transactions. New
subpart 1600 contains provisions that, among other things:
[[Page 14164]]
Require additional disclosures about the SPAC sponsor,
potential conflicts of interest, and dilution;
Require certain disclosures on the prospectus outside
front cover page and in the prospectus summary of registration
statements filed in connection with SPAC IPOs and de-SPAC transactions;
and
Require additional disclosures regarding de-SPAC
transactions, including (1) if the law of the jurisdiction in which the
SPAC is organized requires its board of directors (or similar governing
body) to determine whether the de-SPAC transaction is advisable and in
the best interests of the SPAC and its shareholders, or otherwise make
any comparable determination, disclosure of that determination, and (2)
if the SPAC or SPAC sponsor has received any outside report, opinion,
or appraisal materially relating to the de-SPAC transaction, certain
disclosures concerning the report, opinion, or appraisal.
In addition, we are adopting amendments to provide procedural
protections and to align the disclosures provided to investors, as well
as the legal obligations of companies, in de-SPAC transactions more
closely with those in traditional IPOs. Specifically, we are adopting
final rules that:
Amend the registration statement forms and schedules filed
in connection with de-SPAC transactions to require additional
disclosures about the target company;
Provide that a target company in a registered de-SPAC
transaction is a co-registrant on the registration statement used for
the de-SPAC transaction such that the target company will be subject to
liability under section 11 of the Securities Act;
Make the PSLRA safe harbor unavailable to SPACs (including
with respect to projections of target companies seeking to access the
public markets through a de-SPAC transaction), by defining ``blank
check company'' to encompass SPACs (and other companies that would be
blank check companies but for the fact that they do not sell penny
stock); and
Require re-determination of SRC status following a de-SPAC
transaction.
We also are providing guidance regarding potential underwriter status
under section 2(a)(11) of the Securities Act in de-SPAC transactions.
In addition, to provide reporting shell company shareholders,
including SPAC shareholders, with more consistent Securities Act
liability protections regardless of transaction structure, we are
adopting new Rule 145a that specifies that any business combination of
a reporting shell company, other than a business combination related
shell company, involving another entity that is not a shell company
involves a sale of securities to the reporting shell company's
shareholders.\41\ We are also adopting new 17 CFR 210.15-01 (``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 target company with those
in traditional IPOs.
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\41\ Throughout this release, for readability, 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. 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.
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With respect to effectiveness and compliance with the final rules,
in response to commenters,\42\ we have set an extended effective date
for the new rules (i.e., July 1, 2024, which is 125 days after the date
of publication of this release in the Federal Register). This extended
period before the final rules are effective will provide sufficient
time for an initial public filing to be made under the existing rules
for any transactions that are currently pending or planned. Any filings
made on or after the effective date must comply with the final rules.
---------------------------------------------------------------------------
\42\ Some commenters indicated that some or all of the new rules
should not apply to existing SPACs and/or should apply only
prospectively. See, e.g., letters from American Securities
Association; Cato Institute; Freshfields Bruckhaus Deringer US LLP
(June 13, 2022) (``Freshfields''); Don Nguyen (Apr. 20, 2022);
Nicholas Wilson (June 9, 2022).
---------------------------------------------------------------------------
We are also issuing guidance regarding the status of SPACs under
the Investment Company Act of 1940 (``Investment Company Act'').\43\ We
have decided not to adopt proposed 17 CFR 270.3a-10 (``Rule 3a-10''
under the Investment Company Act) which would have provided a safe
harbor from the definition of investment company under section
3(a)(1)(A) to SPACs that complied with the rule's conditions. Whether a
SPAC is an investment company as defined in the Investment Company Act
is a question of facts and circumstances. Given the individualized
nature of this analysis, and because, depending on the facts and
circumstances, a SPAC could be an investment company at any stage of
its operations such that a specific duration limitation may not be
appropriate, we have decided not to adopt proposed Rule 3a-10. We are,
however, providing guidance as to the type of activities that would
likely raise serious questions about a SPAC's status as an investment
company under the Investment Company Act.
---------------------------------------------------------------------------
\43\ 15 U.S.C. 80a-1 et seq.
---------------------------------------------------------------------------
II. New Subpart 1600 of Regulation S-K
The Commission is adopting final rules to add new subpart 1600 to
Regulation S-K. The new subpart sets forth disclosure requirements
applicable to SPACs regarding, among other things, the sponsor,
potential conflicts of interest, and dilution and requires certain
disclosures on the prospectus cover page and in the prospectus
summary.\44\ The Commission is also adopting final rules to amend a
number of forms and schedules used by SPACs for IPOs and de-SPAC
transactions to require the information set forth in subpart 1600.\45\
To the extent that the disclosure requirements in subpart 1600 address
the same subject matter as the existing disclosure requirements of the
forms or schedules, the requirements of subpart 1600 are
controlling.\46\
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\44\ The requirements in new subpart 1600 will codify and
standardize some of the disclosures already commonly provided by
SPACs.
\45\ See the amendments to Forms S-1, F-1, S-4, F-4 and 8-K and
Schedules 14A and TO. While the Commission did not propose
amendments to Schedule 14C, the disclosure required by subpart 1600
will 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 the requirements of Form S-4 or F-4 that
the Commission is adopting, as applicable, in regard to de-SPAC
transactions would apply in that context. Also, in both Form S-4 and
Form F-4, we made technical changes from the proposal to clarify
that the new Regulation S-K Item 1600 series of disclosures should
be located in the prospectus part of these forms. As a result Form
S-4 provides: ``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) apply in addition to the
provisions of this Form and disclosure thereunder must be provided
in the prospectus, and the structured data provisions of Item 1610
of Regulation S-K (17 CFR 229.1610) apply to those disclosures.'' We
made similar changes to Form F-4. For purposes of consistency across
forms and schedules, we made similar changes as well to Schedule 14A
and Schedule TO, although there is no requirement in these forms to
locate the disclosure in the prospectus portion of these schedules.
In both Schedule 14A and Schedule TO, we made technical changes from
the proposal to clarify that Item 1604(a) does not apply since these
disclosure documents do not include an outside front cover page
similar to a prospectus and Item 1604(b) disclosure should be
included in the front part of the disclosure document instead of the
prospectus summary referred to in Item 1604(b).
\46\ General Instruction L.1. to Form S-4; General Instruction
I.1. to Form F-4; Item 14(f)(1) to Schedule 14A; General Instruction
L to Schedule TO.
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[[Page 14165]]
A. Definitions
1. Proposed Definition: ``De-SPAC Transaction''
The Commission proposed to define the term ``de-SPAC transaction''
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).\47\
---------------------------------------------------------------------------
\47\ Proposed Item 1601(a).
---------------------------------------------------------------------------
2. Comments: Definition of ``De-SPAC Transaction''
One commenter recommended we add the term ``reorganization'' to the
non-exhaustive list of transactions set out in the proposed definition
of de-SPAC transaction.\48\
---------------------------------------------------------------------------
\48\ Letter from Jay Knight, Chair of the Committee on Federal
Regulation of Securities of the Section of Business Law of the
American Bar Association (June 17, 2022) (``ABA'').
---------------------------------------------------------------------------
One commenter recommended the definition of de-SPAC transaction
refer to ``initial business combination'' not ``business combination.''
\49\ Another commenter recommended the definition be named ``initial
business combination'' instead of ``de-SPAC transaction.'' \50\
---------------------------------------------------------------------------
\49\ Letter from ABA.
\50\ Letter from Kirkland & Ellis LLP (June 15, 2022)
(``Kirkland & Ellis'').
---------------------------------------------------------------------------
In response to a request for comment,\51\ one commenter said there
was no need to tie the definition of de-SPAC transaction to
transactions that are permitted under exchange listing standards,
particularly if the definition of SPAC includes non-listed shell
companies.\52\
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\51\ Proposing Release, supra note 7, at 29466 (request for
comment number 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?'').
\52\ Letter from Vinson & Elkins (June 13, 2022) (``Vinson &
Elkins'').
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3. Final Definition: ``De-SPAC Transaction''
After considering the comments received, we are adopting the
definition of de-SPAC transaction as proposed with a modification
discussed below.\53\ Under the final rules, the term de-SPAC
transaction means a business combination, such as a merger,
consolidation, exchange of securities, acquisition of assets,
reorganization, 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).
---------------------------------------------------------------------------
\53\ Item 1601(a) of Regulation S-K.
---------------------------------------------------------------------------
We agree with one commenter's recommendation \54\ to add the term
``reorganization'' to the non-exhaustive list of transactions set out
in the definition of de-SPAC transaction. It is our understanding some
transactions commonly considered to be de-SPAC transactions may be
considered reorganizations. Hence, we have added the suggested term to
the final definition.
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\54\ Letter from ABA.
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A few commenters suggested the definition of de-SPAC transaction
should use the phrase ``initial business combination.'' \55\ We
recognize the phrase ``initial business combination'' may be used
interchangeably with ``business combination'' or ``de-SPAC
transaction'' in the marketplace today, but we believe the simpler
proposed term ``business combination'' used in the body of the de-SPAC
transaction definition will be clearer to market participants. One of
these commenters suggested the term ``initial business combination''
should be used because ``[s]ubsequent acquisitions by the former SPAC
after Closing should not be considered a De-SPAC Transaction.'' \56\ We
note that a company that is no longer a SPAC would not be subject to
the disclosure items in subpart 1600 of Regulation S-K.\57\
---------------------------------------------------------------------------
\55\ Letters from ABA, Kirkland & Ellis.
\56\ Letter from ABA.
\57\ See also infra note 94 and accompanying text concerning
SPAC status after a de-SPAC transaction.
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We agree with the commenter who said there was no need to tie the
definition of de-SPAC transaction to transactions that are permitted
under exchange listing standards, particularly if the definition of
SPAC includes non-listed shell companies.\58\ A narrower definition may
inappropriately exclude transactions that should be included, such as
those involving over-the-counter-traded SPACs. We continue to believe,
as indicated in the Proposing Release,\59\ that the definition of de-
SPAC transaction should include less common transactions that may or
may not be permitted under exchange listing rules but for which the
enhanced disclosure and procedural requirements in the final rules may
be appropriate because they raise the same investor protection
concerns.\60\
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\58\ Letter from Vinson & Elkins.
\59\ Proposing Release, supra note 7, at 29466.
\60\ In adopting this definition of de-SPAC transaction, we do
not intend to indicate that such transactions are or should be
permitted under the exchanges' SPAC listing rules or that exchange
listing requirements should not apply to SPACs seeking an exchange
listing.
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4. Proposed Definition: ``Special Purpose Acquisition Company (SPAC)''
The Commission proposed Item 1601 to define the term ``special
purpose acquisition company (SPAC)'' 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; \61\
(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.\62\
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\61\ Blank check companies subject to Rule 419 must comply with
a comprehensive set of disclosure and investor protection
requirements under the rule and were not proposed to be subject to
the requirements applicable to SPACs under the proposed rules.
\62\ Proposed Item 1601(b).
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5. Comments: Definition of ``Special Purpose Acquisition Company
(SPAC)''
One commenter indicated they saw no need for a definition of the
term ``SPAC,'' as the commenter saw ``no reason why the Proposed Rules
should not apply to all shell companies, other than business
combination shell companies, inclusive of blank check companies'' and
also indicated the proposed definitions of ``SPAC'' and ``de-SPAC
transaction'' were circular, stating, ``The proposed definition of `de-
SPAC transaction' should be revised to eliminate the reference to `a
special purpose acquisition company' in order to eliminate
circularity.'' \63\
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\63\ Letter from Vinson & Elkins (noting that ``as proposed, a
special purpose acquisition company has a business plan to complete
a de-SPAC transaction, and a de-SPAC transaction involves a special
purpose acquisition company.'').
---------------------------------------------------------------------------
A few commenters did not support including the requirement that a
SPAC ``return all remaining proceeds from the registered offering and
any concurrent offerings to its shareholders'' in the proposed SPAC
definition.\64\ One of these commenters said this aspect of the
definition is ``unnecessary and should be eliminated or revised to only
refer to the plan to return proceeds from the registered offering''
because ``SPACs often hold a modest amount of working capital outside
of their trust accounts that they use to fund operating expenses.''
\65\ According to the commenter, ``[i]f a shell company had such cash
remaining at the point when the public shareholders exercise their
redemption rights, it would be inappropriate to exclude such shell
company from the [p]roposed [r]ules
[[Page 14166]]
based solely on retaining such cash.'' \66\ Another commenter
recommended that we change this aspect of the definition to use the
phrase ``redeem the equity securities issued in the registered offering
if the company does not complete a de-SPAC transaction within the
specified time frame.'' \67\
---------------------------------------------------------------------------
\64\ Letters from ABA, Vinson & Elkins.
\65\ Letter from Vinson & Elkins.
\66\ Id.
\67\ Letter from ABA.
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One commenter recommended we narrow the definition of SPAC to only
``a blank check company as defined in Sec. 230.419(a)(2).'' \68\
Another commenter, who opposed defining ``SPAC,'' noted that the
proposed definition ``is not limited to companies listed on a national
securities exchange'' and ``would include shell companies traded in
over-the-counter markets, which are not what would generally be
considered to be `SPACs.' '' \69\ That commenter noted that a ``logical
distinction could be drawn based on exchange listing, rather than on
whether the offering is by a blank check company and therefor subject
to Rule 419.'' \70\ The same commenter recommended that, if we adopt a
new definition, we clarify that a company ``ceases to be a SPAC for
purposes of the rules after consummation of a de-SPAC transaction.''
\71\
---------------------------------------------------------------------------
\68\ Letter from ABA.
\69\ Letter from Vinson & Elkins.
\70\ Id.
\71\ Id.
---------------------------------------------------------------------------
In response to requests for comment,\72\ one commenter said that
``it is clear what entities are SPACs, without the need for additional
boxes to check.'' \73\
---------------------------------------------------------------------------
\72\ Proposing Release, supra note 7, at 29466 (request for
comment number 6) (``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?'').
\73\ Letter from Vinson & Elkins.
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6. Final Definition: ``Special Purpose Acquisition Company (SPAC)''
After considering the comments received, we are adopting the
definition of special purpose acquisition company (or SPAC) as
proposed, with certain modifications discussed below.\74\ Under the
final rules, the term special purpose acquisition company (SPAC) means
a company that has: (1) indicated that its business plan is to: (i)
conduct a primary offering of securities that is not subject to the
requirements of Sec. 230.419 (Rule 419 under the Securities Act); (ii)
complete a business combination, such as a merger, consolidation,
exchange of securities, acquisition of assets, reorganization, or
similar transaction, with one or more target companies within a
specified time frame; and (iii) return proceeds from the offering and
any concurrent offering (if such offering or concurrent offering
intends to raise proceeds) to its security holders if the company does
not complete a business combination, such as a merger, consolidation,
exchange of securities, acquisition of assets, reorganization, or
similar transaction, with one or more target companies within the
specified time frame; or (2) represented that it pursues or will pursue
a special purpose acquisition company strategy.
---------------------------------------------------------------------------
\74\ Item 1601(b) of Regulation S-K.
---------------------------------------------------------------------------
One commenter did not see a need for a new defined term ``SPAC,''
\75\ because, in the commenter's view, enhanced disclosures should
apply to all shell companies (other than business combination shell
companies) and not only to those companies defined as SPACs.\76\
Several of the rules being adopted in this release will enhance
disclosures for investors in non-SPAC shell companies.\77\ However, the
proposed individual disclosure items in the Item 1600 series of
Regulation S-K were largely tailored to SPAC transactions. For the
reasons we discuss in this release below in connection with the
specific rules we are adopting, we believe it is appropriate at this
time to apply enhanced disclosure in connection with companies meeting
the definition of SPAC. However, we will continue to consider whether
enhanced disclosure in other shell company transactions, such as
reverse mergers with public shell companies, would be appropriate or
necessary in the future.\78\
---------------------------------------------------------------------------
\75\ Letter from Vinson & Elkins. See supra note 63 and
accompanying text.
\76\ Letter from Vinson & Elkins.
\77\ See Rule 145a and definitions of ``blank check company'' in
Securities Act Rule 405 and Exchange Act Rule 12b-2.
\78\ According to data provided by The Deal during the years
when it tracked this data, the number of reverse mergers not
involving SPACs was as follows by year: (a) 48 in 2017, (b) 48 in
2018, (c) 28 in 2019, and (d) 17 in 2020. The Deal staff indicated
to the Commission staff they stopped tracking the data after 2020
because of the small number of reverse mergers.
---------------------------------------------------------------------------
This commenter further observed there was circularity in the
proposed definitions of ``SPAC'' and ``de-SPAC transaction.'' \79\ We
agree the final rules should eliminate this circularity. Although the
commenter made the suggestion to revise the definition of ``de-SPAC
transaction'' rather than addressing the issue by revising the
definition of ``SPAC,'' we believe it would be clearer to avoid
circularity by revising the definition of ``SPAC.'' We have replaced
the term ``de-SPAC transaction'' in the definition of ``SPAC'' with
``business combination, such as a merger, consolidation, exchange of
securities, acquisition of assets, reorganization, or similar
transaction, with one or more target companies.''
---------------------------------------------------------------------------
\79\ Letter from Vinson & Elkins. See supra note 63 and
accompanying text.
---------------------------------------------------------------------------
Several comments focused on the aspect of the proposed SPAC
definition regarding the return of proceeds and suggested that special
purpose acquisition companies may not return ``all remaining
proceeds.'' \80\ We agree with commenters that the proposed term
``return all remaining proceeds'' could inappropriately exclude
companies that take some portion of cash out of trust for anticipated
expenses and therefore do not return ``all'' proceeds at the time of
redemption.\81\ To avoid excluding such companies, we have revised the
definition to use the term ``return proceeds'' instead of ``return all
remaining proceeds.'' We have also added a parenthetical reference
``(if such offering or concurrent offering intends to raise proceeds)''
that qualifies the term ``offering and any concurrent offering'' to
account for the fact there may be some SPAC offerings that do not raise
proceeds.
---------------------------------------------------------------------------
\80\ Letters from ABA, Vinson & Elkins. See supra notes 64, 65,
and 66 and accompanying text.
\81\ See, e.g., letters from ABA (``In addition, SPACs are
permitted to withdraw interest to pay income and franchise taxes,
and, upon liquidation, pay certain liquidation costs. . . .'');
Goodwin Procter LLP (June 14, 2022) (``Goodwin'') (``SPACs are
permitted to withdraw interest to pay income and franchise taxes
and, upon liquidation, pay certain liquidation costs. . . .'');
White & Case LLP (June 17, 2022) (``White & Case'') (``In addition,
SPACs are permitted to withdraw interest to pay income and franchise
taxes, and, upon liquidation, pay certain liquidation costs, which
would reduce overall returns.'').
---------------------------------------------------------------------------
We do not believe it is necessary to revise the definition to refer
only to the plan to return proceeds from the primary offering, rather
than the primary offering and any concurrent offering. We understand
SPACs typically place proceeds of concurrent offerings in trust and
return these proceeds if the SPAC does not complete a de-SPAC
transaction within the specified time frame.\82\
---------------------------------------------------------------------------
\82\ See NYSE Listed Company Manual Section 102.06 and Nasdaq
Listing Rule IM-5101-2 (providing for the placement of concurrent
offering proceeds in trust).
---------------------------------------------------------------------------
We are not adopting the recommendation that we should replace the
terms related to the return of proceeds with alternative terms related
to the redemption of equity securities. We continue to believe, as the
Commission indicated in the Proposing Release, that the definition
should not include certain criteria, including the issuance of
redeemable securities, that
[[Page 14167]]
could 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.\83\
---------------------------------------------------------------------------
\83\ Proposing Release, supra note 7, at 29466.
---------------------------------------------------------------------------
One commenter recommended we narrow the definition of SPAC to only
``a blank check company as defined in Sec. 230.419(a)(2).'' \84\ The
Rule 419 definition of ``blank check company'' includes a requirement
that the company is issuing penny stock.\85\ The proposed definition of
SPAC reflects the fact that special purpose acquisition company
structures often are designed to avoid issuing penny stock but continue
to pose disclosure and other investor protection concerns.\86\ Special
purpose acquisition companies frequently do not issue penny stock and,
therefore, would not meet the definition in Sec. 230.419(a)(2). Thus,
the inclusion of the suggested criterion would inappropriately exclude
many or all special purpose acquisition companies from the SPAC
definition.
---------------------------------------------------------------------------
\84\ Letter from ABA.
\85\ See supra notes 1 and 61 (discussion of Securities Act Rule
419). As discussed in section III.E infra, in the final rules, we
are not amending the definition of ``blank check company'' in Rule
419 as proposed but are adopting a definition of ``blank check
company'' in Securities Act Rule 405 that is exclusively for
purposes of the safe harbor created by the PSLRA for forward-looking
statements.
\86\ Proposing Release, supra note 7, at 29465.
---------------------------------------------------------------------------
Another commenter indicated the SPAC definition should draw a
distinction based on exchange listing, which would exclude shell
companies traded in over-the-counter markets. In the commenter's view,
shell companies traded in over-the-counter markets are not generally
considered to be SPACs.\87\ While companies commonly considered to be
SPACs often list on a national securities exchange, we do not believe
the SPAC definition should be limited to such listed entities. While
carving out companies traded over-the-counter might leave out only a
few (or zero) companies today, prevailing structures may further evolve
over time just as they have evolved over time in the past,\88\ and we
believe investors in those over-the-counter companies engaged in the
same kinds of business as exchange-traded companies should have the
same investor protections provided by the rules we are adopting.\89\
---------------------------------------------------------------------------
\87\ Letter from Vinson & Elkins.
\88\ See, e.g., Table 2 in section VIII (Economic Analysis)
(statistics on over-the-counter SPACs for over a three-decade
period).
\89\ Prior to exchange rule changes permitting listing, shells
commonly referred to as SPACs were not exchange-listed. See
Securities Exchange Act Release Nos. 58228 (July 25, 2008) [73 FR
44794 (July 31, 2008)] (Order Granting Approval to Proposed Rule
Change, as modified by Amendment No. 1, to Adopt Additional Initial
Listing Standards to list Securities of Special Purpose Acquisition
Companies) (NASDAQ-2008-013); 57785 (May 6, 2008) [73 FR 27597 (May
13, 2008)] (Order Approving Proposed Rule Change to Adopt New
Initial and Continued Listing Standards to List Securities of
Special Purpose Acquisition Companies) (SR-NYSE-2008-17). According
to data from SPACInsider, in the years 2020 through 2022, there were
zero SPAC IPOs in the over-the-counter market (i.e., that were not
listed on an exchange in connection with the IPO).
---------------------------------------------------------------------------
Furthermore, we are adding a new clause to the definition that
provides that the term special purpose acquisition company also
includes a company that has represented it pursues or will pursue a
special purpose acquisition company strategy.\90\ In the Proposing
Release, the Commission asked if the proposed definition provides a
workable approach to determining which issuers would be subject to the
requirements of proposed subpart 1600.\91\ In addition, the Commission
asked whether there were any potential opportunities for regulatory
arbitrage in shell company or SPAC transactions that the Commission
should consider addressing.\92\ After further consideration of these
regulatory arbitrage concerns, we have revised the final rule to
include new paragraph (b)(2) to Item 1601 concerning pursuit of a
special purpose acquisition company strategy. Variations on common SPAC
structures could cause some companies to fall technically outside one
of the three prongs of paragraph (1) of the final SPAC definition. When
companies make representations they pursue or will pursue a special
purpose acquisition company strategy, they may be indistinguishable to
investors from companies that meet the other components of the
definition. As a result, we believe investors in such companies should
benefit from the enhanced disclosures applicable to SPACs. Therefore,
even where a company technically does not meet one of the three prongs
in paragraph (1) of the final definition of SPAC, if it represents,
directly or indirectly, that it pursues or will pursue a SPAC strategy,
then pursuant to paragraph (2) of the final definition of SPAC, the
company would meet the definition of a SPAC.
---------------------------------------------------------------------------
\90\ As a result of this change, the three prongs contained in
the proposed definition (that had paragraph numbers (1), (2), and
(3)) will be renumbered as paragraphs (1)(i), (ii), and (iii) and
the clause regarding pursuit of a SPAC strategy will be numbered as
paragraph (2). We have also added a parenthetical reference to the
acronym ``(SPAC)'' in the body of the definition in the final rule
as well as in the name of the defined term ``special purpose
acquisition company (SPAC)'' to add incremental clarity that the
acronym also refers to the defined term.
\91\ Proposing Release, supra note 7, at 29466 (request for
comment number 1).
\92\ Proposing Release, supra note 7, at 29490 (request for
comment number 102).
---------------------------------------------------------------------------
Similarly, to avoid the risk that certain varieties of SPACs may
fall outside the definition because of minor technical distinctions
from the prongs of the definition, we have changed the proposed term
``register a primary offering'' to ``conduct a primary offering'' to
account for evolving SPAC structures that may not conduct a registered
offering. We do not believe it would be appropriate for companies in
de-SPAC transactions to avoid the disclosure (or any other)
requirements of these final rules only because the initial SPAC
transaction was not registered. As noted in the Proposing Release,\93\
we intend this definition to be sufficiently broad to take into account
potential variations in the SPAC structure and the possibility that
SPACs may continue to evolve. This adjustment to the definition will
ensure that appropriate disclosures are provided at the de-SPAC stage
regardless of the structure of the initial SPAC transaction. In the
final definition, we have also made a corresponding revision to change
the proposed term ``registered offering'' to ``offering.''
---------------------------------------------------------------------------
\93\ Proposing Release, supra note 7, at 29465.
---------------------------------------------------------------------------
One commenter recommended we clarify that a company ceases to be a
SPAC upon consummation of a de-SPAC transaction.\94\ For the avoidance
of doubt, we are providing guidance that, if a company that meets the
SPAC definition has completed a de-SPAC transaction or, in the case of
one or more target companies, contemporaneous de-SPAC transactions,
then the company no longer meets the definition of a SPAC and that such
companies are not required to comply with the enhanced disclosures
under Regulation S-K applicable to SPACs in registration statements
they file in later periods after the completion of such de-SPAC
transactions.
---------------------------------------------------------------------------
\94\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
We are not requiring a check box on form cover pages indicating
SPAC status as the enhanced disclosure provided by registrants pursuant
to the Item 1600 series of Regulation S-K will make clear the
registrant is a SPAC.\95\
---------------------------------------------------------------------------
\95\ See also section III.C (discussing co-registration on Forms
S-4 and F-4 and the requirement to identify the target company as a
registrant on the registration statement cover page).
---------------------------------------------------------------------------
7. Proposed Definition: ``SPAC Sponsor''
The Commission proposed to define the term ``SPAC sponsor'' as the
entity and/or person(s) primarily responsible
[[Page 14168]]
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.\96\
---------------------------------------------------------------------------
\96\ Proposed Item 1601(c).
---------------------------------------------------------------------------
8. Comments: Definition of ``SPAC Sponsor''
One commenter said the proposal ``should be revised to eliminate
the need for a defined term `SPAC sponsor' '' and, ``[i]nstead, the
rules should require disclosure regarding the SPAC's directors,
officers and affiliates.'' \97\ This commenter also said ``the
definition's exclusion of directors and officers in their capacities as
such would result in there being no `sponsor' for many SPACs.'' This
commenter also said the proposal ``blur[red] the lines between the
roles and responsibilities of the SPAC sponsor and that of the SPAC
board and officers.''
---------------------------------------------------------------------------
\97\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
Another commenter recommended an alternative definition of ``SPAC
sponsor'': ``the entity and/or person(s) that (1) own all or a portion
of the privately placed common equity securities of the special purpose
acquisition company and (2) are primarily responsible for directing and
managing the business and affairs of a special purpose acquisition
company other than in their capacities as (i) directors or officers of
the special purpose acquisition company or (ii) third-party service
providers to the special purpose acquisition company, as applicable.''
\98\ The commenter said that ``the `SPAC sponsor' should be the entity
or persons who have both ownership of [s]ponsor shares and
responsibility for directing and managing the SPAC.'' The commenter
said that their suggested definition will ``identify the entity or
persons that are currently identified as [s]ponsors in registration
statements for the SPAC.'' \99\
---------------------------------------------------------------------------
\98\ Letter from ABA.
\99\ Letter from ABA.
---------------------------------------------------------------------------
9. Final Definition: ``SPAC Sponsor''
After considering the comments received, we are adopting the
definition of SPAC sponsor as proposed with certain modifications
discussed below.\100\ Under the final rules, the term SPAC sponsor
means any entity and/or person primarily responsible for organizing,
directing, or managing the business and affairs of a special purpose
acquisition company, excluding, if an entity is a SPAC sponsor,
officers and directors of the special purpose acquisition company who
are not affiliates of any such entity that is a SPAC sponsor.
---------------------------------------------------------------------------
\100\ Item 1601(c) of Regulation S-K.
---------------------------------------------------------------------------
The definition is designed to be sufficiently broad that
appropriate entities or persons will be subject to the enhanced
disclosure requirements applicable to SPAC sponsors.\101\ Although a
sponsor of a SPAC may perform a variety of functions within the SPAC's
structure, we intend for the SPAC sponsor definition to encompass
activities that, based on the staff's experience reviewing SPAC filings
and public commentary, are commonly understood to be sponsors of SPACs
or with persons referred to as sponsors in current registration
statements.
---------------------------------------------------------------------------
\101\ See, e.g., Item 1603 (regarding SPAC sponsors).
---------------------------------------------------------------------------
We do not believe it would provide investors with adequate
information to tie the SPAC sponsor definition to persons with
particular titles, because the definition and corresponding disclosure
requirements are intended to capture all parties who perform certain
activities that result in such parties having key substantive influence
over the SPAC. The suggestion to replace ``SPAC sponsor'' with
``directors, officers, and affiliates of the SPAC'' would require
disclosure from directors and officers not commonly considered to be
sponsors today and, as indicated by the Commission in the Proposing
Release, would overlap unnecessarily with current required disclosure
concerning directors and officers.\102\ Also, ``directors, officers,
and affiliates of the SPAC'' may not include external management
companies and their principals that should be included in the
definition on the basis of their activities. While State law may
provide that directors manage the business and affairs of a corporation
and may not provide that any one director has any more authority than
any other director,\103\ the phrase ``primarily responsible'' in the
definition of SPAC sponsor is not limited to solely directors or solely
directors and officers. Other persons, such as third-party management
companies and their affiliates, frequently are primarily responsible
for the organization, direction, or management of the business and
affairs of SPACs today and would be SPAC sponsors under the definition
we are adopting.
---------------------------------------------------------------------------
\102\ See Proposing Release, supra note 7, at 29466, n.58 (``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.'').
\103\ See, e.g., DGCL Section 141(a) (``The business and affairs
of every corporation organized under this chapter shall be managed
by or under the direction of a board of directors, except as may be
otherwise provided in this chapter or in its certificate of
incorporation.'').
---------------------------------------------------------------------------
One commenter recommended an alternative definition of SPAC sponsor
that featured, among other things, carve-outs from that alternative
definition for directors and officers of the SPAC and for third-party
service providers.\104\ This commenter also suggested that the proposed
definition's exclusion of directors and officers in their capacities as
such would result in a null set of SPAC sponsors.\105\ Having
considered this comment, we have made changes to the final definition.
We are not adopting the proposed term ``other than in their capacities
as directors or officers,'' because it could be unclear under the
proposed definition whether any action taken on behalf of the SPAC by a
director or officer of a SPAC is ``other than in that person's capacity
as an officer or director.'' As the commenter noted, this could result
in no such persons being considered SPAC sponsors. To address such
potential ambiguities, in the final rule, we have changed the term
``other than in their capacities as directors or officers of the
special purpose acquisition company as applicable'' to ``excluding, if
an entity is a SPAC sponsor, officers and directors of the special
purpose acquisition company who are not affiliates of any such entity
that is a SPAC sponsor.'' Based on the staff's experience, we
understand that a SPAC sponsor entity is typically involved in the
SPAC. However, if the SPAC sponsor is not an entity, then we want to
make sure the appropriate persons are captured within the SPAC sponsor
definition. An officer or director of the SPAC that is an affiliate of
an entity that is a SPAC sponsor would also be a SPAC sponsor under the
final definition. For example, in the case of a hypothetical SPAC where
a third-party management company is a SPAC sponsor and a person is a
director of both the SPAC and this third-party management company, then
this person would also be a SPAC sponsor.
---------------------------------------------------------------------------
\104\ Letter from ABA. See supra note 98 and accompanying text.
\105\ Id.
---------------------------------------------------------------------------
We are not adopting the suggestion to exclude ``third-party service
providers'' from the definition of SPAC sponsor.\106\ As discussed
above, some third-party service providers will be ``SPAC sponsors''
under the definition where they are ``primarily responsible for
organizing, directing, or managing the business and affairs'' of the
SPAC. Other
[[Page 14169]]
third-party service providers, however, will not fall within the
definition of SPAC sponsor where they are not ``primarily responsible''
for organizing, directing, or managing the business and affairs of a
SPAC. For example, external legal counsel that only assists in the
formation of a SPAC by drafting its certificate of incorporation and
bylaws on behalf of a client would not be ``primarily responsible'' for
``organizing . . . the business and affairs of a SPAC.'' \107\ Other
third-party service providers may perform similar administrative or
ministerial activities for a SPAC or provide outside legal or
accounting advice neither of which would cause them to be ``primarily
responsible'' for organizing, directing, or managing the business and
affairs of the SPAC and thus they would not be SPAC sponsors.
---------------------------------------------------------------------------
\106\ Letter from ABA. See supra note 98 and accompanying text.
\107\ Item 1601(c).
---------------------------------------------------------------------------
10. Proposed Definition: ``Target Company''
The Commission proposed to define the term ``target company'' as an
operating company, business, or assets.\108\
---------------------------------------------------------------------------
\108\ Proposed Item 1601(d).
---------------------------------------------------------------------------
11. Comments: Definition of ``Target Company''
One commenter asserted that ``the concept of `assets' being a
`target company' yields anomalous results under certain proposed rules
(such as requiring assets to sign a registration statement) and the
concept of a `business' may be vague (as a business may be a product
line, rather than an entity that could sign a registration
statement).'' \109\ Another commenter suggested ``deleting the term
`assets' from the definition or clarifying that a target company
includes assets where the acquisition of such assets is intended to
constitute the SPAC's initial business combination.'' \110\
---------------------------------------------------------------------------
\109\ Letter from Vinson & Elkins.
\110\ Letter from Freshfields (``We believe there are
circumstances where a SPAC may acquire some assets (such as cash)
but would not yet have completed its acquisition of a target
company.'').
---------------------------------------------------------------------------
12. Final Definition: ``Target Company''
After considering the comments received, we are adopting the
definition of target company as proposed.\111\ Under the final rules,
the term target company means an operating company, business or assets.
---------------------------------------------------------------------------
\111\ Item 1601(d) of Regulation S-K.
---------------------------------------------------------------------------
To address commenters' concerns about the use of the terms
``assets'' and ``business'' in the definition of target company,\112\
we have revised certain registration statement form instructions, as
discussed in more detail below.\113\ We believe these changes address
the commenters' concerns. Therefore, we do not believe it is necessary
to make changes to the proposed definition of ``target company.'' In
addition, although an asset purchase transaction may be a different
form of transaction for the purposes of other legal requirements,
including State law, we do not believe a SPAC combination with a target
company taking the form of an asset purchase should be excluded from
the definition of de-SPAC transaction merely for this reason.
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\112\ Letters from Freshfields, Vinson & Elkins. See supra notes
65 and 66 and accompanying text.
\113\ See infra section III.C.
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B. Sponsors
1. Proposed Rules
The Commission proposed Item 1603(a) to require additional
disclosure about the SPAC sponsor, its affiliates, and promoters \114\
in registration statements and schedules filed in connection with SPAC
registered offerings and de-SPAC transactions,\115\ including
disclosure of the following:
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\114\ The term ``promoter'' is defined in Securities Act Rule
405 and Exchange Act Rule 12b-2.
\115\ See (a) proposed General Instruction VIII to Form S-1, (b)
proposed General Instruction I.1 to Form S-4, (c) proposed General
Instruction VII to Form F-1, (d) proposed General Instruction I.1 to
Form F-4. (e) proposed Item 14(f)(1) of Schedule 14A, and (f)
proposed General Instruction K to Schedule TO.
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The experience, material roles, and responsibilities of
these parties, as well as any agreement, arrangement, or understanding
(1) between the SPAC sponsor and the SPAC, its executive officers,
directors, or affiliates, with respect to determining whether to
proceed with a de-SPAC transaction and (2) between the SPAC sponsor and
unaffiliated security holders of the SPAC regarding the redemption of
outstanding securities;
The controlling persons of the SPAC sponsor and any
persons who have direct and indirect material interests in the SPAC
sponsor and the nature and amount of their interests, as well as an
organizational chart that shows the relationship between the SPAC, the
SPAC sponsor, and the SPAC sponsor's affiliates;
Tabular disclosure of the material terms of any lock-up
agreements with the SPAC 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 SPAC 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 SPAC sponsor, its
affiliates, and any promoters upon the completion of a de-SPAC
transaction.\116\
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\116\ In the Proposing Release, the Commission stated that 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. Proposing
Release, supra note 7, at 29467, n.64.
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2. Comments
Broadly categorized, commenters on proposed Item 1603(a) or
generally on the types of SPAC sponsor issues covered by proposed Item
1603(a) focused on six areas: (1) general comments that expressed
support for the proposals, (2) promoter requirements, (3) compensation,
(4) transfers of SPAC ownership, (5) interests in the SPAC sponsor and
the organizational chart requirement, and (6) agreements.
i. General Comments
A number of commenters generally supported the proposed enhanced
disclosure requirements regarding SPAC sponsors.\117\ Commenters cited
a number of benefits to investors as the reasons for their support,
including the following five benefits: (a) placing investors in a
better position to evaluate the merits of SPAC and de-SPAC
transactions,\118\ (b) illuminating financial incentives of SPAC
sponsors that may affect de-SPAC transaction outcomes,\119\ (c)
providing compensation information that may promote more informed
investment decisions,\120\ (d) providing SPAC
[[Page 14170]]
sponsor ownership interest information that may affect investor ability
to vote on de-SPAC transactions,\121\ and (e) providing information
about SPAC sponsor experience that may help investors assess the SPAC
sponsor's ability to find a target company.\122\
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\117\ Letters from ABA; Stephen W. Hall, Legal Director and
Securities Specialist, and Scott Farnin, Legal Counsel, Better
Markets (June 13, 2022) (``Better Markets); Michael Ryan, Chief
Executive Officer, Bullet Point Network, LP (June 13, 2022)
(``Bullet Point Network''); Charles Pieper (May 13, 2022) (``Charles
Pieper''); John L. Thornton, Co-Chair, Hal S. Scott, President, and
R. Glenn Hubbard, Committee on Capital Markets Regulation (June 13,
2022) (``Committee on Capital Markets Regulation''); Paul Andrews,
Managing Director, Research, Advocacy and Standards, CFA Institute
(May 31, 2022) (``CFA Institute''); Glenn Davis, Deputy Director,
Council of Institutional Investors (June 9, 2022) (``CII''); Dylan
Bruce, Financial Services Counsel, Consumer Federation of America
(June 13, 2022) (``Consumer Federation''); Elizabeth Warren, United
States Senator (July 8, 2022) (``Senator Elizabeth Warren''); Kerrie
Waring, Chief Executive Officer, International Corporate Governance
Network (June 13, 2022) (``ICGN''); Melanie Senter Lubin, President,
North American Securities Administrators Association, Inc. (June 13,
2022) (``NASAA''); Paul A. Swegle, Kinsel Law Offices (Apr. 9, 2022)
(``Paul Swegle'').
\118\ Letter from Committee on Capital Markets Regulation.
\119\ Letter from CII.
\120\ Letter from Consumer Federation.
\121\ Letter from ICGN.
\122\ Letters from ICGN, NASAA.
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Also, several commenters suggested that proposed Item 1603(a) would
codify, to an extent, existing disclosure practices.\123\
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\123\ Letters from ABA, NASAA, Vinson & Elkins.
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ii. Promoters
Some commenters said Item 1603 should not apply to ``promoters.''
\124\ One commenter asserted that application to the SPAC sponsor and
its affiliates would include all significant participants in the SPAC
and thus the ``promoter'' provision would not significantly benefit
investors.\125\ Another commenter said that ``disclosure regarding a
promoter of the SPAC's initial public offering that will have no
involvement with the de-SPAC transaction would be immaterial to
investors.'' \126\
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\124\ Letters from Freshfields, Vinson & Elkins.
\125\ Letter from Freshfields (stating that ``the proposed rules
also already require disclosure of all persons who have direct and
indirect material interests in the SPAC sponsor and the amount and
nature of their interests'' and that ``this should encompass the
most relevant entities and persons'').
\126\ Letter from Vinson & Elkins.
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iii. Compensation
A number of commenters suggested that the proposed disclosure
requirements regarding sponsor compensation would provide useful
information to investors.\127\ A few commenters expressed the view that
sponsor compensation is already sufficiently disclosed.\128\
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\127\ Letters from Better Markets, Charles Pieper, Committee on
Capital Markets Regulation, CFA Institute, Consumer Federation,
Senator Elizabeth Warren, ICGN, NASAA.
\128\ Letters from Samir Kapadia, Director, and Bobby
Cunningham, Director, SPAC Association (June 13, 2022) (``SPAC
Association''); Vinson & Elkins (expressing the view that sponsor
compensation and reimbursement is already disclosed under existing
disclosure requirements and the material terms of lock-up agreements
are already sufficiently disclosed as a matter of industry
practice).
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One commenter said the SPAC sponsor ``20 percent promote is fully
and fairly disclosed and has been for decades.'' \129\ Another
commenter said they ``believe the sponsor's compensation and
reimbursement are already sufficiently disclosed in response to
existing disclosure requirements and that incremental disclosure
requirements are thus not merited.'' \130\
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\129\ Letter from SPAC Association. We understand that the term
SPAC sponsor ``promote'' typically refers to the acquisition by the
SPAC sponsor of a significant percentage of the shares of the SPAC,
typically 20%. We observe the term used to connote a meaning of
``special compensation,'' but it does not involve a preferred
return, such as in real estate private equity investment structures
that also use this terminology.
\130\ Letter from Vinson & Elkins.
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One commenter that did not support the additional proposed
disclosure requirements stated that, if the Commission were nonetheless
to impose new requirements, ``the reference to `compensation' should be
revised to refer instead to all equity and rights to cash held by the
SPAC directors and officers and their affiliates, as certain equity
interests may be purchased for value (i.e., not be `compensation') and
reimbursement of advances or repayment of loans would not be
compensation.'' \131\ Another commenter said ``sponsor compensation
comes almost entirely in the form of capital gains associated with
securities issued in the `promote' resulting from stock price increases
after the de-SPAC transaction, and quantifying such compensation may
involve speculation or be subject to criticism as incomplete.'' \132\
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\131\ Letter from Vinson & Elkins.
\132\ Letter from Loeb & Loeb LLP (June 13, 2022) (``Loeb &
Loeb'').
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Another commenter said that, ``in addressing non-equity
compensation and reimbursements, proposed Item 1603(a)(6) should
explain its requirement to identify other compensation and
reimbursements that are material, individually or in the aggregate and
that the required disclosure may be qualitative and not quantitative,
except where amounts are above a specified de minimis threshold,
similar to the approach taken in certain respects under the existing
compensation disclosure framework in Item 402 of Regulation S-K [17 CFR
229.402].'' \133\
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\133\ Letter from ABA.
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iv. Transfer of SPAC Ownership
Several commenters recommended we adopt requirements to disclose
transfers of SPAC securities by the SPAC sponsor and others. One
commenter recommended, in response to request for comment,\134\ adding
a sentence at the end of Item 1603(a)(6) that states: ``Disclose any
arrangements under which the SPAC sponsor, its affiliates and any
promoters have transferred ownership of any securities in the SPAC to
other parties in exchange for compensation or other benefit to the
sponsor, its affiliates, any promoters, or to the SPAC.'' \135\ The
commenter said that ``SPAC sponsors at times sell off a portion of
their promote or other securities to a `risk-capital syndicate' as a
way of cashing out early on a portion of the compensation they receive
for their work on the SPAC'' and that ``the amount of interest that a
sponsor retains in securities of the SPAC is material for investors
seeking to evaluate the incentive of the sponsor in pursuing a SPAC
merger.'' \136\ Another commenter suggested expanding current Forms 3
and 4 director and officer reporting requirements to cover SPAC
sponsors and their transactions in SPAC securities after the de-SPAC
transaction.\137\ Similarly, another commenter recommended disclosure
of post-de-SPAC transaction transfers, noting ``this reporting could be
time limited, for example to two years'' following the de-SPAC
transaction.\138\
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\134\ Proposing Release, supra note 7, at 29467 (request for
comment number 9) (``Should we require more or less information
about the sponsor's compensation and reimbursements?'').
\135\ Letter from Michael Klausner, Stanford Law School, and
Michael Ohlrogge, NYU School of Law (June 13, 2022) (``Michael
Klausner and Michael Ohlrogge''), included as an attachment to a
letter from Michael Ohlrogge, NYU School of Law (June 13, 2022).
\136\ Id.
\137\ Letter from Paul Swegle.
\138\ Letter from NASAA.
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v. Interest in SPAC Sponsor and Organizational Chart
One commenter said that the proposed approach departs from the
traditional approach to beneficial ownership reporting and recommended
that this item should clarify that ``an indirect economic interest in
less than 10% of a SPAC's founder shares or warrants through ownership
of equity interests in a [SPAC] [s]ponsor should not, in and of itself
and absent other factors, be considered a direct or indirect material
interest in the [SPAC] [s]ponsor.'' \139\ Another commenter said the
identity of natural persons controlling the sponsor is already
disclosed in response to existing 17 CFR 229.403 (``Item 403'' of
Regulation S-K).\140\
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\139\ Letter from ABA.
\140\ Letter from Vinson & Elkins.
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vi. Agreements
One commenter recommended that the Commission should revise
proposed Item 1603(a)(8) to ``specify that if a SPAC, the SPAC sponsor,
or any affiliated party enters into an agreement regarding the
redemption of outstanding securities of the SPAC after the date of the
merger registration statement or proxy, that the SPAC be required to
issue a proxy amendment or similar
[[Page 14171]]
filing prior to the redemption deadline to inform SPAC shareholders of
the new agreement.'' \141\
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\141\ Letter from Michael Klausner and Michael Ohlrogge.
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Another commenter said the material terms of lock-up agreements are
already disclosed as a matter of industry practice and that requiring
additional disclosure would ``go beyond the disclosure requirements
applicable to lock-up agreements that are entered into in connection
with a traditional IPO.'' \142\ Regarding proposed requirements to
disclose any exceptions to relevant lock-up agreements, one commenter
recommended excluding exceptions that are not material or are
customary.\143\ This commenter noted that frequently these exceptions
provide that the transferee agree to the lock-up agreement as a
condition of the transfer.\144\
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\142\ Letter from Vinson & Elkins.
\143\ Letter from Freshfields (``Exceptions to lockups that are
customary and not significant or material [include]: transfers to
affiliates, transfers to family members, gifts and other charitable
donations, transfers by will or inheritance, transfers upon
dissolution of a marriage, and in-kind distributions to an entity's
members and partners'').
\144\ Letter from Freshfields.
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3. Final Rules
After considering the comments received, we are adopting Item
1603(a) as proposed with certain modifications we discuss below.
Additionally, for clarity and consistency throughout Item 1603, we have
replaced the term ``executive officers'' with the term ``officers.''
i. General Discussion
Item 1603(a)'s disclosure requirements will provide a SPAC's
prospective investors and existing shareholders with detailed
information relating to the SPAC sponsor that could be important in
understanding and analyzing a SPAC, including how the rights and
interests of the SPAC sponsor, its affiliates, and any promoters may
differ from, or may conflict with, those of public shareholders.\145\
Given that a SPAC does not conduct an operating business, information
about the background and experience of the SPAC sponsor is important in
assessing a SPAC's prospects for success and may be a relevant factor
in the market value of a SPAC's securities.\146\ Corresponding
disclosure with respect to SPAC sponsor affiliates and promoters will
also provide investors with important information, because the SPAC
sponsor's affiliates and any promoters of the SPAC may also carry out
activities similar to those of a SPAC sponsor. Furthermore, the
enhanced disclosure regarding the SPAC sponsor's compensation and the
SPAC 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.
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\145\ Item 1603(a) will operate in addition to existing
disclosure requirements that may be applicable to a SPAC's
arrangements with SPAC sponsors such as 17 CFR 229.701 (``Item 701''
of Regulation S-K), which requires disclosure about, among other
things, the terms of any private securities transactions between a
SPAC and SPAC sponsors within the past three years, and 17 CFR
229.404 (``Item 404'' of Regulation S-K), which requires disclosure
about certain related party transactions.
\146\ See, e.g., Chen Lin, Fangzhou Lu, Roni Michaely & Shihua
Qin, SPAC IPOs and Sponsor Network Centrality (SSRN Working Paper,
2021); 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).
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Several commenters suggested that proposed Item 1603(a) would
codify, to an extent, existing disclosure practices.\147\ We agree that
the requirements in Item 1603 to provide detailed disclosure about the
SPAC sponsor, the SPAC sponsor's experience, and its rights and
interests will codify existing disclosure practices. This will help
ensure that issuers provide consistent and comprehensive information
across transactions, so that investors can make more informed
investment and voting decisions.
---------------------------------------------------------------------------
\147\ Letters from ABA, NASAA, Vinson & Elkins.
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i. Promoters
We are retaining the applicability of Item 1603 to promoters.\148\
We disagree with the commenters who asserted that Item 1603 should not
apply to ``promoters'' and that the disclosure regarding a promoter
would not significantly benefit investors or would be immaterial to
investors.\149\ Certain persons are explicitly included as a
``promoter'' under Securities Act Rule 405 and Exchange Act Rule 12b-
2.\150\ There may be facts and circumstances involving a SPAC where a
person may be considered either a ``promoter,'' ``SPAC sponsor,''
``officer,'' or ``director'' or may be more than one of these. As with
a SPAC sponsor, the promoter's background and experience, compensation,
and conflicts of interest are material information for investors in the
SPAC IPO (particularly given the absence of an operating business) and
any de-SPAC transaction. Such information will enable investors to
better understand promoter incentives and activities.\151\ A registrant
is not required to repeat the same disclosure twice merely because a
person fits in two categories (for example, both a ``promoter'' and a
``SPAC sponsor'').
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\148\ The proposal's disclosure requirements related to
``promoters'' included the following proposed items: (1) Item
1603(a)(3) (promoter's experience), (2) Item 1603(a)(4) (promoter's
role), (3) 17 CFR 229.1602(b)(6) (``Item 1602(b)(6)'') and Items
1603(a)(6), and 1604(a)(3) (promoter's compensation), and (4) Items
1602(a)(5), 1602(b)(7), 1603(b)(1), 1604(a)(4), and 1604(b)(3)
(promoter conflicts of interest).
\149\ Letters from Freshfields, Vinson & Elkins. See supra notes
124, 125, and 126 and accompanying text.
\150\ Securities Act Rule 405 provides: The term promoter
includes: (i) Any person who, acting alone or in conjunction with
one or more other persons, directly or indirectly takes initiative
in founding and organizing the business or enterprise of an issuer;
or (ii) Any person who, in connection with the founding and
organizing of the business or enterprise of an issuer, directly or
indirectly receives in consideration of services or property, or
both services and property, 10 percent or more of any class of
securities of the issuer or 10 percent or more of the proceeds from
the sale of any class of such securities. However, a person who
receives such securities or proceeds either solely as underwriting
commissions or solely in consideration of property shall not be
deemed a promoter within the meaning of this paragraph if such
person does not otherwise take part in founding and organizing the
enterprise. Exchange Act Rule 12b-2 contains similar provisions.
\151\ Item 1603 also applies to disclosure in de-SPAC
transactions. See, e.g., instructions to Form S-4 and F-4.
---------------------------------------------------------------------------
Additionally, in the final rules, we have made technical changes to
ensure consistent reference to ``SPAC sponsor, its affiliates, and
promoters'' among disclosure requirements relating to the cover page,
summary, and body sections of the prospectus.\152\
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\152\ See Items 1602(a)(3) (adding term ``promoter'' in cover
page requirements to be consistent with Item 1602(b)(6) prospectus
summary requirements) and (b)(6), 1603(a)(6), and 1604(a)(3), (b)(4)
(adding the term ``promoter'' to summary prospectus requirements to
be consistent with cover page requirements in Item 1604(a)(3)), and
(c)(1) (adding the terms ``its affiliates, and promoters'' to
prospectus body requirements to be consistent with cover page and
summary requirements in Item 1604(a)(3) and (b)(4)).
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ii. Compensation
We are adopting the SPAC sponsor compensation disclosure largely as
proposed with certain modifications in response to comments. We
disagree with the commenter who suggested that--because sponsor
compensation and reimbursement are already disclosed under existing
disclosure requirements and current market practice provides for
similar disclosure as to the material terms of lock-up agreements--the
proposed additional disclosure requirements should not be
[[Page 14172]]
adopted.\153\ On the contrary, we believe compliance with the final
rules will be minimally burdensome where disclosure of this information
is already market practice and will create a uniform and transparent
regime across-the-board, maintaining a minimum standard of disclosure
across transactions, even if market practice were to change in the
future.
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\153\ Letter from Vinson & Elkins. See also letter from SPAC
Association (asserting that ``the SPAC 20% promote is fully and
fairly disclosed and has been for decades''). See supra notes 128,
129, and 130 and accompanying text.
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We agree with comments that returns based on the price appreciation
from the ``promote'' stake owned by the SPAC sponsor may be a
significant source of potential remuneration to the SPAC sponsor that
investors would want to know about in making their investment and
voting decisions.\154\ As a result, we have added terms explicitly
requiring disclosure of the amount of securities issued or to be issued
by the SPAC to the SPAC sponsor, its affiliates, and promoters and the
price paid or to be paid for such securities.\155\ For example, where a
SPAC sponsor purchased a 20 percent ownership interest in the SPAC,
this interest and the purchase price would be required to be disclosed
under the revised provision and would not be excluded on the basis of
not being ``compensation.''
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\154\ Letters from Loeb & Loeb, Vinson & Elkins. See supra notes
131 and 132 and accompanying text.
\155\ See Items 1602(a)(3) and (b)(6), 1603(a)(6), and
1604(a)(3), (b)(4), and (c)(1). For the avoidance of doubt, in Items
1602(a)(3) and (b)(6), 1603(a)(6), and 1604(a)(3), disclosure should
be provided with respect to each person who is one of the types of
named persons in those items; registrants may provide totals of
those individual disclosures but the disclosure of a single lump sum
covering all types of persons named in those items would be
insufficient by itself.
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Pursuant to these changes, any mechanisms, such as an anti-dilution
provision,\156\ to keep the SPAC sponsor ownership at a certain level
(or similar mechanisms for affiliates or promoters) and any potential
cancellation of shares issued or to be issued to the SPAC sponsor (or
its affiliates or promoters) or increase in shares issued to the SPAC
sponsor (or its affiliates or promoters) will be required to be
disclosed since these features would affect shares issued or to be
issued to those parties. The approach taken in the final rules will
address the concerns over speculation related to quantifying
compensation expressed by one commenter,\157\ because these contractual
terms are known at the time of the IPO and therefore do not require any
speculation about possible stock price changes after the de-SPAC
transaction.
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\156\ See, e.g., Clifford Chance, Guide to Special Purpose
Acquisition Companies 5 (Sept. 2021), available at https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2021/09/guide-to-special-purpose-acquisition-companies.pdf (``However, if
additional public shares or equity-linked securities are issued in
connection with the de-SPAC transaction, the exchange ratio for the
founder shares will typically be adjusted to maintain the 20%
promote for the sponsors.''); Michael Klausner, Michael Ohlrogge &
Harald Halbhuber, Net Cash Per Share: The Key to Disclosing SPAC
Dilution, 40 Yale J. on Reg. 18, 28 (2022) (stating that ``[s]ome
SPACs also provide `anti-dilution' protection to sponsors by giving
them the right to an additional 20% of newly raised PIPE equity at
the time of a merger'' and stating that typically ``sponsors waive
their right to some or all these additional shares, though in some
cases they do so in exchange for additional shares.'').
\157\ Letter from Loeb & Loeb. See supra note 132 and
accompanying text.
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Regarding the comments concerning reimbursement of advances and
repayment of loans,\158\ we do not believe it is necessary to modify
the proposed term ``reimbursement.'' The term is not limited to
specific types of reimbursements. Any funds outlaid by the SPAC sponsor
that are later returned to the SPAC sponsor would constitute a
``reimbursement'' under the rule, notwithstanding that the return of
the funds to the SPAC sponsor may also include other amounts (such as
accrued interest).
---------------------------------------------------------------------------
\158\ Letter from Vinson & Elkins. See supra note 131 and
accompanying text.
---------------------------------------------------------------------------
We are not adopting another commenter's recommendation that
required disclosure be qualitative rather than quantitative unless the
amounts are above a specified de minimis threshold.\159\ Because de
minimis thresholds for several categories of compensation could be
significant on an aggregate basis, if quantitative disclosure were only
required above a certain de minimis threshold, investors may not
receive the complete set of compensation information they need to
evaluate the structure of the SPAC in which they may invest. We would
not object, however, to the registrant disclosing de minimis
reimbursements (such as for perquisites that are de minimis) by
providing an aggregate total of those de minimis reimbursements by
category rather than on an item-by-item basis. We view such disclosure
as consistent with the requirement in Item 1603(a)(6) to disclose the
reimbursements' ``nature.''
---------------------------------------------------------------------------
\159\ Letter from ABA. See supra note 133 and accompanying text.
---------------------------------------------------------------------------
iii. Transfer of SPAC Ownership
In response to several commenters' recommendation to disclose
transfers of SPAC securities by the SPAC sponsor and others, we are
modifying Item 1603(a)(6) to require such disclosure.\160\ We agree
that disclosure of share transfers by a SPAC sponsor, its affiliates,
and promoters would provide important information to investors seeking
to evaluate the incentives of these parties. We believe it would also
be important for investors to know if the SPAC ownership level of these
parties has changed because of cancellation of the securities.\161\
Accordingly, in the final rule, we have revised proposed Item
1603(a)(6) to add the requirement: ``Disclose any circumstances or
arrangements under which the SPAC sponsor, its affiliates, and
promoters, directly or indirectly, have transferred or could transfer
ownership of securities of the SPAC, or that have resulted or could
result in the surrender or cancellation of such securities.'' With
respect to indirect transfers, for example, if there was a transfer of
ownership interests in the SPAC sponsor or ownership interests in a
holding company that owns interests in the SPAC sponsor, then
disclosure would be required under this item.\162\
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\160\ Letters from Michael Klausner and Michael Ohlrogge, NASAA,
Paul Swegle. See supra notes 135, 136, 137, and 138 and accompanying
text.
\161\ Certain earn-out provisions entered into in connection
with a de-SPAC transaction may involve cancellation of securities if
certain targets are not met.
\162\ In addition, in final Item 1603(a)(6) we replaced ``has or
will be'' with ``has been or will be,'' and replaced ``rendered''
with ``rendered or to be rendered,'' for clarity.
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At this time, we are not making any changes to add requirements to
disclose transfers after the de-SPAC transaction occurs, because we
believe, for most SPACs, SPAC sponsors will already have Form 3 and 4
reporting obligations.\163\
---------------------------------------------------------------------------
\163\ See 17 CFR 240.16a-2 under the Exchange Act (Among others,
any person who is the beneficial owner, directly or indirectly, of
more than 10% of any class of equity securities registered pursuant
to Exchange Act section 12 and any director or officer of the issuer
of such securities shall be subject to the provisions of Exchange
Act section 16); Exchange Act section 16(a). SPAC sponsors also may
have beneficial ownership reporting obligations pursuant to sections
13(d) and 13(g) of the Exchange Act and rules thereunder.
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iv. Interest in SPAC Sponsor and Organizational Chart
We are adopting Item 1603(a)(7) as proposed except that we are not
adopting the proposal to provide an organizational chart.
One commenter said that ``proposed Item 1603(a)(7) should clarify
that . . . an indirect economic interest in less than 10% of a SPAC's
founder shares or warrants through ownership of equity interests in a
Sponsor should not, in and of itself and absent other factors, be
considered a direct or indirect material
[[Page 14173]]
interest in the Sponsor.'' \164\ We do not believe that the disclosures
of material interests in the SPAC sponsor should be based on a bright-
line absolute percentage of ownership, whether based on percentage
ownership of shares of the SPAC or based on percentage ownership of
shares of the SPAC sponsor. As a general matter, we note that
registrants regularly apply materiality standards that are not tied to
absolute percentages in connection with their disclosure under the
Federal securities laws. We believe a bright-line standard would not be
appropriate here because the percentage of ownership of a SPAC sponsor
that is material could differ from SPAC sponsor to SPAC sponsor. Also,
we note that percentage ownership is not the only way in which a
material interest in the SPAC sponsor may be present.\165\ For example,
where a person has a voting interest but no economic interest in the
SPAC sponsor, the required disclosure would need to be provided with
respect to such voting interest.
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\164\ Letter from ABA.
\165\ See, e.g., definition of ``control'' in Rule 405 (The term
control . . . means the possession, direct or indirect, of the power
to direct or cause the direction of the management and policies of a
person, whether through the ownership of voting securities, by
contract, or otherwise.).
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Related to our consideration of this comment, however, we have
determined not to adopt the proposed organizational chart requirement
in Item 1603(a)(7). The proposed organizational chart requirement would
have required graphical display of levels of ownership that are above
the level of direct ownership of the SPAC sponsor (i.e., tracing
``upstream'' through layers of interest-holders to the ultimate
interest-holder). It also would have required graphical display of
levels of ownership of companies other than the SPAC sponsor (but that
would be under common control with the SPAC sponsor) that are below
these interest-holders (i.e., tracing ``downstream'' through layers of
affiliated controlled persons). We believe, in this context at this
time, particularly with respect to institutions with an interest in the
SPAC sponsor that may have complex company organizational structures,
the complexity of the upstream and downstream tiers of ownership
discussed above may be difficult to prepare graphically. As a result,
we are not adopting the organizational chart requirement.
Another commenter said the identity of natural persons controlling
the sponsor is already disclosed in response to existing Item 403 of
Regulation S-K.\166\ Item 403 requires security ownership information
concerning certain beneficial owners and management, but new Item
1603(a) will elicit additional information because of its requirements
concerning background, experience, and roles, among other things. Also,
while current Item 403(a) requires identifying any person who is known
to be the beneficial owner of more than five percent of any class of
the SPAC's voting securities, new Item 1603(a)(7) adds a requirement to
name controlling persons of the SPAC sponsor. Furthermore, to the
extent portions of Item 1603(a) may overlap with Item 403 as they may
pertain to specific registrant facts and circumstances, registrants are
not required to provide duplicative disclosure. Therefore, we do not
expect that any partial overlap--depending on specific registrant facts
and circumstances--in disclosure that could be required under the final
rule with disclosure required under Item 403 would impose significant
additional burdens on registrants.
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\166\ Letter from Vinson & Elkins.
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v. Agreements
We are adopting Item 1603(a)(8) and (9), concerning agreements, as
proposed. Final Item 1603(a)(8) provides that the registrant must
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. One
commenter recommended that the Commission should revise proposed Item
1603(a)(8) to ``specify that if a SPAC, the SPAC sponsor, or any
affiliated party enters into an agreement regarding the redemption of
outstanding securities of the SPAC after the date of the merger
registration statement or proxy, that the SPAC be required to issue a
proxy amendment or similar filing prior to the redemption deadline to
inform SPAC shareholders of the new agreement.'' \167\ We do not
believe it is necessary to revise the item in the manner suggested to
capture events that follow the filing of a proxy statement in
connection with a de-SPAC transaction, as we believe registrant
obligations to amend such filings under current law, including to
ensure disclosure are not misleading, are sufficient.\168\
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\167\ Letter from Michael Klausner and Michael Ohlrogge.
\168\ See 17 CFR 240.14a-9 (``Rule 14a-9''). See also 17 CFR
240.14a-6(h).
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Final Item 1603(a)(9) provides that the registrant must 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.
In response to the commenter who stated that the required
additional disclosure would go beyond the disclosure requirements
applicable to lock-up agreements entered into in connection with a
traditional IPO,\169\ we believe that, based on Commission staff
experience reviewing filings, registrants in IPOs currently provide
information that is analogous to the Item 1603(a)(9) required
information. To the extent Item 1603(a)(9) may incrementally require
more disclosure compared to IPOs, we believe this is appropriate
because investors in SPACs often focus heavily on the nature of the
SPAC sponsor's interest in the SPAC and because agreements,
arrangements, or understandings regarding restrictions on whether and
when the SPAC sponsor and its affiliates may sell securities of the
SPAC often can be more complex than lock-up agreements in IPOs. For
example, SPAC lock-up agreements often include provisions that depend
on certain levels of stock price appreciation.\170\
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\169\ Letter from Vinson & Elkins. See supra note 142 and
accompanying text.
\170\ See, e.g., Connie Loizos, The Year of the Disappearing
Lock-up, TechCrunch (Jan. 4, 2022) (``many related deals contain
language that restricts sponsors from selling shares for a year from
the day the deal is completed, but there are much faster ways out.
According to one popular provision, if a SPAC's shares trade
slightly above their initial pricing for more than 20 days in a 30-
day period, the lockup provision vanishes.''), available at https://techcrunch.com/2022/01/04/the-year-of-the-disappearing-lock-up/;
Lock-Up Periods: Regular IPOS V/S SPACS IPOS, Legal Scale (Sept. 21,
2022), available at https://www.legalscale.com/lock-up-periods-regular-ipos-v-s-spacs-ipos/; Ran Ben-Tzur, Itka Safir, Terms of IPO
Lock-Up Agreements for Technology Companies Shift as Direct Listings
and SPACs Gain Traction (2020), available at https://www.fenwick.com/insights/publications/terms-of-ipo-lock-up-agreements-for-technology-companies-shift-as-direct-listings-and-spacs-gain-traction (out of 80 traditional IPO-companies surveyed,
four (i.e., 5%) used Price-based lock-up releases).
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[[Page 14174]]
With respect to the suggestion to exclude from this disclosure
customary exceptions to lock-up agreements,\171\ we are concerned that
almost all, if not all, exceptions found in any lock-up agreement could
be determined to be customary by a registrant, which would mean they
would not be disclosed to investors under the suggested approach.
Further, even where lock-up agreements are filed as an exhibit,\172\
exceptions to SPAC lock-up agreements considered ``customary'' by
industry participants may be difficult for a reasonable investor to
understand, and therefore narrative disclosure in the body of the
filing may help investors understand these terms.\173\
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\171\ Letter from Freshfields. See supra notes 143 and 144 and
accompanying text.
\172\ See 17 CFR 229.601(a) and (b)(10)(ii)(A) (requiring the
filing of any contract to which directors, officers, promoters,
voting trustees, security holders named in the registration
statement or report are parties, with certain exceptions). See also
requirements for registrant to furnish exhibits required by Item 601
of Regulation S-K in: Form S-1, Item 16; Form F-1, Item 8; Form S-4,
Item 21(a); Form F-4, Item 21.
\173\ When we use the term ``narrative'' disclosure here, we do
not mean that solely qualitative information should be provided.
Depending on the facts and circumstances, quantitative information
may be required in connection with these lock-up disclosures.
Depending on the facts and circumstances, one example of such
quantitative disclosure could be where the exception to the lock-up
depends on application of a formula involving a financial measure.
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In addition, we believe each such exception to a lock-up agreement
is important to investors because exceptions to restrictions on
transfer in lock-up agreements can result in the sale of a significant
amount of shares that could affect the trading price of the SPAC or of
the post-de-SPAC transaction combined company.\174\ In addition, in
connection with disclosure in a SPAC IPO, to the extent that an
investor may have invested in the SPAC based in part on the experience
and expertise of the SPAC sponsor and its affiliates, we believe the
disclosure about exceptions to lock-up agreements could be important to
these investors in understanding the extent to which the interests of
the SPAC sponsor and investor are aligned.\175\ Similarly, this
information is important in connection with disclosure in a de-SPAC
transaction. For example, this information remains important in
connection with a de-SPAC transaction where the SPAC sponsor will have
a continuing management role at the post-de-SPAC transaction combined
company. Also, for example, even where the SPAC sponsor may not have a
continuing management role, this information is important where the
SPAC sponsor may have the ability to express views that influence the
current management of the post-de-SPAC transaction combined company--
potentially due to the size of the SPAC sponsor's ownership stake in
the combined company or the value of the SPAC sponsor's ongoing counsel
based on the SPAC sponsor's expertise. In each of these examples, we
believe the disclosure about exceptions to lock-up agreements will be
important because it will help the investor understand the extent to
which the interests of the SPAC sponsor and investor are aligned.
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\174\ See, e.g., Cooley LLP, Blog: 10 Key Considerations for
Going Public with a SPAC (Aug. 3, 2020), available at https://www.jdsupra.com/legalnews/blog-10-key-considerations-for-going-80315/ (``Most SPAC sponsors will be subject to a 1-year lock-up,
which can create staggered releases of shares into the market after
the combination and may at times try to push the target company
holders to also have a 1-year lockup to align interests. Companies
should be thoughtful, in discussions with their financial advisors,
on how additional shares will come into the market and implications
for the public company's trading volatility.'').
\175\ With respect to lock-up agreements generally, see Alon
Brav & Paul Gompers, The Role of Lockups in Initial Public
Offerings, 16 The Rev. of Fin. Stud. 1 (2003), available at https://doi.org/10.1093/rfs/16.1.0001 (finding lockup agreements serve as a
commitment device to address moral hazard concerns).
---------------------------------------------------------------------------
While one commenter suggested that current market practice is for
transferees who receive shares pursuant to an exception from a lock-up
to agree to the lock-up as a condition of the transfer,\176\ we do not
believe this means information about exceptions to lock-up agreements
will not be important to investors. If the SPAC sponsor or affiliates
may divest their ownership of the SPAC, this may affect investor
evaluation of the SPAC and the incentives of the SPAC sponsor,
regardless of whether a transferee is also subject to transfer
restrictions. Investors may consider the potential amounts of shares
that could be transferred to be an important factor that could affect
the market valuation of the issuer. Moreover, based on the Commission
staff's experience, some registrants today already discuss each
exception in detail, while others discuss the exceptions in general
terms.
---------------------------------------------------------------------------
\176\ Letter from Freshfields. See supra note 144 and
accompanying text.
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C. Conflicts of Interest
1. Proposed Rules
SPAC sponsors and others may have material potential or actual
conflicts with the interests of investors that could have adverse
effects on those investors. The Commission proposed conflicts of
interest disclosure requirements in certain items in proposed Item
1602, 1603, 1604, and 1605 in connection with SPAC registered offerings
other than de-SPAC transactions, such as IPO transactions, and in
connection with de-SPAC transactions, described in more detail below.
The Commission proposed Item 1602(a)(5) and (b)(7), which apply to
registered offerings other than de-SPAC transactions, to require that
some of these conflicts of interest disclosure requirements appear on
the prospectus front cover page and in the prospectus summary,
respectively.\177\ The Commission also proposed prospectus cover page
and prospectus summary conflict of interest disclosure requirements in
connection with de-SPAC transactions in proposed Item 1604(a)(4) and
(b)(3).\178\
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\177\ See also proposed General Instruction VIII to Form S-1,
proposed General Instruction VII to Form F-1.
\178\ See also proposed General Instruction I.1 to Form S-4,
proposed General Instruction I.1 to Form F-4, proposed Item 14(f)(1)
of Schedule 14A, and proposed General Instruction K to Schedule TO.
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The Commission proposed that Item 1603 (including 1603(b) regarding
conflicts of interest) apply to de-SPAC transactions, as well as other
registered offerings, including SPAC IPOs.\179\ Proposed Item 1603(b)
would require disclosure of any actual or potential material conflict
of interest between (1) the SPAC sponsor or its affiliates or the
SPAC's officers, directors, or promoters, and (2) unaffiliated security
holders. This proposed item included any conflict of interest with
respect to determining whether to proceed with a de-SPAC transaction
and any conflict of interest arising from the manner in which a SPAC
compensates the SPAC sponsor or the SPAC's executive officers and
directors or the manner in which the SPAC sponsor compensates its own
executive officers and directors. In addition, the Commission proposed
Item 1603(c) to require disclosure regarding the fiduciary duties each
officer and director of a SPAC owes to other companies.
---------------------------------------------------------------------------
\179\ See (a) proposed General Instruction VIII to Form S-1, (b)
proposed General Instruction I.1 to Form S-4, (c) proposed General
Instruction VII to Form F-1, (d) proposed General Instruction I.1 to
Form F-4. (e) proposed Item 14(f)(1) of Schedule 14A, and (f)
proposed General Instruction K to Schedule TO.
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Furthermore, in connection with de-SPAC transactions, the
Commission proposed Item 1605(d) to require disclosure of any material
interests in the de-SPAC transaction or any related financing
transaction held by the SPAC sponsor and the SPAC's officers and
directors, including fiduciary or contractual obligations to other
entities
[[Page 14175]]
as well as any interest in, or affiliation with, the target
company.\180\
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\180\ See also proposed General Instruction I.1 to Form S-4,
proposed General Instruction I.1 to Form F-4, proposed Item 14(f)(1)
of Schedule 14A, and proposed General Instruction K to Schedule TO.
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2. Comments
Broadly categorized, commenters on the conflicts of interest
proposals focused on five areas: (1) general comments, including those
with general expressions of support for or opposition to the proposals,
(2) SPAC and target company officer and director conflicts of interest,
(3) de-SPAC conflicts of interest, (4) addition of disclosure of
``break-even'' thresholds, and (5) additional responses to Commission
requests for comment.
A number of commenters generally supported the proposed enhanced
disclosure requirements in regard to conflicts of interest and
fiduciary duties.\181\
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\181\ Letters from ABA, Better Markets, Bullet Point Network,
CFA Institute, CII, Committee on Capital Markets Regulation,
Consumer Federation, ICGN, NASAA, Paul Swegle, Public Citizen (June
10, 2022) (``Public Citizen'').
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Several commenters suggested that the proposed disclosure
requirements would codify, to an extent, existing disclosure
practices.\182\ Some commenters suggested that proposed disclosure
requirements about conflicts of interest and fiduciary duties would
provide useful information to investors.\183\
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\182\ Letters from ABA, NASAA, Vinson & Elkins.
\183\ Letters from Better Markets, CFA Institute, CII, Committee
on Capital Markets Regulation, Consumer Federation, ICGN, NASAA.
---------------------------------------------------------------------------
One commenter said that ``in requiring disclosure of known actual
or potential material conflicts of interest, proposed Item 1603(b)
should clarify that a knowledge-based standard is the appropriate
standard in determining whether disclosure is required under this
item.'' \184\
---------------------------------------------------------------------------
\184\ Letter from ABA.
---------------------------------------------------------------------------
Another commenter recommended ``that disclosures should include the
names of all sponsors and their financial arrangements with SPACs'' and
``information on the nature of the claims the investors have on the
SPAC if no de-SPAC transaction takes place'' during the applicable
period or they choose to exit before the de-SPAC is completed.\185\
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\185\ Letter from ICGN.
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A few commenters discussed issues related to potential SPAC and
target company officer and director conflicts of interest.\186\ One of
these commenters recommended that ``there should be mandatory
disclosures of conflicts of interest among SPAC directors, SPAC
officers, target company directors and target company officers.'' \187\
Another of these commenters recommended that ``proposed Item 1603(c)
should be limited to those situations where the fiduciary duties of an
officer or director owed to other companies might reasonably be
expected to present a potential conflict with respect to a potential
de-SPAC transaction or the SPAC's ability to pursue de-SPAC transaction
opportunities.'' \188\
---------------------------------------------------------------------------
\186\ Letters from ABA, CII.
\187\ Letter from CII.
\188\ Letter from ABA.
---------------------------------------------------------------------------
Some commenters viewed proposed Item 1605, including proposed Item
1605(d) concerning conflicts of interest in connection with de-SPAC
transactions, as redundant with current rules.\189\ One of these
commenters said these disclosures are ``duplicative of those already
prescribed in the existing regulatory schemes for proxy materials and
registration statements filed in connection with de-SPAC
transactions.'' \190\ In lieu of adopting proposed Item 1605, the
commenter recommended a ``uniform methodology to address conflicts of
interest arising from business combinations in general by revising
Items 1004(a)(2) and 1013(b) of Regulation M-A [17 CFR 229.1004(a)(2)
and 229.1013(b)] and Item 403 of Regulation S-K to incorporate the
provisions of proposed Item 1605.'' \191\ The other commenter opposed
the adoption of new disclosure requirements 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,'' because this ``would be redundant with the existing
requirements of Schedule 14A Item 5.'' \192\
---------------------------------------------------------------------------
\189\ Letters from ABA, Vinson & Elkins.
\190\ Letter from ABA.
\191\ Letter from ABA.
\192\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
Some commenters recommended that certain additional disclosures
should be required. One commenter on the proposal said that registrants
``should also provide, in an easily understandable, tabular format. .
.the break-even points for non-redeeming investors under different
scenarios, the break-even point for the sponsor, the ownership
distribution for non-redeeming investors, the effects of outstanding
warrants and sponsor shares, and the resulting ownership of the target
company for non-redeeming shareholders and alternative investors.''
\193\ Another commenter said that registrants should provide a break-
even average share price for the sponsor, which would inform investors
and, in the commenter's opinion, the target company.\194\ The commenter
said ``this will be a simple numerical representation of the effective
cost basis of the sponsor and can be used to ascertain the extent to
which a sponsor's position differs from that of other investors.''
\195\ One commenter stated that ``SPACs should disclose the minimum
post-merger share value at which proceeding with the SPAC merger will
yield a higher return to the SPAC sponsor than liquidating the SPAC.''
\196\
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\193\ Letter from NASAA.
\194\ Letter from Jonathan Kornblatt, CMT, Fintech Institutional
Advisory (June 12, 2022) (``Jonathan Kornblatt'').
\195\ Letter from Jonathan Kornblatt.
\196\ Letter from Michael Klausner and Michael Ohlrogge.
---------------------------------------------------------------------------
A few commenters responded to requests for comment in the proposal
related to whether we should also require a description of any policies
and procedures used to minimize potential or actual conflicts of
interest.\197\ One commenter said that ``a requirement for disclosure
of policies and procedures or assessment and management of conflicts of
interest would result in incremental boilerplate disclosures.'' \198\
Another commenter said it would be ``superfluous to require a
description of any policies and procedures used or to be used to
minimize potential or actual conflicts of interest in addition to what
proposed Item 1603 has already prescribed.'' \199\
---------------------------------------------------------------------------
\197\ Proposing Release, supra note 7, at 29468 (request for
comment number 17).
\198\ Letter from Vinson & Elkins.
\199\ Letter from ABA.
---------------------------------------------------------------------------
One commenter responded to requests for comment related to whether
SPACs should be required to provide additional disclosure regarding
material conflicts of interest in Exchange Act reports following their
IPOs.\200\ The commenter said that, ``regarding disclosure in Exchange
Act reports following the SPAC IPO and the Form 8-K announcing the
signing of the de-SPAC transaction, additional disclosure should be
required only where the conflict of interest is material and has not
been previously disclosed.'' \201\
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\200\ Proposing Release, supra note 7, at 29468 (request for
comment number 18).
\201\ Letter from Vinson & Elkins.
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3. Final Rules
We are adopting Items 1602(a)(5) and (b)(7), 1603(b), 1604(a)(4)
and (b)(3), and 1605(d) substantially as proposed, except for the
changes discussed below. Having considered comments received, we are
adopting the final rules to provide information to investors about the
material potential or actual conflicts
[[Page 14176]]
that SPAC sponsors and others covered by the final rules may have with
the interests of investors. These conflicts could influence the actions
of the SPAC to the detriment of its unaffiliated security holders. The
potential conflicts of interest of SPAC sponsors and others may be
particularly relevant for investors to the extent that they arise when
a SPAC and its management are deciding whether to engage in a de-SPAC
transaction. The SPAC sponsor's compensation structure creates
incentives to complete a de-SPAC transaction. These incentives may
induce a SPAC sponsor and others to compel the SPAC to complete the de-
SPAC transaction on unfavorable terms to avoid liquidation of the SPAC
at the expiry of this period.
There are numerous situations that could give rise to these
potential conflicts. For example, SPAC sponsors or their affiliates may
have a potential conflict of interest stemming from the nature of the
SPAC sponsor's compensation or security ownership (particularly where
the security owned is purchased at disparate prices, often
substantially lower than the price paid by public security holders).
This type of potential conflict of interest may present significant
financial incentives to pursue a de-SPAC transaction even in the
absence of attractive target company transaction opportunities.\202\
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\202\ See, e.g., Usha Rodrigues & Mike Stegemoller, Exit, Voice,
and Reputation: The Evolution of SPACs, 37 Del. J. Corp. L. 849, 896
(2013) (stating that ``sponsors were expected to put more and more
of their own money at risk (in the form of private placements),
setting themselves up for substantial losses if no acquisition
occurred'' as the SPAC form evolved).
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SPAC sponsors and their affiliates may also sponsor multiple SPACs,
which may result in decisions regarding the allocation of these
persons' time and target company acquisition opportunities that may
adversely affect SPAC security holders. Alternatively (or in addition),
SPAC sponsors and their affiliates may owe employment, contractual, or
fiduciary duties to other companies than the SPAC, which, among other
things, may affect the ability of the SPAC to execute a de-SPAC
transaction or may affect the terms to which a SPAC agrees in any
ultimate de-SPAC transaction. In these situations, the SPAC sponsor and
others covered by the final rules may not only be incentivized to take
actions that benefit other entities, but they may be compelled by these
other duties to do so, potentially at the expense of the SPAC and its
security holders. In addition, SPAC sponsors and their affiliates may
seek to enter a de-SPAC transaction with a target company they are
affiliated with when superior target company transaction opportunities
may be available.
The final rules will provide investors with a more complete
understanding of the conflicts of interest related to an investment in
a SPAC, including in situations like the examples above. Investors will
have improved information concerning interests of the SPAC sponsor and
others covered by the final rule that could reduce the value of their
investment or that could result in opportunities potentially available
to the SPAC not being realized. In this way, the final rules will allow
investors to analyze risks associated with potential conflicts of
interest regarding a SPAC more accurately.
We are not including a knowledge qualifier in conflicts of interest
disclosure, as suggested by one commenter,\203\ because we expect the
SPAC and its officers and directors will be in a position to know their
own conflicts and that the SPAC may obtain similar information from the
SPAC sponsor, its affiliates, and promoters (who will be in a position
to know their own conflicts) by virtue of the relationship between the
SPAC and the SPAC sponsor and between the SPAC and any promoters.\204\
In addition, we note that registrants can rely on 17 CFR 230.409 and
240.12b-21 with respect to information unknown or not reasonably
available.
---------------------------------------------------------------------------
\203\ Letter from ABA. See supra note 184 and accompanying text.
\204\ Similarly, current Item 404 regarding conflicts of
interest does not contain such knowledge qualifier.
---------------------------------------------------------------------------
Another commenter recommended the conflicts of interest disclosures
should include: names of all sponsors and their financial arrangements
with SPACs; claims investors have on the SPAC if no de-SPAC transaction
takes place; and claims investors have on the SPAC if investors exit
before the de-SPAC transaction.\205\ We note that all of those items
were included in the proposal, and we are adopting them as
proposed.\206\
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\205\ Letter from ICGN. See supra note 185 and accompanying
text.
\206\ See, e.g., proposed Items: 1603(a)(1) (names of sponsors)
and (a)(5) through (6) (agreements and compensation) and 1602(b)(3)
and (4) (redemption rights and plans in the event no de-SPAC
transaction is consummated).
---------------------------------------------------------------------------
A few commenters discussed issues related to potential SPAC and
target company officer and director conflicts of interest.\207\ One of
these commenters recommended the conflicts of interest disclosures
cover SPAC officers, SPAC directors, target company officers, and
target company directors.\208\ In considering the comment, we observed
that proposed Item 1604 was inconsistent with proposed Items 1603(b)
and 1605(d) by not covering SPAC officers and directors. We do not
believe there are any special factors warranting such a difference. As
a result, we have modified the language in Item 1604 to require
disclosure regarding SPAC officers and directors as in the other
adopted items. This change to Item 1604(a)(4) (cover page) and (b)(3)
(prospectus summary) will ensure the benefits of the rule that we
discuss generally above will apply to these rules as well.\209\ With
respect to target company officers and directors, we believe that
disclosure of their conflicts of interest is consistent with co-
registration requirements in connection with the final amendments to
registration forms and with final Rule 145a.\210\ As discussed in
connection with those requirements, since the de-SPAC transaction is in
substance an offering by the target company, the conflicts of interest
of target company officers and directors may be important to investor
investment, redemption, and voting decisions. Thus, we have amended
Items 1603(b), 1604(a)(4) (prospectus cover page) and (b)(3)
(prospectus summary), and 1605(d) to require this disclosure.\211\ We
would not expect registrants to provide duplicative disclosure merely
because a person falls into more than one of the categories of persons
covered by the final rules.\212\
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\207\ Letters from ABA, CII.
\208\ Letter from CII. See supra note 187 and accompanying text.
\209\ We are also making related minor changes for clarity in
Item 1604(a)(4) and (b) to change the term ``or its affiliates'' to
``, SPAC affiliates.'' In Item 1604(b) and in a number of other
places in the final rules, we also eliminated the term ``shall''
(e.g., by replacing it with the word ``must'') consistent with
relevant plain English guidance.
\210\ See infra sections III.C and IV.A.
\211\ In addition, in final Item 1603(b) we replaced ``with
respect to'' with ``that may arise'' (in the phrase ``any material
conflict of interest that may arise in determining whether to
proceed with a de-SPAC transaction'') for clarity and consistency
with Item 1602(b)(7). In final Item 1603(b) we also revised the
phrase ``the manner in which the special purpose acquisition company
compensates a SPAC sponsor, officers, or directors'' by replacing
the term ``and'' with ``or,'' because the requirements of Item
1603(b) should apply disjunctively where any of the named persons
has a relevant material conflict of interest.
\212\ For example, if the SPAC hypothetically happened to share
officers or directors with the target company, the same disclosure
(that was relevant for both the SPAC and target company) for the
same individual person would not need to be provided once for the
person as a SPAC official and a second time for the person as a
target company official. The SPAC and target should be mindful,
though, that different disclosures about conflicts arising under
each role may be required.
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One commenter recommended that we limit Item 1603(c) disclosure to
[[Page 14177]]
those situations where officer or director fiduciary duties owed to
other companies might reasonably be expected to present a potential
conflict with a SPAC's de-SPAC transaction opportunities.\213\ We do
not agree with this recommendation, because we do not believe conflicts
will only arise in situations where there are fiduciary duties owed to
other companies that are expected to present a potential conflict with
a SPAC's de-SPAC transaction opportunities. For example, a director's
obligations to other companies may compete with his or her attention to
the SPAC. Because we believe this information is material to investors,
we are not making any changes to the proposal in this respect in the
final rules we are adopting.
---------------------------------------------------------------------------
\213\ Letter from ABA. See supra note 188 and accompanying text.
---------------------------------------------------------------------------
Some commenters expressed the view that proposed Item 1605,
including proposed Item 1605(d) concerning conflicts of interest in
connection with de-SPAC transactions, would be redundant with current
rules.\214\ The Commission is not making changes in the final rules we
are adopting in response to these comments. Given the unique qualities
of de-SPAC transactions, we believe registrants will benefit from the
centralization of the SPAC-related requirements in the Item 1600 series
of Regulation S-K rather than in a different location as
suggested.\215\ Regarding any potential for redundancy with other
Commission rules, if there are facts and circumstances that may result
in required disclosure under a current rule being the same as under any
of the rules we are adopting, registrants will not be required to
repeat disclosures (except where the applicable rule may require, such
as by calling for the disclosure in a specific location such as the
prospectus cover page or prospectus summary).
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\214\ Letters from ABA, Vinson & Elkins. See supra notes 189,
190, 191, and 192 and accompanying text.
\215\ The Commission adopted a similar approach in rules
regarding limited partnership roll-up transactions. See 17 CFR
229.900 through 229.915.
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Some commenters recommended we adopt certain requirements (in
addition to those proposed) involving ``break-even'' disclosure.\216\
With respect to disclosure of a SPAC sponsor's ``break-even'' price per
share, one commenter said this would help investors ``ascertain the
extent to which a sponsor's position differs from that of other
investors.'' \217\ We believe that the other conflicts of interest
disclosures required by the final rules will provide sufficient
information to allow investors to understand the potential differences
in incentives between them and a SPAC sponsor, and as a result we are
not adopting the suggested ``break-even'' disclosure.
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\216\ Letters from Jonathan Kornblatt, Michael Klausner and
Michael Ohlrogge, NASAA. See supra notes 193, 194, 195, and 196 and
accompanying text.
\217\ Letter from Jonathan Kornblatt.
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We are not requiring registrants to provide ``break-even'' price
per share disclosure regarding non-redeeming investors as suggested by
commenters because each investor would already know the basis at which
they acquired the shares of the SPAC and the SPAC may not know this
information for many of its investors, who could have acquired the
shares at a variety of prices through the public market. We are
likewise not requiring disclosure suggested by commenters that would
provide a price at which the SPAC sponsor would recoup their
investments in the SPAC. We believe such disclosure could be confusing
for investors, as many SPAC sponsors may consider such amounts as sunk
costs, which they do not consider when deciding whether to proceed with
a de-SPAC transaction. As a commenter notes,\218\ SPAC sponsors may be
incentivized to proceed with de-SPAC transactions below the initial
SPAC share price; however, that is largely because SPAC sponsors lack
redemption rights. Generally, SPAC shareholders would seek de-SPAC
transactions that result in share prices that exceed their redemption
value. SPAC sponsor decisions to proceed with a transaction may be
driven by the SPAC sponsor's expectation of their future deal flow and
potential legal or reputational concerns among other factors. The
``break-even'' disclosure suggested by commenters would not take into
account these factors. Moreover, none of these factors can be easily
quantified, and the ones that can be quantified would be burdensome to
produce and potentially difficult for investors to analyze and assess
(given the difficulty in reliably quantifying those factors) and also
would not be easily comparable across different SPACs (given the SPAC-
specific and SPAC sponsor-specific nature of those factors). The rules
as adopted will improve investors' ability to understand the SPAC
sponsor's conflicts of interest, and we are concerned that adding a
disclosure that takes into account difficult-to-quantify factors like
the ones discussed above would detract from the disclosures that we are
adopting.
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\218\ See letter from Michael Klausner and Michael Ohlrogge
(``If a sponsor has committed to make no new investments in the SPAC
at the time of its merger, then any post-merger share value greater
than $0 will be preferable to the sponsor than receiving nothing in
a liquidation. If, however, the sponsor commits to purchase new
securities in the SPAC at the time of the SPAC merger, then the
share value at which a merger will be a better deal for a sponsor
than a liquidation will be above $0.'').
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In the final rules, we are not requiring a description of policies
and procedures used to minimize potential or actual conflicts of
interest. We believe the other disclosures we are adopting regarding
conflicts of interest, including new Item 1603, will appropriately
address investor protection concerns in this regard. We are also not
making any changes that would expand the Series 1600 of Regulation S-K
disclosures regarding conflicts of interest beyond registration
statements, proxy statements, information statements, and tender offer
statements as proposed to other Exchange Act reports (such as to Form
10-Q, 10-K, or 8-K).\219\
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\219\ See letter from Vinson & Elkins, supra note 201 and
accompanying text, and Proposing Release, supra note 7, at 29468
(request for comment number 18).
---------------------------------------------------------------------------
Finally, we are making additional minor or technical changes in the
final rules. First, we are making a change to the description of
persons against whose interests the conflicts must be compared against
from ``unaffiliated security holders'' to ``unaffiliated security
holders of the SPAC'' in Items 1603(b) and 1604(a)(4) (prospectus cover
page) and (b)(3) (prospectus summary). This change will avoid any
potential ambiguity or confusion regarding whether target company
officers and directors must compare their interests to security holders
of the target company or security holders of the SPAC.
Second, we are making a technical change in final Item 1605(d) to
use ``or'' instead of ``and'' each time in the phrase ``held by the
SPAC sponsor and the special purpose acquisition company's officers . .
. and directors.'' This change makes clear the disclosure should apply
with respect to each named person and not only where all such persons
share the same interest.
Third, we have made certain technical changes in some of the final
rules regarding conflicts of interest to clarify the sets of persons
being compared.\220\
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\220\ In final Item 1602(a)(5) and (b)(7), we have revised the
punctuation and conjunctions compared to the proposal to clarify the
two sets of persons that are to be compared in connection with the
required potential or actual conflict of interest disclosure by
changing the proposed phrase ``between the SPAC sponsor or its
affiliates or promoters and purchasers in the offering'' to
``between the SPAC sponsor, its affiliates, or promoters; and
purchasers in the offering.'' To clarify the two sets of persons to
be compared in Item 1604(a)(4), we have added the words ``, on one
hand,'' before the first set of persons and the words ``, on the
other hand,'' before the second set of persons. For clarity and
consistency throughout Item 1603, we have also revised the term
``executive officer(s)'' in each place where it is used in Item
1603(b) and (c) to refer to ``officer(s).''
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[[Page 14178]]
Fourth, in final Item 1603(b), we are changing each reference to
``the SPAC sponsor'' to ``any SPAC sponsor'' because there can be more
than one such sponsor.
Fifth, we have revised the phrase ``State whether there may be
actual or potential conflicts of interest . . .'' in proposed Item
1602(a)(5) to add a materiality qualifier such that the phrase in final
Item 1602(a)(5) provides ``State whether there may be actual or
potential material conflicts of interest. . . .'' This change makes
prospectus cover page disclosure requirements under Item 1602(a)(5)
consistent with the similar provisions of Item 1603(b), which require
disclosure in the body of the disclosure document. We believe both
provisions should contain the same materiality qualifier, because the
provisions are related since Item 1602(a)(5) requires the registrant to
provide a cross-reference to related disclosures in the prospectus,
which includes disclosures made under Item 1603(b).
D. Dilution
1. Proposed Rules
Information about dilution conveys important information to
investors about factors that may affect the value of a security
holder's interest in a SPAC. Dilution in current Commission filings is
typically measured by calculating changes in net tangible book value
per share.\221\ There are a number of potential sources of dilution in
common SPAC structures, including: (a) shareholder redemptions, (b)
SPAC sponsor compensation, (c) underwriting fees, (d) warrants, (e)
convertible securities, and (f) PIPE financings.
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\221\ See 17 CFR 229.506 (``Item 506'' of Regulation S-K). 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.
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The Commission proposed several new rules that would require
additional information about SPAC dilution in connection with
registered offerings by SPACs, including IPOs, and in connection with
de-SPAC transactions.\222\ With respect to registered offerings by
SPACs (including IPOs) other than de-SPAC transactions, the Commission
proposed Item 1602(a)(3) and (4), (b)(6), and (c).\223\ With respect to
de-SPAC transactions, the Commission proposed Item 1604(a)(3), (b)(4),
(5), and (6), and (c).\224\ Each of these proposed disclosure
requirements is addressed in more detail below.
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\222\ See proposed Items 1602(a)(3) and (4), (b)(6), and (c) and
1604(a)(3), (b)(4), (5), and (6), and (c) of Regulation S-K.
\223\ See proposed General Instruction VIII to Form S-1 and
proposed General Instruction VII to Form F-1.
\224\ See (a) proposed General Instruction VIII to Form S-1, (b)
proposed General Instruction I.1 to Form S-4, (c) proposed General
Instruction VII to Form F-1, (d) proposed General Instruction I.1 to
Form F-4, (e) proposed Item 14(f)(1) of Schedule 14A, and (f)
proposed General Instruction K to Schedule TO.
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First, with respect to SPAC IPOs, in Item 1602(a)(3), the
Commission proposed that the prospectus outside front cover page
include, among other things, disclosure of whether compensation of the
SPAC sponsor and its affiliates may result in a material dilution of
the purchasers' equity interests. Also, the Commission proposed Item
1602(a)(4) to require on the outside front cover page of the
prospectus, disclosure 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 Item 506 of Regulation S-K:
Remaining Pro Forma Net Tangible Book Value per Share
----------------------------------------------------------------------------------------------------------------
25% of maximum 50% of maximum 75% of maximum Maximum
Offering Price of __ redemption redemption redemption redemption
----------------------------------------------------------------------------------------------------------------
.................. .................. .................. ..................
----------------------------------------------------------------------------------------------------------------
Instruction 1 to Item 1602(a)(4) provided that, if the offering
includes an over-allotment option, separate rows must be included in
the tabular disclosure showing remaining pro forma net tangible book
value per share with and without the exercise of the over-allotment
option.\225\
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\225\ In this context, the Commission considers the term over-
allotment option to be interchangeable with the term ``greenshoe
option.'' For a general description of the nature of a ``greenshoe''
or ``over-allotment option,'' see, e.g., Patrick M. Corrigan,
Footloose with Green Shoes: Can Underwriters Profit from IPO
Underpricing?, 38 Yale J. on Reg. 908, 917-918 (2021)
(``Underwriting agreements in firm commitment offerings also give
underwriters the right, but not the obligation, to purchase an
additional amount of shares [(`Option Shares')] at the same price as
the underwriter is obligated to purchase the [specified number of
shares set out in the underwriting agreement (`Firm Shares')]. . . .
Underwriters typically have 30 days following the execution of the
underwriting agreement to exercise their option. The closing for the
Option Shares may occur on the same closing date as for the Firm
Shares, or on a later date. In modern IPOs, the size of the green
shoe option is virtually always 15% of the Firm Shares, an amount
that constitutes the maximum permissible under FINRA rules.'')
(Footnotes omitted).
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In addition, in Item 1602(b)(6) the Commission proposed that for
SPAC IPOs, the summary prospectus include, among other things,
disclosure of the extent to which compensation of the SPAC sponsor, its
affiliates, and promoters may result in a material dilution of the
purchasers' equity interests. In addition to the prospectus cover page
and prospectus summary requirements for SPAC IPOs, the Commission also
proposed Item 1602(c) regarding dilution. This proposed item would
require, in addition to the disclosure required by Sec. 229.506 (Item
506 of Regulation S-K), a description of material potential sources of
future dilution following the registered offering by the special
purpose acquisition company. This proposed item also would require
disclosure in tabular format of 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.
The other dilution provisions proposed by the Commission related to
de-SPAC transactions. The Commission proposed Item 1604(a)(3) to
require on
[[Page 14179]]
the outside front cover page of the prospectus, among other things,
disclosure of whether compensation of the SPAC sponsor, its affiliates,
and promoters 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. Proposed Item 1604(a)(3) also
required the provision of a cross-reference, highlighted by prominent
type or in another manner, to the locations of related disclosures in
the prospectus.
Three additional proposed rules with respect to de-SPAC
transactions, Item 1604(b)(4) through (6), each required prospectus
summary disclosure. First, proposed Item 1604(b)(4) required, among
other things, tabular disclosure of whether compensation of the SPAC
sponsor and its affiliates has resulted or may result in a material
dilution of the equity interests of unaffiliated security holders of
the special purpose acquisition company. Second, proposed Item
1605(b)(5) required, among other things, disclosure of the dilutive
impact, if any, of any financing transactions that have occurred or
will occur in connection with the consummation of the de-SPAC
transaction on unaffiliated security holders. Third, proposed Item
1604(b)(6) required disclosure of 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.
For de-SPAC transactions, the Commission also proposed Item 1604(c)
to require a description of 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.
Under Item 1604(c), proposed Item 1604(c)(1) required the provision of
a sensitivity analysis disclosure in tabular format that expresses the
amount of potential dilution under a range of reasonably likely
redemption levels. Proposed Item 1604(c)(1) also required, at each
redemption level in the sensitivity analysis, quantification of 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. Additionally, proposed
Item 1602(c)(2) required a description of the model, methods,
assumptions, estimates, and parameters necessary to understand the
sensitivity analysis disclosure.
2. Comments
A number of commenters generally supported some or all of the
proposed enhanced dilution disclosure requirements.\226\ Several of
these commenters suggested that proposed dilution disclosure
requirements would provide useful information to investors.\227\ Other
commenters, however, generally opposed or raised concerns regarding
some or all of the proposed enhanced dilution disclosure
requirements.\228\ Several of these commenters expressed views that the
proposed disclosure requirements regarding dilution would not be
helpful to investors.\229\ Specific comments on various aspects of the
proposal are described below.
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\226\ Letters from Better Markets (``The disclosures should
assist shareholders in understanding . . . potential sources of
dilution of their shares. . . .''), Bullet Point Network (``We also
agree with the SEC's proposal to add sensitivity tables to show the
dilution across a range of redemption scenarios. . . .''), CFA
Institute (``we encourage a rapid implementation of the Proposed
Rules on improving disclosures, transparency of dilution. . . .''),
CII (``We generally agree . . . on the need to . . . bring greater
clarity to dilution under various SPAC share redemption scenarios. .
. .''), Committee on Capital Markets Regulation (``In particular,
the Committee supports the proposed enhanced disclosures regarding .
. . dilution. . . .''), Consumer Federation, ICGN (``Finally, the
disclosure around dilution concerns . . . are also critical
components for investor decision-making.''), PricewaterhouseCoopers
LLP (June 10, 2022) (``PwC'') (``We believe the proposed disclosure
changes will lead to greater transparency and clarity in important
areas (e.g., actual or potential conflicts/misalignments of
interests or actual or potential sources of dilution).'').
\227\ See, e.g., Consumer Federation (``more detailed
information on the potential impact of dilution on the value of SPAC
shares could help investors better understand the various sources of
dilution and the extent to which their investments might drop in
value, which they could then factor into their decision making.''),
NASAA (``NASAA believes that some of the most important de-SPAC
disclosures proposed are those concerning the potential for dilution
and the potential impacts to returns from sponsor compensation,
`promote' shares, underwriting fees and warrants.'').
\228\ Letters from ABA; Freshfields; Loeb & Loeb; Michael
Klausner, Stanford Law School, Michael Ohlrogge, NYU School of Law,
and Harald Halbhuber, NYU School of Law (June 13, 2022) (``Michael
Klausner, Michael Ohlrogge, and Harald Halbhuber''); Letter from
Christopher J. Capuzzi, Daniel L. Forman, Adam M. Harris, David B.
Hennes, Carl P. Marcellino, and Paul D. Tropp, Ropes & Gray LLP
(June 13, 2022) (``Ropes & Gray''); White & Case.
\229\ See, e.g., Letters from ABA (``Generally, proposed Items
1602(a)(4), 1602(c) and 1604(c) require disclosures and the
application of financial analysis tools that we do not believe are
grounded in methodologies used by investors or financial experts in
valuing a common share. . . .''), Ropes & Gray (``We respectfully
submit that the information called for by these proposed rules would
not provide investors or analysts with meaningful information in
valuing SPAC shares at the time of a SPAC IPO.''), White & Case
(``We submit that proposed Items 1602(a)(4) and 1602(c) of
Regulation S-K should not be adopted . . . such proposed disclosure
would not provide any useful information to investors and would
produce inherently misleading disclosure.'').
---------------------------------------------------------------------------
Several commenters addressed issues related to levels of redemption
in connection with proposed SPAC dilution disclosure. One commenter
said that the ``quantitative disclosure currently required under S-K
Item 506 at IPO is not helpful for investors, as the output is largely
driven by the maximum redemption scenario which can differ based on (i)
different provisions of the SPAC's constituent documents. . .and (ii)
the interpretation of those constituent documents.'' \230\ In lieu of
disclosure using the methodology in existing Item 506 as was proposed,
this commenter said that ``SPACs should present the per share amount of
cash (or securities) in trust, under a range of hypothetical redemption
scenarios and after giving effect to sponsor equity, underwriter
compensation and IPO expenses.'' To promote comparability, this
commenter also suggested that ``the hypothetical redemption scenarios
include a maximum of 100% of the public shares (regardless of any
provisions of the SPAC's constituent documents that might theoretically
limit redemptions) less any shares subject to a binding commitment to
not be redeemed.''
---------------------------------------------------------------------------
\230\ Letter from Vinson & Elkins.
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Another commenter, who expressed the general view that ``proposed
Items 1602(a)(4) and 1602(c) of Regulation S-K should not be adopted,''
said that ``it is unclear whether a maximum redemption threshold for
purposes of proposed Item 1602(a)(4) should require or call for
anything other than the redemption of 100% of the SPAC's public
shares.'' \231\ This commenter also said that ``a maximum redemption
scenario for a SPAC would vary across different de-SPAC transactions''
because of the various ways the redemption level is impacted, including
by the SPACs' governing documents, listing requirements, and negotiated
conditions in the de-SPAC transaction.\232\ The commenter observed that
``some de-SPAC transactions are structured such that certain funding
mechanisms, such as backstop, forward purchase or PIPE arrangements,
apply only in the event of certain redemption thresholds, further
complicating the ability to make the assumptions required by proposed
Item 1602(a)(4).'' \233\ As a result, this commenter asserted that
``any purported maximum redemption scenario disclosed at the time of
IPO cannot be based on reasonable assumptions given
[[Page 14180]]
the inherent lack of specifics available at the time of the IPO for a
prospective de-SPAC transaction.'' \234\
---------------------------------------------------------------------------
\231\ Letter from White & Case.
\232\ Id.
\233\ Id.
\234\ Id.
---------------------------------------------------------------------------
The same commenter said that ``a SPAC may actually become subject
to a maximum redemption scenario that is lower than the quartile
intervals required to be presented by proposed Item 1602(a)(4).'' \235\
One commenter recommended the Commission require dilution disclosure at
a 90% redemption level, stating it ``could be particularly useful to
investors if recent redemption activity is indicative of future
activity.'' \236\
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\235\ Letter from White & Case.
\236\ Letter from CII, citing Joanna Makris, SPAC Market Review
2022 as ``finding February 2022 redemption rate of 89%'' available
at https://www.boardroomalpha.com/spac-market-review-march-2022/.
---------------------------------------------------------------------------
Commenters raised concerns that dilution disclosure would be
characterized by uncertainty, be based on hypothetical assumptions, or
depend on unknown variables.\237\ One commenter said that the proposed
disclosure under Item 1602(a)(4) and (c) would require ``dilution
disclosure informed by purely hypothetical assumptions'' and that
``lengthy and detailed caveats regarding the assumptions would be
needed.'' \238\ As a result of these concerns, the commenter concluded
that ``proposed Items 1602(a)(4) and 1602(c) of Regulation S-K would
only confuse and mislead investors.'' \239\ Other commenters noted that
dilution disclosure at the IPO stage would depend on unknown
variables,\240\ which one of these commenters said will mean the
disclosure is not meaningful.\241\ One of these commenters suggested
that ``tabular disclosure and sensitivity analyses in SPAC IPO
registration statements should be limited to the sources of dilution in
existence or contracted at the time of the IPO.'' \242\
---------------------------------------------------------------------------
\237\ Letters from Freshfields, Vinson & Elkins, White & Case.
\238\ Letter from White & Case.
\239\ Letter from White & Case.
\240\ Letters from Freshfields, Vinson & Elkins (stating that
the specifics of the transaction that are unknown include: ``will
there be a PIPE financing, at what per share valuation, will the
PIPE issuance include warrants, will there be convertible equity or
debt issued, what will transaction expenses be, are there
convertible or derivative securities of the target that will be
assumed,'' and ``Most importantly, the value of the target company
is not known at the time of the IPO.'').
\241\ Letter from Freshfields (stating that they did not think
the dilution table on the cover of the SPAC's IPO prospectus ``will
be meaningful because the SPAC does not yet know the amount of
equity to be issued in a PIPE (if any) or to the target company's
stockholders (if any) or the extent to which the SPAC sponsor's
promote will be renegotiated in connection with the actual de-SPAC
transaction.'').
\242\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
Several commenters expressed concerns that the proposed dilution
disclosure would not provide meaningful information to investors.\243\
One of these commenters said that ``proposed Items 1602(c) and 1604(c)
are ambiguous as to what is required to be considered as dilution and
how that dilution is to be measured and presented.'' \244\ This
commenter said they do not believe current Item 506 disclosures are
useful to investors and do not believe investors will find the similar
disclosures proposed to be required by Items 1602(a)(4) and (c) and
1604(c) to be any more useful. One commenter said, ``the proposed
additional dilution disclosure to be included in an IPO prospectus
(proposed Item 1602) would just capture in one place information
already being disclosed with perhaps some new caveats about potential
for dilutive financings and accordingly not result in a better informed
investor.'' \245\
---------------------------------------------------------------------------
\243\ Letters from ABA, Ropes & Gray (``information called for
by the proposed rules would not provide investors or analysts with
meaningful information in valuing SPAC shares at the time of a SPAC
IPO.''), Vinson & Elkins, White & Case.
\244\ Letter from ABA.
\245\ Letter from Loeb & Loeb.
---------------------------------------------------------------------------
The Commission proposed that the calculation of pro forma net
tangible book value be done consistent with the methodologies and
assumptions used in the disclosure provided pursuant to Item 506 of
Regulation S-K. One commenter said that ``[Item 506] presentation is
not meaningful to investors and in some instances the presentation may
actually show that there is a decrease in net tangible book value from
the offering after giving effect to the redeemable shares.'' \246\
---------------------------------------------------------------------------
\246\ Letter from Vinson & Elkins.
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Another commenter said that, without an identified de-SPAC target
or structured de-SPAC transaction, the limited information at the time
of the SPAC IPO used to calculate the proposed Item 1602(a)(4)
disclosures would produce ``an absurd result.'' \247\ The commenter
expressed the view that the disclosure provided based on this limited
information would not be useful because ``all of a SPAC's shares sold
to public investors in the SPAC's IPO (the public shares) are required
to be classified as temporary equity upon the completion of the IPO,''
which would mean that ``the calculation of pro forma net tangible book
value per share in accordance with U.S. GAAP [Generally Accepted
Accounting Principles] inevitably produces a deficit and remains the
same constant figure across any assumed redemption thresholds.'' \248\
---------------------------------------------------------------------------
\247\ Letter from White & Case.
\248\ Id.
---------------------------------------------------------------------------
Another commenter said that ``proposed Item 1602(a)(4) would
require disclosure of the estimated remaining pro forma net tangible
book value per share at specified redemption levels consistent with the
methodologies in Item 506 of Regulation S-K'' but noted that ``Item 506
does not provide a definition for net tangible book value,'' and, as a
result, the commenter has ``observed diversity in such calculations.''
\249\ The commenter recommended ``that the Commission include a
definition of net tangible book value in the final rule to enhance the
usefulness and comparability of the dilution disclosures for investors
in SPAC transactions and other registered securities offerings as
applicable.'' \250\
---------------------------------------------------------------------------
\249\ Letter from Ernst & Young LLP (June 13, 2023) (``Ernst &
Young'').
\250\ Id.
---------------------------------------------------------------------------
One commenter recommended that the Commission give ``illustrative
examples and calculations'' of the dilution disclosure to ensure
``robust, transparent, and consistent dilution disclosures.'' \251\
Another commenter said they ``agree with the proposal to add
sensitivity tables to show the dilution across a range of redemption
scenarios and would suggest the SEC provide a format to standardize
that disclosure.'' \252\ One commenter recommended that ``sensitivity
analyses should only be required for sources of dilution, such as
warrants, where the dilutive impact varies based on changing equity
values or other variables.'' \253\
---------------------------------------------------------------------------
\251\ Letter from PwC.
\252\ Letter from Bullet Point Network.
\253\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
In response to a request for comment asking whether we should
require disclosure of net cash per share (in addition to, or in lieu of
the proposed dilution disclosures),\254\ several commenters recommended
we require net cash per share disclosure.\255\ One commenter said that,
in lieu of the proposed dilution disclosure, ``SPACs should present the
per share amount of
[[Page 14181]]
cash (or securities) in trust, under a range of hypothetical redemption
scenarios and after giving effect to sponsor equity, underwriter
compensation and IPO expenses.'' \256\ Another commenter said that
``the actual net cash per share for non-redeeming shareholders under
different redemption scenarios should be displayed in an easily
understandable, tabular format.'' \257\
---------------------------------------------------------------------------
\254\ See Proposing Release, supra note 7, at 29470 (request for
comment number 20) (``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?'').
\255\ Letters from CII; Michael Klausner, Michael Ohlrogge, and
Harald Halbhuber; NASAA; Vinson & Elkins.
\256\ Letters from Vinson & Elkins.
\257\ Letter from NASAA.
---------------------------------------------------------------------------
A different commenter said they ``support clear disclosure of net
cash per share after taking into account all sources of dilution and
dissipation of cash, under various redemption scenarios.'' \258\ This
commenter said that reductions in net cash may be attributable to a
variety of sources, including: (a) sponsor compensation and investment
terms, (b) share redemption, (c) exercise of warrants, fractional
warrants and convertible securities, (d) PIPE financing, and (e)
underwriting fees.\259\ The commenter also said that ``[g]iven the
complexity and contingencies involved in the de-SPAC process, investors
. . . need clear information about potential consequences to inform
their understanding of the true cost of the business combination.''
\260\
---------------------------------------------------------------------------
\258\ Letter from CII.
\259\ Id.
\260\ Id.
---------------------------------------------------------------------------
One group of commenters said that ``the final rules for SPAC
mergers should require SPACs to prominently disclose the amount of net
cash underlying each share at the time of a de-SPAC transaction,''
including on the cover page of the registration statement.\261\ These
commenters also said, with respect to the proposed Item 1604(c)
requirement to describe ``each material potential source of future
dilution'' for non-redeeming SPAC shareholders, that the dilution
concept included in the provision reflects a concept of dilution that
is focused on ``ownership dilution,'' not the kind of dilution (and
dissipation of cash) that reduces the net cash underlying a SPAC
share.\262\ These commenters concluded that, as proposed, none of the
disclosures in Item 1604(c) of Regulation S-K would inform investors
about the net cash underlying a SPAC share. These commenters also
provided a formula for the calculation of net cash per share: (a) total
cash (consisting of the sum of cash from SPAC public shareholders plus
cash from PIPEs or forward purchase agreements minus cash expenses
minus the value of warrants minus the value of other equity
derivatives), divided by (b) total shares (consisting of public shares
plus founder shares plus PIPE or forward purchase agreement shares plus
other shares plus shares issuable under rights).\263\ Another commenter
supported using this calculation of net cash per share after taking
into account all sources of dilution and dissipated cash under 25%,
50%, 75%, 90%, and 100% redemption scenarios.\264\
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\261\ Letter from Michael Klausner, Michael Ohlrogge, and Harald
Halbhuber (providing that net cash per share should include: ``each
material source of future dilution and dissipation of cash that non-
redeeming shareholders may experience by electing not to tender
their shares in connection with the de-SPAC transactions and
quantify its impact on the net cash underlying a share'').
\262\ Letter from Michael Klausner, Michael Ohlrogge, and Harald
Halbhuber, citing Klausner, Ohlrogge & Halhubber, Net Cash Per
Share: The Key to Disclosing SPAC Dilution (NYU Law and Economics
Research Paper No. 22-14, Mar. 28, 2022, last revised Sept. 17,
2022), available at https://ssrn.com/abstract=4047180 (retrieved
from SSRN Elsevier database) (see supra note 156). For treatment of
warrants in connection with this net cash per share formula, see id.
at 27 (``All warrants should be valued using standard accounting
methodologies as of the day before the merger's announcement, and
their aggregate value should be subtracted from total cash. This is
consistent with most SPACs' accounting treatment of warrants as a
liability. To ensure comparability across different SPACs, however,
we propose subtracting the value of the warrants even when they are
structured to avoid liability treatment under GAAP.'' (Footnotes
omitted)); id. at 27, n.32 (``Alternatively, SPACs could be required
to disclose the value of warrants at the time their proxy statement
is filed. This would reflect the market's valuation of the warrants'
dilution.''); but see Klausner, Ohlrogge & Ruan, supra note 18 at
233, n.11 (2022) (``The concept of net cash per share is central to
our analysis. We define that term to be cash in the SPAC minus
underwriting fees and other fees incurred in connection with a
SPAC's merger minus the value of warrants as of the day before the
announcement of the merger, divided by shares issued in the SPAC's
IPO plus shares issued to shares issued to PIPE investors. We follow
the SEC's treatment of warrants as liabilities. If we treat warrants
as equity of the same value in the denominator of net cash per
share, the results would not be significantly different. For the few
SPACs that have convertible debt, we treat the conversion feature as
a warrant.'' (Emphasis added)).
\263\ Id.
\264\ Letter from CII.
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One commenter said they ``read proposed Item 1604(c)(1) as
requiring a determination of the enterprise valuation that will result
in a stockholder's `interest per share' (calculated by reference to a
pro forma closing date balance sheet. . .). . .being at least equal to
the $10 price per share paid in the IPO.'' \265\ The commenter said
``this is the equivalent of requiring a traditional IPO to include in
its Item 506 dilution section alternative price ranges, the midpoint of
which would not result in dilution to IPO investors,'' which the
commenter said ``we can safely assume would be materially different
from the proposed cover page range due to the significant disconnect
between market prices and net book value per share.'' \266\ The
commenter said ``if misunderstood by the reader, this proposed
disclosure also has the dangerous potential to lead a SPAC shareholder
to view the disclosure as a guarantee that the stock will not trade
down in the aftermarket.'' \267\
---------------------------------------------------------------------------
\265\ Letter from Loeb & Loeb.
\266\ Id.
\267\ Id.
---------------------------------------------------------------------------
One commenter on the proposal said that ``[f]or de-SPAC
transactions, the most meaningful information would be the expected
value per share, using the agreed equity value of the target company
plus net cash proceeds from the de-SPAC transaction under a range of
hypothetical redemption scenarios.'' \268\ The commenter said, ``Given
that SPAC warrants are almost uniformly out of the money at the agreed
per share equity value used in the de-SPAC transaction (typically the
$10 IPO per unit price), conveying the potential dilutive effect of the
warrants can be handled in many different ways.'' The commenter
suggested disclosing ``the percentage ownership of the surviving
company at various hypothetical share increments above $10 per share,
utilizing the treasury share method.'' \269\
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\268\ Letter from Vinson & Elkins.
\269\ Letter from Vinson & Elkins. Regarding the treasury stock
method for warrants, see, e.g., Donald E. Kieso, Jerry J. Weygandt &
Terry D. Warfield, Intermediate Accounting, Volume 2, 17 (2019)
(``The treasury stock method applies to written call options and
equivalents and assumes that: 1. the options and warrants or
equivalents are exercised at the beginning of the year (or on the
date of issue if it is later), and 2. the proceeds are used to
purchase common shares for the treasury at the average market price
during the year. If the exercise price is lower than the average
market price, then the proceeds from exercise are not sufficient to
buy back all the shares. This would result in more shares being
issued than purchased and will therefore be dilutive. The excess
number of the shares (incremental number) to be issued over the
number of shares that would be purchased is added to the weighted
average number of shares outstanding in calculating [per share
ratios]. Note that no adjustment is made to the numerator.'').
---------------------------------------------------------------------------
One commenter recommended that the Commission should consider
requiring that intermediaries provide information about ``the sponsor,
actual and potential conflicts of interest, [and] how much a non-
redeeming SPAC investor's interest will be diluted'' in a separate
``Key Risks and Conflicts form'' that is detached from the prospectus,
so that the disclosure receives more investor attention and focus.\270\
---------------------------------------------------------------------------
\270\ Letter from CFA Institute.
---------------------------------------------------------------------------
One commenter said that disclosures about ``any lock-up periods or
earnout provisions for sponsors or underwriters
[[Page 14182]]
would be of significant interest to investors and should be required if
part of the SPAC offering.'' \271\
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\271\ Letter from NASAA.
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3. Final Rules
i. Overview of Final Rules and Changes From Proposal
After considering the comments received, regarding dilution
disclosure in SPAC registered offerings (such as SPAC IPOs) other than
de-SPAC transactions, we are adopting Item 1602(a)(3) and (4), (b)(6),
and (c) as proposed, except for certain modifications we discuss below.
Regarding de-SPAC transactions, we are also adopting Item 1604(a)(3),
(b)(4), (5), and (6), and (c) as proposed, except for certain
modifications we discuss below. Each of these provisions is discussed
in detail below.
a. Overview of Final Item 1602 Dilution Disclosure (IPOs and Non-De-
SPAC Transaction Registered Offerings) and Changes From Proposal
1. Item 1602(a)
Final Item 1602(a)(3) requires, on the outside front cover page of
the prospectus in plain English, a statement of the amount of the
compensation received or to be received by the SPAC sponsor, its
affiliates, and promoters, the amount of securities issued or to be
issued by the SPAC to the SPAC sponsor, its affiliates, and promoters
and the price paid or to be paid for such securities, and whether this
compensation and securities issuance may result in a material dilution
of the purchasers' equity interests. Final Item 1602(a)(3) also
requires the provision of a cross-reference, highlighted by prominent
type or in another manner, to the locations of related disclosures in
the prospectus. Final Item 1602(a)(3) is different from the proposal
only with respect to changes made regarding SPAC sponsors and
securities issuances discussed above in section II.B.
Final Item 1602(a)(4) requires, with respect to SPAC IPOs, on the
outside front cover page of the prospectus in plain English, disclosure
in the tabular format specified at quartile intervals based on
percentages of the maximum redemption threshold: the offering price; as
of the most recent balance sheet date filed, the net tangible book
value per share, as adjusted, as if the offering and assumed redemption
levels have occurred and to give effect to material probable or
consummated transactions (other than the completion of a de-SPAC
transaction); and the difference between the offering price and such
net tangible book value per share, as adjusted.
Final Table 1 to Paragraph (a)(4) provides:
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
----------------------------------------------------------------------------------------------------------------
.................. .................. .................. ..................
----------------------------------------------------------------------------------------------------------------
Final Instruction 1 to Item 1602(a)(4) provides, if the offering
includes an over-allotment option, separate rows in the tabular
disclosure must be included showing the information required by
paragraph (a)(4) with and without the exercise of the over-allotment
option.
Final Item 1602(a)(4) includes several changes compared to the
proposal. First, we have clarified in the final rule how to calculate
the required dilution information. In response to the proposal, some
commenters generally sought clarification, such as illustrative
examples, calculations, or definitions, in connection with the dilution
calculation.\272\ We believe the changes in the final rules will be
simpler for registrants to follow and comply with because they provide
clear steps regarding how the dilution disclosure should be determined.
In addition, we have deleted proposed references to calculating
dilution ``consistent with the methodologies and assumptions used in
the disclosure provided pursuant to Sec. 229.506 (Item 506 of
Regulation S-K).'' These references to Item 506 are not necessary given
the changes made to clarify how to calculate the required dilution
information. This change also ensures that redeemable common stock is
not treated as temporary equity for purposes of the calculation in a
way that could undermine the meaningfulness of the dilution disclosure
as we discuss in more detail below in response to comments. Relatedly,
we are revising Item 6 of Form S-1 to state that the registrant must
``Provide the information required by Item 506 of Regulation S-K (Sec.
229.506 of this chapter), unless the registrant is a special purpose
acquisition company (as defined in Item 1601 of Regulation S-K),''
because the requirements of Item 1602(a)(4) are intended to supplant
the requirements of Item 506 for SPACs.
---------------------------------------------------------------------------
\272\ See letters from PwC, Ernst & Young, supra notes 249 and
251.
---------------------------------------------------------------------------
In addition, we have deleted proposed references in Item 1602(a)(4)
to ``estimated remaining pro forma net tangible book value per share''
as the name for the dilution measurement and instead refer to ``net
tangible book value per share, as adjusted.'' We were concerned that
references to ``estimated remaining pro forma net tangible book value
per share'' could be ambiguous and that registrants could misinterpret
the term to require estimation of what the net tangible assets of a
combined company might be in any ultimate de-SPAC transaction. The
deletion of this term and its replacement with the new term helps
clarify that registrants should not include any estimates of the assets
of any ultimate target company in this calculation.
In addition, in final Item 1602(a)(4), we have replaced the
proposed phrase ``at quartile intervals up to the maximum redemption
threshold'' with ``at quartile intervals based on percentages of the
maximum redemption threshold.'' We believe registrants could mistakenly
interpret the proposed terms to require quartile intervals based on the
total number of shares issued in the offering for the three redemption
levels in the table other than the maximum redemption level. We believe
this change will eliminate that potential for misinterpretation.
2. Item 1602(b)
Final Item 1602(b)(6) requires the prospectus summary to include in
plain English in a tabular format, the nature and amount of the
compensation received or to be received by the SPAC sponsor, its
affiliates, and promoters, the amount of securities issued or to be
issued by the SPAC to the SPAC sponsor, its affiliates, and promoters
and the price paid or to be paid for such
[[Page 14183]]
securities, and, outside of the table, the extent to which this
compensation and securities issuance may result in a material dilution
of the purchasers' equity interests. Final Item 1602(b)(6) is different
from the proposal only with respect to changes made regarding SPAC
sponsors and securities issuances discussed above in section II.B.
3. Item 1602(c)
Final Item 1602(c) requires disclosure in a tabular format for the
same quartile intervals as in Item 1602(a)(4): the offering price; net
tangible book value per share, as adjusted, determined in the same
manner as in Item 1602(a)(4); and the difference between the offering
price and such net tangible book value per share, as adjusted. Final
Item 1602(c) also requires that the tabular disclosure must show: the
nature and amounts of each source of dilution used to determine net
tangible book value per share, as adjusted; and the number of shares
used to determine net tangible book value per share, as adjusted; and
any adjustments to the number of shares used to determine the per share
component of net tangible book value per share, as adjusted. Final Item
1602(c) also requires a description of each material potential source
of future dilution following the registered offering by the special
purpose acquisition company, including sources not included in the
table with respect to the determination of net tangible book value per
share, as adjusted. Final Item 1602(c) also requires a description of
the model, methods, assumptions, estimates, and parameters necessary to
understand the tabular disclosure.
Final Item 1602(c) contains several changes from the proposal. We
have clarified in the final rule that Item 1602(c) dilution should be
calculated in the same way as in Item 1602(a)(4) and have deleted
references in proposed Item 1602(c) to Item 506 of Regulation S-K,
consistent with changes discussed above made to final Item 1602(a)(4)
in this respect. In addition, we have clarified that the table in Item
1602(c) should show the nature and amounts of each source of dilution
and the number of shares used in the calculation in order to eliminate
any ambiguity and the potential that registrants could misinterpret the
item to mean that the table merely needs to show the final dilution
information and not the line items that went into its calculation.
With respect to the proposed requirement to describe material
potential sources of future dilution, the final rules specify that the
description should be located outside the table. The final rules also
state that the description of each material potential source of future
dilution outside of the table should include ``sources not included in
the table with respect to the determination of net tangible book value
per share, as adjusted.'' We are making this change to clarify that the
disclosure outside of the table is not to be merely duplicative of the
sources of dilution used for the calculation of the measure of dilution
within the table. Without these changes, the item could have been
misinterpreted by registrants to require only disclosure of the same
sources of dilution used in the tabular calculation of dilution, only
in a non-tabular format. Depending on a SPAC's specific facts and
circumstances, the non-tabular disclosure of ``each material potential
source of future dilution'' under Item 1602(c) may need to discuss a
broader set of items than ``material probable or consummated
transactions'' that are included for purposes of calculating the
tabular dilution measure.\273\
---------------------------------------------------------------------------
\273\ Depending on the facts and circumstances, both qualitative
and quantitative information may be required in the disclosures made
outside of the table.
---------------------------------------------------------------------------
We have also clarified that underlying factors such as assumptions
that are necessary to understand the table must be described in order
to eliminate any ambiguity under the proposal that no such information
is required beyond the numbers in the dilution table. This
clarification also makes final Item 1602(c) consistent with final Item
1604(c), which contained a proposed provision to this effect (that we
are adopting as discussed in detail below).
b. Overview of Final Item 1604 Dilution Disclosure (De-SPAC
Transactions) and Changes From Proposal
1. Item 1604(a)
Final Item 1604(a)(3) requires, on the outside front cover page of
the prospectus in plain English, a statement of 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; the amount of securities issued or
to be issued by the SPAC to the SPAC sponsor, its affiliates, and
promoters and the price paid or to be paid for such securities in
connection with the de-SPAC transaction or any related financing
transaction; and whether this compensation and securities issuance 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. Final Item 1604(a)(3) also requires the provision of
a cross-reference, highlighted by prominent type or in another manner,
to the locations of related disclosures in the prospectus. Final Item
1604(a)(3) is different from the proposal only with respect to changes
made regarding SPAC sponsors and securities issuances discussed above
in section II.B.
2. Item 1604(b)
Final Item 1604(b)(4) requires that the prospectus summary must
include in plain English, in a tabular format, the terms and 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, the amount of securities issued or
to be issued by the SPAC to the SPAC sponsor, its affiliates, and
promoters and the price paid or to be paid for such securities in
connection with the de-SPAC transaction or any related financing
transaction; and, outside of the table, the extent to which that
compensation and securities issuance has resulted or may result in a
material dilution of the equity interests of non-redeeming shareholders
of the special purpose acquisition company.
In final Item 1604(b)(4), we revised to clarify that certain
disclosure should appear outside of the table (rather than within it).
It also makes the item consistent with Item 1602(b)(6) in requiring
disclosure of the extent of the material dilution not merely whether or
not there is such material dilution. Also, in the final rule, we have
replaced the term ``unaffiliated security holders'' with ``non-
redeeming shareholders'' to ensure consistency of usage throughout Item
1604. In addition, this change eliminates any ambiguity that might have
caused some registrants to believe they need to subtract affiliated
shares from the denominator of the net tangible book value per share
calculation, which the proposal did not intend. We also made changes to
final Item 1604(b)(4) as compared to the proposal with respect to SPAC
sponsors, promoters, and securities issuances discussed above in
section II.B.
Final Item 1604(b)(5) requires the prospectus summary to include a
brief description in plain English of the material terms of any
material 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 non-
redeeming shareholders. The sole change from the proposal is that, in
final
[[Page 14184]]
Item 1604(b)(5), we have revised the term ``unaffiliated security
holders'' to ``non-redeeming shareholders'' for the same reasons as
discussed above regarding Item 1604(b)(4).\274\
---------------------------------------------------------------------------
\274\ In addition, in final Item 1603(b)(5) we added the word
``material'' before the words ``financing transactions'' for
consistency with final Item 1604(a)(2).
---------------------------------------------------------------------------
Final Item 1604(b)(6) requires the prospectus summary to include a
brief description in plain English of the rights of security holders to
redeem the outstanding securities of the special purpose acquisition
company and the potential dilutive impact of redemptions on non-
redeeming shareholders. We made one change to final Item 1604(b)(6)
compared to the proposal to clarify the disclosure required. Final
1604(b)(6) contains the phrase ``potential dilutive impact of
redemptions on non-redeeming shareholders'' instead of the proposed
phrase ``impact of redemptions on the value of the securities owned by
non-redeeming shareholders.'' We believe this clarification will
eliminate ambiguity and the potential that registrants could
misinterpret the item to require undertaking valuations under different
scenarios of the securities owned by non-redeeming shareholders.
3. Item 1604(c)
We received comments that indicated that we should provide a
definition of net tangible book value or provide examples to enhance
the comparability of the disclosures.\275\ In consideration of these
comments, we have revised Item 1604(c) to more clearly set forth the
dilution disclosures and calculations it requires and to align this
dilution calculation with the dilution calculation under Item
1602(a)(4) and (c), although, as we discuss herein, there are technical
differences between the adjustments under Item 1602(a)(4) and (c)
versus adjustments under Item 1604(c).
---------------------------------------------------------------------------
\275\ See letters from PwC, Ernst & Young, supra notes 249 and
251.
---------------------------------------------------------------------------
Final Item 1604(c) requires disclosure in a tabular format that
includes intervals representing selected potential redemption levels
that may occur across a reasonably likely range of outcomes of: the
offering price disclosed pursuant to Item 1602(a)(4) in the initial
registered offering by the SPAC; as of the most recent balance sheet
date filed, the net tangible book value per share, as adjusted, as if
the selected redemption levels have occurred and to give effect to,
while excluding the de-SPAC transaction itself, material probable or
consummated transactions, and other material effects on the SPAC's net
tangible book value per share from the de-SPAC transaction; and the
difference between such offering price and such net tangible book value
per share, as adjusted. Final Item 1604(c) also requires that the
tabular disclosure must show: the nature and amounts of each source of
dilution used to determine net tangible book value per share, as
adjusted; the number of shares used to determine net tangible book
value per share, as adjusted; and any adjustments to the number of
shares used to determine the per share component of net tangible book
value per share, as adjusted.
Final Item 1604(c) also requires, outside of the table, a
description of 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, including
sources not included in the table with respect to the determination of
net tangible book value per share, as adjusted.\276\ Final Rule
1604(c)(1) requires, with respect to each redemption level, a statement
of 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 IPO price per share of common stock. Final
Item 1604(c)(2) requires the provision of a description of the model,
methods, assumptions, estimates, and parameters necessary to understand
the tabular disclosure.
---------------------------------------------------------------------------
\276\ In final Item 1604(c) we moved the phrase ``that non-
redeeming shareholders may experience by electing not to tender
their shares in connection with the de-SPAC transaction'' from the
end of the relevant sentence to instead follow the words ``future
dilution'' for clarity.
---------------------------------------------------------------------------
Final Item 1604(c) introductory text and (c)(1) and (2) contain
certain changes from the proposal. We believe the changes in the final
rules will be simpler for registrants to follow and comply with because
they provide clear steps regarding how the dilution disclosure should
be determined. In addition, in clarifying how to calculate the required
dilution, final Item 1604(c) also ensures that redeemable common stock
is not treated as temporary equity for purpose of the calculation in a
way that could undermine the meaningfulness of the dilution disclosure.
As part of these clarifications, we have deleted the proposed provision
in Item 1604(c)(1) that would have required ``sensitivity analysis
disclosure in tabular format that expresses the amount of potential
dilution under a range of reasonably likely redemption levels.'' We
were concerned the meaning of that proposed provision could be unclear
to registrants, particularly its references to ``sensitivity
analysis.'' We believe there was potential for some registrants to
interpret the proposed provision merely to mean a range of redemption
levels must be analyzed, while other registrants could interpret the
provision to mean that a range of redemption levels must be analyzed
and also that a sensitivity analysis must be conducted that reflects a
range of assumptions for the range of redemption levels.
We also have deleted the following language of proposed Item
1604(c)(1): ``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.'' We were
concerned that the references in that proposed provision to certain
sources of potential dilution could confuse registrants about how to
calculate dilution and could produce inconsistent interpretations
across different registrants.
Final Item 1604(c) accomplishes the same goal as these deleted
provisions in proposed Item 1604(c)(1) by requiring disclosure ``in a
tabular format that includes intervals representing selected potential
redemption levels that may occur across a reasonably likely range of
outcomes.'' We believe the final rule will make it clear that the item
does not prescribe the redemption levels for which dilution information
must be provided (in contrast to Item 1602(a)(4) and (c)).
Under Item 1604(c), registrants should not select redemption levels
that are not possible. For example, registrants should not select
levels that, combined with any other funding (such as PIPEs) in
connection with the de-SPAC transaction, would result in the SPAC
having cash that is lower than any minimum cash condition in the
agreements related to the de-SPAC transaction. Registrants are not
required to select exactly four levels for Item 1604(c) (which they are
required to do in Item 1602(a)(4) and (c)) but should ensure the
redemption levels reasonably inform investors of a range of potential
outcomes.\277\
---------------------------------------------------------------------------
\277\ While there may be exceptions depending on specific facts
and circumstances, the presentation of fewer than four levels of
redemption is unlikely to constitute a sufficient range of outcomes
to inform investors. As discussed above, there is no requirement in
Item 1604(c) to select four redemption levels as there is in Item
1602(a)(4) and (c), but registrants who seek to provide less than
four redemption levels pursuant to Item 1604(c) should ensure such
presentation is appropriate and tailored to the unique circumstances
of the relevant de-SPAC transaction warranting such a presentation.
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[[Page 14185]]
Furthermore, we have clarified that the table in final Item 1604(c)
should show the nature and amounts of each source of dilution and the
number of shares used in the calculation in order to eliminate any
ambiguity and the potential that registrants could misinterpret the
item to mean that the table needs to show only the final dilution
information and not the line items that went into its calculation.
In addition, with respect to the proposed requirement to describe
material potential sources of future dilution, the final rule specifies
that the description should be located outside of the table. The final
rule also states that each material potential source of future dilution
outside of the table should include ``sources not included in the table
with respect to the determination of net tangible book value per share,
as adjusted.'' We are making this change to clarify that the disclosure
outside of the table is not merely duplicative of the sources of
dilution used for the calculation of the measure of dilution within the
table. Without these changes, the item could have been misinterpreted
by registrants to require disclosure of the same sources of dilution
used in the tabular calculation of dilution, only in a non-tabular
format. Depending on a SPAC's specific facts and circumstances, the
non-tabular disclosure of ``each material potential source of future
dilution'' under Item 1604(c) may need to discuss a broader set of
items than ``material probable or consummated transactions'' that are
included for purposes of calculating the tabular dilution measure.
Finally, to reflect the deletion discussed above of the proposed
provision in Item 1604(c)(1) regarding ``sensitivity analysis,'' we
have inserted in final Item 1604(c)(2) the words ``necessary to
understand the tabular disclosure'' instead of the proposed words
``necessary to understand the sensitivity analysis disclosure.''
ii. Value of SPAC Dilution Information to Investors as a General Matter
and Under the Final Rules
In adopting the final rules, we agree with the commenters that
expressed the view that the dilution disclosures will provide helpful
information to investors. There are a number of potential sources of
dilution in common SPAC structures, including: (a) shareholder
redemptions, (b) SPAC sponsor compensation, (c) underwriting fees, (d)
warrants, (e) convertible securities, and (f) PIPE financings. The
enhanced dilution disclosure required by the final rules will enable
investors in a SPAC IPO 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.\278\
---------------------------------------------------------------------------
\278\ In this regard, we note that the initial purchasers in
SPAC IPOs often resell or redeem their shares prior to the
completion of the de-SPAC transaction. See, e.g., Benjamin Mullin &
Amrith Ramkumar, BuzzFeed Suffers Wave of SPAC Investor Withdrawals
Before Going Public, Wall St. J., Dec. 2, 2021. See also Klausner,
Ohlrogge & Ruan, supra note 18.
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Dilution disclosure in Commission filings has evolved over
time.\279\ Today, Commission dilution disclosure requirements remain
important, including with respect to SPACs. The Commission disagrees
with the views expressed by some commenters that dilution disclosure
would not be meaningful for investors' investment decision-making or
for valuation purposes at the IPO stage or de-SPAC transaction
stage.\280\ Investors may use dilution information differently
depending on the type of registrant, such as whether the issuer is an
operating company or a shell company, such as a SPAC. For example, with
an operating company some ``value investors'' may compare the offering
price to net tangible book value.\281\ For a SPAC, however, this
specific comparison may be less meaningful than with an operating
company because SPACs typically have limited assets at the time of the
IPO and the offering price is typically fixed at $10 per share. In
addition, with an operating company, some ``value investors'' may
compare the debt of the issuer to the net tangible book value. For a
SPAC, however, this specific comparison may be less meaningful than
with an operating company, because SPACs typically have limited debt at
the time of the IPO and have limited assets. Furthermore, with an
operating company, some investors may seek to determine a value for the
issuer taking into account return on net tangible assets or by using a
value calculated by multiplying a market average price-to-net-tangible-
book-value-per-share ratio times the issuer's net tangible book value
per share. For a SPAC, however, these specific methods may be less
meaningful than with an operating company because of the limited assets
of the SPAC and limited, if any, net income at the time of the IPO.
---------------------------------------------------------------------------
\279\ See Guides for Preparation and Filing of Registration
Statements, Release No. 33-4666 (Feb. 7, 1964) [29 FR 2490, 2492
(Feb. 15, 1964)]; Guides for the Preparation and Filing of
Registration Statements, Release No. 33-4936 (Dec. 9, 1968) [33 FR
18617, 18619 (Dec. 17, 1968)]; Contents of Prospectuses and to
Guides for Preparation and Filing of Registration Statements,
Release No. 33-5278 (Aug. 8, 1972) [37 FR 15985, 15986 (Aug. 9,
1972)]; Proposed Revision of Regulation S-K and Guides for the
Preparation and Filing of Registration Statements and Reports,
Release No. 33-6276 (Dec. 23, 1980) [46 FR 78, 82-83 (Jan. 2,
1981)]; Adoption of an Integrated Disclosure System, Release No. 33-
6383 (Mar. 19, 1982) [47 FR 11380, 11390 (Mar. 16, 1982)].
\280\ Letters from ABA, Ropes & Gray, Vinson & Elkins, White &
Case. See supra notes 243 and 244 and accompanying text.
\281\ See, e.g., Klausner, Ohlrogge & Halbhuber, supra note 156
at 19 (2022) (``Disclosure of net cash per share at the time of a
SPAC's merger is necessary to allow shareholders to make an informed
decision as to whether to redeem their shares (for roughly $10 per
share) or to invest in a proposed merger. . . . One would expect the
amount of net cash invested in a target to be closely related to the
value of post-merger shares that SPAC shareholders receive in
exchange. Our research bears this relationship out empirically,
showing that the lower the net cash per share that a SPAC delivers,
the lower the post-merger share price will be.'' (Footnotes
omitted)). As discussed below in the section ``Net Cash Per Share
Disclosure Recommendations,'' we agree with comments that suggested
net cash per share information is important to investors, but we
believe the net tangible book value per share calculation, which we
discuss in more detail below, would substantially convey such
information.
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Dilution disclosure is important to SPAC investors for two reasons
at both the IPO and de-SPAC transaction stages: (1) it provides
investors a way of understanding the impact of the disparity in price
paid by insiders and the price paid by investors for shares, and (2) it
enables investor comparisons to other SPACs. Additionally, at the de-
SPAC transaction stage, dilution disclosure is important to SPAC
investors for a third reason: it helps investors evaluate the economics
of the de-SPAC transaction, which can inform their investing and voting
decisions. We discuss these three reasons in more detail as follows.
First, the difference in per share net tangible book value, as
adjusted, as compared to the $10 offering price, demonstrates to
investors how the typically lower-priced SPAC sponsor promote stake
affects these investors' claims on the tangible assets of the company.
Similarly, at the de-SPAC transaction stage, when certain other
transactions may become probable, the net tangible book value per
share, as adjusted, will convey to investors a better understanding of
the dilution that these other transactions may produce. Relatedly, net
tangible book value per share, as adjusted, provides information to
investors on dilution (in the sense of diminution in percentage
ownership) resulting from the SPAC sponsor promote, because an increase
in common shares in the denominator reduces net tangible book value per
share, as adjusted.
[[Page 14186]]
Second, investors may focus on the relative dilution in a
particular SPAC offering as compared to other SPAC offerings. For
example, some types of investors may be more focused on finding SPACs
with the highest net tangible book values per share compared to the $10
offering price and less focused on other qualitative factors about the
SPAC.
Third, as discussed above, SPAC shares can be redeemed at an agreed
upon price. Some commentators have emphasized that it is important for
investors to have information at the de-SPAC transaction stage that
enables investors to value these shares on a basis other than the
stated agreement price.\282\ The dilution information will help
investors to evaluate the economics of the business combination
transaction, assisting their investment and voting decision-making.
Investors' redemption decisions are also likely informed by the market
price of the SPAC shares, just as owners of stock options base their
exercise decisions, in part, on the value of the underlying stock.
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\282\ See, e.g., Klausner, Ohlrogge & Halbhuber, supra note 156
at 19 (2022) (``Disclosure of net cash per share at the time of a
SPAC's merger is necessary to allow shareholders to make an informed
decision as to whether to redeem their shares (for roughly $10 per
share) or to invest in a proposed merger. . . . One would expect the
amount of net cash invested in a target to be closely related to the
value of post-merger shares that SPAC shareholders receive in
exchange. Our research bears this relationship out empirically,
showing that the lower the net cash per share that a SPAC delivers,
the lower the post-merger share price will be.'' (Footnotes
omitted)). As discussed below in the section ``Net Cash Per Share
Disclosure Recommendations,'' we agree with comments that suggested
net cash per share information is important to investors, but we
believe the net tangible book value per share calculation, which we
discuss in more detail below, would substantially convey such
information.
---------------------------------------------------------------------------
While dilution information is important to SPAC investors for the
reasons discussed above, we acknowledge that SPAC investors may use
dilution information differently than investors in an operating
company. For example, with an operating company some ``value
investors'' may compare the offering price to net tangible book
value.\283\ For a SPAC, however, this specific comparison may be less
meaningful than with an operating company because SPACs typically have
limited assets at the time of the IPO and the offering price is
typically fixed at $10 per share. In addition, with an operating
company, some ``value investors'' may compare the debt of the issuer to
the net tangible book value.\284\ For a SPAC, however, this specific
comparison may be less meaningful than with an operating company,
because SPACs typically have limited debt at the time of the IPO and
have limited assets. Furthermore, with an operating company, some
investors may seek to determine a value for the issuer that takes into
account return on net tangible assets \285\ or by using a value
calculated by multiplying a market average price-to-net-tangible-book-
value-per-share ratio times the issuer's net tangible book value per
share. For a SPAC, however, these specific methods may be less
meaningful than with an operating company because of the limited assets
of the SPAC and limited, if any, net income at the time of the
IPO.\286\
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\283\ See, e.g., Richard Phalon, Forbes Greatest Investment
Stories 3 (2004) (``In his last years, Ben Graham,'' the co-author
with David Dodd of Security Analysis (1934), ``distilled six decades
of experience into ten criteria that would help the intelligent
investor pick value stocks . . . The Ten: . . . [4.] A stock price
down to two-thirds of tangible book value per share.'').
\284\ See, e.g., ibid. (``Ben Graham distilled six decades of
experience into ten criteria . . . [6.] Total debt less than
tangible book value.'').
\285\ See, e.g., Todd A. Finkle, Warren Buffett, Investor and
Entrepreneur, (2023) (``To assess a company's potential as an
investment vehicle,'' the investors discussed in the book ``are
looking for a set of specific ratios that indicate potential for
yielding high returns . . . Most of [these investors'] investments
are in companies that earn `more than 20 percent' of what [one of
the investors] calls the `net tangible equity capital or net
tangible assets' required to run their businesses . . . The formula
for returns on a company's net tangible assets is as follows: Return
on Net Tangible Assets = Net Income/Net Tangible Assets.'').
\286\ See, e.g., Mario Massari, Gianfranco Gianfrate & Laura
Zanetti, The Valuation of Financial Companies: Tools and Techniques,
Section 5.3.1 Market Multiples 126-127 (2014), David Frykman, Jakob
Tolleryd, The Financial Times Guide to Corporate Valuation 58-59
(2012) (book-value based multiples work ``best with a company with a
lot of tangible assets like factories, hardware commodities, mines,
etc. and that derives its revenue and cash flow from those assets.
Examples of such companies today are banks, real estate and
investment companies. . ..When calculating the P/BV ratio for a
company in distress, usually intangible assets are removed from the
book value since they most probably have no resale value. That ratio
is sometimes referred to as price/tangible book value . . . .'').
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We disagree with comments that suggested market practice of
disclosing dilution information obviates the need for the proposed
rules regarding dilution.\287\ The final rules will help standardize
dilution disclosures across registrants and provide a minimum
transparent floor for disclosure, even if market practices change. To
the extent potential future registrants may otherwise have provided
these disclosures based on market convention or other reasons, such
registrants are not likely to incur additional costs in preparing this
disclosure.
---------------------------------------------------------------------------
\287\ Letter from Loeb & Loeb. See supra note 245 and
accompanying text.
---------------------------------------------------------------------------
Some commenters suggested current dilution disclosure under Item
506 produces--and the proposed dilution disclosure would produce--
results that are flawed or are calculated using varying methods by
registrants.\288\ We acknowledge the concerns expressed by these
commenters that using a method of calculating Item 506's measure of net
tangible book value that substantively excludes the redeemable common
stock classified as temporary equity may result in dilution disclosure
that is less meaningful to an investor. For example, in a SPAC IPO,
this calculation could produce negative net tangible book value per
share despite the proceeds raised in the offering.
---------------------------------------------------------------------------
\288\ Letters from Ernst & Young, Vinson & Elkins, White & Case.
See supra notes 246, 247, 248, 249, and 250 and accompanying text.
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iii. Discussion and Examples Regarding the Calculation of Net Tangible
Book Value Per Share, As Adjusted, in SPAC IPOs (Item 1602(a)(4) and
(c)) and in De-SPAC Transactions (Item 1604(c))
a. Dilution Disclosure Under Items 1602(a)(4) and (c) and 1604(c)
Generally
After considering the comments, we have made changes (as described
above) in the final rules to clarify the calculation of net tangible
book value per share, as adjusted, as the measure of dilution in Items
1602(a)(4) and (c) and 1604(c). Without these revisions, there would be
a risk that some disclosure, even under the new rules, could present
results that are not meaningful to investors, such as negative net
tangible book value per share in some transactions. In addition, we
believe the changes in the final rules will be simpler for registrants
to follow and comply with because they provide clear steps regarding
how to determine dilution.
b. SPAC IPO Dilution Disclosure: Comparison of Item 1602(a)(4) and (c)
Final Item 1602(a)(4) and (c) are similar in that they require the
disclosure of net tangible book value per share, as adjusted, shown in
a tabular format. These items, however, have four key differences.
First, Item 1602(a)(4) tabular disclosure must be provided on the
prospectus cover, while Item 1602(c) disclosure must be provided in the
prospectus body. Second, unlike Item 1602(c), registrants providing the
Item 1602(a)(4) tabular disclosure do not need to show individual line-
items for each source of dilution used to determine net tangible book
value per share, as adjusted, in the table; for Item 1602(a)(4), they
may simply show net tangible book value per share, as adjusted, in the
table for the required quartiles. Third, Item 1602(c) also
[[Page 14187]]
contains the following requirement that Item 1602(a)(4) does not
contain--to describe, outside of the table, each material potential
source of future dilution following the registered offering by the
special purpose acquisition company, including sources not included in
the table with respect to the determination of net tangible book value
per share, as adjusted. Fourth, unlike Item 1602(a)(4), Item 1602(c)
requires the provision of a description of the model, methods,
assumptions, estimates, and parameters necessary to understand the
tabular disclosure.
With respect to the requirement in final Item 1602(c) to describe
each material potential source of future dilution (including those not
shown in the table), these material potential sources of future
dilution under final Item 1602(c) are to be disclosed outside of the
table. These sources may not be the same as transactions that must be
shown in the dilution table required by Item 1602(c). This non-tabular
disclosure of ``each material potential source of future dilution'' in
Item 1602(c) potentially may need to discuss a broader set of items
than ``material probable or consummated transactions,'' although this
would depend on a SPAC's specific facts and circumstances.
c. De-SPAC Dilution Disclosure Under Item 1604(c), Including Examples
of Adjustments
Dilution disclosure is also required in final Item 1604(c) in
connection with de-SPAC transactions. An objective of the dilution
disclosure required by Item 1604(c) is to depict the amount of net
assets that the SPAC will contribute to the post-combination entity, as
also noted by some commenters.\289\ In order to accomplish this
objective of depicting the amount of net assets that the SPAC will
contribute to the post-combination entity, final Item 1604(c) requires
three adjustments of the SPAC's net tangible book value per share as of
the most recent balance sheet filed. The first adjustment is for the
redemption of the SPAC's shares. This adjustment is important because
both the amount of net tangible assets in the numerator (for example,
cash or securities held through the trust account) and the number of
shares in the denominator will vary, depending on the redemption level.
The second adjustment is to give effect to material probable or
consummated transactions other than consummation of the de-SPAC
transaction itself. This adjustment is also important because these
transactions may affect the amount of net tangible assets in the
numerator and the number of shares in the denominator. Examples of
transactions that could be material probable or consummated
transactions include funding backstops, forward purchases, or PIPE
financings. We generally expect the term ``probable or consummated
transactions'' to be applied in the net tangible book value per share,
as adjusted, calculation, similar to its application in 17 CFR 210.11-
01 through 210.11-03 (``Article 11'' of Regulation S-X),\290\ which
requires pro forma financial information that incorporates the effects
of ``probable or consummated transactions.'' \291\ The third adjustment
is for inclusion of other material effects of the de-SPAC transaction
on the SPAC's net tangible book value per share but not the de-SPAC
transaction itself. A consummation of the de-SPAC transaction could
have material effects on the amount of net tangible book value that the
SPAC contributes to the post-combination entity that do not stem from
the types of transactions identified in the second adjustment discussed
above. Two examples of such other effects would be the issuance of
shares contingent on consummation of the de-SPAC transaction as
compensation to a SPAC sponsor and the expected incurrence of
transaction expenses to consummate the de-SPAC transaction.
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\289\ See accord Klausner, Ohlrogge & Halbhuber, supra note 156
at 21, n.10 (``A post-merger calculation, which we explain below is
an incorrect way to measure dilution, would include all shares
outstanding of the combined post-merger company, including shares
issued to shareholders of the target.''). In addition, inclusion of
these shares in the denominator is inconsistent with the numerator
calculation as it excludes the de-SPAC transaction itself.
\290\ While we expect ``probable or consummated transactions''
to generally be applied similarly between the net tangible book
value per share, as adjusted, calculation and Article 11 of
Regulation S-X, we observe that the contexts of each disclosure are
different and do not foreclose the possibility that different
treatments of a transaction may arise depending on the particular
circumstances.
\291\ See, e.g., 17 CFR 210.11-01(a)(8) (``Consummation of other
transactions has occurred or is probable for which disclosure of pro
forma financial information would be material to investors.'')
Notwithstanding this similarity with Article 11 of Regulation S-X, a
company should not title or describe ``net tangible book value per
share, as adjusted'' as a ``pro forma'' measure, which could mislead
investors since target company assets are not included in the
calculation.
---------------------------------------------------------------------------
Further, to ensure ``net tangible book value per share, as
adjusted'' depicts the amount of net assets that the SPAC will
contribute to the post-combination entity, calculation of the measure
excludes the effect of the consummation of the de-SPAC transaction
itself. Thus, target company assets should not be included in net
tangible book value per share, as adjusted and, in de-SPAC transactions
where the consideration paid for the target company is securities of
the SPAC, the SPAC should not include those securities paid as
consideration in the denominator of the net tangible book value per
share, as adjusted, calculation.\292\
---------------------------------------------------------------------------
\292\ See accord Klausner, Ohlrogge & Halbhuber, supra note 156
at 21, n.10 (``A post-merger calculation, which we explain below is
an incorrect way to measure dilution, would include all shares
outstanding of the combined post-merger company, including shares
issued to shareholders of the target.''). In addition, inclusion of
these shares in the denominator is inconsistent with the numerator
calculation as it excludes the de-SPAC transaction itself. Also, as
a result of our approach of excluding target company assets, we have
not adopted a commenter suggestion that would have included the
value of the target company. See letter from Vinson & Elkins, supra
note 268 and accompanying text (expressing the view that the most
meaningful information would be a per share value of the target
company plus net cash).
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iv. Discussion of Comments
a. Warrants
We are not adopting one commenter's recommendation that dilution
from warrants should be conveyed using the treasury share method.\293\
A treasury share method approach would involve calculating the
difference between the strike price of a warrant and the trading price
of the shares of the post-de-SPAC transaction combined company.\294\ At
the time of the dilution disclosure, those trading prices are not
known. The commenter suggested using ``various hypothetical share
increments above $10 per share,'' which is the typical SPAC IPO
offering price.\295\ We do not believe that conveying the dilutive
effect of warrants using that approach would be appropriate in
connection with the dilution disclosure requirements we are adopting,
because the hypothetical prices used in the calculation may not be
realistic. Further, we believe there is sufficient disclosure about the
terms of the warrants \296\ that would enable an investor to conduct
such analysis on the strike price of a warrant using assumptions of
trading prices of shares.
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\293\ Letter from Vinson & Elkins. See supra note 269 and
accompanying text.
\294\ See Kieso, Weygandt & Warfield (discussing the treasury
stock method), supra note 269.
\295\ Id.
\296\ See, e.g., final Item 1604(c), Item 1602(b)(3), Item
1603(a)(6), and Item 1604(b)(5) and (c).
---------------------------------------------------------------------------
The same commenter recommended that ``sensitivity analyses should
only be required for sources of dilution, such as warrants, where the
dilutive impact varies based on changing equity values or other
variables.'' \297\ As discussed above, final Item 1604(c) does not
include the proposed provisions related
[[Page 14188]]
to sensitivity analysis that concerned the commenter. For Item
1602(a)(4) and (c) and 1604(c), with respect to classification of
warrants on an unadjusted basis, as either a liability or equity,
registrants should follow applicable GAAP.\298\ This classification may
affect the calculation of net tangible book value per share, as
adjusted, because a liability-classified warrant would increase
liabilities thereby reducing net tangible book value, while an equity-
classified warrant would not do so, unless the effect of its exercise
is included in the calculation. Whether to adjust net tangible book
value per share to give effect to the exercise of a warrant is a
judgment based on facts and circumstances, including whether the effect
of the exercise would be consistent with the objective of the
disclosure--to depict the amount of net assets the SPAC will contribute
to the post-combination entity. When the exercise of the warrant is not
contingent on the consummation of the de-SPAC transaction, then
adjustment that includes the effect of the warrant's exercise in net
tangible book value per share, as adjusted, generally would not be
appropriate because those warrants will remain outstanding after the
de-SPAC transaction.
---------------------------------------------------------------------------
\297\ Letter from Vinson & Elkins.
\298\ See Financial Accounting Standards Board Accounting
Standards Codification 815-40 and International Financial Reporting
Standard IAS 32, Financial Instruments: Presentation.
---------------------------------------------------------------------------
As discussed above, the non-tabular disclosure of ``each material
potential source of future dilution'' under Item 1604(c) potentially
may need to discuss a broader set of items than ``material probable or
consummated transactions,'' although this would depend on a SPAC's
specific facts and circumstances. Thus, whether or not a registrant has
made an adjustment for warrants in net tangible book value per share,
as adjusted, the registrant may need to describe how the warrants are a
material potential source of future dilution.
b. Redemptions
We are not adopting a commenter's suggestion to include a
redemption scenario that would reflect ``100% of the public shares
(regardless of any provisions in the SPAC's governing documents that
might theoretically limit redemptions).'' \299\ While we acknowledge
that the suggested approach would permit an identical comparison across
SPACs at the 100% redemption level, as the commenter noted, we believe
that suggested approach would be less meaningful to investors than the
maximum redemption level approach we are adopting in the final rules,
because that suggested approach would not take into account the
governing documents and so would present a scenario that may not in
fact occur in practice. We agree that comparability is an important
goal as there may be certain investors who focus on the relative
dilution in a particular SPAC offering as compared to other SPAC
offerings. However, that comparability across SPACs should be balanced
with the need to disclose information tailored to the registrant. The
requirement in Item 1602(a)(4) and (c) of the final rules to provide a
maximum redemption level (instead of redemption based on 100% of
securities sold) and other redemption levels as a percentage of this
maximum will provide more issuer-specific information than absolute
25%, 50%, 75%, and 100% levels.\300\ While the rules we are adopting
will not necessarily provide comparability at identical percentages
across SPACs, we believe investors nevertheless may make valuable
comparisons across SPACs when looking at the dilution information
supplied at each of the prescribed intervals in the rule.\301\
---------------------------------------------------------------------------
\299\ Letter from Vinson & Elkins. See supra note 230 and
accompanying text.
\300\ Item 1604(c) allows more discretion over issuer-specific
dilution information by requiring a range of reasonably likely
redemption levels rather than the fixed percentages established by
the table in Item 1602(a)(4).
\301\ If the offering sizes across the SPACs being compared are
similar and the restrictions on maximum redemptions in the governing
documents of the SPACs being compared are similar, the percentages
presented in the table may be close to identical across the relevant
set of SPACs examined. Also, where the size of the offering is large
and the restriction on redemption is small by comparison, the
various 25, 50, and 75 percentages of maximum redemption may closely
approximate 25, 50, and 75 absolute percentages of securities sold
in the offering. For example, if the offering raises $1 billion and
the redemption restriction is $5 million, then the maximum
redemption level would be 99.5% ($995 million divided by $1 billion)
and 75% of the maximum redemption level would be 74.625% (.75 times
.995). See also Table 1 (Number of SPAC IPOs in the U.S. Securities
Market from 2012-2023) in section I (providing data, including total
capital raised per year and the number of offerings per year, from
which an average offering size per year may be calculated).
---------------------------------------------------------------------------
The same commenter expressed the view that current dilution
disclosure under Item 506 of Regulation S-K is unhelpful for IPO-stage
investors, as the output is driven by the maximum redemption scenario
which can differ based on (i) different provisions of the SPAC's
constituent documents and (ii) the interpretation of those constituent
documents.\302\ We believe the dilution information requirements
related to IPOs in Item 1602 that we are adopting will provide more
helpful information to investors than current market practice under
Item 506 with respect to SPACs, where, in the experience of the
Commission staff, some registrants have focused solely on a maximum
redemption scenario. Item 1602 as adopted will provide a greater range
of redemption scenario dilution information to investors. Further, the
Commission does not believe that different interpretations of a SPAC's
governing documents will make a SPAC unable to provide the required
dilution information at the maximum redemption level for two reasons.
First, a SPAC will know how to interpret its own governance documents.
In addition, in the experience of the Commission staff, many SPACs use
similar, well-established governing document provisions that set their
maximum redemption level at a level to avoid the SPAC being an issuer
of penny stock.\303\ We do not anticipate these standardized provisions
will involve difficult interpretive issues.
---------------------------------------------------------------------------
\302\ Letter from Vinson & Elkins. See supra note 230 and
accompanying text.
\303\ See Rule 419 (Offerings by blank check companies); Rule
3a51-1 (definition of ``penny stock'').
---------------------------------------------------------------------------
One commenter said that ``a SPAC may actually become subject to a
maximum redemption scenario that is lower than the quartile intervals
required to be presented by proposed Item 1602(a)(4).'' \304\ As
discussed above in the description of the dilution rules we proposed,
the redemption levels required by Item 1602(a)(4) are ``25% of maximum
redemption,'' ``50% of maximum redemption,'' and ``75% of maximum
redemption'' and thus are relative to the maximum redemption level and
are not an absolute percentage. To clarify for investors the percentage
used, registrants may add information to the table headers. For
example, where the maximum redemption is 97.5%, a registrant could add
``25% of Maximum Redemption (24.375%).'' For greater clarity, in final
Item 1602(a)(4), we have replaced the proposed terms ``at quartile
intervals up to the maximum redemption threshold'' with the terms ``at
quartile intervals based on percentages of the maximum redemption
threshold,'' because we believe registrants could mistakenly interpret
the proposed terms to require quartile intervals based on the total
number of shares issued in the offering for the three redemption levels
in the table other than the maximum redemption level.
---------------------------------------------------------------------------
\304\ Letter from White & Case.
---------------------------------------------------------------------------
One commenter recommended the Commission require dilution
disclosure
[[Page 14189]]
at a 90% redemption level.\305\ We do not believe it is necessary to
make such changes to the final rules. We believe the four redemption
thresholds proposed will give investors a reasonable picture of the
potential range of dilution outcomes pursuant to Item 1602(a)(4) and
(c). For Item 1604(c) in connection with de-SPAC transactions, we
believe providing a prescriptive level of 90% would be inconsistent
with the requirement to provide SPAC-specific reasonably likely
redemption levels.
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\305\ Letter from CII. See supra note 236 and accompanying text.
---------------------------------------------------------------------------
c. Assumptions
Commenters raised concerns that dilution disclosure would be
characterized by uncertainty, be based on hypothetical assumptions, or
depend on unknown variables.\306\ As discussed above, we have made
changes to final Items 1602(a)(4) and (c) and 1604(c) to clarify how
registrants should calculate dilution. Where registrants are making
adjustments consistent with ``net tangible book value per share, as
adjusted'' or are making assumptions in connection with other dilution
disclosures required under the final rules, we believe registrants
should be able to provide the required dilution information based on
reasonable assumptions. We do not believe that dilution disclosure
would mislead investors, as suggested by one commenter, or that such
assumptions would need to be presented with lengthy and detailed
caveats.\307\ On the contrary, we believe investors will understand
that assumptions being made in connection with required dilution
disclosure do not mean the dilution has occurred or is certain to
occur. The final rules require a description of the assumptions
necessary to understand the tabular disclosure,\308\ and, in providing
that disclosure, registrants may highlight that these are assumptions
in order to make that point clearer for investors. While we do not
believe that the assumptions necessarily need lengthy and detailed
caveats,\309\ if there are facts and circumstances in which a
registrant believes a lengthy or detailed discussion is needed, we
believe that would be appropriate to allow investors to understand the
accompanying tabular disclosure.
---------------------------------------------------------------------------
\306\ Letters from Freshfields, Vinson & Elkins, White & Case.
See supra notes 237, 238, and 240 and accompanying text.
\307\ Letter from White & Case. See supra note 238 and
accompanying text.
\308\ See final Items 1602(c) and 1604(c)(2).
\309\ In this respect, as noted above, we disagree with the
comment that ``lengthy and detailed caveats'' would be ``need[ed].''
See letter from White & Case, supra note 238 and accompanying text.
---------------------------------------------------------------------------
d. Net Cash Per Share Disclosure
We are not adding an explicit net cash per share disclosure
requirement as several commenters recommended that we require.\310\ One
group of commenters said net cash per share disclosure should be
provided on the cover page of the registration statement.\311\ These
commenters expressed the view that the dilution concept included in the
proposal reflects a concept of dilution that is focused on ``ownership
dilution,'' not the kind of dilution (and dissipation of cash) that
reduces the net cash underlying a SPAC share.\312\
---------------------------------------------------------------------------
\310\ Letters from CII; Michael Klausner, Michael Ohlrogge, and
Harald Halbhuber; NASAA; Vinson & Elkins. See supra notes 254
through 264 and accompanying text.
\311\ Letter from Michael Klausner, Michael Ohlrogge, and Harald
Halbhuber. See supra note 261 and accompanying text.
\312\ Letter from Michael Klausner, Michael Ohlrogge, and Harald
Halbhuber. See supra note 262 and accompanying text. These
commenters also provided a formula for the calculation of net cash
per share: (a) Total cash (consisting of the sum of cash from SPAC
public shareholders plus cash from PIPEs or forward purchase
agreements minus cash expenses minus the value of warrants minus the
value of other equity derivatives), divided by (b) Total shares
(consisting of public shares plus founder shares plus PIPE or
forward purchase agreement shares plus other shares plus shares
issuable under rights). See id.
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We do not agree with that group of commenters that the proposal was
limited to dilution focused solely on reduction in the percentage
ownership of a shareholder out of total shares deemed to be issued and
outstanding. We agree this form of dilution described by commenters is
an element of the denominator in the net tangible book value per share,
as adjusted, calculation, but the numerator of the net tangible book
value per share, as adjusted, calculation will capture and convey other
information--such as existing cash (prior to the relevant transaction,
e.g., IPO or de-SPAC transaction), cash raised in securities issuances,
and cash paid out to holders of redeemable securities--of the same type
that these commenters focus on in recommending disclosure of net cash
per share.\313\
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\313\ When calculating return on net tangible book value per
share, some investors may exclude non-operating assets, such as cash
among others, in order limit the measure to those returns on net
tangible book value per share that are sustainable. See, e.g., Gary
R. Trugman, Understanding Business Valuation (2018) (recommending an
analyst calculating return on net tangible assets ``remove any items
on the balance sheet that may be attributable to non-operating
assets or liabilities.''). However, for the avoidance of doubt on
the part of registrants, this is not appropriate for a registrant
with respect to the calculation on net tangible book value per
share, as adjusted, in connection with dilution disclosure, which
should include non-operating tangible assets such as cash among
others.
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Because we believe substantially all the information that would be
conveyed to an investor by a net cash per share measure will be
conveyed by the required ``net tangible book value per share, as
adjusted,'' we are not adding an explicit net cash per share disclosure
requirement.\314\ But shareholders who seek to calculate ``net cash per
share'' at different levels of redemption should have the information
to perform this calculation based on the disclosure provided in
connection with net tangible book value per share, as adjusted.
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\314\ The calculations of net tangible book value per share, as
adjusted, in final Item 1602(a)(4) and (c) and 1604(c), take into
account similar elements as the cash component of net cash per
share, such as the inclusion of cash held by the SPAC and securities
purchased by the SPAC, as well as the removal of expenses and
warrant liabilities. Net cash per share has aspects that make it
less useful for investors than net tangible book value per share, as
adjusted. First, with respect to the net cash per share calculation,
``net cash'' in the numerator is reduced by the value of the equity-
classified awards, which would be inconsistent with GAAP. We do not
believe this is appropriate and have not taken this approach with
respect to net tangible book value per share, as adjusted (as
discussed above). Second, the net cash per share calculation
includes all shares issuable by rights, regardless of any conditions
on such issuance, whereas net tangible book value per share, as
adjusted, would only make an adjustment to include such shares where
a criterion for making an adjustment is met (as discussed above).
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e. Cover Page
Regarding comments that recommended that de-SPAC transaction
dilution information be presented on the prospectus cover page,\315\
the Commission believes it is sufficient to require the tabular
disclosure in the prospectus body in Item 1604(c).\316\ At the de-SPAC
stage, there will be more registrant-specific information included in
the dilution disclosure, as the registrant will have more information
about potential causes of dilution (such as expected redemption levels
and financings that will accompany the de-SPAC transaction). Due to
this, these disclosures may not be as easily presentable in a
straightforward way on the cover page. Item 1604(a)(3), however, will
require the registrant to state on the prospectus cover page whether
SPAC sponsor compensation and ownership may result in a material
dilution of the equity interests of non-redeeming shareholders who hold
the securities until the consummation of the
[[Page 14190]]
de-SPAC transaction and to provide a cross-reference highlighted by
prominent type to the location of related disclosures in the
prospectus.
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\315\ Letter from Michael Klausner, Michael Ohlrogge, and Harald
Halbhuber.
\316\ As discussed above, in combined proxy statements and
registration statements in connection with de-SPAC transactions, the
cover page of the prospectus may be further back in the document.
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f. Interest Per Share Disclosure
We disagree in part with the commenter who suggested that the final
sentence of proposed Item 1604(c)(1) required a determination of the
enterprise valuation that will result in a shareholder's ``interest per
share'' calculated by reference to a pro forma closing date balance
sheet being at least equal to the $10 price per share paid in the
IPO.\317\ The use of the term ``valuation'' in Item 1604(c)(1) would
not require, as suggested by the commenter, an ``enterprise valuation''
(which typically values the sum of the equity and debt of a company
minus cash).\318\ We agree, however, with the general point suggested
by the commenter that a registrant's preparation of Item 1604(c)(1)
disclosure could be assisted by reference to, among other potential
sources, a pro forma balance sheet. But we believe this would be the
case only where such pro forma balance sheet contains the number of
total shares (calculated consistent with Item 1604(c)), because the
amount of shares is a critical component of the calculation required to
provide disclosure under this item. The pro forma balance sheet may not
be capable of serving as the sole source of this information, because
it may show total shares only for certain redemption levels, such as
zero redemptions and maximum redemptions; hence, it may not provide the
total share number ``with respect to each redemption level'' as
required by Item 1604(c)(1).
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\317\ Letter from Loeb & Loeb, supra notes 265, 266, and 267 and
accompanying text. See also proposed Item 1604(c)(1) (``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.'').
\318\ See, e.g., Jeffrey C. Hooke, Security Analysis on Wall
Street: A Comprehensive Guide to Today's Valuation Methods 234
(1998) (showing key valuation data of publicly traded stocks using
enterprise value defined as (1) market value of equity, plus (2)
outstanding debt, minus (3) cash on hand).
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To further clarify, we provide the following basic example of
disclosure under Item 1604(c)(1). A hypothetical SPAC issued shares in
an IPO at $10 per share. After giving effect to the IPO, the issued and
outstanding shares of the SPAC are 20,000,000, for a total market
capitalization of $200,000,000. In connection with the de-SPAC
transaction, the SPAC issues 65,000,000 shares to the target company's
shareholders and issues 15,000,000 shares in a private placement for a
total of 100,000,000 outstanding shares. Two (out of several)
redemption levels the SPAC has chosen to use for the disclosure
required by Item 1604(c) are zero redemptions and 5,000,000 shares
redeemed (5% of the total shares). Where redemptions are zero, for
purposes of Item 1604(c)(1), the SPAC would have 100,000,000 total
shares after giving effect to the de-SPAC transaction and related
financing. Where redemptions are zero, the company valuation at or
above which the non-redeeming shareholders' interest per share would be
at least the IPO price per share ($10 in this example) would be
calculated as: $10 (per share IPO price) times 100,000,000 shares, or
$1,000,000,000. Where 5,000,000 shares are redeemed (5% of the total
shares), the SPAC would have 95,000,000 total shares after giving
effect to the de-SPAC transaction and related financing. At this
redemption level, the company valuation at or above which the non-
redeeming shareholders' interest per share would be at least the IPO
price per share ($10 in this example) would be calculated as: $10 (per
share IPO price) times 95,000,000 shares, or $950,000,000. For the
remaining redemption levels, the registrant would provide the required
disclosure in a similar manner.
With respect to the commenter's concern that some investors may
misunderstand disclosure under the item and view it as a guarantee that
the stock will not trade down in the aftermarket,\319\ we do not
believe investors are likely to misunderstand disclosure under Item
1604(c)(1) in that manner. As discussed above, we believe it will be
clear to investors that the various valuation figures provided at each
of the redemption levels are not guarantees about movements in or
levels of future market trading prices of the post-de-SPAC transaction
combined company. In addition, to the extent a registrant has a concern
about investor confusion regarding the disclosure required under Item
1604(c)(1), such a registrant could provide additional disclosure
discussing this issue, such as, for example, explicitly stating that
the required disclosure is not a guarantee that the trading price of
the combined company will not be below the IPO price nor is the
disclosure a guarantee the company valuation will attain one of the
stated levels of valuation.
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\319\ Letter from Loeb & Loeb. See supra note 267 and
accompanying text.
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Another commenter recommended that the Commission consider
requiring that intermediaries provide information about ``the sponsor,
actual and potential conflicts of interest, [and] how much a non-
redeeming SPAC investor's interest will be diluted'' in a separate
``Key Risks and Conflicts form'' that is detached from the prospectus,
so that the disclosure receives more investor attention and focus.\320\
We believe that the disclosure we are requiring in this release will
receive an appropriate level of investor attention and focus and that
no further amendments are needed in this regard.
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\320\ Letter from CFA Institute.
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g. Lock-Up and Earnout Provisions
One commenter said that ``any lock-up periods or earnout provisions
for sponsors or underwriters would be of significant interest to
investors and should be required if part of the SPAC offering.'' \321\
We are not making any changes in response to this comment because the
final rules already will require such disclosure. Where there are
earnout provisions for SPAC sponsors, the registrant would need to
disclose these pursuant to Items 1602 and 1604 regarding compensation
of SPAC sponsors and ownership of SPAC securities by SPAC sponsors.
Also, where there are lock-ups for SPAC sponsors, the registrant would
need to disclose these pursuant to Item 1603(a)(9) regarding 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 SPAC. In connection with
underwriters, plan of distribution information is required by Forms S-1
and F-1.\322\
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\321\ Letter from NASAA.
\322\ See Item 8 of Form S-1 (incorporating 17 CFR 229.508 (Item
508 of Regulation S-K) (Plan of Distribution)) and Item 4 of Form F-
1 (requiring the furnishing of information pursuant to Part 1, Item
9.B (Plan of Distribution) of Form 20-F).
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E. Prospectus Cover Page and Prospectus Summary Disclosure
1. Proposed Rules
i. Proposed Prospectus Cover Page Disclosure
For registered offerings (including IPOs) by SPACs other than de-
SPAC transactions, the Commission proposed Item 1602(a) to require
information on the prospectus outside front cover page in plain English
about, among other things: (1) the time frame for the SPAC to
consummate a de-SPAC transaction, (2) redemptions, (3) SPAC sponsor
compensation, (4) dilution (including simplified tabular disclosure),
and (5) conflicts of interest.
[[Page 14191]]
For de-SPAC transactions, the Commission proposed Item 1604(a) to
require that SPACs include information on the prospectus outside front
cover page in plain English about, among other things: (1) the fairness
of the de-SPAC transaction, (2) material financing transactions, (3)
SPAC sponsor compensation and dilution, and (4) conflicts of interest.
ii. Proposed Prospectus Summary Disclosure
For registered offerings (including IPOs) by SPACs other than de-
SPAC transactions, the Commission proposed Item 1602(b) to require in
the prospectus summary a brief description in plain English about,
among other things: (1) how the SPAC 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 SPAC
intends to consummate a de-SPAC transaction, (5) any plans to seek
additional financings and how the terms of additional financings may
impact unaffiliated security holders, (6) in a tabular format,
compensation of 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.
For de-SPAC transactions, the Commission proposed Item 1604(b) to
require in the prospectus summary a brief description in plain English
about, among other things: (1) the background and material terms of the
de-SPAC transaction, (2) whether the SPAC 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 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 SPAC and the potential impact of redemptions on the
value of the securities owned by non-redeeming shareholders.
2. Comments
Several commenters generally supported the proposed prospectus
cover page and prospectus summary disclosure requirements.\323\ One of
these commenters expressed the view that these requirements would
assist shareholders in understanding: (a) the compensation structures
for SPAC sponsors, (b) conflicts in the relationship between SPAC
sponsor, underwriter, and shareholder, (c) potential sources of
dilution, and (d) whether or not any fairness opinions were obtained
from third parties in connection with the de-SPAC transaction.\324\ The
commenter suggested this understanding would better equip investors to
evaluate the wisdom of placing their money at risk in a SPAC, would
closely align the information provided in SPAC IPOs with the
information provided to investors in traditional IPOs, and would help
to narrow the information asymmetries in the SPAC IPO model.
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\323\ Letters from ABA (expressing support for proposed Items
1602 and 1604 but also expressing concern regarding the length and
density of prospectus cover page and determining fairness in de-SPAC
transactions), Better Markets, CFA Institute.
\324\ Letter from Better Markets.
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Several commenters suggested the proposed prospectus cover page
requirements would produce cover page disclosure that will be dense and
longer than one page.\325\
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\325\ See, e.g., letters from ABA, Loeb & Loeb, Ropes & Gray,
Vinson & Elkins. See also 17 CFR 229.501 (``Item 501'' of Regulation
S-K) (one-page limit for prospectus cover page).
---------------------------------------------------------------------------
One commenter said ``requiring disclosure to be included at least
three times in the document (e.g., on the cover page, in the summary,
and in the body of the document where the same information often
appears multiple times) seems excessive and potentially distracting to
investors.'' \326\ This commenter also expressed the view that the
Commission should not require disclosure of `` `any plans to seek
additional financing and how such additional financing might impact
shareholders' in IPO registration statements.'' \327\ The commenter
said that, at the time of the IPO, this disclosure would be ``purely
hypothetical,'' and would lead to ``boilerplate'' disclosures that
would ``distract'' investors from other more useful and material
information.\328\ The commenter, however, said that, ``if the SPAC
already has commitments for additional financing at the time of the IPO
(e.g., a forward purchase agreement or a backstop commitment), the
material terms of such financings and potential impact on shareholders
or on the de-SPAC transaction should be disclosed.'' \329\
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\326\ Letter from Vinson & Elkins.
\327\ Id.
\328\ Id.
\329\ Id.
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3. Final Rules
After considering the comments received, we are adopting Items
1602(a) and (b) and 1604(a) and (b) as proposed with certain
modifications discussed below.\330\
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\330\ In certain rules, a cover page requirement may be similar
to but not identical with a prospectus summary requirement. We note
that the cover page disclosure for Item 1602(a)(3) (exclusive of
securities issuance disclosure) is not required to contain the same
level of detail as required in the tabular disclosure in the
prospectus summary under Item 1603(b)(6), which should contain line
items for each compensation item. Disclosure under Item 1603(a)(6)
should provide a similar level of detail as under Item 1602(b)(6),
except in non-tabular format.
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We agree with the commenter who expressed the view that investors
will benefit from these provisions, including by better understanding
factors including compensation, conflicts of interest, and
dilution.\331\ Under the final rules, the key disclosures concerning
SPAC offerings and de-SPAC transactions will be highlighted on the
cover page and in the prospectus summary in an easily readable and
understandable form. The disclosure under these items also will enable
investors to better parse complex aspects of SPAC transactions. As a
result, we believe investors will be
[[Page 14192]]
better able to identify and assess important aspects of the
transactions that may affect their investment and voting decisions.
Although in current market practice, many SPACs already disclose
similar information on prospectus cover pages,\332\ the final rules we
are adopting will standardize this information across all registration
statements filed by SPACs for IPOs and for de-SPAC transactions. In
addition, investors may benefit from comparing this information not
only across other SPAC transactions but by comparing it to investments
contemplated in securities of non-SPACs where those registrants provide
similar disclosure under current market practice.
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\331\ Letter from Better Markets. See supra note 324 and
accompanying text.
\332\ 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.
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Several commenters suggested the proposed prospectus cover page
requirements would produce cover page disclosure that will be dense and
longer than one page.\333\ While we recognize that the new cover page
requirements will increase the amount of information included on the
prospectus outside front cover page, we believe these requirements will
be a limited incremental increase compared to current prospectus
outside front cover page disclosure and we do not believe that this
incremental increase will undermine the overall clarity of the cover
page disclosure. Also, we continue to believe outside front cover page
prominence of the required information serves the key purpose of
alerting investors to the importance of the information. We believe
registrants will be able to fit the required dilution information in
tabular form on the outside front cover page just as they currently fit
required information on the securities offering price, underwriting
fees, and net proceeds in tabular form on the outside front cover page.
Based on Commission staff's experience with current outside front cover
page disclosure and staff's consideration of how outside front cover
page disclosure will appear under the final rules, we believe there
will be space to add this additional table and other new disclosure
required by the final rules without making the outside front cover page
cramped or difficult to read. We also do not believe these requirements
will compel registrants to abandon non-required elements that often
appear on the outside front cover page such as company artwork and
logos, use of large fonts for service provider names, and aesthetic use
of empty space.
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\333\ See, e.g., letters from ABA, Loeb & Loeb, Ropes & Gray,
Vinson & Elkins. See also Item 501 of Regulation S-K (one-page limit
for prospectus cover page).
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One commenter on the proposal said requiring cover page, prospectus
summary, and body of the document disclosures seems excessive and
potentially distracting to investors.\334\ We disagree and believe the
enhanced disclosures in each of the three locations will serve a
valuable purpose for investors.\335\ The cover page provides the first
alerts to investors about information that is important for their
investment and voting decisions. In the prospectus summary, we believe
the additional disclosures will reduce information processing costs,
including for less financially sophisticated investors or investors
with limited time to analyze the prospectus, by providing information
in plain English about important SPAC features in a concise format.
Finally, the prospectus body contains the detailed information needed
for more comprehensive investor understanding.
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\334\ Letter from Vinson & Elkins. See supra note 326 and
accompanying text.
\335\ Staff experience in reviewing current SPAC filings is that
some SPACs repeat disclosure numerous times in current registration
statements even where not required by current rules; we infer from
this market practice that some issuers may believe such repetition
is helpful to investors in understanding important facts that may
not be well understood through an isolated reference. The final
rules we are adopting are not inconsistent with that current market
practice.
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One commenter expressed the view that prospectus summary disclosure
related to additional financings (other than committed financings) at
the IPO stage would be hypothetical and boilerplate and would distract
investors from more useful information.\336\ We agree that, if
financing agreements have been entered into, then they must be
disclosed. To this end, Item 1602(b)(5) requires disclosure of these
agreements and how their terms may impact unaffiliated security
holders. However, under final Item 1602(b)(5), as proposed, even if no
such agreements have been entered at the time that Item 1602(b)(5) is
applicable, registrants are required to generally describe any plans to
seek additional financings and how the terms of additional financings
may affect unaffiliated security holders even if the actual, specific
terms of any financing agreements (should they ultimately be entered)
may not be known.\337\ The disclosure of these plans will alert
investors to the potential aspects of the overall de-SPAC transaction
structure, including those that impact future dilution, which will help
investors make informed investment and voting decisions. As with
dilution disclosure in SPAC IPOs that we discuss in section II.D.3
above (where commenters raised similar concerns), even where a
registrant has not committed to a transaction or will not have
consummated a transaction, registrants should be able to use reasonable
assumptions about potential financing needs to provide the required
disclosure. We disagree with the view that this prospectus summary
information would be a distraction to investors from other important
information. On the contrary, as we discuss generally above, we believe
the prospectus summary disclosure regarding additional financing plans
will highlight key issues for investors and the summary format will
help them process the information, particularly when comparing
potential investments in different SPACs. We do not believe investors
will misconstrue this information to mean the additional financing is
certain to occur. Registrants may highlight this lack of certainty in
their disclosure if they have concerns their investors will misconstrue
the information.\338\ We do not expect the additional financing
prospectus summary disclosures will be boilerplate, as the additional
financing disclosure will need to be tailored to the plans of the SPAC.
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\336\ Letter from Vinson & Elkins. See supra notes 328 and 329
and accompanying text.
\337\ Final Item 1602(b) provides that the disclosure required
thereunder in the prospectus summary must be in the form of a
``brief description.'' We expect that the level of detail of the
disclosure under final Item 1602(b)(5) of ``[a]ny plans to seek
additional financings'' will reflect the level of development of
such plans. A registrant is only required to disclose plans that are
known to the registrant to be ``plans to seek additional
financings.''
\338\ In connection with similar issues in the context of Item
1602(c) disclosure of ``each material potential source of future
dilution,'' we discuss above in section II.D.3.iii that registrants
may warn investors that the disclosure about such potential sources
should not be misconstrued as indications certain events are certain
to occur in the future.
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In final Item 1602(a)(5), we replaced the proposed term ``SPAC
sponsor or its affiliates or promoters and purchasers in the offering''
with the term ``SPAC sponsor, its affiliates, or promoters; and
purchasers in the offering.'' We made the same changes to final Item
1602(b)(7).\339\ Both the changes to Item 1602(a)(5) and (b)(7) were
made to clarify that the interests of each of the listed persons should
be assessed
[[Page 14193]]
against the interests of ``purchasers in the offering.'' \340\
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\339\ In addition, in final Items 1602(b)(7) and 1604(a)(4) and
(b)(3) we moved ``material'' after ``actual or potential'' for
consistency throughout new subpart 1600.
\340\ In addition, in final Item 1602(b)(5) we replaced the
proposed term ``impact'' with the term ``affect'' for clarity.
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In final Item 1604(a)(1) and (b)(2), we made revisions to reflect
changes we are making to Items 1606 and 1607 that are discussed in
section II.G.\341\
---------------------------------------------------------------------------
\341\ See final Item 1604(a)(1) and (b)(2).
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In final Item 1604(a)(4), following the phrase ``State whether, in
connection with the de-SPAC transaction, there may be any actual or
potential material conflict of interest,'' we added the phrase
``including any material conflict of interest that may arise 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 a SPAC sponsor,
officers, and directors or the manner in which a SPAC sponsor
compensates its officers and directors.'' This change makes Item
1604(a)(4) required cover page disclosure congruent with Item 1603(b)
(non-cover page) disclosure. In de-SPAC transactions, the cover page
disclosure under Item 1604(a)(4) should provide a cross reference to,
among other things, the description of these actual or potential
material conflicts of interest under Item 1603(b).
We also made a number of other changes to the final rules related
to prospectus cover page and prospectus summary disclosure that are
discussed above in other sections of this release.\342\
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\342\ See (a) section II.B (Sponsors) discussion of final Items
1602(a)(3) and (b)(6) and 1604(a)(3) and (b)(4) and (5); (b) section
II.C (Conflicts of Interest) discussion of final Items 1602(a)(5),
1604(a)(4) and (b)(3), and 1602(b)(7); and (c) section II.D
(Dilution) discussion of final Items 1602(a)(4) and 1604(b)(4) and
(5). In addition to the changes to final Item 1604(b)(3) discussed
in other sections of this release, we have moved the language ``in
connection with the de-SPAC transaction'' from the end of the item
to the beginning of the item and made punctuation and paragraph
numbering changes to clarify the comparison of interests must be
between each of ``the SPAC sponsor, SPAC officers, SPAC directors,
SPAC affiliates or promoters, target company officers, or target
company directors'' and ``unaffiliated security holders of the
SPAC.''
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F. De-SPAC Transactions: Background, Reasons, Terms, and Effects
1. Proposed Item 1605
The Commission proposed Item 1605 of Regulation S-K to 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;
A brief description of any related financing transaction,
including any payments from the SPAC 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;
Disclosure regarding the accounting treatment and the
Federal income tax consequences of the de-SPAC transaction, if
material;
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; and
A statement whether or not security holders are entitled
to any redemption or appraisal rights, a summary of such redemption or
appraisal rights, and, if there are no redemption or appraisal rights
available for security holders who object to the de-SPAC transaction, a
brief outline of any other rights that may be available to security
holders.
2. Comments: Item 1605
One commenter stated that proposed Item 1605 would provide useful
information to investors.\343\ Some commenters, however, opposed
proposed Item 1605, stating it would be duplicative of existing
disclosure requirements.\344\ One of these commenters said that, in
lieu of adopting Item 1605, they ``recommend a more uniform methodology
to address conflicts of interest arising from business combinations in
general by revising Items 1004(a)(2) and 1013(b) of Regulation M-A and
Item 403 of Regulation S-K to incorporate the provisions of proposed
Item 1605 taking into consideration that many issues addressed in
proposed Item 1605 may arise and be applicable to business combinations
that are not effected by a SPAC or a blind pool.'' \345\
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\343\ Letter from Committee on Capital Markets Regulation.
\344\ Letters from ABA (``To eliminate duplication, we recommend
against adoption of Item 1605''), Vinson & Elkins (``The SEC should
not adopt a new disclosure requirement 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'').
\345\ Letter from ABA (specifically suggesting ``revising Items
1004(a)(2) and 1013(b) of Regulation M-A and Item 403 of Regulation
S-K to incorporate the provisions of proposed Item 1605 taking into
consideration that many issues addressed in proposed Item 1605 may
arise and be applicable to business combinations that are not
effected by a SPAC or a blind pool'').
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One commenter recommended that we revise proposed Item 1605(b)(2),
with respect to descriptions of related financings.\346\ The commenter
said, ``PIPE investors often buy into SPAC deals on discounted terms
compared to the terms offered to public shareholders in a SPAC.'' The
commenter said ``the discount that PIPE investors receive is in the
form of additional derivative securities, guarantees, or other complex
financial arrangements and it is difficult for public investors to know
the effective price per share at which PIPE investors are buying.''
\347\ The commenter recommended that we revise proposed Item 1605(b)(2)
to state: ``A brief description of related financing transactions,
including the effective price per share at which investors are buying,
after accounting for the value of any securities or guarantees they
receive from the SPAC, SPAC sponsor or affiliate of either in
connection with the financing transaction.'' \348\
---------------------------------------------------------------------------
\346\ Letter from Michael Klausner and Michael Ohlrogge.
\347\ Id. (``For instance, if a PIPE investor buys a share for
$10, but also receives a free warrant worth $1.50, then the PIPE
investor is in effect paying $8.50 for the share.'').
\348\ Id.
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3. Final Item 1605
After considering the comments received, we are adopting Item 1605
as proposed, with several modifications discussed below.
By providing a specialized disclosure rule tailored to de-SPAC
transactions, the Item 1605 disclosure requirements will provide
investors with information necessary to evaluate the reasons for a de-
SPAC transaction and for choosing a particular structure and financing
for the transaction. These requirements will also help promote
consistent disclosure, allowing for greater comparability of these
disclosures across de-SPAC transactions.
Given the unique qualities of de-SPAC transactions, we believe
registrants will benefit from the centralization of the SPAC-related
requirements in the Item 1600 series of Regulation S-K. If there are
facts and circumstances that may result in required disclosure under a
current rule being the same as under any of the rules we are adopting,
registrants are not
[[Page 14194]]
required to repeat disclosures, except where the applicable rule may so
require (such as by calling for the disclosure in a specific location
such as the prospectus cover page or prospectus summary). We are not
adopting the recommendation that we adopt a more uniform methodology to
address conflicts of interest arising from business combinations in
general,\349\ because it is beyond the scope of our proposals
concerning conflicts of interest and Item 1605, both of which are
focused on SPACs.
---------------------------------------------------------------------------
\349\ Letter from ABA. See supra note 345 and accompanying text.
---------------------------------------------------------------------------
We are not revising Item 1605(b)(2) to provide more specificity on
the types of securities or guarantees received from the SPAC, as
suggested by one commenter. We are adopting Item 1605(b)(2) as proposed
to require the disclosure of material terms of the de-SPAC transaction,
including a brief description of any related financing transaction,
including any payments from the SPAC sponsor to investors in connection
with the financing transaction. In most, if not all, cases, Item
1605(b)(2) will require the registrant to disclose the price paid by
PIPE investors and other benefits such as derivative securities that
are acquired by PIPE purchasers (in addition to SPAC shares), because
these are likely to be material terms. One commenter recommended we
require ``A brief description of related financing transactions,
including the effective price per share at which investors are buying,
after accounting for the value of any securities or guarantees they
receive from the SPAC, SPAC sponsor or affiliate of either in
connection with the financing transaction.'' \350\ We are not revising
the item to adopt this recommendation because we believe it would be
difficult for registrants to calculate accurately or would result in
inconsistent methodologies among registrants, or both, with respect to
how registrants would convert various features, rights, or contractual
provisions attendant to related financing transactions into amounts
used to adjust actual transaction values to achieve the suggested
effective price; we believe the resulting disclosure characterized by
these issues could mislead investors or undermine the ability of
investors to make comparisons across SPACs or both.
---------------------------------------------------------------------------
\350\ Letter from Michael Klausner and Michael Ohlrogge. See
supra notes 347 and 348 and accompanying text.
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We have made a number of modifications in final Item 1605 as
compared to the proposal. First, in Item 1605(a), we have replaced the
term ``Furnish'' with the term ``Provide'' in the sentence ``Furnish a
summary of the background of the de-SPAC transaction'' to make it clear
that we intend this disclosure to be filed. This change will also make
Item 1605(a) consistent with the other items in Item 1605 in this
respect.
Second, in Item 1605(b)(5) and (6), we have deleted the phrase ``,
if material'' to align the phrasing with the existing disclosure
requirements in Item 4 of Form S-4 \351\ as it was our intent to
capture the same information at the same threshold and we did not
intend for the phrasing to imply that the accounting treatment or
Federal income tax consequences may not be material disclosure in a
business combination transaction.\352\
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\351\ See disclosure requirements in (a)(5) and (a)(6) under
Item 4 of Form S-4.
\352\ In addition, in final Item 1605(b)(4) we deleted the
phrase ``after the completion of the de-SPAC transaction'' for
clarity and to avoid redundancy with the immediately preceding words
``as a result of the de-SPAC transaction.''
---------------------------------------------------------------------------
Third, as discussed above in section II.C of this release regarding
conflicts of interest, we are revising Item 1605(d) to address
interests of target company officers and directors. Thus, in final Item
1605(d), we have added the phrase ``; or held by the target company's
officers or directors that consist of any interest in, or affiliation
with, the SPAC sponsor or the special purpose acquisition company.''
Fourth, in final Item 1605(d), we have revised the phrase ``held by
the SPAC sponsor and the special purpose acquisition company's officers
and directors'' by replacing the term ``and'' with ``or'' in each
instance, because the requirements of Item 1605(d) should apply
disjunctively where any of the named persons has a material interest in
the de-SPAC transaction or any related financing (and not be limited to
only those situations where every named person has such an interest).
Fifth, we revised Item 1605(b)(3), (4), and (6) to clarify that
these requirements will require disclosure with respect to the SPAC,
target company, and/or security holders of the SPAC or target company.
These changes eliminate potential ambiguity that could have caused
registrants to inappropriately interpret the items as not including
disclosure with respect to those persons in connection with de-SPAC
transactions. Accordingly, as adopted:
final Item 1605(b)(3) requires: ``A reasonably detailed
discussion of the reasons of the SPAC and the target company for
engaging in the de-SPAC transaction and reasons of the SPAC for the
structure and timing of the de-SPAC transaction and any related
financing transaction;''
final Item 1605(b)(4) requires: ``An explanation of any
material differences in the rights of SPAC and target company security
holders as compared with security holders of the combined company as a
result of the de-SPAC transaction;'' and
final Item 1605(b)(6) requires: ``The Federal income tax
consequences of the de-SPAC transaction to the SPAC, the target
company, and their respective security holders.''
G. Board Determination About the De-SPAC Transaction; Reports,
Opinions, Appraisals, and Negotiations
1. Proposed Item 1606(a)
The Commission proposed Item 1606(a) to address concerns regarding
potential conflicts of interest and misaligned incentives in connection
with the SPAC's decision to proceed with a particular de-SPAC
transaction and to assist investors in assessing the fairness of a
particular de-SPAC transaction to unaffiliated investors. Specifically,
the Commission proposed 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 transactions 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.
2. Comments: Item 1606(a)
Commenters expressed differing views on proposed Item 1606(a). Some
commenters supported the proposed requirement.\353\
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\353\ Letters from Better Markets; Marcie Frost, Chief Executive
Officer, California Public Employees' Retirement System (June 9,
2022) (``CalPERS''); Committee on Capital Markets Regulation;
Consumer Federation; Professor Holger Spamann (June 12, 2022)
(``Holger Spamann''); NASAA; Public Citizen.
---------------------------------------------------------------------------
Other commenters opposed proposed Item 1606(a).\354\ Some of these
commenters expressed the view that modeling rules applicable to de-SPAC
transactions after the going private rules is inappropriate because the
underlying
[[Page 14195]]
affiliate relationships present in a going private transaction are not
present in a de-SPAC transaction.\355\ Some commenters observed that a
fairness determination is not required or provided in an IPO and thus
should not be required in a de-SPAC transaction.\356\
---------------------------------------------------------------------------
\354\ Letters from ABA; Andrew Tuch, Professor of Law,
Washington University in St. Louis (June 13, 2022) (``Andrew
Tuch''); Cato Institute; CFA Institute; Davis Polk & Wardwell LLP
(June 13, 2022) (``Davis Polk''); Freshfields; Goodwin; Alfredo
Ortiz, President & CEO, Job Creators Network (June 13, 2022) (``Job
Creators Network''); Jonathan Kornblatt; Kirkland & Ellis; Loeb &
Loeb; NYC Bar; Paul Swegle; Ropes & Gray; Skadden Arps Slate Meagher
& Flom LLP (June 13, 2022) (``Skadden''); White & Case.
\355\ Letters from Andrew Tuch, Freshfields, Kirkland & Ellis,
Loeb & Loeb, Skadden.
\356\ Letters from ABA, Cato Institute, CFA Institute, Davis
Polk, Freshfields, Kirkland & Ellis, NYC Bar, Ropes & Gray, Skadden,
White & Case.
---------------------------------------------------------------------------
One commenter said proposed Items 1606 and 1607 would represent a
``dramatic shift to de-SPAC transactions processes and disclosures,''
because, in part, SPAC boards have not historically made a
recommendation to shareholders regarding whether or not to redeem
shares at the time of the business combination and fairness opinions
obtained in connection with de-SPAC transactions are typically limited
to whether the transaction is fair to the SPAC, not whether the
transaction is fair to any particular class of shareholders.\357\ This
commenter observed, ``By opining on whether the de-SPAC transaction and
related financings are fair to unaffiliated stockholders, as opposed to
the SPAC itself, the SPAC board and any fairness opinion provider would
essentially be making a recommendation regarding whether or not to
redeem shares.'' \358\
---------------------------------------------------------------------------
\357\ Letter from Ropes & Gray.
\358\ Id.
---------------------------------------------------------------------------
Several commenters expressed the view that requiring disclosure of
a fairness determination would result in increased liability and
litigation risk in de-SPAC transactions \359\ and in fewer de-SPAC
transactions.\360\ A few commenters indicated that financial advisors
may refuse to provide fairness opinions due to concerns about the
potential liability related to delivery of a fairness opinion, in which
case the SPAC board of directors would decide not to proceed with an
otherwise favorable de-SPAC transaction due to the board's concerns
about its own liability.\361\
---------------------------------------------------------------------------
\359\ Letters from Cato Institute, CFA Institute, Freshfields,
Goodwin, Jonathan Kornblatt, White & Case.
\360\ Letters from Davis Polk, Goodwin, Job Creators Network,
Jonathan Kornblatt, Skadden, White & Case.
\361\ Letters from ABA, Goodwin.
---------------------------------------------------------------------------
Other commenters expressed the view that proposed Items 1606 and
1607 would effectively require de-SPAC transactions to be
``substantively fair,'' which, in the view of these commenters, would
exceed the Commission's authority.\362\ One of these commenters
expressed that imposing a substantive obligation on the SPAC board of
directors to undertake an analysis of the fairness of the de-SPAC
transaction is an issue that is the exclusive province of State
law.\363\
---------------------------------------------------------------------------
\362\ Letters from ABA, Goodwin, NYC Bar, White & Case.
\363\ Letter from NYC Bar.
---------------------------------------------------------------------------
One commenter stated that, while the disclosure in proposed Item
1606(a) would be new, ``in light of the fiduciary duties applicable to
SPACs and their directors and officers,'' the disclosure in proposed
Item 1606(a) and (b) ``would likely be redundant with the standard
disclosure of the SPAC board's reasons for approval of the de-SPAC
transaction.'' \364\
---------------------------------------------------------------------------
\364\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
Several commenters expressed concern that the proposed fairness
determination disclosure requirement would likely or effectively
require a SPAC to obtain a fairness opinion from a financial advisor
\365\ and raised concern about the cost of obtaining a fairness
opinion.\366\ One of those commenters also expressed concern that the
perceived requirement, under proposed Items 1606(a) and 1607, to obtain
a fairness opinion could increase the need to include projections in
the de-SPAC transaction disclosure documents in support of a SPAC
sponsor's fairness determination.\367\
---------------------------------------------------------------------------
\365\ Letters from ABA, Andrew Tuch, Cato Institute, Davis Polk,
Freshfields, Job Creators Network, Jonathan Kornblatt, Paul Swegle.
\366\ Letters from ABA, Cato Institute, Davis Polk, Freshfields,
Goodwin, Jonathan Kornblatt, Paul Swegle, Ropes & Gray, Skadden.
\367\ Letter from Cato Institute (indicating that disclosure of
projections would raise potential liability for SPACs as a result of
the amendments to the PSLRA safe harbor).
---------------------------------------------------------------------------
Another commenter indicated that proposed Item 1606 (and Item 1607)
would be burdensome and, to address that burden, suggested that
proposed Item 1606 should not apply to de-SPAC transactions generally
but only to those de-SPAC transactions that raise risks of ``severe
conflicts of interest.'' \368\
---------------------------------------------------------------------------
\368\ Letter from Andrew Tuch (``In short, the Proposed Rules
would subject de-SPACs to more onerous regulation than either going-
private transactions subject to Rule 13e-3 [17 CFR 270.13e-3] or
traditional IPOs. A way to address this is to apply Items 1606 and
1607 more selectively, to those de-SPACs raising heightened risks of
self-dealing by SPAC fiduciaries, or perhaps not to apply these
particular provisions at all.'').
---------------------------------------------------------------------------
Some commenters also said they prefer that any fairness
determination be made as to the de-SPAC transaction as a whole (instead
of the de-SPAC transaction and any related financing transaction
separately) \369\ and with respect to all of a SPAC's shareholders
(instead of to its unaffiliated shareholders).\370\ One of those
commenters also suggested that a fairness determination should not
include related financings because financial advisors providing a
fairness opinion do not traditionally include such financing within the
scope of the opinion.\371\
---------------------------------------------------------------------------
\369\ Letters from ABA, Davis Polk, Freshfields, Goodwin, Ropes
& Gray, Skadden, White & Case.
\370\ Letters from ABA, Goodwin.
\371\ Letter from Davis Polk.
---------------------------------------------------------------------------
3. Final Item 1606(a)
We continue to believe that SPACs and the hybrid nature of de-SPAC
transactions present potential conflicts of interest and misaligned
incentives that are not present in other types of business combination
transactions. As a result, we believe that it is appropriate for
shareholders to have more complete information regarding the SPAC's
decision to proceed with a particular de-SPAC transaction. Many
commenters that supported proposed Item 1606(a) expressed similar
views.\372\ At the same time, we acknowledge that many commenters
raised significant concerns with the proposed disclosure
requirement.\373\ Some commenters expressed concerns that the proposed
rule could be interpreted to require a fairness opinion,\374\ even if
not explicitly required, and concerns about the cost to obtain such an
opinion.\375\ Some commenters also expressed concerns about imposing
requirements in connection with the de-SPAC transaction process of
going public that do not exist in the traditional IPO process, such as
requiring a fairness determination.\376\ Regarding these concerns,
while we acknowledge that disclosures regarding the board's
determination to proceed with a particular transaction are more
typically associated with merger transactions, as discussed above, the
de-SPAC transaction is a hybrid capital raising transaction that marks
the introduction of the target company to the U.S. public
[[Page 14196]]
securities markets (similar to an IPO), and such introduction is done
by way of a business combination or similar transaction. As a result,
while we believe that the similarity to an IPO is a reason that the de-
SPAC transaction regulatory framework generally should be similar to
the IPO regulatory framework, the business combination element of de-
SPAC transactions makes certain differences in the final rules that
apply to de-SPAC transactions appropriate.
---------------------------------------------------------------------------
\372\ Letters from Better Markets, CalPERS, Committee on Capital
Markets Regulation, Consumer Federation, Holger Spamann, NASAA,
Public Citizen. See supra note 353 and accompanying text.
\373\ Letters from ABA, Andrew Touch, Cato Institute, CFA
Institute, Davis Polk, Freshfields, Goodwin, Job Creators Network,
Jonathan Kornblatt, Kirkland & Ellis, Loeb & Loeb, NYC Bar, Paul
Swegle, Ropes & Gray, Skadden, White & Case. See supra note 354 and
accompanying text.
\374\ Letters from ABA, Andrew Tuch, Cato Institute, Davis Polk,
Freshfields, Job Creators Network, Jonathan Kornblatt, Paul Swegle.
See supra note 365 and accompanying text.
\375\ Letters from ABA, Cato Institute, Davis Polk, Freshfields,
Goodwin, Jonathan Kornblatt, Paul Swegle, Ropes & Gray, Skadden. See
supra note 366 and accompanying text.
\376\ Letters from ABA, Andrew Tuch, Cato Institute, CFA
Institute, Davis Polk, Freshfields, Kirkland & Ellis, Loeb & Loeb,
NYC Bar, Ropes & Gray, Skadden, White & Case. See supra notes 355
and 356 and accompanying text.
---------------------------------------------------------------------------
In response to commenters' concerns, we are revising Item 1606(a)
to focus on situations in which a determination as to the advisability
of the de-SPAC transaction is required by the law of the jurisdiction
in which the SPAC is organized.\377\ Doing so will make clear that Item
1606(a) does not require the de-SPAC transaction to be substantively
fair or the SPAC to make a fairness determination when it is not
otherwise required to do so under applicable State or foreign corporate
law.\378\
---------------------------------------------------------------------------
\377\ See generally Section 251(b) of the Delaware General
Corporation Law (``The board of directors . . . shall adopt a
resolution approving an agreement of merger or consolidation and
declaring its advisability.'').
\378\ This revision also addresses the comments questioning the
Commission's authority to require a fairness determination and the
comment expressing the view that imposing an obligation on a board
to undertake an analysis of the fairness of the de-SPAC transaction
is an issue that is the exclusive province of State law. See supra
notes 362 and 363, respectively, and accompanying text.
---------------------------------------------------------------------------
Instead, under final Item 1606(a), if the law of the jurisdiction
of the SPAC's organization requires the SPAC's board of directors (or
similar governing body) \379\ to determine whether the de-SPAC
transaction is advisable and in the best interests of the SPAC and its
shareholders, or otherwise make any comparable determination, the SPAC
will be required to disclose that determination. Under Delaware General
Corporation Law, a board of directors of a corporation that seeks to
enter a merger or consolidation is required to adopt a resolution
approving the transaction agreement and declaring its
advisability.\380\ In the experience of the Commission staff, many
SPACs governed by Delaware law provide a statement in registration
statements or proxy statements filed for de-SPAC transactions that the
transaction agreement the board approved is advisable and in the best
interests of shareholders. Comparable requirements may apply to
registrants organized under the laws of other jurisdictions. The final
rule would codify existing disclosure practices in this regard and
serve to standardize the disclosure across a variety of State or
foreign law requirements.
---------------------------------------------------------------------------
\379\ This provision allows for the possibility that a SPAC's
governing body may be other than a ``board of directors,'' whether
as a result of a SPAC being organized as an entity other than a
corporation or being a corporation organized in a jurisdiction where
the governing body is different than a ``board of directors.''
\380\ See supra note 377 and accompanying text.
---------------------------------------------------------------------------
We believe that the approach taken in final Item 1606(a) represents
an appropriate balance between our goal of providing more transparency
around the SPAC's decision to proceed with a particular de-SPAC
transaction and the concerns raised by commenters that the proposed
rule would create a new substantive corporate law requirement \381\ as
well as other concerns raised by commenters, including increased
liability and risks of litigation and decreased de-SPAC
transactions.\382\ The new disclosure requirement will help achieve the
same goal sought by the proposed fairness determination requirement--
enhancing SPAC security holders' ability to assess the SPAC's decision
to proceed with a particular de-SPAC transaction--without imposing new
procedural obligations regarding how such a decision is made. While the
final rule will not require a SPAC to make a determination regarding
the fairness or suitability of the de-SPAC transaction, if such a
determination is required by applicable corporate law, we believe
investors should be informed of that fact and receive appropriate
disclosure (as described below) regarding the considerations that went
into such a determination.\383\ The fact that many registrants already
provide such disclosure supports our view that the factual disclosures
required by the final rule should not impose undue costs or create
excessive exposure to new liability or litigation risk.
---------------------------------------------------------------------------
\381\ The approach taken in final Item 1606(a) also addresses a
related commenter's concern that disclosure arising from a fairness
determination would be redundant in light of the fiduciary duties
applicable to SPACs and their officers and directors. See letter
from Vinson & Elkins. See also supra note 364 and accompanying text.
\382\ Letters from Cato Institute, CFA Institute, Davis Polk,
Freshfields, Goodwin, Job Creators Network, Jonathan Kornblatt,
Skadden, White & Case. See supra notes 359 and 360 and accompanying
text.
\383\ Because final Item 1606(a) will require disclosure when a
determination is required to be made under the law of the SPAC's
jurisdiction of organization, rather than imposing a separate
fairness determination that would be more burdensome, we do not
believe there is a need to limit Item 1606(a) to instances of
``severe conflicts of interest,'' as one commenter suggested. See
letter from Andrew Tuch. See also supra note 368 and accompanying
text.
---------------------------------------------------------------------------
In addition, these changes from the proposal should avoid any
misimpression that Item 1606(a) creates a requirement, implicit or
explicit, or expectation that a fairness opinion must be obtained to
comply with its requirements. We are mindful of commenters' concerns
about increased liability and litigation risk associated with such
opinions.\384\ We are also mindful of comments indicating that
financial advisors may refuse to provide fairness opinions due to
concerns about the potential liability related to delivery of a
fairness opinion and that a SPAC's board of directors may decide not to
proceed with an otherwise favorable de-SPAC transaction because it
cannot obtain a fairness opinion.\385\ Cognizant of these concerns, we
reiterate that nothing in the final rule requires a SPAC to obtain a
fairness opinion in connection with a de-SPAC transaction.
---------------------------------------------------------------------------
\384\ Letters from Cato Institute, CFA Institute, Freshfields,
Goodwin, Jonathan Kornblatt, White & Case. See supra note 359 and
accompanying text.
\385\ Letters from ABA, Goodwin. See supra note 361 and
accompanying text.
---------------------------------------------------------------------------
The changes to Items 1606(a) and (b) and 1607 \386\ should also
address one commenter's concern that the new requirements would
represent ``a dramatic shift to de-SPAC transactions processes and
disclosures'' by requiring more limited disclosure aligned with
requirements already applicable to a SPAC by the law of its
jurisdiction of incorporation.\387\
---------------------------------------------------------------------------
\386\ See infra section II.G.10-12.
\387\ Letter from Ropes & Gray. See supra notes 357 and 358 and
accompanying text.
---------------------------------------------------------------------------
We agree with commenters who stated that any rule addressing the
board's decision to proceed with a de-SPAC transaction should focus on
all of a SPAC's security holders rather than only its unaffiliated
security holders.\388\ In response to these comments, we have revised
the final rule to reference security holders of the SPAC generally, in
contrast to the proposed rule, which addressed only unaffiliated
security holders.
---------------------------------------------------------------------------
\388\ Letter from ABA, Goodwin. See supra note 370 and
accompanying text.
---------------------------------------------------------------------------
The changes to Item 1606(a) address one commenter's concern that
the perceived requirement to obtain a fairness opinion could increase
the need to include projections in the de-SPAC transaction disclosure
documents in support of such fairness determination.\389\
---------------------------------------------------------------------------
\389\ Letter from Cato Institute. See supra note 367 and
accompanying text.
---------------------------------------------------------------------------
Finally, in response to commenters' recommendations that proposed
Item 1606(a) be required with respect to the de-SPAC transaction and
related financing as a whole,\390\ we are revising
[[Page 14197]]
Item 1606(a) to remove any reference to related financing. While the
proposed rule was intended to result in the disclosure of a fairness
determination with respect to a de-SPAC transaction as a whole, we were
persuaded by commenters' concerns that including ``any related
financing'' in the rule could have signaled a separate determination
should be made with respect to the related financing.\391\ We continue
to believe that related financing is usually fundamental to the success
of the de-SPAC transaction but have adopted a final rule that
simplifies the disclosure about the determinations made by a SPAC's
board of directors (or similar governing body) with respect to the de-
SPAC transaction. On the other hand, given the continued importance to
a SPAC's shareholders of the related financing, we are moving the
reference to related financing to final Item 1606(b), which requires
discussions of the factors considered by the SPAC board of directors
(or similar governing body) in making the determination disclosed in
response to Item 1606(a). This change is discussed further below.
---------------------------------------------------------------------------
\390\ Letters from ABA, Davis Polk, Freshfields, Goodwin, Ropes
& Gray, Skadden, White & Case. See supra notes 369-371 and
accompanying text.
\391\ Id.
---------------------------------------------------------------------------
4. Proposed Item 1606(b)
The Commission proposed Item 1606(b) to supplement the fairness
determination disclosure required by proposed Item 1606(a).
Specifically, proposed Item 1606(b) would require a SPAC to discuss the
material factors upon which the 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.
5. Comments: Item 1606(b)
Commenters expressed differing views on proposed Item 1606(b). Some
commenters supported the proposed requirement generally \392\ and some
commenters specifically indicated the requirement would allow investors
to conduct a better evaluation of the merits of a de-SPAC transaction
and incentivize sponsors to avoid transactions that could potentially
be viewed as unfair.\393\
---------------------------------------------------------------------------
\392\ Letters from Better Markets, CalPERS, Holger Spamann.
\393\ Letters from Committee on Capital Markets Regulation,
Consumer Federation.
---------------------------------------------------------------------------
Other commenters stated that the inclusion of a mandatory list of
factors to be addressed in disclosure under proposed Item 1606(b) may
force the SPAC to disclose information not actually considered by the
SPAC in making its fairness determination.\394\ Some commenters also
stated that the mandatory list of factors in proposed Item 1606(b) is
at odds with the Commission's history of implementing a principles-
based disclosure regime and does not account for the fact that the
factors relevant to making a fairness determination will vary from
company to company and that different fairness assessors may also have
different views on which factors are appropriate for the same
company.\395\ These commenters proposed that the Commission modify
proposed Item 1606(b) to provide that the factors should be discussed
to the extent they were considered.\396\ One commenter said that it is
``not within the Commission's authority to require SPAC boards of
directors to conform their deliberative processes to the Commission's
rules and that Item 1606(b) impermissibly encroaches upon the
discretion of a board to evaluate whatever information it deems
appropriate in deciding to proceed with a transaction.'' \397\
---------------------------------------------------------------------------
\394\ Letters from ABA, Goodwin, White & Case.
\395\ Letters from ABA, Goodwin.
\396\ Id.
\397\ Letter from White & Case.
---------------------------------------------------------------------------
Some commenters stated that the factors the proposal required to be
discussed should not be assigned weight because it would not be
practical or workable to do so, such weighting could result in
investors placing too much or not enough emphasis on the factors
described by the SPAC, and various members of the SPAC board will
likely assign differing weights to differing factors.\398\ Another
commenter stated that a weighting of factors would require a high
degree of professional subjectivity, which may expose boards and
financial institutions to liability which would ultimately discourage
them from pursuing de-SPAC transactions.\399\
---------------------------------------------------------------------------
\398\ Letters from ABA, Goodwin, Ropes & Gray.
\399\ Letter from Skadden.
---------------------------------------------------------------------------
6. Final Item 1606(b)
We are adopting Item 1606(b) as proposed, with certain
modifications discussed below. We continue to believe that disclosure
of the factors considered by a SPAC's board of directors (or similar
governing body) in making the decision to proceed with a de-SPAC
transaction, to the extent they were considered, would provide
shareholders with important information to allow those shareholders to
make informed voting or investment decisions.
While several commenters supported proposed Item 1606(b),\400\ as
discussed above, some commenters expressed the view that only factors
actually considered should be required to be discussed.\401\ This was
the intent of the language in the proposed rule requiring a discussion
of ``factors upon which the belief stated in paragraph (a) . . . is
based.'' In light of the comments received, however, to clarify our
intent in the final rule, we have added the terms ``To the extent
considered'' to qualify the factors and the analysis of those factors
required to be discussed. This change will avoid any potential for
ambiguity or misinterpretation that the rule requires a discussion of
factors not considered or a more extensive analysis of any factor
considered than would otherwise have taken place in the absence of the
final rule.\402\ As a result, final Item 1606(b) requires a discussion
of a non-exclusive list of factors the board of directors (or similar
governing body) considered in making any determination disclosed in
response to Item 1606(a) to the extent such factors were considered.
These factors would include, but not be limited to, the valuation of
the target company, financial projections relied upon by the board of
directors (or similar governing body), the terms of financing
materially related to the de-SPAC transaction, any report, opinion, or
appraisal referred to in Item 1607(a), and the dilution described in
Item 1604(c). We believe these factors are generally matters that a
board of directors (or similar governing body) is likely to consider in
determining whether a transaction is advisable and in the best
interests of the SPAC and its security holders (or in making a
comparable determination). At the same time, by revising the disclosure
requirement to make clear that the listed factors must be disclosed to
the extent considered, the final rule reflects our understanding that
the fiduciary duties and discussions of boards of directors (or similar
governing bodies) are not uniform across companies or jurisdictions.
Moreover, this change makes clear that final Item 1606(b) does not
require boards of directors (or similar governing bodies) to
specifically consider the listed factors or, if considering them,
dictate how thoroughly to consider them, when determining whether a
transaction is advisable and in the best interests of the
[[Page 14198]]
SPAC and its security holders (or in making a comparable
determination).
---------------------------------------------------------------------------
\400\ Letters from Better Markets, CalPERS, Committee on Capital
Markets Regulation, Consumer Federation, Holger Spamann, NASAA,
Public Citizen. See supra note 393 and accompanying text.
\401\ Letters from ABA, Goodwin, White & Case. See supra notes
394-396 and accompanying text.
\402\ This revision also addresses the comments questioning the
Commission's authority to mandate the factors that a SPAC must
discuss under Item 1606(b). See supra notes 362, 363, and 397 and
accompanying text.
---------------------------------------------------------------------------
Some commenters expressed concern with the practicability of
assigning weight to factors, the possibility that shareholders would
emphasize those weights too much or too little,\403\ and that a
weighting of factors, which may require a high degree of professional
subjectivity, may expose boards and financial institutions to liability
which would ultimately discourage them from pursuing de-SPAC
transactions.\404\ Although proposed Item 1606(b) was never intended to
force disclosure of the weight of each factor where the SPAC board did
not, or could not, conduct such a weighting (proposed Item 1606(b)
required a discussion of such weighting only ``to the extent
practicable''), we nevertheless recognize commenters' concerns and the
possibility that the proposed item requirement could be misunderstood.
Based on commenters' suggestions, we have removed references to the
weighting of factors from final Item 1606(b) to eliminate such
potential misinterpretation and in recognition of the potential
practical challenges to assigning a weight to various factors or
discussing such weighting.
---------------------------------------------------------------------------
\403\ Letters from ABA, Goodwin, Ropes & Gray. See supra note
398 and accompanying text.
\404\ Letter from Skadden. See supra note 399 and accompanying
text.
---------------------------------------------------------------------------
To reduce potential redundancy in the disclosure requirement, we
have also removed the terms ``in reasonable detail'' from the first
sentence of Item 1606(b). Any disclosure responsive to Item 1606(b) is
already required to be complete, and the deleted terms are not
necessary to confirm that such a principle applies here.
Further, as discussed above, we are revising Item 1606(b) to
include any financing materially related to the de-SPAC transaction in
the non-exclusive list of factors to be discussed because PIPE
offerings and other financings are a common feature of a de-SPAC
transaction and, in some instances, the success of the de-SPAC
transaction and of the post-de-SPAC company is dependent on the
existence of related financing. Given the importance of such financing,
we have revised final Item 1606(b) to include financing materially
related to the de-SPAC transaction in the non-exclusive list of factors
that a board of directors (or similar governing body) would be required
to discuss, to the extent the board of directors (or similar governing
body) considered such financing. By moving the reference to related
financing from Item 1606(a) to Item 1606(b), we are also eliminating
any potential confusion that the board of directors (or similar
governing body) would need to make a separate Item 1606(a)
determination for financing materially related to the de-SPAC
transaction.
7. Proposed Item 1606(c) Through (e)
The Commission proposed Item 1606(c) through (e) to 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 security holders, and whether the transaction(s) were
approved by a majority of directors of the SPAC who are not employees
of the SPAC.
8. Comments: Item 1606(c) Through (e)
Commenters expressed differing views on proposed Item 1606(c)
through (e). Some commenters supported the proposed requirements.\405\
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\405\ Letters from Better Markets, CalPERS, Committee on Capital
Markets Regulation, Consumer Federation, Holger Spamann, NASAA,
Public Citizen.
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With respect to proposed Item 1606(c), one commenter indicated that
disclosure about whether the de-SPAC or related financing transaction
was structured to require approval of at least a majority of
unaffiliated security holders would be redundant due to the requirement
of Item 21 of Schedule 14A to disclose similar information.\406\
---------------------------------------------------------------------------
\406\ Letter from Vinson & Elkins.
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With respect to proposed Item 1606(d), a few commenters expressed
the view that retention of a representative to act solely on behalf of
unaffiliated security holders in the negotiation of the de-SPAC
transaction is rare and that, as a result, such a requirement will not
result in meaningful additional disclosure.\407\ One of the commenters
also indicated that the disclosure requirement would not result in a
change in the use of unaffiliated representatives.\408\
---------------------------------------------------------------------------
\407\ Letters from Freshfields, Vinson & Elkins.
\408\ Letter from Freshfields.
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One commenter supported the proposed requirement to disclose
whether any non-executive director voted against, or abstained from
voting on, the approval of the de-SPAC transaction \409\ and said it is
consistent with current market practice.\410\ Another commenter stated
that a requirement to identify any director that voted against or
abstained from voting on the approval of the de-SPAC transaction would
``prejudice[ ] companies against de-SPAC transactions'' and could
inhibit board discussions.\411\ This commenter said that this proposed
requirement would make it more difficult and less likely that
individual directors would oppose a transaction if they know that their
objection will be made public.\412\ This commenter also recommended
that the proposed rule be more precise about its applicability being
only to directors of the SPAC.\413\
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\409\ We have moved this requirement from proposed Item 1606(a)
to final Item 1606(e). Thus, we are including comments relating to
that portion of proposed Item 1606(a) in this section.
\410\ Letter from Davis Polk.
\411\ Letter from Freshfields.
\412\ Id.
\413\ Id.
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9. Final Item 1606(c) Through (e)
We continue to believe that the new disclosures under Item 1606(c)
through (e) will provide investors with important information and a
better understanding of the process by which a SPAC determined to
proceed with a particular de-SPAC transaction. We are adopting Item
1606(c), (d), and (e) as proposed, with some modifications and minor
technical changes discussed below. In the final rules, we moved the
requirement to identify any director who voted against, or abstained
from voting on, approval of the de-SPAC transaction from proposed Item
1606(a) to final Item 1606(e), because, as Item 1606(e) is generally
related to issues involving approval of the de-SPAC transaction by the
board of directors (or similar governing body), we considered this a
more appropriate place for this requirement.
We disagree with the assertion made by a commenter that the
disclosure required under proposed Item 1606(c) would be redundant
given the existing requirement in Item 21 of Schedule 14A, which
requires disclosure of the vote required for approval (among other
things) of the matter by shareholders.\414\ Schedule 14A does not
expressly differentiate among affiliated and unaffiliated security
holders as with Item 1606(c). Also, a Schedule 14A may not be filed in
connection with some de-SPAC transactions. Thus, we believe the
information provided to investors under Item 1606(c) is not redundant
and will benefit investors by improving their understanding of the
SPAC's governance procedures followed in connection with approving the
de-SPAC transaction. We expect this improved understanding will enhance
investor voting, redemption, and other
[[Page 14199]]
investment decisions. We have revised Item 1606(c) to clarify that the
shareholder approval relates to shareholders of the SPAC.
---------------------------------------------------------------------------
\414\ Letter from Vinson & Elkins. See supra note 406 and
accompanying text.
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A few commenters said the use of unaffiliated representatives in
negotiations is rare.\415\ One of those commenters also said the
disclosure requirement in proposed Item 1606(d) would not lead to a
change in market practices.\416\ We note that the proposed rule was not
intended and the final rule is not intended to change market practices
relating to the retention of any such unaffiliated representative. As
is the case with final Item 1606(c) and (e), final Item 1606(d) is a
disclosure requirement intended to provide investors with important
information and a better understanding of the process by which a SPAC
determined to proceed with a particular de-SPAC transaction and does
not require SPACs to change their processes in connection with de-SPAC
transaction approval.
---------------------------------------------------------------------------
\415\ Letters from Freshfields, Vinson & Elkins. See supra notes
407 and 408 and accompanying text.
\416\ Letter from Vinson & Elkins. See supra note 408 and
accompanying text.
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One commenter said directors will be more reluctant to vote against
a de-SPAC transaction if they know that their objection will be made
public.\417\ We decline to revise Item 1606(e) in response to the
commenter's concern. Directors are generally subject to fiduciary
duties imposed by State or foreign law. We expect that directors will
generally seek to make voting decisions consistent with their duties to
security holders or the company irrespective of whether that decision
is publicly disclosed.
---------------------------------------------------------------------------
\417\ Letter from Freshfields. See supra notes 411 and 412 and
accompanying text.
---------------------------------------------------------------------------
We have also made conforming changes to Item 1606(c) through (e) to
be consistent with final Item 1606(a), as discussed above.
10. Proposed Item 1607
The Commission proposed Item 1607(a) to require disclosure about
whether or not the SPAC or SPAC sponsor 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 SPAC, SPAC sponsor or unaffiliated security holders.
The Commission proposed Item 1607(b) to require disclosure of
certain information about any such report, opinion, or appraisal from
an outside party as well as any negotiation or report by an
unaffiliated representative, including the identity of the outside
party or unaffiliated representative, the qualifications of the outside
party or unaffiliated representative, any material relationship between
the outside party, its affiliates, or unaffiliated representative and
the SPAC, SPAC sponsor, or their respective affiliates, whether the
SPAC or SPAC sponsor determined the amount of consideration to be paid
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. Proposed Item 1607(b) would also require a summary
of the negotiation, report, opinion, or appraisal, including a
description of the procedures followed, the findings and
recommendations, the bases for and methods used to arrive at such
findings and recommendations, any instructions received from the SPAC
or SPAC sponsor, and any limitation imposed by the SPAC or SPAC sponsor
on the scope of the investigation.
The Commission proposed Item 1607(c) to 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.
11. Comments: Item 1607
We received differing views from commenters. Some commenters
generally supported proposed Item 1607.\418\ Other commenters generally
opposed, or expressed concerns regarding specific aspects of, proposed
Item 1607.\419\ We discuss these specific concerns in more detail
below.
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\418\ Letters from Committee on Capital Markets Regulation;
Consumer Federation; ICGN; Michael Dambra, Ph.D., CPA, University at
Buffalo, SUNY, Omri Even-Tov, Ph.D., University of California,
Berkeley, Kimberlyn George, University of California, Berkeley (June
3, 2022) (``Michael Dambra, Omri Even-Tov, and Kimberlyn George'').
\419\ Letters from ABA (``with respect to proposed Item 1607, we
believe it is unnecessary and unrealistic to require the filing of
board books and other written materials presented to the board in
connection with the reports, opinions or appraisals, as in the case
with going-private transactions''), Andrew Tuch, Ernst & Young,
Goodwin, Ropes & Gray, Vinson & Elkins.
---------------------------------------------------------------------------
As discussed above in the comments on proposed Item 1606, several
commenters stated that proposed Items 1606 and 1607 exceed the
Commission's authority because they effectively require de-SPAC
transactions to be ``substantively fair.'' \420\
---------------------------------------------------------------------------
\420\ Letters from ABA, Goodwin, NYC Bar, White & Case. See
supra note 362 and accompanying text.
---------------------------------------------------------------------------
Some of these commenters suggested that the filing of board
materials required under Item 1607(c) is inappropriate because it will
``inevitably'' result in a reduction of information presented to, and
considered by, a SPAC's board of directors, which may affect the
board's ability to fulfill its fiduciary duties.\421\ Given that board
materials are typically not prepared with a view that they will be
included in public filings and subject to liability, these commenters
also expressed the view that filing such materials may expose their
preparers to liability under the Securities Act and the Exchange Act
and that the proposed requirement would be ``impractical and
unworkable'' because the preparers are not trained to prepare any such
materials to withstand scrutiny under the Federal securities laws.\422\
Also, the commenters indicated that some preparers will not consent to
the use of their materials in a public filing.\423\ Finally, these
commenters stated that some information included in such reports may be
immaterial, speculative, or ultimately determined to be
unreliable.\424\
---------------------------------------------------------------------------
\421\ Letters from ABA, Goodwin.
\422\ Id.
\423\ Id.
\424\ Id.
---------------------------------------------------------------------------
One commenter indicated that the requirement in proposed Item
1607(c) to file as an exhibit (or include) any such report, opinion, or
appraisal related to the fairness determination in addition to the
requirement in proposed Item 1607(b) to disclose a summary of the
report, opinion, or appraisal could limit any incremental benefit an
investor would receive from the filing of such reports, opinions, or
appraisals.\425\ Another commenter stated that proposed Item 1607
should not apply to de-SPAC transactions generally but only to those
de-SPAC transactions that raise risks of ``severe conflicts of
interest.'' \426\ Yet another commenter suggested that the Commission
consider whether the incremental cost and liabilities related to filing
the reports would have the unintended consequence of discouraging SPACs
from obtaining the reports because SPACs would not be required to
obtain the reports as a basis for their fairness determination under
proposed Item 1606(a).\427\ One commenter also proposed that we more
narrowly tailor Item 1607(b)(6) to de-SPAC transactions and modify Item
4(b) of Forms S-4 and F-4 to direct filers to comply with the
requirements of Item 1607(b)(6), rather than 17 CFR 229.1015(b) (``Item
1015(b)'' of
[[Page 14200]]
Regulation M-A), for de-SPAC transactions.\428\
---------------------------------------------------------------------------
\425\ Letter from Ernst & Young.
\426\ Letter from Andrew Tuch.
\427\ Letter from Ernst & Young.
\428\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
12. Final Item 1607
We are adopting Item 1607(a) as proposed with the modifications
discussed below. Final Item 1607(a) only requires the disclosure
specified in Item 1607(b) if the SPAC or SPAC sponsor received any
report, opinion (other than an opinion of counsel), or appraisal from
an outside party or unaffiliated representative materially relating to
a determination disclosed in response to Item 1606(a), the approval of
the de-SPAC transaction, the consideration or the fairness of the
consideration to be offered to security holders of the target company
in the de-SPAC transaction, or the fairness of the de-SPAC transaction
to the SPAC, its security holders, or SPAC sponsor. Thus, if such a
report, opinion, or appraisal from an outside party or unaffiliated
representative was not received, then no disclosure will be required
under Item 1607.
The final rule includes some clarifying revisions to Item 1607(a).
We added a reference to an ``unaffiliated representative'' to avoid any
confusion arising out of references to an ``unaffiliated
representative'' in Item 1607(b) without a corresponding reference in
Item 1607(a). We also added the parenthetical terms ``other than an
opinion of counsel'' to clarify that an opinion of counsel is outside
of the rule's scope. In addition, we included a reference to the target
company in final Item 1607(a)(3) to specify which security holders are
being offered the consideration. Finally, we reversed the order of
``SPAC sponsor'' and ``security holders'' in final Item 1607(a)(4) to
avoid the implication that the rule also applies to security holders of
SPAC sponsor.
To address commenters' concerns regarding the possible disclosure
of immaterial, speculative, or unreliable materials,\429\ we are
revising Item 1607(a) to limit the scope of the final rule to only
reports, opinions, or appraisals that are materially related to any
Item 1606(a) determination of the board of directors (or similar
governing body) or the other matters listed in final Item 1607(a)(2)
through (4). As they already do now in other filings relating to de-
SPAC transactions, SPACs may continue to add any supplemental,
explanatory discussion so that investors can properly understand the
context and purpose of the disclosed reports, opinions, or appraisals
and assess these reports, opinions, or appraisals appropriately.
---------------------------------------------------------------------------
\429\ Letters from ABA, Goodwin. See supra note 424 and
accompanying text.
---------------------------------------------------------------------------
In addition, by revising Item 1606 to remove the requirement to
disclose a fairness determination in the context of a de-SPAC
transaction and making corresponding revisions to Item 1607, the final
rule should address commenters' concerns that proposed Item 1607 would
exceed the Commission's authority.\430\
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\430\ Letters from ABA, Goodwin, NYC Bar, White & Case. See
supra note 420 and accompanying text.
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We believe adopting final Item 1607 is more consistent with the
remaining rules applicable to SPACs and de-SPAC transactions than the
alternative suggested by a commenter to instead update similar existing
requirements in Form S-4 and F-4.\431\ Item 1607(a) is limited to a
specific set of events and determinations, unlike Item 4(b) in Form S-4
and F-4, which more generally refer to reports, opinions, or appraisals
materially relating to the subject transaction. Also, under the
alternative suggested by the commenter, the Item 1607(b) disclosure
would not be required to the extent a de-SPAC transaction is not
registered on Form S-4 or F-4.\432\ Finally, we believe registrants
will benefit from the centralization of the SPAC-related requirements
in the Item 1600 series of Regulation S-K, which are primarily applied
to de-SPAC transactions through new general instructions in the
relevant forms and schedules,\433\ rather than through revisions to
specific item requirements within each relevant form or schedule as
suggested.
---------------------------------------------------------------------------
\431\ Letter from Vinson & Elkins. See supra note 428 and
accompanying text.
\432\ Item 14(b)(6) of Schedule 14A directs filers to comply
with Item 1015(b) of 17 CFR 229.1000 through 229.1016 (``Regulation
M-A'') in the same manner as Form S-4 and F-4. But see the potential
registration requirements for de-SPAC transactions, in the absence
of an exemption, as a result of the adoption of Rule 145a.
\433\ See General Instruction L.1 to Form S-4; General
Instruction VIII to Form S-1; General Instruction I.1 to Form F-4;
General Instruction VII to Form F-1; General Instruction K to
Schedule TO.
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Several commenters expressed concern that compliance with Item
1607(c) will result in a reduction of information presented to the
SPAC's board of directors, which could negatively affect the ability of
those directors to fulfill their fiduciary duties.\434\ Another
commenter suggested that the incremental cost and liability of filing
such materials would discourage a SPAC from obtaining those
materials.\435\ While we recognize these concerns and acknowledge that
the final rule could impact the information provided to the SPAC's
board of directors,\436\ we believe there remain significant incentives
(e.g., conducting due diligence on the target company or receiving an
independent evaluation of the proposed de-SPAC transaction) for boards
to seek and use this information as part of their decision-making
process so we do not find this a persuasive reason to withhold such
disclosure from investors. Directors are generally subject to fiduciary
duties imposed by State or foreign law. We expect directors to seek to
fulfill those duties by continuing to inform themselves of the
potential merits of a de-SPAC transaction with the assistance of
outside parties despite the potential public nature, added cost, or
risk of liability associated with the filing of any report, opinion, or
appraisal.
---------------------------------------------------------------------------
\434\ Letters from ABA, Goodwin. See supra note 421 and
accompanying text.
\435\ Letter from Ernst & Young. See supra note 427 and
accompanying text.
\436\ See discussion of Item 1607, infra section VIII.B.1.iii.f.
---------------------------------------------------------------------------
Furthermore, we believe that it would be impractical to require
disclosure under Item 1607 only in instances of ``severe conflicts of
interest'' as one commenter suggested \437\ because quantifying or
classifying the extent of a conflict of interest is difficult given the
wide variety of facts and circumstances in each de-SPAC transaction.
---------------------------------------------------------------------------
\437\ Letter from Andrew Tuch. See supra note 426 and
accompanying text.
---------------------------------------------------------------------------
We are adopting Item 1607(b) and (c) as proposed, with two
technical modifications. We revised Item 1607(b)(5) to specify that the
related disclosure is only required for reports, opinions, or
appraisals related to the fairness of the consideration to be offered
to security holders of the target company in the de-SPAC transaction.
We also revised Item 1607(c) to specify that the reports, opinions, or
appraisals required to be filed are those referred to in Items 1607(a)
and (b).
We disagree with the comments that the filing of reports, opinions,
or appraisals pursuant to Item 1607(c) would have limited incremental
benefit to investors.\438\ Although the summary required by Item
1607(b)(6) provides investors with useful information regarding the
preparation and findings or recommendations of the report, opinion, or
appraisal, we believe that it is important for investors to be able to
review the actual report, opinion, or appraisal being summarized and,
in many cases, being relied upon by the board when considering the
transaction.
---------------------------------------------------------------------------
\438\ Letter from Ernst & Young. See supra note 425 and the
accompanying text.
---------------------------------------------------------------------------
We also disagree with the comments that the filing of reports,
opinions, or
[[Page 14201]]
appraisals pursuant to Item 1607(c) would present their preparers with
an ``impractical and unworkable'' task or that the preparers would not
consent to the public use of such materials.\439\ While the
requirements of Item 1607(c) may affect how preparers price their
services as well as the types of information included in their reports
and opinions, such materials have historically and routinely been
included with filings relating to transactions other than de-SPAC
transactions,\440\ and in those cases, registrants and preparers have
been able to navigate the preparation, filing, and evaluation of such
materials. We are not aware of any reason (and commenters have not
provided any specific reason) why materials used in de-SPAC
transactions would be any different.
---------------------------------------------------------------------------
\439\ Letters from ABA, Goodwin. See supra notes 422 and 423 and
accompanying text.
\440\ For example, in a going-private transaction subject to
Rule 13e-3, any report, opinion (other than an opinion of counsel)
or appraisal from an outside party that is materially related to the
transaction is required to be filed as an exhibit to the Schedule
13E-3. See Item 16 of Schedule 13E-3 and 17 CFR 229.1016(c) (Item
1016(c) of Regulation M-A). Additionally, in other public company
mergers and business combinations, Item 21(c) of Forms S-4 and F-4
requires that any report, opinion or appraisal materially relating
to the subject transaction and referred to in the prospectus be
furnished as an exhibit to such form.
---------------------------------------------------------------------------
We are also amending Item 601 of Regulation S-K, Schedule 14A, and
Schedule TO to implement the final Item 1607(c) exhibit filing
requirement. For Forms S-1, S-4, F-1, and F-4, which refer to the
exhibit requirements in Item 601 of Regulation S-K, the Item 1607(c)
exhibit filing requirement will be incorporated through new 17 CFR
229.601(b)(98) (Item 601(b)(98) of Regulation S-K). Schedule 14A and
Schedule TO will incorporate the Item 1607(c) exhibit filing
requirement through new Item 25(b) of Schedule 14A and new Item 12(b)
of Schedule TO, respectively. Because Item 1 of Schedule 14C generally
requires compliance with the relevant items of Schedule 14A, the Item
1607(c) exhibit filing requirement will be incorporated into Schedule
14C through new Item 25(b) of Schedule 14A.
H. Tender Offer Filing Obligations
1. Proposed Item 1608
The Commission proposed Item 1608 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.\441\ Proposed Item
1608 would not affect the staff position for those SPACs that file
Schedule 14A or 14C for their de-SPAC transactions or extensions. SPACs
that do not file a Schedule 14A or 14C (such as FPIs) in connection
with the de-SPAC transaction (or an extension of time to complete a de-
SPAC transaction),\442\ however, would be subject to the requirements
of proposed Item 1608.\443\
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\441\ See supra note 23.
\442\ ``Foreign private issuer'' is defined in Securities Act
Rule 405 and 17 CFR 240.3b-4(c). The term ``foreign private issuer''
means any foreign issuer other than a foreign government except for
an issuer meeting the following conditions as of the last business
day of its most recently completed second fiscal quarter: (1) More
than 50% of the issuer's outstanding voting securities are directly
or indirectly held of record by residents of the United States; and
(2) Any of the following: (i) The majority of the executive officers
or directors are United States citizens or residents; (ii) More than
50% of the assets of the issuer are located in the United States; or
(iii) The business of the issuer is administered principally in the
United States.
\443\ 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 17 CFR 229.1011(c)
(``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.''
---------------------------------------------------------------------------
2. Comments: Item 1608
A few commenters generally supported the proposed rule but
suggested certain changes.\444\
---------------------------------------------------------------------------
\444\ Letters from ABA, Vinson & Elkins.
---------------------------------------------------------------------------
One of these commenters recommended the Commission codify and
clarify that a SPAC filing a Schedule 14A or 14C in connection with a
de-SPAC transaction (or seeking an extension of time to complete a de-
SPAC transaction) would neither need to file a Schedule TO nor comply
with the tender offer rules.\445\ While expressing support for proposed
Item 1608, the same commenter stated that a SPAC stockholder's ability
to redeem its shares at its option does not result in the existence of
a tender offer.\446\ The same commenter stated that SPACs that are FPIs
and that elect to report generally on domestic forms and whose de-SPAC
transaction disclosure document is nearly ``identical'' to a proxy or
information statement filed by a domestic filer pursuant to Regulation
14A or 14C should not have to file a Schedule TO.\447\ Finally, the
commenter stated that such a SPAC's investors are confused when
presented with a proxy statement and a tender offer document that
proceed as parallel but different processes while not having any added
protection.\448\
---------------------------------------------------------------------------
\445\ Letter from ABA.
\446\ Id.
\447\ Id.
\448\ Id.
---------------------------------------------------------------------------
Another commenter suggested that proposed Item 1608 is too broad
because it would apply to tender offers conducted by SPACs but not
related to a de-SPAC transaction.\449\ The same commenter stated that
the adoption of proposed Securities Act Rule 145a would effectively
require the use of Form S-4 or F-4 for all de-SPAC transactions, thus
rendering Item 1608 unnecessary.\450\
---------------------------------------------------------------------------
\449\ Letter from Vinson & Elkins.
\450\ Id.
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3. Final Item 1608
After considering the comments, we are adopting Item 1608 as
proposed.
We decline to revise the final item to clarify that a SPAC filing a
Schedule 14A or 14C in connection with a de-SPAC transaction (or
seeking an extension of time to complete a de-SPAC transaction) would
neither need to file a Schedule TO nor comply with the tender offer
rules, as recommended by a commenter.\451\ We do not believe the
codification of the commenter's view is necessary because Item 1608, as
adopted, is a more precise way to address an exception to the standard
de-SPAC transaction structures that have been used historically. We
also note that Item 1608 applies only if a SPAC files a Schedule TO for
the redemption of securities offered to security holders (e.g., in
connection with a de-SPAC transaction or an extension of the timeframe
to complete a de-SPAC transaction). We have revised General Instruction
K to Schedule TO to
[[Page 14202]]
separately address the requirements for a filing that relates to a
redemption of securities offered to security holders other than in
connection with a de-SPAC transaction (e.g., the redemption of
securities in connection with an extension of the timeframe to complete
a de-SPAC transaction).
---------------------------------------------------------------------------
\451\ Letter from ABA. See supra note 445 and accompanying text.
---------------------------------------------------------------------------
With respect to the comment that the redemption of a SPAC's shares
at the option of a stockholder is not a tender offer,\452\ as noted
above, the Commission has expressed the view that SPAC redemptions
conducted pursuant to a SPAC's organizational documents generally have
indicia of being a tender offer. However, as discussed above, 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. Item 1608 does not affect this staff position
for those SPACs that file a Schedule 14A or 14C for their de-SPAC
transactions or extensions.
---------------------------------------------------------------------------
\452\ Letter from ABA. See supra note 446 and accompanying text.
---------------------------------------------------------------------------
Regarding the comment that FPIs whose de-SPAC transaction
disclosure document is ``identical'' to a proxy or information
statement filed by a domestic filer pursuant to Regulation 14A or 14C
should not have to file a Schedule TO,\453\ we note that an FPI is not
required to comply with Regulations 14A or 14C and, thus, any filing
the FPI considers to be a proxy or information statement would not be
subject to compliance with those regulations and would not be subject
to the liability provisions associated with filings required to comply
with those regulations (although the filing would be subject to the
liability provisions associated with the specific filing made).
---------------------------------------------------------------------------
\453\ Letter from ABA. See supra note 447 and accompanying text.
---------------------------------------------------------------------------
Finally, with respect to the same commenter's statement that
investors in a SPAC that is an FPI and which delivers both a disclosure
document similar to a proxy statement and a tender offer document will
be confused without any additional protection,\454\ we believe the SPAC
should be able to provide enough clarity and investor support regarding
the purposes of each such document to surmount these concerns.
---------------------------------------------------------------------------
\454\ Letter from ABA. See supra note 448 and accompanying text.
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We also received a suggestion to expressly state that Item 1608 is
applicable only to tender offers conducted by SPACs related to a de-
SPAC transaction.\455\ We decline to revise Item 1608 as suggested
because Item 1608 is intended to apply to Schedule TO filings by SPACs
for any redemption of securities offered to security holders, which
would include the redemption of securities offered in connection with
an extension of the timeframe to complete a de-SPAC transaction.\456\
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\455\ Letter from Vinson & Elkins. See supra note 449 and
accompanying text.
\456\ If a SPAC files a Schedule TO for any redemption of
securities offered to security holders, final Item 1608 requires a
Schedule TO to 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)(2) of Schedule 14A (Sec. 240.14a-101), as
applicable, in addition to the information otherwise required by
Schedule TO. If the Schedule TO relates to an extension of the
timeframe to complete a de-SPAC transaction and a target company has
not been identified by the SPAC, we would not expect this
information required by Item 1608 regarding a target private
operating company to be known or disclosed.
---------------------------------------------------------------------------
In response to a commenter's view that the adoption of proposed
Rule 145a may result in the requirement to use Form S-4 or F-4 for all
de-SPAC transactions, thus rendering Item 1608 unnecessary,\457\ we
note that there are certain situations today,\458\ and there could be
situations under future SPAC structures, in which Item 1608 would still
be applicable and provide security holders with important disclosure to
use in making their investment decision.
---------------------------------------------------------------------------
\457\ Id.
\458\ For example, the redemption of securities offered by a
foreign private issuer or in connection with an extension of the
timeframe to complete a de-SPAC transaction where a Schedule 14A or
14C is not filed.
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I. Structured Data Requirement
1. Proposed Item 1610
The Commission proposed Item 1610 to require SPACs to tag all
information disclosed pursuant to subpart 1600 of Regulation S-K in
Inline XBRL in accordance with Rule 405 of Regulation S-T and the EDGAR
Filer Manual.
2. Comments
A number of commenters supported proposed Item 1610.\459\ One of
those commenters said that tagging the quantitative and narrative
disclosures would provide investors with searchable formats to access
the information they would like to review, including potential
conflicts of interests and potential risks.\460\ Another commenter said
the provision of structured data will make subpart 1600 of Regulation
S-K information more easily accessible for purposes of aggregation,
comparison, filtering, and other analysis.\461\
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\459\ Letters from ABA; Crowe LLP (June 13, 2022) (``Crowe'');
ICGN; PwC; Campbell Pryde, President and CEO, XBRL US (June 13,
2022) (``XBRL US'').
\460\ Letter from ICGN.
\461\ Letter from PwC.
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Some commenters addressed whether the Commission should provide
exemptions or different requirements for FPIs, SRCs, or emerging growth
companies (``EGCs'').\462\ One commenter said there was not a
compelling reason to provide for such exemptions or different
requirements.\463\ Another commenter said that ``[u]ltimately
requirements should be the same'' across issuers ``to ensure the
availability of a complete dataset for investors,'' but that ``the
Commission may wish to offer a phase-in period for smaller companies
and [foreign private issuers] that have more limited resources.'' \464\
---------------------------------------------------------------------------
\462\ Letters from ICGN, XBRL US. See Proposing Release, supra
note 7, at 29476 (request for comment number 55) (requesting comment
on structured data with respect to FPIs, SRCs, and EGCs).
\463\ Letter from ICGN.
\464\ Letter from XBRL US.
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One commenter indicated they believe there is no need for
structured data tagging for SPAC IPOs because SPAC IPOs are
considerably simpler and easier to understand for investors than
traditional IPOs and the redemption rights make an investment in a SPAC
IPO considerably less risky.\465\ Another commenter recommended that
the Commission evaluate responses from the issuer community regarding
the costs of tagging this information.\466\
---------------------------------------------------------------------------
\465\ Letter from Vinson & Elkins.
\466\ Letter from PwC.
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One commenter said the Commission should provide detailed technical
guidance prior to the rule implementation, taking account of all
possible use cases for reporting, and an EDGAR Beta testing environment
with voluntary early filing allowed 12 to 15 months prior to the first
mandatory compliance date.\467\
---------------------------------------------------------------------------
\467\ Letter from XBRL US.
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One commenter suggested the Commission consider use of Legal Entity
Identifiers (LEIs) within the registration process and enhanced
disclosures of IPOs by SPACs and in de-SPAC transactions.\468\
---------------------------------------------------------------------------
\468\ Letter from Stephan Wolf, CEO, Global Legal Entity
Identifier Foundation (June 13, 2022) (``Global Legal Entity
Identifier Foundation'') (``The LEI itself is a 20-digit, alpha-
numeric code based on the ISO 17442 standard developed by the
International Organization for Standardization (ISO).'').
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3. Final Item 1610 and Tagging Compliance Date
After considering the comments received, we are adopting Item 1610
as
[[Page 14203]]
proposed,\469\ but we are providing a one year phased-in compliance
date for the tagging requirements.
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\469\ The tagging requirements we are adopting are implemented
by inclusion of a cross-reference to Rule 405 of Regulation S-T in
Item 1610 of Regulation S-K and by revising 17 CFR 232.405(b) to
include the proposed SPAC-related disclosures. We are also adopting
amendments that add a corresponding Instruction to Schedule TO.
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We agree with the commenter who said that tagging the quantitative
and narrative disclosures would provide investors with searchable
formats to access the information they would like to review, including
potential conflicts of interests and potential risks.\470\ We also
agree with the commenter who said that the provision of structured data
will make subpart 1600 of Regulation S-K information more easily
accessible for purposes of aggregation, comparison, filtering, and
other analysis.\471\
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\470\ Letter from ICGN. See supra note 460 and accompanying
text.
\471\ Letter from PwC. See supra note 461 and accompanying text.
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We believe that the structured data requirements will enhance the
usability of the SPAC disclosures. The requirements we are adopting
include detail tagging of the quantitative disclosures and block text
tagging of the narrative disclosures required under subpart 1600. These
structured data requirements will make SPAC disclosures more readily
available and easily accessible to investors and other market
participants for aggregation, comparison, filtering, and other
analysis.\472\
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\472\ These considerations are generally consistent with
objectives of the recently enacted Financial Data Transparency Act
of 2022, which directs the establishment by the Commission and other
financial regulators of data standards for collections of
information. Such data standards must meet specified criteria
relating to openness and machine-readability and promote
interoperability of financial regulatory data across members of the
Financial Stability Oversight Council. See James M. Inhofe National
Defense Authorization Act for Fiscal Year 2023, Public Law 117-263,
tit. LVIII, 136 Stat. 2395, 3421-39 (2022).
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One commenter suggested that the Commission may wish to ``offer a
phase-in period for smaller companies and [foreign private issuers]
that have more limited resources.'' \473\ To address these concerns, we
have determined to provide a one-year phase in for the tagging
requirements. We believe the additional one-year period for tagging
compliance will help lessen burdens associated with the tagging
requirements under the final rules for all registrants.\474\
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\473\ Letter from XBRL US. See supra note 464 and accompanying
text.
\474\ Furthermore, SRCs and FPIs are subject to Inline XBRL
requirements for other filings, which minimizes the burden reduction
associated with any tagging phase-in for those entities. See infra
note 477.
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We disagree with one commenter's view that there is no need for
structured data tagging for SPAC IPOs because SPAC IPOs are
considerably simpler and easier to understand for investors than
traditional IPOs and the redemption rights make an investment in a SPAC
IPO considerably less risky.\475\ On the contrary, we believe
structured data is useful to investors in the SPAC IPO setting (as well
as the de-SPAC transaction setting), particularly by enabling
comparison and the extraction and analysis of information, as discussed
above. In addition, as discussed above, special risks such as conflicts
of interest and dilution in SPAC IPOs and de-SPAC transactions may be
complex and enhancing investor ability to use, compare, and analyze the
data will help investors assess such risks.
---------------------------------------------------------------------------
\475\ Letter from Vinson & Elkins. See supra note 465 and
accompanying text.
---------------------------------------------------------------------------
We have not received any responses from the issuer community
regarding the costs of the data tagging requirements, but we
nonetheless do not believe the structured data requirements will unduly
add to companies' burden in preparing their filings based on our
extensive experience with existing tagging requirements. We believe
such incremental costs are appropriate given the significant benefits
to investors, as described above.
As a result of the requirement to tag SPAC IPO disclosures, SPACs
will incur tagging compliance costs at an earlier stage of their
lifecycle, because SPACs do not have to tag IPO registration statements
under current Commission rules.\476\ While the tagging requirements for
SPAC disclosures will impose additional compliance costs on
registrants, we expect such costs will be modest and largely the final
rules will simply shift the timing of such costs because under the
current rules such registrants are subject to data tagging requirements
in their first post-IPO periodic report on Form 10-Q, 20-F, or 40-
F,\477\ as discussed in greater detail in section VIII (Economic
Analysis) below.
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\476\ SPACs are currently 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. See 17 CFR 229.601(b)(101)(i)(A).
\477\ See 17 CFR 229.601(b)(101).
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One commenter recommended that the Commission provide an EDGAR
beta-testing environment with voluntary early filing allowed 12 to 15
months prior to the first mandatory compliance date.\478\ In lieu of
the suggested beta-testing environment, we have determined to provide a
one year phased-in compliance date for the tagging requirements, as
noted above. This approach will provide additional time for registrants
to prepare for the new requirements. It will also provide sufficient
time for the adoption of a final taxonomy that will take into
consideration initial disclosures that will be provided in response to
the final rules, which should help lessen the compliance burden for
registrants and improve data quality for investors by reducing the need
for extensive custom tagging. The commenter also said the Commission
should provide detailed technical guidance prior to the rule
implementation, ``taking account of all possible use cases for
reporting'' to ensure consistency of reported data.\479\ Consistent
with the Commission's common practice, a draft taxonomy will be made
available for public comment, and the Commission will incorporate a
final taxonomy into an updated version of the EDGAR system before the
tagging requirements take effect.
---------------------------------------------------------------------------
\478\ Letter from XBRL US. See supra note 467 and accompanying
text.
\479\ Id.
---------------------------------------------------------------------------
One commenter suggested the Commission consider use of Legal Entity
Identifiers (LEIs) within the registration process and enhanced
disclosures of IPOs by SPACs and in de-SPAC transactions.\480\ The
Commission is not adopting requirements regarding LEIs in this
rulemaking but will take the comment under advisement.\481\
---------------------------------------------------------------------------
\480\ Letter from Global Legal Entity Identifier Foundation. See
supra note 468 and accompanying text.
\481\ See supra note 472 (regarding the Financial Data
Transparency Act of 2022).
---------------------------------------------------------------------------
III. Disclosures and Liability in De-SPAC Transactions
In light of the reliance on de-SPAC transactions as a vehicle for
private operating companies to access the U.S. public securities
markets with greater relative frequency than in the past, the
Commission proposed a number of new rules and amendments to existing
rules to more closely align the treatment of private operating
companies entering the public markets through de-SPAC transactions with
that of companies conducting traditional IPOs. In connection with these
proposals, the Commission expressed the view in the Proposing Release
that a private operating company's method of becoming a public company
should not negatively impact investor protection.\482\
---------------------------------------------------------------------------
\482\ Proposing Release, supra note 7, at 29477.
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[[Page 14204]]
A. Non-Financial Disclosures in De-SPAC Disclosure Documents
1. Proposed Rules
The Commission proposed to require certain non-financial statement
disclosures in connection with de-SPAC transactions. The Commission
proposed 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 the target company pursuant to
the following items in Regulation S-K would be required in the
registration statement or schedule \483\ filed in connection with the
de-SPAC transaction: (1) Sec. Sec. 229.101 (``Item 101'') (description
of business); (2) 229.102 (``Item 102'') (description of property); (3)
229.103 (``Item 103'') (legal proceedings); (4) 229.304 (``Item 304'')
(changes in and disagreements with accountants on accounting and
financial disclosure); (5) 229.403 (``Item 403'') (security ownership
of certain beneficial owners and management, assuming the completion of
the de-SPAC transaction and any related financing transaction); \484\
and (6) 229.701 (``Item 701'') (recent sales of unregistered
securities).\485\ Where the private operating company is an FPI, the
proposed amended registration forms included 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 provided by FPIs in IPOs.\486\
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\483\ See (a) proposed Item 14(f)(2) of Schedule 14A; (b)
proposed General Instruction L.2. to Form S-4; and (c) proposed
General Instruction I.2 to Form F-4. See also proposed Item 1608 of
Regulation S-K (incorporating into Schedule TO applicable
information required by Item 14(f)(2) of Schedule 14A, General
Instruction L.2. to Form S-4, and General Instruction I.2 to Form F-
4). Proposed Item 14(f)(2)(vii) of Schedule 14A would have required
additional disclosure for any directors appointed without action by
the security holders of the SPAC.
\484\ 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.
\485\ The proposed changes to Forms S-4 and F-4 regarding
disclosure pursuant to Item 701 of Regulation S-K were proposed to
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.
\486\ Proposed General Instruction L.2 to Form S-4; proposed
General Instruction I.2 to Form F-4.
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Also, the Commission proposed amendments to Forms S-1 and F-1 to
provide that where these forms are used to register securities in
connection with a de-SPAC transaction, these forms must include the
information required in Forms S-4 (in the case of Form S-1) and F-4 (in
the case of Form F-1).\487\ Finally, the Commission proposed General
Instruction K to Schedule TO and new Item 14(f)(1) to Schedule 14A to
incorporate into each of those forms, if the filing relates to a de-
SPAC transaction, the disclosure provisions of Items 1603 through 1609
of Regulation S-K, as well as the structured data provision of Item
1610 of Regulation S-K.
---------------------------------------------------------------------------
\487\ See proposed General Instruction VIII to Form S-1 (``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.''); proposed General Instruction VII to
Form F-1 (``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.'').
---------------------------------------------------------------------------
2. Comments
Commenters generally supported the Commission's proposal to align
non-financial disclosures for de-SPAC transactions with the
requirements in a traditional IPO.\488\ A few commenters suggested the
proposed disclosure requirements are consistent with current
practice.\489\ These commenters said the proposed disclosure
requirements would otherwise be required in a Form 8-K filing following
the closing of the de-SPAC transaction.\490\ One commenter said the
proposed requirements reflect ``current best practice'' and would not
create a ``significant burden'' for targets.\491\
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\488\ Letters from ABA, CalPERS, Davis Polk, Ernst & Young,
ICGN, NASAA, PwC.
\489\ See letters from ABA, PwC.
\490\ Letters from ABA, PwC.
\491\ Letter from ABA.
---------------------------------------------------------------------------
One commenter said that the proposed requirements, other than Item
701, would require information ``already disclosed with respect to
target companies.'' \492\ In the commenter's view, the proposed
disclosures, including Item 701, ``would not provide meaningful
information or benefits to investors.'' \493\
---------------------------------------------------------------------------
\492\ Letter from Vinson & Elkins. This commenter also said,
``We do not believe Item 701 disclosure with respect to the target
company, as opposed to the registrant, would be consistent with IPO
disclosure or provide meaningful information to investors.''
\493\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
Regarding the proposed amendment to Form S-1 to require the
information required by Form S-4, one commenter recommended ``the final
rule include explicit language that such Form S-1 should include all
information for the private operating company that would have been
required in a Form S-4.'' \494\
---------------------------------------------------------------------------
\494\ Letter from Grant Thornton LLP (June 13, 2022) (``Grant
Thornton'').
---------------------------------------------------------------------------
3. Final Rules
Except for the modifications we discuss below, we are adopting as
proposed: (a) General Instruction L.2 to Form S-4, (b) General
Instruction I.2 to Form F-4,\495\ (c) Item 14(f)(2) of Schedule 14A,
(d) General Instruction K to Schedule TO, (e) General Instruction VIII
to Form S-1, and (f) General Instruction VII to Form F-1.\496\ We
believe there will be two main benefits to investors from these
requirements. First, the inclusion of these disclosures in a Form S-4
or Form F-4 registration statement will mean that 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 IPO.
---------------------------------------------------------------------------
\495\ The regulatory text section of the Proposing Release
inadvertently omitted Item 304 of Regulation S-K from proposed
General Instruction I.2 to Form F-4. We have corrected that
oversight in this adopting release. Additionally, the cross-
references to the applicable Items from Form 20-F in the case where
the target is a foreign private issuer have been corrected from
those proposed to align with the requirements applicable to domestic
targets, that is Items 4, 6.E, 7.A, 8.A.7, and 16F of Form 20-F. In
addition, in Form F-4, we have added the term ``applicable'' to
modify ``disclosure requirements'' in the following sentence in
General Instruction I in order to be consistent with similar
language in Form S-4: ``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.'' We made similar changes to add the term
``applicable'' to Schedule 14A and Schedule TO for the same reason.
\496\ Under the final rules, with respect to the requirements to
provide Item 403 of Regulation S-K (security ownership of certain
beneficial owners and management) information assuming the
completion of the de-SPAC transaction and any related financing
transaction, the Item 403 information that must be provided is with
respect to certain beneficial owners, directors, named executive
officers, and directors and executive officers as a group (i.e., the
persons identified in Item 403) of the post-de-SPAC transaction
combined company and not for the target company as a separate
entity.
---------------------------------------------------------------------------
Second, as a result of these new requirements, this information
will be available to investors prior to the inception of trading of the
post-business combination company's securities on a national securities
exchange, rather than the earliest instance of such requirement being
the requirement to set this information out in a Form 8-K due within
four business days of the completion of the de-SPAC
[[Page 14205]]
transaction.\497\ As a result, shareholders will be able to consider
this information when they make voting, investment, or redemption
decisions in connection with a de-SPAC transaction.
---------------------------------------------------------------------------
\497\ We note registrants should already be preparing this
information in anticipation of making a Form 8-K filing (or a Form
20-F for an FPI) in connection with a de-SPAC transaction. See supra
note 489 (letters from ABA, PwC).
---------------------------------------------------------------------------
One commenter suggested that disclosure under the proposed
requirements is already provided with respect to target companies and
would not provide meaningful benefits to investors.\498\ We disagree
with this view that the requirements would not provide meaningful
benefits to investors. Also, we believe compliance with these
requirements will be minimally burdensome where disclosure of this
information is already market practice and codifying this practice will
create a uniform, transparent, minimum floor standard of disclosure
across transactions, even if market practice were to change in the
future.
---------------------------------------------------------------------------
\498\ Letter from Vinson & Elkins. See supra notes 492 and 493
and accompanying text.
---------------------------------------------------------------------------
In response to the comment recommending that Form S-1 should
include explicit language that Form S-1 should include all information
for the private operating company that would have been required in a
Form S-4,\499\ we have revised General Instruction VIII of Form S-1 to
clarify that, if the securities to be registered on Form S-1 will be
issued in a de-SPAC transaction, the requirements of Form S-4 apply to
Form S-1, including, but not limited to, Item 17 and General
Instruction L. Similarly, in the final rules, we have revised General
Instruction VII of Form F-1 to clarify that, if the securities to be
registered on Form F-1 will be issued in a de-SPAC transaction, the
requirements of Form F-4 apply to Form F-1, including, but not limited
to, Item 17 and General Instruction I.
---------------------------------------------------------------------------
\499\ Letter from Grant Thornton. See supra note 494 and
accompanying text.
---------------------------------------------------------------------------
With respect to instructions in both General Instruction L.2 to
Form S-4 and General Instruction I.2 to Form F-4 that apply with
respect to the target company ``[i]f the target company is a foreign
private issuer,'' we made several corrections from the proposal. First,
we deleted the requirement to provide target company information
pursuant to Item 3.C of Form 20-F (reasons for the offer and use of
proceeds), because there is not a similar analog in the list of
disclosure items to be provided with respect to the target company when
the target company is not an FPI in the same instructions. Second, we
deleted the requirement to provide target company information pursuant
to Item 9.E of Form 20-F (dilution) because dilution information will
already be required through the application of Item 1604 in the forms
in connection with a de-SPAC transaction.\500\ Third, we added a
requirement to provide target company information pursuant to Item 16F
of Form 20-F (change in registrant's certifying accountant), because
the intent of the proposal was that there should be an analog for FPI
target companies to Item 304 of Regulation S-K (changes in and
disagreements with accountants on accounting and financial disclosure)
in the list of disclosure items to be provided with respect to the
target company when the target company is not an FPI in the same
instructions and the reference to Item 16F of Form 20-F was
inadvertently omitted from the proposal.
---------------------------------------------------------------------------
\500\ We made a similar change to Form F-1. We added new Item
9.E.4 to Form F-1 that provides: Where the registrant is a special
purpose acquisition company (as defined in Item 1601 of Regulation
S-K), in lieu of providing the information required under Item 9.E.1
and Item 9.E.2, provide the disclosure required pursuant to Item
1602(a)(4) and (c) of Regulation S-K in an offering other than a de-
SPAC transaction (as defined in Item 1601 of Regulation S-K) and
provide the disclosure required under Item 1604(c) of Regulation S-K
in connection with a de-SPAC transaction.
---------------------------------------------------------------------------
In the final rules, we have also revised Item 14(f)(2) of Schedule
14A to remove the additional disclosure required for any directors
appointed without action by the security holders of the SPAC to align
the disclosure required under Item 14(f)(2) of Schedule 14A with that
required under General Instruction L.2 to Form S-4 and General
Instruction I.2 to Form F-4.
B. Minimum Dissemination Period
1. Proposed Rules
Historically, in business combination transactions, there has been
no requirement under Commission rules to provide security holders with
a minimum amount of time to consider proxy statement or other
disclosures.\501\ In view of the unique circumstances surrounding de-
SPAC transactions, the Commission proposed to amend Exchange Act Rule
14a-6 and Rule 14c-2, as well as to add instructions to Forms S-4
(General Instruction L.3) and F-4 (General Instruction I.3), to require
that prospectuses and proxy and information statements filed in
connection with de-SPAC transactions be distributed to security holders
at least 20 calendar days in advance of a security holder 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.\502\
---------------------------------------------------------------------------
\501\ In Form S-4 and Form F-4, however, there is a requirement
to send a prospectus to security holders a minimum of 20 business
days prior to a security holder meeting, or, if no meeting is held,
other action, 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.
\502\ The 20-calendar day period is the same length of time as
the 20-day advance disclosure period in 17 CFR 240.13e-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)].
---------------------------------------------------------------------------
2. Comments
A number of commenters generally supported the proposed minimum
dissemination periods for disclosure documents in de-SPAC
transactions.\503\
---------------------------------------------------------------------------
\503\ Letters from ABA, Better Markets (supporting the 20-day
dissemination period, stating that ``[t]o make meaningful decisions,
investors in a SPAC need the information regarding the proposed
transaction in a timely manner'' and that ``[i]n the absence of a
federally mandated minimum time period to disseminate information
regarding the transaction, the potential for abuse is clear'');
CalPERS; CFA Institute (``CFA Institute supports as much lead time
as possible for dissemination of disclosure documents regarding the
de-SPAC transaction and agrees with the proposed minimum of twenty
(20) calendar days in advance merger approval vote''); Davis Polk
(``the minimum dissemination period proposed in the amendments to
Exchange Act rules 14a-6 and [14c-2] is a welcome modification to
improve public confidence by providing a minimum period to review
the disclosures provided in connection with a de-SPAC
transaction.''); ICGN (``For investors, after a SPAC has searched
for a potential business candidate for up to two years, time may be
running out. Investors should be able to receive proxy and
prospectus statements within a reasonable time frame that provides
them with the ability to assess the de-SPAC business transaction and
vote accordingly.''); NASAA.
---------------------------------------------------------------------------
One commenter on the proposal supported ``as much lead time as
possible for dissemination'' and suggested the Commission ``consider
whether federal securities laws should override the laws of the
jurisdiction of incorporation or organization if such jurisdictions
allow less than 20 calendar days advance dissemination for de-SPAC
merger/proxy vote documentation where such de-SPAC will be trading on
SEC regulated markets.'' \504\
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\504\ Letter from CFA Institute.
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Another commenter said that the period of 20 calendar days ``is
consistent with current market practice
[[Page 14206]]
for the solicitation period in de-SPAC transactions.'' \505\ The
commenter said that, if the safe harbor from the Investment Company Act
is adopted as proposed, the Commission should ``consider an exception
to the minimum dissemination period in the event necessary to stay
within the safe harbor.'' \506\
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\505\ Letter from Davis Polk.
\506\ Letter from Davis Polk.
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Another commenter said, ``The SEC's proposed solution does not
align with the treatment of IPOs. An IPO prospectus is substantially
final at launch of the IPO roadshow; however, since there is no
required length for a roadshow, investors in an IPO may only have
access to a substantially final version of the prospectus for a few
days prior to making their investment decision.'' \507\ The commenter
said that stockholder meeting notices required to be provided certain
numbers of days prior to a stockholder meeting are typically included
in proxy statements and stated that, ``Under the current framework, the
final registration statement or proxy statement in a de-SPAC
transaction is available for at least 10 days and a preliminary version
is typically publicly available for up to several months longer than in
an IPO.'' This commenter also stated, ``The SEC justifies this
differential treatment by citing 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, but it fails to
appreciate that many of these same considerations can be present in IPO
transactions and that this proposed rule is decidedly contrary to the
SEC's stated intention of aligning de-SPAC transactions with IPOs.''
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\507\ Letter from Vinson & Elkins.
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Another commenter appeared to suggest that the minimum
dissemination period for purposes of proposed General Instruction L.3
to Form S-4 should be the same as the IPO ``48 hour'' rule of 17 CFR
240.15c2-8 (``Rule 15c2-8'').\508\
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\508\ Letter from Loeb & Loeb.
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3. Final Rules
We are adopting the amendments to Rules 14a-6 and 14c-2 and Forms
S-4 (General Instruction L.3) and F-4 (General Instruction I.3) as
proposed, except for clarifying changes discussed below. In addition to
the need for enhanced disclosure in de-SPAC transactions, we continue
to believe that it is important to ensure that SPAC security holders
have adequate time to analyze the information presented in these
transactions.
Although the laws of a SPAC's jurisdiction of incorporation or
organization may require the SPAC to send a notice to its security
holders at least a specified number of days before the security holder
meeting to approve a proposed business combination transaction, the
information in such notices is often limited.\509\ These laws do not
generally require a minimum period of time for dissemination of other
information about the transaction (including any proxy statements or
other materials required by the Federal securities laws) to security
holders.\510\ Exchange listing standards also do not impose such
requirements.\511\ Without a minimum period for dissemination of
prospectuses, proxy statements, and other materials before a security
holder meeting (or action by consent), SPACs and SPAC sponsors may
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.
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\509\ See, e.g., Del. Code Ann. tit. 8, sec. 222; Del. Code Ann.
tit. 8, sec. 251(c) (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]'').
\510\ See R. Franklin Balotti, Jesse A. Finkelstein, John Mark
Zeberkiewicz & Blake Rohrbacher, 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.'').
\511\ See, e.g., NYSE Listed Company Manual Section 401.03 which
``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'' and 402.05 which ``recommends the [proxy soliciting]
material be provided 30 days prior to the meeting date in order to
allow the firms ample time to mail the material to beneficial owners
and receive replies from them.''
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We recognize that SPACs are often required under their governing
instruments and applicable exchange listing rules to complete de-SPAC
transactions within a certain time frame. Nevertheless, given the
complexity of the structure of SPACs, the conflicts of interest that
are often present in this structure and the effects of dilution on non-
redeeming shareholders, the 20-calendar day minimum dissemination
periods we are adopting will provide an important investor protection
by establishing a minimum time period for security holders to review
prospectuses and proxy and information statements in de-SPAC
transactions.\512\
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\512\ The requirements to ``distribute'' the various security
holder materials under the minimum dissemination time periods in the
rules we are adopting are satisfied when the materials are sent and
not when they are received by the security holder. Thus, where the
registrant is mailing a full set of hard copy materials to security
holders, the requirement would be met when the materials are placed
in the mail.
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In order to account for the prospect that the laws of a SPAC's
jurisdiction of incorporation or organization may have a maximum
advance time period provision applicable to the dissemination of
materials to security holders, the rules we are adopting include
provisions 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. One commenter suggested that the
Commission should override the laws of the jurisdiction of
incorporation or organization of the SPAC where such jurisdictions
provide a maximum period for dissemination of less than 20 days.\513\
We are not adopting such suggestion because we believe the instances
where there is a maximum period of less than 20 days will be
limited.\514\
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\513\ Letter from CFA Institute. See supra note 117 and
accompanying text.
\514\ A review, in June 2023, by the Commission staff of the
corporation laws of each of the 50 U.S. States found there are
currently no U.S. States with a maximum period of notice for a
stockholder meeting that is less than 20 days. We acknowledge that
there remains the possibility a U.S. State could change its law to
provide for a maximum period of notice less than 20 days or foreign
law could contain such a provision.
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Another commenter said that the Commission should consider an
exception to the minimum dissemination period where necessary to stay
within the Investment Company Act safe harbor.\515\ As discussed below
in section VI, we are not adopting the proposed Investment Company Act
safe harbor.
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\515\ Letter from Davis Polk. See supra note 506 and
accompanying text.
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One commenter suggested that the proposed minimum dissemination
period is contrary to the Commission's stated purpose of aligning de-
SPAC transactions with IPOs because investors in IPOs typically have
only short periods of time to review prospectuses.\516\ While we
acknowledge that, under the final rules, investors may
[[Page 14207]]
have more time to review prospectuses in a de-SPAC transaction than in
an IPO, we believe this is appropriate because in the Commission
staff's experience, due to the hybrid nature of SPAC transactions,
registration statements in de-SPAC transactions in some cases are
substantially lengthier than both the earlier IPO registration
statement for the specific SPAC (that is involved in the de-SPAC
transaction) and registration statements for IPOs of traditional
operating companies, as the registration statements contain both IPO-
like information about the target company and M&A-like information
about the de-SPAC (and other related) transactions. Further, as noted
by a different commenter \517\ and as observed by Commission staff,
current market practice appears to be that many SPACs deliver these
disclosures to investors earlier than 20 calendar days prior to the
meeting date, meaning the final rules we are adopting should impose
minimal burdens in such instances and would provide a uniform and
transparent minimum floor standard for the dissemination of such
disclosure should market practices change.
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\516\ Letter from Vinson & Elkins. See supra note 507 and
accompanying text.
\517\ Letter from Davis Polk.
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One commenter also said that a preliminary version of the final
registration statement may be available for months prior to the
security holder meeting date related to the de-SPAC transaction.\518\
We do not believe this fact provides a basis for not adopting the
proposed rules regarding minimum dissemination periods. These
preliminary filings may be amended prior to their becoming effective
and, in the case of a combined registration and proxy statement that
has not yet become effective, this disclosure would not yet have been
delivered to security holders.
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\518\ Letter from Vinson & Elkins. See supra note 507 and
accompanying text.
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To the extent one commenter appeared to suggest that the minimum
dissemination period should be the same as the IPO ``48 hour'' rule of
Exchange Act Rule 15c2-8,\519\ we do not believe a 48-hour period would
provide investors sufficient time to review the disclosure,
particularly given the complex hybrid nature of de-SPAC transactions.
Moreover, providing only 48 hours before the shareholder meeting will
not provide enough time for certain shareholders' votes to be
considered as a practical matter, given that many shares are held
through securities intermediaries such as broker-dealers and such
intermediaries often require voting instruction forms to be submitted
to them at least 48 hours prior to the shareholder meeting.\520\
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\519\ Letter from Loeb & Loeb. See supra note 508 and
accompanying text.
\520\ As discussed in sections III.C and IV.A, the Commission is
adopting Rule 145a and amendments to registration statement forms
that are related to certain co-registration obligations. As a
result, in connection with de-SPAC transactions, Rule 15c2-8 may
apply and require the delivery of the preliminary prospectus to any
person who is expected to receive a confirmation of sale pursuant to
the terms of that rule, because the target company is typically not
such a reporting company before the transaction. We will continue to
consider the effect of Rule 15c2-8 on de-SPAC transactions. At the
present time, however, we are not making any changes to Rule 15c2-8.
---------------------------------------------------------------------------
We are making minor changes in the final rules compared to the
proposals for purposes of clarity and to make the registration forms
congruent with the amendments to Rules 14a-6 and 14c-2 that we are
adopting. The final rules provide that each of Rules 14a-6 and 14c-2
and Forms S-4 and F-4 will contain the language ``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 to be held or
action is to be taken in connection with the de-SPAC transaction.''
Where the proposed amendments to Forms S-4 and F-4 referred to the
``date on which action is to be taken,'' these revisions eliminate any
potential for misinterpretation that the proposed language only
referred to action by consent and not at a meeting of security holders.
In addition, the terms ``to be held'' and ``to be taken'' are intended
to clarify these rules since these events are in the future when viewed
from the point in time at which the security holder materials are
distributed.
C. Private Operating Company as Co-Registrant
1. Proposed Rules
Under section 6(a) of the Securities Act, each ``issuer'' \521\
must sign a Securities Act registration statement.\522\ In the
Proposing Release, the Commission stated that a de-SPAC transaction
marks the introduction of a 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.\523\ The Commission stated that, 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.\524\
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\521\ The Securities Act broadly defines the term ``issuer'' to
include every person who issues or proposes to issue any securities.
See section 2(a)(4) of the Securities Act [15 U.S.C. 77b].
\522\ 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.
\523\ Proposing Release, supra note 7, at 29479.
\524\ Proposing Release, supra note 7, at 29479.
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Given that the target company therefore is, in substance, an
``issuer'' of securities in a de-SPAC transaction regardless of
transaction structure,\525\ the Commission proposed to amend
Instruction 1 to the signatures section of both Form S-4 and Form F-4
to require that, when the SPAC would be the issuer filing the
registration statement for a de-SPAC transaction, the term
``registrant'' would mean not only the SPAC but also the target
company.\526\ The Commission also proposed to amend the general
instructions to Forms S-4 and F-4 to provide that, if the securities to
be registered on the form will be issued by a SPAC in a de-SPAC
transaction, the term ``registrant'' for purposes of the disclosure
requirements of the form means the SPAC.\527\
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\525\ See section 2(a)(4) of the Securities Act.
\526\ See Proposed Instruction 1 to the Signatures section of
Form S-4 and Form F-4. Securities Act registration statement forms
use the term ``registrant'' throughout rather than the term
``issuer.'' See, e.g., Form S-4. A ``registrant'' is a type of
``issuer.'' Rule 405 defines the term ``registrant'' as ``the issuer
of the securities for which the registration statement is filed.''
For the purposes of this release, we are using the terms ``co-
registrant'' and ``co-registration'' to describe the situation where
the target company must be included as a registrant on a
registration statement for a de-SPAC transaction given that the
target company is an ``issuer'' of securities in a de-SPAC
transaction regardless of transaction structure. Moreover, 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.
\527\ Proposed General Instruction L.1 to Form S-4; proposed
General Instruction I.1 to Form F-4.
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2. Comments
A number of commenters generally supported the proposal.\528\ These
commenters indicated that the co-registration proposal would better
align liability and disclosure in de-SPAC transactions with IPOs. One
stated that ``the proposed changes that would treat a target operating
company as a co-
[[Page 14208]]
registrant at the time a Form S-4 or F-4 is filed would contribute to
the Commission achieving its objective to better align de-SPAC
transactions with traditional IPOs and afford investors with consistent
protections.'' \529\ Another stated that, ``By making target companies
co-registrants, the Proposed Rules ensure that target operating
companies and their directors and officers have strong incentives under
section 11 to deter disclosure errors and other misconduct, even in
conventionally structured de-SPACs.'' \530\ Yet another stated, ``We
believe that treating both the SPAC and the target as an issuer under
Section 6(a) of the Securities Act would help to align investor
protections with those of a traditional IPO.'' \531\
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\528\ Letters from Andrew Tuch; Americans for Financial Reform
Education Fund (June 13, 2022) (``Americans for Financial Reform
Education Fund''); Better Markets; CalPERS; CFA Institute; CII;
Senator Elizabeth Warren; ICGN; KPMG LLP (June 13, 2022) (``KPMG'');
Loeb & Loeb; NASAA; Paul Swegle.
\529\ Letter from KPMG.
\530\ Letter from Andrew Tuch.
\531\ Letter from CII.
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Several of these commenters also indicated that the rule proposal
would benefit investors by increasing the quality and reliability of
the disclosure provided in de-SPAC transaction registration statements.
One argued that the disclosures provided in de-SPAC registration
statements should be ``enhanced'' due to the fact that ``both parties
to the de-SPAC transaction [would be] liable for material misstatements
and omissions to investors and shareholders,'' \532\ while another
stated ``the proposed co-registrant requirements, and attendant
liabilities for misstatements or omissions, would ensure that target
company directors, boards and managements make accurate representations
regarding the status of the pre-merger entity.'' \533\
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\532\ Letter from Better Markets.
\533\ Letter from NASAA.
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Other commenters generally opposed or had concerns regarding the
proposal,\534\ generally characterizing the proposal as ``not
necessary'' \535\ or ``inappropriate.'' \536\ Several commenters stated
that the rule proposal would not benefit investors or that the benefit
would be uncertain.\537\ A number of commenters indicated that there
are already strong incentives under the existing framework to ensure
that disclosures in registration statements for de-SPAC transactions
are accurate and complete, pointing to the existing liability
frameworks that they state apply to de-SPAC transactions, such as
sections 11 and 17(a) of the Securities Act, sections 10(b) and 14(a)
of the Exchange Act, and 17 CFR 240.10b-5 (``Rule 10b-5''), and the
Commission's ability to bring enforcement actions.\538\ A few of these
commenters suggested it is unnecessary to impose additional liability
because target company officers and directors, by virtue of their roles
in the combined company, will effectively ``own'' any Exchange Act
liabilities related to the disclosure in the de-SPAC transaction
registration statement inherited by the combined company.\539\
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\534\ Letters from ABA, Davis Polk, Freshfields, Job Creators
Network, NYC Bar, Skadden, Vinson & Elkins.
\535\ Letter from Davis Polk.
\536\ Letter from ABA.
\537\ Letters from ABA (``It is unclear if the Co-Registrant
Amendment would meaningfully enhance disclosures and protections for
investors in practice''), Davis Polk (``we do not expect that the
disclosure practice will be improved by such amendments''), Job
Creators Network.
\538\ Letters from ABA (stating that ``the Target and its
affiliates--while not signatories of the Merger Registration
Statement--may nonetheless still be subject to liability for
disclosures in the Merger Registration Statement under Rule 10b-5 of
the Exchange Act and potential enforcement actions by the Commission
under Section 17(a) of the Securities Act and Section 10(b) of the
Exchange Act, and under the proxy rules as participants in the proxy
solicitation by the SPAC.''), Davis Polk (``the private operating
target company and its affiliates are already subject to enforcement
actions by the Commission irrespective of these amendments . . .
.''), Kirkland & Ellis (noting that ``alternative statutory
liability schemes cover various aspects of the de-SPAC transaction,
including Section 11 where appropriate.''), NYC Bar, Skadden, Vinson
& Elkins, Winston & Strawn LLP (June 13, 2022) (``Winston &
Strawn'') (``In connection with the stockholder vote to approve the
business combination and the repurchase of shares from redeeming
SPAC stockholders, a SPAC already has liability under Section 14(a)
of the Exchange Act and the antifraud provisions of Rule 10b-5.'').
\539\ Letters from ABA (noting that under current law ``the
Target's directors and officers will `own' the disclosures going
forward . . . so there is already a strong incentive for the
Target's directors and officers to ensure the accuracy and
completeness of the initial Merger Registration Statement
disclosures''), NYC Bar (``it is unnecessary to impose additional
liability on the Target's directors and management in connection
with the registration statement because those parties, by virtue of
inheriting the disclosures of the registration statement and the
ongoing disclosure obligations of the combined public company, will
have Exchange Act liability going forward and with respect to
historical disclosures as a result of the business combination.'').
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Several commenters suggested the co-registrant proposal would
create a disparity compared to traditional M&A business combination
transactions where a target is not a co-registrant.\540\ In contrast,
another commenter stated that de-SPAC transactions involve ``clearly
different facts and circumstances than a non-SPAC merger because the
SPAC board is not making a decision about the benefits of changing its
operating business model via merger but rather is offering its
shareholders the alternative of investing in the surviving company if
they prefer that to $10 in cash.'' \541\
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\540\ Letters from ABA (``Inasmuch as a De-SPAC Transaction is
fundamentally an M&A transaction, and no different than business
combinations in other contexts, the Commission has never required
targets in other business combinations in these circumstances to be
added as co-registrants of a merger registration statement.''), CFA
Institute (``As to the need to amend the merger registration
statement forms and schedules filed in connection with de-SPAC
mergers involving a private operating company target, but not other
mergers, creates regulatory uncertainty and confusion.''), Skadden
(``Moreover, the proposed co-registrant changes may occasion
inconsistent treatment of de-SPAC transactions compared to other
business combination transactions that are substantively similar and
where the Commission's concerns about the adequacy of target company
disclosure also could exist.''). See also letter from Nicholas
Pappas, King & Wood Mallesons (June 13, 2022) (``King & Wood
Mallesons'') (``An example of the species of transaction in respect
of which the Proposed Rules require qualification is where a seller
is proposing to sell a subsidiary/target company. . . . At the time
of running the sale process there is generally no intention on the
part of the seller to IPO the target company.'').
\541\ Letter from Bullet Point Network.
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Other commenters suggested the co-registration proposal is
inconsistent with existing definitions of registrant and issuer
because, they asserted, the target in a de-SPAC transaction is not
issuing or proposing to issue any securities pursuant to the de-SPAC
registration statement.\542\
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\542\ Letters from ABA, Freshfields. See also definitions of
``issuer'' and ``registrant,'' supra notes 521 and 526.
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One commenter opposed the co-registration proposal and expressed
the view that: ``[i]n most de-SPAC transactions the shares being
registered on the SPAC's registration statement are being issued only
to the target's shareholders and are not being issued or sold by the
target company. Adding the target company as a co-registrant means
that, in most cases, the target company will have potential Section 11
liability with respect to its own shareholders, but this is not logical
or intuitive and is not consistent with the structure of a traditional
IPO. In a traditional IPO, a company's existing shareholders at the
time of the IPO do not receive registered shares and would not have
potential Section 11 claims against the company due to the disclosures
in the IPO registration statement.'' \543\
---------------------------------------------------------------------------
\543\ Letter from Freshfields.
---------------------------------------------------------------------------
Another commenter suggested the co-registration proposal is
inconsistent with 17 CFR 230.140 (``Rule 140'').\544\ The commenter
said the purpose of Rule 140--to ``ensure[ ] that the requisite
information about the underlying issuer is adequately disclosed so new
investors are fully informed of the attendant risks and returns
relating to a potential investment''--is ``not a concern in de-SPAC
transactions,'' because ``full Form 10-type information'' is already
provided under current rules about the
[[Page 14209]]
SPAC and the target company.\545\ This commenter also said that in a
de-SPAC transaction ``no new proceeds are being received by the
Combined Company,'' which is a ``notable difference'' from Rule
140.\546\
---------------------------------------------------------------------------
\544\ Letter from ABA.
\545\ Id.
\546\ Id.
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Other commenters on the co-registration proposal requested certain
clarifications. One commenter supported the co-registration requirement
but suggested the Commission clarify whether ``liability correctly or
mistakenly extends to anyone other than unaffiliated, non-redeeming
SPAC shareholder[s].'' \547\ A different commenter asked the Commission
to clarify ``which entities would be considered co-registrants in these
types of transactions and therefore subject to the applicable
requirements under the securities laws.'' \548\
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\547\ Letter from CFA Institute (``For example, could such
liability extend to various SPAC `insiders' who may claim they are
unaffiliated and do not redeem, even though they have conducted
detailed due diligence and have negotiated special deal terms with
the SPAC such as anchor and PIPE investors. Moreover, would this
provision extend the target company liability to its own, private
company shareowners.'').
\548\ Letter from KPMG (specifically noting that ``SPACs may
acquire more than one operating company as part of a de-SPAC
transaction'').
---------------------------------------------------------------------------
Several commenters addressed issues related to the scope of section
11 liability that may stem from the co-registration proposal. One
commenter suggested that, as drafted, the proposal would make the
target company a signer but not a co-registrant.\549\ Specifically,
this commenter said that the proposed change to Instruction 1 to the
Signatures section of the forms purports to make the target company a
registrant ``for purposes of this instruction'' but that ``the change
would solely require that the target company, along with its specified
officers and directors, sign the registration statement,'' citing for
purposes of comparison ``existing Instruction 3 to the Signatures
section of the forms, which the commenter said is not limited solely to
the Signatures section.'' \550\ The commenter opposed the proposed co-
registration requirements and said that, ``if the regulatory goal is
exposing the target company and its officers and directors, as
signatories, to Section 11 liability for material misstatements or
omissions in the registration statement, the proposed amendment to
Instruction 1 of the forms accomplishes that.'' \551\
---------------------------------------------------------------------------
\549\ Letter from Vinson & Elkins.
\550\ Letter from Vinson & Elkins. See also supra note 526
(describing Instruction 3 to the Signatures sections of Forms S-4
and F-4).
\551\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
Other commenters expressed views on which entity and which officers
and directors should be required to sign the de-SPAC transaction
registration statement. One commenter said that the Commission should
``clarify that directors and executive officers of the target company,
who will not be directors or executive officers of the target company
following the consummation of the de-SPAC transaction, are not required
to sign the registration statement used for the de-SPAC transaction and
are not deemed to be directors or executive officers of the target
company for purposes of the liability provisions of the securities
laws.'' \552\ Another commenter stated that the ``required signatories
should be the surviving company, which might be a new registrant and
the directors and officers of that entity.'' \553\ In contrast, another
commenter expressed the view that ``[t]arget company managers and
directors are responsible for providing the information necessary for
investor approval of a de-SPAC merger, and must provide accounting
information as well as current operations and forecasts,'' because they
``also profit significantly from selling private shares and/or
receiving significant ownership positions in the post-SPAC entity.''
\554\ A different commenter suggested that liability under the co-
registration proposal would be both over-inclusive and under-inclusive,
because new officers or directors may be appointed \555\ and because
target company officers or directors may resign.\556\ Finally, one
commenter pointed out that in a de-SPAC transaction structured as an
acquisition of assets, the assets acquired could not sign a
registration statement.\557\
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\552\ Letter from Freshfields (``This would be consistent with
the obligations in a traditional IPO, where the registrant
identifies in the prospectus who will be its directors following the
IPO'').
\553\ Letter from Vinson & Elkins (``Putting aside the
signatory/registrant distinction, we believe that the SEC should not
make the target company sign the registration statement or be a full
co-registrant'').
\554\ Letter from NASAA (``With this in mind, [the commenter]
supports the attachment of Section 11 responsibilities to the
managers and directors of target companies.'').
\555\ Letter from ABA (``in many (if not substantially all) De-
SPAC Transactions, given the minimum 20-day gap period between the
Merger Registration Statement's effectiveness and Closing, and
significant Closing uncertainty at the time of registration
statement effectiveness, additional directors (such as `outside'
independent directors or Sponsor designees) will join the Combined
Company board just prior to or concurrent with Closing.'').
\556\ Letter from ABA (``In many De-SPAC Transactions, certain
legacy Target directors (and sometimes officers) will resign
immediately prior to Closing. So the group of individuals to whom
Securities Act liability attaches (i.e., the persons signing the
Merger Registration Statement) under the Co-Registrant Amendment is
at the same time both under-inclusive and over-inclusive.'').
\557\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
A number of commenters addressed Exchange Act reporting company
obligations of the target company as a result of proposed co-
registration requirements. Several commenters raised concerns that if
the target company is a co-registrant on a de-SPAC registration
statement, the target company would become an Exchange Act reporting
company at the time of effectiveness.\558\ Specifically, commenters
raised concerns about the target company being required to file
Exchange Act reports during the interim period between when the
registration statement for the de-SPAC transaction becomes effective
and the closing of the de-SPAC transaction.\559\
---------------------------------------------------------------------------
\558\ Letters from ABA (noting that, in the time between
effectiveness and closing of the merger, ``there is a risk that the
parties may terminate a De-SPAC Transaction subsequent to the Merger
Registration Statement effectiveness date, including (among other
reasons) for failure to obtain stockholder approval, failure to
satisfy a `minimum cash' or `maximum redemption' closing condition,
or failure to obtain a required regulatory or third-party approval.
However, once the Merger Registration Statement has been declared
effective, under the Co-Registrant Amendment, the Target would
nonetheless be subject to ongoing Exchange Act reporting obligations
for at least 12 months, even if a De-SPAC Transaction is
terminated.''), Crowe, Davis Polk, Freshfields (``[I]f the Form S-4
or Form F-4 is declared effective by the SEC, but the de-SPAC
transaction does not close, the target, previously a private
company, would be burdened with disclosure obligations as if it was
a public company for at least the remainder of the year but would
have no securities trading in the public markets.''), Grant
Thornton, KPMG.
\559\ Letters from ABA (``The Co-Registrant Amendment, if
adopted as proposed, would subject Targets to reporting obligations
pursuant to Section 15(d) of the Exchange Act following
effectiveness of the Merger Registration Statement. Given the
proposed 20-day minimum solicitation period prior to the SPAC
stockholders' meeting, it is entirely possible that the SPAC
acquirer and the Target could each be required to file a quarterly
report on Form 10-Q or annual report on Form 10-K prior to the
Closing date.''), KPMG (``The Proposed Rules indicate that the
target operating company would be an issuer, therefore subjecting it
to the reporting obligations of a public company and requiring it to
file a periodic report for that recently ended reporting period.
This would create circumstances where multiple periodic filings,
such as Forms 10-K or 10-Q, are required to be filed for the same
period for multiple entities involved in the transaction.''), PwC.
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A different commenter said ``the proposed rules should clarify that
a target company that will ultimately not be the public company parent
following the de-SPAC transaction does not become subject to the
periodic reporting requirements of Section 13 of the Exchange Act as a
result of being a co-registrant in the registration statement for the
de-SPAC transaction.'' \560\ If a
[[Page 14210]]
target company that does not become the public company parent does
become subject to periodic reporting, the commenter said that ``upon
effectiveness of such registration statement, the target company would,
as a result of Section 15(d) of the Exchange Act, automatically be
required to begin filing 10-Ks, 10-Qs and other periodic reports
required by the Exchange Act, and this would be an Exchange Act
reporting obligation that is separate from the public company Exchange
Act reporting obligation. These reports would be essentially the same
reports as filed by its public parent company and would create
significant additional compliance costs while resulting in no
substantive additional public disclosure.'' The commenter expressed the
view that this was not an intended consequence of the rule proposal and
said the Commission should clarify this aspect of the co-registration
proposal.
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\560\ Letter from Davis Polk.
---------------------------------------------------------------------------
Some commenters suggested the Commission should clarify in any
final rules whether, in a situation where the de-SPAC transaction is
not ultimately consummated, a target company that is a co-registrant
for a de-SPAC registration statement that has been declared effective
may suspend its periodic reporting obligations under procedures similar
to those set out in Staff Legal Bulletin 18 regarding abandoned IPOs
and acquired issuers.\561\ A number of commenters raised concerns about
costs for target companies as co-registrants, particularly with respect
to the cost of directors and officers insurance.\562\ One commenter
stated, ``Targets will be forced to substantially enhance their D&O
[directors and officers] liability insurance coverage . . . [and], if
the De-SPAC Transaction is never completed for some reason, Targets
would likely not be able to `ratchet down' their coverage to more
typical private company levels until the next policy renewal date.''
\563\ One commenter stated that co-registration would result in
disclosure requirements that are inconsistent with the proposed
revisions to Regulation S-X, raising the issue of whether, if there
were multiple target companies, if each company would be required to
provide financials audited in accordance with the standards of the
Public Company Accounting Oversight Board (United States) (``PCAOB''),
rather than solely the predecessor pursuant to proposed Rule 15-01(a)
of Regulation S-X.\564\ This commenter indicated that co-registration
would result in inconsistencies with IPOs where there are multiple
target companies and queried whether all target companies ``should be
required to sign the registration statement or just the accounting
predecessor or acquiror, the one whose shareholders own the largest
amount of the surviving company, etc.'' \565\ A different commenter
asked for guidance regarding a target company's section 15(d) reporting
obligation in the case where there are multiple targets.\566\
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\561\ Letters from Crowe, Grant Thornton. See also KPMG (``It is
also possible that a SPAC merger is terminated after the effective
date of a Form S-4 or F-4 registration statement, due to the vote
from shareholders or for other reasons. In this situation, the
Proposal indicates that the target operating company is a
registrant, with ongoing filing obligations, but without having
completed the merger. We recommend the Commission consider
clarifying the reporting obligations of target operating companies
in such circumstances.''). See Staff Legal Bulletin No. 18 (CF)
(Mar. 15, 2010).
\562\ Letters from ABA; Anonymous (Apr. 7, 2022) (``Anonymous
(Apr. 7, 2022)''); Skadden (``Given the potential for increased risk
of liability to boards, we also expect D&O liability insurance
premiums to increase significantly, further diluting the value of
the transaction to stockholders.''). See also letters from ABA,
Goodwin, White & Case (each discussing directors and officers
insurance premium costs in connection proposed Item 1606(a)) and Job
Creators Network (noting that costs generally will increase, as
``SPACs and target companies should expect extensive diligence
requests from financial institutions, advisors, and their counsel in
connection with a de-SPAC transaction'' (citations omitted)).
\563\ Letter from ABA.
\564\ Letter from Vinson & Elkins.
\565\ Letter from Vinson & Elkins.
\566\ Letter from PwC.
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One commenter suggested the Commission create a new form for de-
SPAC transactions.\567\ The commenter, who supported ``the SEC's stance
that SPAC business combinations should be treated as de facto IPOs,''
suggested the Commission align SPAC disclosures with Form S-1 by
creating a SPAC-specific form that would ``closely resemble a
traditional IPO S-1, rather than the traditional S-4 used for merger
transactions.'' \568\ The commenter proposed that, in this new SPAC-
specific form, ``management projections should not be disclosed to
public SPAC shareholders . . . even if management projections have been
reviewed by the SPAC board of directors in their role as shareholder
fiduciaries.'' \569\
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\567\ Letter from Bullet Point Network.
\568\ Id.
\569\ Id.
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3. Final Rules
After considering the comments received, we are adopting the co-
registration proposal substantially as proposed, with some
modifications.
Under existing rules, when a SPAC or a holding company offers and
sells its securities in a registered de-SPAC transaction, staff
observed a majority of the relevant disclosure in the de-SPAC
transaction registration statement is about the target company, but
only the SPAC or holding company, 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 de-SPAC transaction. These signers are
subject to liability under section 11 of the Securities Act (along with
other persons who have liability under section 11). In these
situations, the private operating company and its officers and
directors may therefore not incur liability as signatories to the
registration statement under section 11 of the Securities Act, even
though information about the target company is highly significant to
investors and this result is unlike if the target company had conducted
a traditional IPO registered on Form S-1 or Form F-1. As discussed in
more detail below, it is our view that in a de-SPAC transaction the
target company is an issuer of securities under section 2(a)(4) of the
Securities Act, and, therefore, the target company along with its
required officers and directors must sign a registration statement
filed by a SPAC or another shell company for the de-SPAC transaction,
because both in substance and by operation of new Securities Act Rule
145a, the target company is issuing or proposing to issue securities in
a de-SPAC transaction, regardless of the transaction structure. In
addition, the business operations of the target company will be those
that are carried on by the combined company going forward. The co-
registration requirements will therefore enhance investor protection by
aligning Federal securities law liability with the entity that is the
primary source of the information disclosed about the new public
operating company.\570\
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\570\ Although target companies' Federal securities law
liability is not currently aligned with the liability of a company
in a traditional IPO, they may be exposed to other liability (as are
companies in a traditional IPO) from Commission enforcement actions
or potentially to investors under anti-fraud statutory provisions
and rules that require scienter or negligence to the extent the
elements of the relevant cause of action are met. See, e.g.,
Exchange Act section 10(b) and Rule 10b-5 thereunder (imposing
liability for false or misleading statements made in connection with
a purchase or sale of securities) and, where applicable, Rule 14a-9
(for false and misleading statements made in connection with the
solicitation of proxies).
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Section 2(a)(4) of the Securities Act broadly defines the term
``issuer'' to include every person who issues or proposes to issue
securities. The
[[Page 14211]]
legislative history of this broad definition 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 Securities Act, the person(s) that have
access to the information most relevant to investors are responsible as
an ``issuer'' for providing such information.\571\ However, certain
commenters asserted that a target company cannot fall within the
definition of issuer in a de-SPAC transaction because ``[t]he [t]arget
in a De-SPAC Transaction ordinarily is not issuing or proposing to
issue any securities pursuant to the Merger Registration Statement--it
is the SPAC's securities to be issued.'' \572\ We disagree. As
explained below, even in transaction structures where a target company
does not issue its own securities in the course of the de-SPAC
transaction, it will always be proposing to issue the securities of the
combined company in connection with the Rule 145a transaction that is
occurring when the SPAC conducts a business combination that changes it
from a shell company to an operating company.\573\
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\571\ 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.'').
\572\ Letter from ABA.
\573\ See infra section IV.A.
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The final rules will ensure that, when a registration statement is
filed for a de-SPAC transaction, a target company, its principal
executive officer or officers, its principal financial officer, its
comptroller or principal accounting officer, and a majority of its
board of directors or persons performing similar functions sign the
registration statement.\574\ These signatories, among others, will be
liable under section 11, for any material misstatements or omissions in
the registration statement (subject to a due diligence defense for all
parties other than an issuer) and will thereby be held accountable to
investors for the accuracy of the disclosures in the registration
statement that previously would have been signed only by the SPAC or a
holding company and its officers and directors.\575\ We continue to
believe such liability, and the corresponding accountability to
investors, is appropriate given that it is the private operating
company that, in substance, issues or proposes to issue its securities,
as securities of the newly combined public company. We expect that this
requirement will improve the reliability of the disclosure provided to
investors in connection with de-SPAC transactions by creating strong
incentives for such additional signing persons (among others who would
have liability under section 11 as a result of these requirements, such
as non-signing directors) to conduct thorough diligence in connection
with the de-SPAC transaction and review more closely the disclosure
about the target company.
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\574\ See section 6(a) of the Securities Act [15 U.S.C 77f].
\575\ In this regard, we note that the target company's officers
and directors are the parties most similarly situated to the
officers and directors of a private company conducting a traditional
IPO, in terms of their knowledge of, and background in, the company
going public through a de-SPAC transaction.
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As noted above, the final rules reflect certain modifications to
the proposed rules. First, we are requiring that the names of all co-
registrants appear on the cover page. Second, we are clarifying that
the target company is a registrant and not merely a signatory to the
registration statement, as suggested by some commenters. Third, we are
addressing scenarios where the target company is a business or assets.
Finally, we are expanding the instructions to Forms S-4 and F-4 to also
require that the target company and its related section 6(a)
signatories sign a registration statement for a de-SPAC transaction
filed by a holding company. This change is intended to ensure that the
target company signs the registration statement in a transaction
structure involving a holding company given that, as noted above, the
target company is an ``issuer'' of the securities in any registered de-
SPAC transaction. We have also added the same requirements to Form S-1
and Form F-1. We discuss these changes to the final rules and the
comments received on the proposal in more detail below.
Several commenters suggested that there are already strong
incentives under the existing framework to ensure that disclosures in
registration statements for de-SPAC transactions are accurate and
complete.\576\ A few of these commenters suggested it is unnecessary to
impose additional liability because target company officers and
directors, by virtue of their roles in the combined company, will
effectively ``own'' any Exchange Act liabilities related to the
disclosure in the de-SPAC transaction registration statement inherited
by the combined company.\577\
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\576\ Letters from ABA, Kirkland & Ellis, NYC Bar, Skadden,
Vinson & Elkins, Winston & Strawn. See supra note 538.
\577\ See supra note 539.
---------------------------------------------------------------------------
As commenters noted, currently when a SPAC \578\ files a
registration statement in connection with a de-SPAC transaction that
becomes effective, the SPAC is exposed to strict liability for material
misstatements regarding all disclosures in the registration statement,
including the disclosures related to the target company. In addition,
the SPAC and/or target company may be exposed to liability from
Commission enforcement actions or potentially to investors under anti-
fraud statutory provisions and rules that require scienter or
negligence.\579\
---------------------------------------------------------------------------
\578\ The discussion, with respect to SPACs filing a
registration statement, applies equally to de-SPAC transaction
structures where a holding company is created and files a
registration statement.
\579\ See supra note 570.
---------------------------------------------------------------------------
We disagree with the commenters who suggested that existing
liability protections make it unnecessary for the target company to
have strict liability for statements in the de-SPAC registration
statement. In the Securities Act, Congress determined that an issuer
that offers and sells its securities to the public using a registration
statement should be strictly liable to investors for any material
misstatements and omissions in the effective registration
statement.\580\ Furthermore, strong private liability in registered
transactions is one of the central tenets of the Securities Act.\581\
As discussed throughout this release, in a de-SPAC transaction, the
target company is an issuer because it, in substance, issues or
proposes to issue its securities, as securities of the newly combined
public company. As an issuer and the primary source of information
disclosed about the combined operating company in registered de-SPAC
transactions, the
[[Page 14212]]
target company and its officers and directors are best situated to
ensure the accuracy and completeness of such disclosures. Accordingly,
investors in de-SPAC transactions are entitled to the protections
arising from having the target company and other issuers sign the de-
SPAC registration statement, including strict liability for statements
in the effective registration statement, regardless of any other
liabilities that may apply.
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\580\ Under section 6(a) of the Securities Act, each ``issuer''
must sign the registration statement, and ``every person who signed
the registration statement'' has liability under section 11(a) of
the Securities Act. See 15 U.S.C. 72(a) and 77k(a). The provisions
of section 11(b) of the Securities Act provide limited situations
where no liability under section 11(a) will attach but exclude
issuers from applying that provision. See 15 U.S.C. 77k(b)
(``Notwithstanding the provisions of subsection (a) no person, other
than the issuer, shall be liable as provided therein who shall
sustain the burden of proof. . . .'' (Emphasis added)).
\581\ See William O. Douglas & George E. Bates, The Federal
Securities Act of 1933, 43 Yale L.J. 171, 173 (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.''). See also supra note 850
and accompanying text (noting the importance of private rights of
action in addition to Commission enforcement mechanisms as part of
the Federal securities law statutory scheme, which provides for
several private rights of action).
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With respect to commenters' argument that the target company, and
its officers and directors, will ``own'' liability for statements made
in the de-SPAC registration statement going forward, we acknowledge
that, under the existing framework, in specific situations where the
target company survives and/or the officers and directors of the target
company are officers and directors of the surviving company, they would
potentially have liability, including strict liability, for statements
in the de-SPAC registration statement. However, that assumption of
liability under current regulations does not change the fact that in
other transaction structures, the target company and its officers and
directors may not be strictly liable for the statements made in any
registration statement filed in connection with the de-SPAC
transaction, notwithstanding that the target company is, in substance,
an issuer in these transaction structures for the reasons discussed
above. So that target company liability is consistent across de-SPAC
transaction structures, we are adopting the co-registration proposal as
proposed, subject to the changes discussed herein.
A few commenters suggested the co-registrant proposal would create
a disparity compared to traditional business combination transactions,
because the target company is not a co-registrant in those
transactions.\582\ In contrast, another commenter said, ``These are
clearly different facts and circumstances than a non-SPAC merger''
because the SPAC board is not deciding whether to change its operating
business model via merger but rather is offering its shareholders the
opportunity to invest in the surviving company.\583\ One commenter
suggested that requiring the target company to sign a registration
statement for a de-SPAC transaction would be inconsistent with how
section 11 liability applies in a traditional IPO because, under the
co-registrant proposal, the target company could be liable to its
existing shareholders for information about the target company included
in the de-SPAC registration statement.\584\ As discussed above,\585\
the hybrid nature of de-SPAC transactions makes them distinguishable
from other business combinations or traditional IPOs, because the
transaction simultaneously: (i) functions as a form of public capital
raising for the target company, (ii) transforms a shell company, that
is not a business combination related shell company, into an operating
company, and (iii) commonly represents the introduction of a formerly
private company to the public markets for the first time. In a de-SPAC
transaction, the target company is, in substance, acting as issuer of
securities and therefore should incur section 11 liability for the
disclosures about its business and its financial results and condition,
which constitute critical information for investors making investment,
redemption, and voting decisions.
---------------------------------------------------------------------------
\582\ Letters from ABA, Skadden. See supra note 540.
\583\ Letter from Bullet Point Network.
\584\ Letter from Freshfields.
\585\ See supra section I.
---------------------------------------------------------------------------
As noted above, the de-SPAC transaction commonly marks the
introduction of the target company to the U.S. public securities
markets, and investors look to the business and prospects of the target
company in evaluating an investment in the combined company.\586\
Moreover, new Rule 145a recognizes that a de-SPAC transaction involves
a sale of the securities of the combined company to the SPAC's
shareholders. Information relating to the target company is the most
significant factor in investor decisions to participate in the de-SPAC
transaction because the target company will become the operating
business of the combined company upon consummation of the de-SPAC
transaction. In addition, the target company is the principal
beneficiary of the capital that the SPAC has previously raised and is
contributing to the combined company. Co-registration is necessary in
these circumstances so that appropriate levels of liability for the
related disclosures attaches to the entity that is the primary source
of the information disclosed--information that relates to and
ultimately benefits the target company itself. Requiring the target
company and its officers and directors to sign the registration
statement will help to ensure that the information provided to
investors in connection with a de-SPAC transaction is accurate,
complete, and reliable by incentivizing such parties to exercise more
care in the preparation of that information.
---------------------------------------------------------------------------
\586\ Less commonly, the target company may be a public company
or may be a previously public company that went private.
---------------------------------------------------------------------------
One commenter suggested the co-registration proposal is
inconsistent with Securities Act Rule 140, which according to the
commenter ``ensures that the requisite information about the underlying
issuer is adequately disclosed,'' and does not apply to de-SPAC
transactions, because de-SPAC registration statements already provide
registrants with disclosures about the target company, and the target
company already may be subject to some liability for disclosures
contained therein.\587\ While Rule 140 and these new co-registration
requirements both expose parties to liability, they do so in different
factual situations and for different purposes, and therefore are not
inconsistent. As discussed above, we acknowledge that disclosure about
target companies is already included in de-SPAC registration statements
and target companies may have liability under de-SPAC registration
statements in some situations. However, target companies do not have
liability as issuers in all transaction structures, notwithstanding the
fact that a de-SPAC transaction marks the introduction of the target
company to the U.S. public securities markets and investors look to the
business and prospects of the target company in evaluating an
investment in the combined company.
---------------------------------------------------------------------------
\587\ Letter from ABA. See Rule 140.
---------------------------------------------------------------------------
One commenter supported the proposal but suggested that the
Commission clarify whether ``liability correctly or mistakenly extends
to anyone other than unaffiliated, non-redeeming SPAC shareholder[s].''
\588\ Under the final rules, the target company, its section 6(a)
signing persons, and its directors will be subject to the same
liability as any other issuer (including to affiliated shareholders).
---------------------------------------------------------------------------
\588\ Letter from CFA Institute.
---------------------------------------------------------------------------
A different commenter recommended that the Commission clarify
``which entities would be considered co-registrants in these types of
transactions and therefore subject to the applicable requirements under
the securities laws.'' \589\ We have provided additional clarification
regarding which entities would be a co-registrant in connection with
changes to the instructions to registration forms compared to the
proposed instructions that we discuss below.
---------------------------------------------------------------------------
\589\ Letter from KPMG (specifically noting that ``SPACs may
acquire more than one operating company as part of a de-SPAC
transaction'').
---------------------------------------------------------------------------
As noted above, one commenter suggested the proposal would make the
target company a signer but not a co-
[[Page 14213]]
registrant on Forms S-4 and F-4.\590\ We do not agree with this
assessment because, as an ``issuer'' of the securities in a registered
de-SPAC transaction, the target company is both a required signatory of
the registration statement pursuant to section 6(a) and a
``registrant'' under Rule 405. To that end, Rule 405 states that a
``registrant'' is a type of ``issuer''--i.e., ``the issuer of the
securities for which the registration statement is filed.''
---------------------------------------------------------------------------
\590\ Letter from Vinson & Elkins.
---------------------------------------------------------------------------
The proposed instruction that the term ``registrant'' means the
SPAC for purposes of the disclosure obligations of the form was not
intended to mean that a target company would not also be considered a
registrant. The purpose of that instruction was to make clear that the
defined term ``registrant'' on the form refers to the ``SPAC'' and to
allow for a different defined term to be used on the form when
specialized disclosure with respect to the ``target company'' is
required. The proposed instruction to the Signatures section was
intended to clarify that both the SPAC and target company and their
required officers and directors must sign the form but would not have
made the target company a ``signer not a registrant.''
Nevertheless, to clarify this point, in the final rules, we are
making technical changes to the instructions to the forms. In
connection with the request by a commenter to compare the proposed
instructions to current Instruction 3 to the Signatures section, we are
revising the instructions to Forms S-4 and F-4 to require that the
names of each co-registrant appear on the cover page consistent with
current Instruction 3. We are also revising the instructions to require
that the target company and its related section 6(a) signatories sign a
registration statement for a de-SPAC transaction filed by a holding
company, to account for the fact that the target company is an
``issuer'' of the securities in any registered de-SPAC transaction. As
a result, in the final rules, the last sentence of General Instruction
L.1 of Form S-4 provides: ``If the securities to be registered on this
Form will be issued by a special purpose acquisition company (as such
term is defined in Item 1601 of Regulation S-K) or another shell
company in connection with a de-SPAC transaction, the registrants also
include the target company (as such term is defined in Item 1601 of
Regulation S-K), and it must be so designated on the cover page of this
Form. In such a de-SPAC transaction, where the target company consists
of a business or assets, the seller of the business or assets is deemed
to be a registrant instead of the business or assets and must be so
designated on the cover page of this Form. Further, in such a de-SPAC
transaction, the term `registrant' for purposes of the disclosure
requirements of this Form means the special purpose acquisition
company, and the term `company being acquired' for the purposes of the
disclosure requirements of this Form means the target company.''
Similarly, we are revising the last sentence of Instruction 1 of the
Signatures section and revising proposed General Instruction I.1 to
Form F-4 and the last sentence of Instruction 1 of the Signatures
section of Form F-4 in the same manner as with Form S-4.
Also with respect to changes in the forms to implement the co-
registration requirements, in the Proposing Release, the Commission
solicited comment on whether Form S-1 and Form F-1 should be amended to
include instructions as to signatures which, when used for a de-SPAC
transaction, would align the signature requirements of these forms to
Form S-4 and Form F-4.\591\ Because Form S-1 and, where issuers are
eligible, Form F-1, remain available for de-SPAC transactions, it is
consistent with the protection of investors to include equivalent
instructions as to signatures to ensure consistent liability for de-
SPAC transactions regardless of which Securities Act form is used for
registration. Accordingly, we are adopting amendments to the
instructions to signatures in Form S-1 and Form F-1 that correspond to
those in Form S-4 and Form F-4.
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\591\ See Proposing Release, supra note 7, at 29480 (request for
comment number 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?'').
---------------------------------------------------------------------------
A number of commenters stated that liability under the co-
registration proposal would be over and/or under-inclusive with respect
to the target company's officers and directors. As discussed above, the
final rules make clear that the target company is a co-registrant (and
not merely a signer) with respect to the de-SPAC transaction.
Therefore, as with any registrant, the target company will be required
to have its principal executive officer or officers, principal
financial officer and controller or principal accounting officer, and
at least a majority of its board of directors or persons performing
similar functions sign the registration statement.
With respect to commenter suggestions that only continuing target
company officers and directors should sign the registration
statement,\592\ we do not believe it would be necessary or appropriate
to adopt such a requirement for several reasons. First, to require
signatures only from continuing target company officers and directors
would be inconsistent with the statutory signature requirements under
Securities Act section 6(a), which requires each issuer's ``principal
executive officer or officers, its principal financial officer, its
comptroller or principal accounting officer, and the majority of its
board of directors or persons performing similar functions'' to sign
the registration statement.\593\ Moreover, non-continuing directors who
did not sign the registration statement nonetheless may be liable under
section 11, because section 11(a)(2) provides that the persons with
liability to persons who acquired securities include ``[e]very person
who was a director of (or person performing similar functions) or
partner in the issuer at the time of the filing of the part of the
registration statement with respect to which his liability is
asserted.'' \594\ Second, if a target company officer or director will
not be a continuing officer or director in the combined company, it is
within the control of the target company officer or director to resign
prior to the effectiveness of the de-SPAC registration statement.\595\
Finally, we note that Securities Act section 6 requires only the
issuer's ``principal executive officer or officers, its principal
financial officer, [and] its comptroller or principal accounting
officer,'' but not other officers, to sign the registration
statement.\596\ Accordingly, if the non-continuing target company
officers are not one of these officers, they are not required to sign
the registration statement.
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\592\ See letters from Freshfields, Vinson & Elkins.
\593\ 15 U.S.C. 77f(a).
\594\ 15 U.S.C. 77k(a)(2).
\595\ See also 15 U.S.C. 77(k)(b)(1) (allowing for the potential
removal of section 11 liability from persons who ``before the
effective date . . . had resigned from or had taken such steps as
are permitted by law to resign from, or ceased or refused to act in,
every office, capacity, or relationship in which he was described in
the registration statement as acting or agreeing to act, and . . .
had advised the Commission and the issuer in writing that he had
taken such action'').
\596\ 15 U.S.C. 77f(a).
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The proposed definition of target company included a ``business''
or ``assets'' and the proposed definition of ``de-SPAC transaction''
included an ``acquisition of assets.'' One commenter pointed out that
in a de-SPAC transaction structured as an acquisition of assets, the
assets acquired could not sign a registration statement.\597\ We are
not making any changes in the final definitions of those terms.
However, to align the signature requirements for the
[[Page 14214]]
acquisition of a business or assets as closely as possible to the
signature requirements being adopted for all other target companies, we
are revising the instructions to Forms S-4 and F-4 to provide that, in
de-SPAC transactions involving the purchase of assets or a business,
the term ``registrant'' includes the seller of the business or assets.
As with target companies in non-asset deals, the signatories of the
asset purchase agreement (or similar transaction agreement) would be
the sellers required to sign the registration statement.\598\ When a
de-SPAC transaction involves the sale of assets that meet the
definition of a business in Article 11 of Regulation S-X,\599\ the
seller of the assets must provide the historical financial information
regarding the acquisition in the registration statement.\600\ Thus,
such seller of assets and its officers and directors are similarly
situated to the target company and its officers and directors (i.e.,
the seller of a business that will continue as the combined company) in
a de-SPAC transaction not structured as an asset sale.\601\
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\597\ See supra note 557 and accompanying text.
\598\ This is consistent with the functional approach taken in
the language of section 6(a) of the Securities Act, whereby the
signatories of a registration statement, who incur section 11
liability, must include ``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).''
\599\ 17 CFR 210.11-01(d) (``Rule 11-01(d)'' of Regulation S-X).
\600\ In the unusual event that the assets do not meet the
definition of a business, registrants may wish to contact the
Division of Corporation Finance about the reporting of historical
financial information for the assets.
\601\ The disclosure provided as to the assets acquired that
constitute a business would be that which is required for 17 CFR
210.3-05(e), as applicable.
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Several commenters raised concerns that, if the target company is a
co-registrant on a de-SPAC registration statement, then the target
company would become an Exchange Act reporting company at the time of
effectiveness and would be required to file reports during the interim
period between when the registration statement for the de-SPAC
transaction becomes effective and the closing of the de-SPAC
transaction.\602\ Relatedly, several commenters noted that the target
company would incur this reporting obligation even if the de-SPAC
transaction does not ultimately close.\603\ In response to these
concerns, some commenters suggested the final rules should either
clarify that a target company that is a co-registrant on a de-SPAC
registration statement does not become subject to periodic reporting
requirements,\604\ or, in a situation where the de-SPAC transaction is
not ultimately consummated, a target company that is a co-registrant
for a de-SPAC registration statement may suspend its periodic reporting
obligations under procedures similar to those set out in Staff Legal
Bulletin 18 regarding abandoned IPOs and acquired issuers.\605\
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\602\ Letters from ABA, KPMG, PwC (also noting this would be the
case in de-SPAC transactions involving multiple target companies).
See supra note 559.
\603\ Letters from ABA, Crowe, Davis Polk, Freshfields, Grant
Thornton, KPMG. See supra note 558.
\604\ Letter from Davis Polk.
\605\ Letters from Crowe, Grant Thornton. See supra note 561.
See also KPMG, supra note 561.
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As ``registrants'' and ``issuers,'' target companies will be
required by applicable Exchange Act provisions to file periodic reports
after the effectiveness of the de-SPAC registration statement and until
the target company terminates and/or suspends its Exchange Act report
obligations. We do not believe an exemption from the Exchange Act's
reporting requirements is necessary or appropriate in the public
interest or consistent with the protection of investors because, during
the pendency of the de-SPAC transaction, SPAC investors will benefit
from receiving updated information about the target company that, in
substance and as reflected in Rule 145a, proposes to issue securities
of the newly combined public company, through which the formerly
private company will operate its business. In the event that a target
company that is not the predecessor \606\ to the shell company is
required to file a periodic report such as a Form 10-K or 10-Q as a
standalone issuer, the periodic report would be required to comply with
the form requirements and doing so could require the disclosure of
updated information about the target company that is not the
predecessor that would not have been required in the registration
statement.\607\
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\606\ The term ``predecessor'' when used in this section has the
same meaning as applied under Regulation S-X and the determination
of financial statement requirements. To have a target company that
is not the predecessor, the de-SPAC transaction must include
multiple targets. We note that the overwhelming majority of de-SPAC
transactions only involve one target. See infra discussion at note
1226 (indicating that approximately 97% of de-SPAC transactions
involve only one target).
\607\ For example, a Form 10-K would require the financial
statements of a non-predecessor target company to be audited in
accordance with the standards of the PCAOB (17 CFR 210.1-02(d)) as
well as disclosure of certain information specified in Regulation S-
K, such as executive compensation (17 CFR 229.402).
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We agree with commenters,\608\ however, that a target company (that
became a reporting company by virtue of being a co-registrant for a de-
SPAC transaction registration statement that has been declared
effective) may look to 17 CFR 240.12h-3 (Exchange Act Rule 12h-3) and
Staff Legal Bulletin 18 for guidance regarding how it can suspend its
reporting obligations under section 15(d) of the Exchange Act in
situations in which: (1) the de-SPAC transaction does not close, or (2)
at the closing of the de-SPAC transaction, the target company is
acquired and another company has become a public reporting company with
respect to the combined business created by the de-SPAC transaction.
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\608\ See supra note 561.
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A number of commenters raised concerns about costs for target
companies as co-registrants, particularly with respect to the cost of
directors and officers insurance.\609\ We recognize that the final
rules, in particular the co-registration requirements, could result in
increased costs for target companies. Based on Commission staff's
experience, target companies that enter de-SPAC transactions may have
directors and officers insurance, and business combination agreements
in connection with de-SPAC transactions may contain provisions
regarding the provision of directors and officers insurance to target
company officials.\610\ As a result, any increased costs incurred by
target companies in connection with de-SPAC transactions with respect
to directors and officers insurance under the final rules will be
incremental to those already incurred. Furthermore, we believe these
incremental costs are justified by the enhanced investor protections
that will be realized by the co-registration requirements. We discuss
our analysis of the costs and benefits of the final rules in more
detail in section VIII below.
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\609\ Letters from ABA, Anonymous (Apr. 7, 2022), Skadden. See
supra note 562. See also ABA, Job Creators Network, Goodwin, White &
Case. See supra note 562.
\610\ De-SPAC transaction agreements (such as merger agreements)
commonly contain a target company covenant, representation, or
similar provision that the target company will maintain its
directors and officers insurance or contain a representation or
warranty that the target company's directors and officers insurance
listed on the target company's disclosure schedules to the agreement
is in force and effect.
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One commenter said that co-registration would result in disclosure
requirements that are inconsistent with the proposed revisions to
Regulation S-X, raising the issue of whether, if there were multiple
target companies, each company would be required to provide
[[Page 14215]]
financial statements audited in accordance with PCAOB standards in the
de-SPAC registration statement, rather than solely the predecessor
pursuant to proposed Rule 15-01(a) of Regulation S-X.\611\ This
commenter indicated that co-registration would result in
inconsistencies with IPOs where there are multiple target companies.
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\611\ Letter from Vinson & Elkins.
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As the commenter notes, in the case of multiple companies being
acquired by the SPAC, if each of those companies meets the definition
of ``target company'' being adopted,\612\ then each would be required
to be a co-registrant on the de-SPAC registration statement. Under the
final rules all target companies are issuers, as defined by section
2(a)(7) of the Sarbanes-Oxley Act of 2002 (``Sarbanes-Oxley
Act''),\613\ and therefore, under current 17 CFR 210.1-02(d) (``Rule 1-
02(d)'' of Regulation S-X), any audit of the target's financial
statements would be required to be performed in accordance with PCAOB
standards by a PCAOB-registered audit firm. However, also as noted by
the commenter, proposed Rule 15-01(a) provided that only target
companies that would constitute the predecessor for financial reporting
purposes would be required to comply with Rule 15-01 of Regulation S-X
in connection with a de-SPAC transaction and provide financial
statements audited in accordance with PCAOB standards.\614\ We continue
to believe this is the appropriate outcome given the hybrid nature of
de-SPAC transactions, as it aligns the de-SPAC transaction financial
reporting to that of an IPO that includes multiple companies.\615\ All
target companies provide information that is included in the
registration statement and therefore should face Securities Act
liability as co-registrants and issuers on the de-SPAC registration
statement.\616\
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\612\ See Item 1601(d) of Regulation S-K, adopted herein.
\613\ Public Law 107-204, Sec. 404(b) 116 Stat. 745 (2002).
\614\ See Rule 15-01 of Regulation S-X, adopted herein.
\615\ In an IPO where a shell company acquires multiple
businesses in a ``put together'' transaction, only the
predecessor(s) (in some transactions, there may be more than one
predecessor) would be required to provide historical financial
statements audited in accordance with PCAOB standards. See Rule 1-
02(d) of Regulation S-X for the audit requirements and Rule 3-02(a)
of Regulation S-X which incorporates a predecessor into these
requirements.
\616\ Entities for which their financial statements are included
in the Form S-4 or F-4 through application of Rule 3-05 of
Regulation S-X, Rule 3-14 of Regulation S-X, or 17 CFR 210.8-04
(``Rule 8-04'' of Regulation S-X) that are not target companies
would not be considered a registrant to the Form S-4 or F-4.
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In order to address the tension identified by the commenter, and to
clarify that all target companies are co-registrants and issuers but
only target companies that are predecessors \617\ must provide
financial statements audited in accordance with PCAOB standards, we are
modifying the proposed revisions to the definition of ``audit (or
examination)'' in Rule 1-02(d) to clarify that Rule 15-01(a) governs
the audit requirements for all issuers (both predecessors and non-
predecessors) that combine with a shell company.\618\ We have also
added language to Rule 15-01(a) to clarify that for non-predecessor
issuers--in the context of a registration statement or proxy statement
filed for the combination with an issuer that is a shell company \619\
(e.g., in a de-SPAC transaction, non-predecessor co-registrant target
companies)--the term ``audit (or examination)'' is defined as ``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.'' \620\ In addition to
adopting the proposed changes to Item 17 of Form S-4 or Form F-4 that
direct companies to Article 15 for the financial statements required in
a de-SPAC transaction, we have revised the proposed Instruction L to
Form S-4 and Instruction I to Form F-4 to clarify that for purposes of
the disclosure requirements in those forms, the target company is the
``company being acquired.''
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\617\ See supra note 606.
\618\ See Rule 1-02(d) of Regulation S-X, adopted herein.
\619\ In the event a non-predecessor issuer is required to file
a Form 10-K on a standalone basis, the financial statements would be
required to be audited under PCAOB standards, pursuant to Rule 1-
02(d) of Regulation S-X because the entity is filing an Exchange Act
report for itself and not as a non-predecessor issuer under Rule 15-
01(a).
\620\ See Rule 15-01(a) of Regulation S-X, adopted herein. An
issuer that is not a predecessor that is already registered under
Exchange Act sections 13(a) or 15(d) would be required to file
financial statements audited in accordance with PCAOB standards
pursuant to Rule 1-02(d) of Regulation S-X.
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As stated in the proposal,\621\ the proposed financial reporting
requirements were intended to more closely align the de-SPAC
transaction disclosures to the disclosures made where a shell company
acquires multiple businesses in a ``put together'' transaction before
an IPO. This approach recognizes the hybrid nature of the de-SPAC
transaction and the fact that the historical financial statements of
the predecessor(s), and in some circumstances the SPAC, would be the
historical financial information that would be presented in the
combined company's Exchange Act reporting. The Commission proposed
Article 15 of Regulation S-X instead of proposing a requirement that
all target companies provide audited financial statements under the
registrant disclosure requirements of Item 14 of Form S-4 and Form F-4,
which apply to the information required to be provided by registrants
other than Form S-3 and Form F-3 eligible registrants, respectively.
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\621\ See Proposing Release at section IV.B.
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To illustrate application of the final rules, assume a SPAC files a
Form S-4 to register the issuance of shares to acquire two unrelated
businesses and only one of the businesses will be the predecessor for
financial reporting purposes. Under the final rules, each ``issuer''
(the SPAC and the two unrelated businesses) must sign the registration
statement.\622\ The pro forma financial statements included in the Form
S-4 depict a reverse recapitalization with the predecessor and an
acquisition of the other business. Subsequent Exchange Act reports,
such as the next Form 10-K, will include the historical financial
statements of the predecessor. In this scenario, the Form S-4 would
require two to three years of historical financial statements for the
business that will be the predecessor audited in accordance with PCAOB
standards. By contrast, the non-predecessor business will be a company
being acquired under Item 17 of Form S-4 and its financial statements
may be audited in accordance with either PCAOB standards or U.S. GAAS
standards, despite it being an issuer.
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\622\ 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.
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We recognize that predecessor determinations in de-SPAC
transactions may include scenarios that differ from the above
illustrative example. For example, a transaction with two target
companies could instead result in a determination that there are two
predecessors. In that example, the financial statements of both target
[[Page 14216]]
companies must be audited in accordance with PCAOB standards.\623\
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\623\ Determination of the predecessor(s) in a de-SPAC
transaction, as in any other transaction, is a facts and
circumstances driven determination made by the registrant(s).
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Section 102 of the Sarbanes-Oxley Act makes it ``unlawful for any
person that is not a registered public accounting firm to prepare or
issue . . . any audit report with respect to any issuer.'' \624\ The
final rules do not change this requirement for issuers to engage PCAOB-
registered accounting firms, and therefore all issuers, including non-
predecessor target companies, will need to engage a PCAOB-registered
audit firm when the de-SPAC transaction requires audited historical
financial statements (but, as discussed above, the PCAOB-registered
firm could audit the financial statements of non-predecessor target
companies either under the standards of the PCAOB or U.S. GAAS). We
acknowledge commenter concerns that, because PCAOB Rule 3211 requires a
registered audit firm to file a Form AP with the PCAOB when its audit
report for an issuer is included in a filing with the Commission,\625\
multiple Forms AP may be required for a single transaction where the
related registration statement requires audit reports for multiple
issuers and when more than one registered audit firm was involved.\626\
To the extent that the PCAOB deems it necessary to provide guidance or
take other action in response to the final rules, the Commission and
its staff will work with the PCAOB, as appropriate.
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\624\ See 15 U.S.C. 7212(a).
\625\ See PCAOB Rule 3211, Auditor Reporting of Certain Audit
Participants, available at https://pcaobus.org/about/rules-rulemaking/rules/section_3/section-3-auditing-and-related-professional-practice-standards-rule-3211-amended. Note 2 to PCAOB
Rule 3211 states that the rule requires the filing of a report on
Form AP regarding an audit report only the first time the audit
report is included in a document filed with the Commission.
Subsequent inclusion of precisely the same audit report in other
documents filed with the Commission does not give rise to a
requirement to file another Form AP. See id.
\626\ Letters from Crowe, Grant Thornton.
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Regarding a commenter's suggestion that the Commission create a new
S-1-like form for de-SPAC transactions, which should not include
management projections,\627\ we do not believe that is necessary. The
amendments to existing registration statement forms that we are
adopting in this release accomplish our enhanced disclosure goals,
including addressing similarities between IPOs and de-SPAC
transactions, and appropriately take into account the business
combination context of de-SPAC transactions. With respect to
projections in registration statements, as we discuss in detail below,
our final definitions of ``blank check company'' should address the
commenter's concerns regarding the use of projections in de-SPAC
transaction registration statements.\628\ In addition, as noted below,
there is no prohibition under current rules on including projections in
registration statements on Form S-1 or F-1.\629\
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\627\ Letter from Bullet Point Network.
\628\ See infra section III.E discussion of PSLRA Safe Harbor.
\629\ See infra discussion in section III.E proximate to notes
836 and 858.
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D. Re-Determination of Smaller Reporting Company (SRC) Status
1. Proposed Rules
SRCs constitute 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.\630\
For example, SRCs are not required to provide quantitative and
qualitative information about market risk pursuant to 17 CFR 229.305
(Item 305 of Regulation S-K).\631\ In general, an SRC is a company that
is not an investment company, an asset-backed issuer or a majority-
owned subsidiary of a parent that is not an SRC and (1) had 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.\632\ SRC
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.\633\ Once a company
determines that it is not an SRC, it will retain this non-SRC 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.\634\
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\630\ See, e.g., 17 CFR 229.10(f) (``Item 10(f)'' of Regulation
S-K); 17 CFR 210.8-01 (``Rule 8-01'' of Regulation S-X), 17 CFR
210.8-02 (``Rule 8-02'' of Regulation S-X), 17 CFR 210.8-03, 17 CFR
210.8-07, and 17 CFR 210.8-08 (``Rule 8-08'' of Regulation S-X);
Item 1A of Form 10 and Form 10-K; Item 3.02 of Form 8-K. An FPI is
not eligible to use the scaled disclosure requirements for SRCs
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) of Regulation S-K; Instruction 2
to definition of ``smaller reporting company'' in Securities Act
Rule 405 and Exchange Act Rule 12b-2.
\631\ 17 CFR 229.305(e) (Item 305(e) of Regulation S-K).
\632\ 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.
\633\ See 17 CFR 229.10(f)(2)(i) and (f)(2)(ii) (``Item
10(f)(2)(ii)'' of Regulation S-K). In re-determining SRC 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.
\634\ See 17 CFR 229.10(f)(2)(iii); Securities Act Rule 405;
Exchange Act Rule 12b-2.
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The Commission proposed to require a re-determination of SRC status
following the consummation of a de-SPAC transaction through proposed
amendments to the definition of ``smaller reporting company'' in each
of Securities Act Rule 405, Exchange Act Rule 12b-2, and Item 10(f) of
Regulation S-K. Specifically, the Commission proposed that the post-de-
SPAC transaction registrant must re-determine its SRC status prior to
the time it makes its first Commission filing, other than the Form 8-K
filed with Form 10 information,\635\ and reflect this re-determination
in the issuer's next periodic report.\636\
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\635\ 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.
\636\ Proposed Item 10(f)(2)(iv) of Regulation S-K; proposed
paragraph (3)(iv) in the definition of ``smaller reporting company''
in Securities Act Rule 405; proposed paragraph (3)(iv) in the
definition of ``smaller reporting company'' in Exchange Act Rule
12b-2.
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The Commission also proposed, in connection with this re-
determination: (a) that public float be measured as of a date within
four business days after the consummation of the de-SPAC transaction;
\637\ and (b) that annual revenues be measured using the annual
revenues of the target company as of the most recently completed fiscal
year reported in the Form 8-K filed with Form 10 information.\638\ The
Commission did not propose any changes to the float and revenue
thresholds in the current definitions of ``smaller reporting company.''
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\637\ Proposed Item 10(f)(2)(iv)(A) of Regulation S-K; proposed
paragraph (3)(iv)(A) in the definition of ``smaller reporting
company'' in Securities Act Rule 405; proposed paragraph (3)(iv)(A)
in the definition of ``smaller reporting company'' in Exchange Act
Rule 12b-2.
\638\ Proposed Item 10(f)(2)(iv)(B) of Regulation S-K; proposed
paragraph (3)(iv)(B) in the definition of ``smaller reporting
company'' in Securities Act Rule 405; proposed paragraph (3)(iv)(B)
in the definition of ``smaller reporting company'' in Exchange Act
Rule 12b-2.
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2. Comments
Broadly categorized, commenters on the SRC re-determination
proposal focused on four areas: (1) general comments, including those
with general expressions of support for or opposition to the proposals,
(2) timing and re-determination of public float, (3) ramifications of
loss of SRC status, and (4) requests for guidance. In addition, in
response to a request for comment from
[[Page 14217]]
the Commission in the Proposing Release, several commenters addressed
issues of re-determination of the following: accelerated filer and
large accelerated filer status, EGC status, and FPI status.
A few commenters generally supported the proposed re-determination
of SRC status following a de-SPAC transaction.\639\ One commenter noted
that such re-determination would ``generally align that determination
with that of an IPO.'' \640\ Another commenter noted that such re-
determination was a signal that ``the Commission appears to be
forestalling a situation in which a company that would not have been
eligible to use the scaled disclosures and other accommodations
available to a smaller reporting company if it had become public
through a traditional initial public offering would, nonetheless, be
eligible to take advantage of those accommodations based on the smaller
reporting company status of the pre-merger SPAC.'' \641\
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\639\ Letters from KPMG, PwC.
\640\ Letter from KPMG.
\641\ Letter from PwC.
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Others opposed, or raised concerns regarding, the proposed re-
determination of SRC status following a de-SPAC transaction.\642\ One
commenter stated that such a re-determination immediately after the de-
SPAC transaction is inconsistent with the Commission's objective of
aligning the requirements with those of IPOs.\643\ Another commenter
indicated that the change could be problematic for certain
transactions, such as ``where (1) the SPAC is an SRC and the legal
acquirer, (2) the target company was an SRC prior to the closing of the
de-SPAC transaction and filed two years of audited financial statements
and (3) the post-closing public float exceeds $700 million.'' \644\
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\642\ Letters from Ernst & Young, Vinson & Elkins.
\643\ Letter from Ernst & Young.
\644\ Letter from Vinson & Elkins.
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One commenter stated they did not object to re-determination based
on public float within a short time following closing of the de-SPAC
transaction.\645\
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\645\ Letter from ABA.
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Another commenter recommended an alternative approach to re-
determining SRC status similar to the determination of SRC status used
by an IPO company filing its initial registration statement under Item
10(f)(2)(ii) of Regulation S-K but based on ``the revenues and public
float of the target company that will be the predecessor for financial
reporting purposes.'' \646\ This commenter proposed the public float
should be calculated ``as the agreed value of the equity consideration
payable to the owners of the target company, plus the total outstanding
shares of the SPAC (valued at $10 per share, or whatever the agreed
per-share valuation of the equity consideration is), plus any common
equity to be issued to finance the de-SPAC transaction.'' \647\ The
commenter further stated, ``The surviving company should have the
option to redetermine its status based on the number of shares
outstanding after the closing of the de-SPAC transaction (i.e.,
reflecting redemptions and any equity not issued in the financing
transaction or as equity consideration), consistent with the last
sentence of S-K Item 10(f)(2)(ii)(C).'' \648\
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\646\ Letter from Vinson & Elkins.
\647\ Letter from Vinson & Elkins.
\648\ Letter from Vinson & Elkins.
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Several commenters addressed the ramifications of the loss of SRC
status. Commenters observed that one such ramification is that a
registration statement filed after the point at which non-SRC status
must be reflected could require incremental disclosure for a non-SRC,
such as an additional year of financial statements beyond what was
provided in the Form S-4 in connection with a de-SPAC transaction.\649\
One of these commenters suggested, ``An alternative approach would be
for a company, upon completion of a de-SPAC transaction, to transition
into or out of SRC status in conjunction with the annual report to be
filed for the year of the transaction based upon the public float as of
the later of four business days after the merger transactions or the
end of the second fiscal quarter.'' \650\ The commenter also added,
``Such a revision could still result in an SRC merging with a public
shell exiting SRC status more quickly than under current rules while
mitigating the burden and inconsistency of providing incremental
information not previously required for companies accessing the public
market shortly after the de-SPAC transaction.'' \651\
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\649\ Letters from Ernst & Young (``For example, the proposed
redetermination timing could result in a post-business combination
company losing its SRC status and having to provide an additional
year of audited financial statements (i.e., for the year preceding
the earliest period included in the Form S-4/proxy) in a follow-on
registration statement. . . .''), Grant Thornton (``the proposed
rule would preclude the post-combination entity to use scaled
disclosure alternatives in registration statements filed after it
files the first periodic report on Form 10-Q but before it files its
first annual report on Form 10-K.''), Vinson & Elkins (``If the
post-closing public float exceeds $700 million, the post-closing
company would be required to include three years of audited
financial statements in its annual report and any registration
statement, which may be more than what was included in the Form S-4
or proxy statement filed in connection with the de-SPAC
transaction.'').
\650\ Letter from Ernst & Young.
\651\ Letter from Ernst & Young.
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Another commenter recommended that the Commission consider whether
``accommodations may be warranted to the post-combination entity
regarding presentation of audited financial statements and related
information (such as MD&A or separate financial statements of
significant equity method investees) for periods prior to those
presented in the Form S-4 or F-4 for the private operating company.''
\652\
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\652\ Letter from Grant Thornton (``We note that while the
provision in Section 7(a)(2)(A) of the Securities Act for providing
only two years of audited financial statements is limited to initial
registration statements, the SEC staff does not object if emerging
growth companies (EGCs) do not present, in other registration
statements, audited financial statements for any periods prior to
the earliest audited period presented in its initial registration
statement,'' citing Generally Applicable Questions on Title I of the
JOBS Act, Question 12).
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One commenter recommended that the Commission clarify whether an
amendment to a Form 8-K with Form 10 information (often referred to as
a ``super 8-K'') to include pre-acquisition annual financial statements
of the private operating company ``will be deemed to be the first
periodic report for the purposes of effectiveness of the SRC status in
connection with a de-SPAC transaction'' in circumstances where a de-
SPAC transaction is consummated shortly after the fiscal year-end of
the private operating company but before its financial statements for
that annual period are required in a Form 10 registration
statement.\653\
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\653\ Letter from Grant Thornton.
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Another commenter recommended, for purposes of determining whether
the post-de-SPAC registrant may exclude management's assessment of
internal control over financial reporting in the Form 10-K covering the
fiscal year in which the transaction was consummated, that the
Commission codify the staff's view \654\ that a SPAC's need to file an
amended super 8-K to update the target company's financial statements
for its most recent year[hyphen]end is the equivalent to the first
annual report.\655\
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\654\ Letter from BDO USA, LLP (June 13, 2022) (``BDO''). See
CDI 215.02 Division of Corporation Finance, Compliance and
Disclosure Interpretations: Regulation S-K, Section 215.02,
available at https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
\655\ The Commission views this comment from BDO, which
discussed considering the amended ``super 8-K'' as the first annual
report following the de-SPAC transaction, as a different comment
than the one from Grant Thornton, supra note 653, which discussed
considering the amended ``super 8-K'' as the first periodic report
following the de-SPAC transaction.
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Another commenter stated that the Commission ``should revisit and
revise
[[Page 14218]]
its guidance in 5230.1 of the Division of Corporation Finance's
Financial Reporting Manual, which could result in more information
being required in a Super 8-K . . . than would be required in a Form S-
1 for the target company.'' \656\
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\656\ Letter from Vinson & Elkins.
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In response to a request for comment in the Commission in the
Proposing Release,\657\ several commenters addressed issues of re-
determination of filer status, EGC status, and FPI status.
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\657\ Proposing Release, supra note 7, at 29481 (request for
comment number 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?'').
---------------------------------------------------------------------------
Some commenters recommended that the Commission should put post-de-
SPAC transaction registrants on the same footing with respect to filer
status as a company that has recently undertaken an IPO, because,
otherwise, where a post-de-SPAC transaction registrant inherits the
SPAC's reporting history, this could impact the timing of when the
post-de-SPAC transaction registrant becomes subject to accelerated
filing obligations.\658\ Other commenters suggested the Commission
should further analyze or consider the issue.\659\
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\658\ See letters from BDO (``If a de[hyphen]SPAC transaction is
considered the equivalent of an IPO, it is not clear why the
post[hyphen]merger filer status would be treated differently for a
company that chooses one going[hyphen]public transaction over the
other.''), Ernst & Young (``We recommend aligning the determination
of EGC status, filer status and foreign private issuer status for
the post-business combination company with the requirements that
apply to a traditional IPO. We believe that, if the post-business
combination company is not eligible to file a Form S-3 shelf
registration statement, it would be consistent to disregard the
SPAC's reporting history for purposes of determining filer status
(i.e., a post-business combination company would generally be a non-
accelerated filer). Such entities should also be permitted to
`reset' the EGC clock of five years for considering their status as
an EGC. We have observed an evolution in the structuring of SPAC
transactions (e.g., use of a double-dummy structure) that can
achieve certain financial reporting results (e.g., filer status and
foreign private issuer status). Therefore, we support aligning the
redetermination requirements so that the transaction structure would
not result in financial reporting differences.''), Fenwick & West
LLP (June 7, 2022) (``Fenwick'') (``The de-SPAC Issuer should
benefit from the transition, grace periods and other accommodations
following the Closing Date that IPO Issuers benefit from following
the Effective Date (for example, the de-SPAC Issuer should benefit
from the same exemption from Sarbanes-Oxley Act Section 404(a)
compliance under Item 308 of Regulation S-K [17 CFR 229.308] in
respect of its first Annual Report on Form 10-K filed after the
Closing Date.''), Vinson & Elkins.
\659\ Letters from KPMG (``we recommend the Commission consider
clarifying the determination of the combined company's filer status
upon consummation of the de-SPAC transaction.''), PwC (``We believe
that the underlying policy objectives associated with each type of
filer status should be evaluated to determine whether the goals
would be furthered by re-determination. . . .For instance, in
proposing that the post-business combination company re-determine
its smaller reporting company status shortly after consummating the
de-SPAC transaction. . . .We support the proposal to require timely
re-determination in this circumstance. We believe a similar analysis
should be undertaken with respect to other statuses.'').
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A few commenters recommended that the EGC status of the combined
company following a de-SPAC transaction should be re-determined upon
consummation of the de-SPAC transaction.\660\
---------------------------------------------------------------------------
\660\ Letters from Ernst & Young (``We recommend aligning the
determination of EGC status, filer status and foreign private issuer
status for the post-business combination company with the
requirements that apply to a traditional IPO. . . . Such entities
should also be permitted to `reset' the EGC clock of five years for
considering their status as an EGC.''), KPMG (recommending the
Commission consider clarifying the determination of a combined
company's filer status, including EGC status, upon consummation of a
de-SPAC transaction), PwC (supporting SRC re-determination proposal
and stating that ``We support the proposal to require timely re-
determination in this circumstance. . . . We believe a similar
analysis should be undertaken with respect to other statuses.''),
Vinson & Elkins.
---------------------------------------------------------------------------
Several commenters, including some who made recommendations
regarding EGC status, recommended that the Commission provide for re-
determination of FPI status in connection with the de-SPAC
transaction.\661\
---------------------------------------------------------------------------
\661\ Letters from Ernst & Young, KPMG, Vinson & Elkins.
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One commenter noted that they have ``observed an evolution in the
structuring of SPAC transactions (e.g., use of a double-dummy
structure) that can achieve certain financial reporting results (e.g.,
filer status and foreign private issuer status)'' and expressed support
for ``aligning the redetermination requirements so that the transaction
structure would not result in financial reporting differences.'' \662\
---------------------------------------------------------------------------
\662\ Letter from Ernst & Young.
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Another commenter stated: ``Allowing redetermination of foreign
private issuer status would result in disclosure requirements and filer
status determinations that are consistent with what would apply if the
target company went public via an IPO, without regard to the de-SPAC
transaction structure. A de-SPAC transaction may be structured so that
an entity other than the SPAC is the acquiror for tax reasons, due to
the domicile of the surviving company, or due to required consents and
approvals applicable to the target company. Aligning the disclosure
requirements so that, for example, a target company that would have
qualified as a foreign private issuer could be acquired by a domestic
SPAC and then the surviving company could be immediately eligible for
foreign private issuer status would allow de-SPAC transactions to be
structured in the best interests of shareholders.'' \663\ Similar views
were expressed by another commenter.\664\
---------------------------------------------------------------------------
\663\ Letter from Vinson & Elkins.
\664\ See letter from Freshfields.
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3. Final Rules and Guidance
After considering the comments received, we are adopting amendments
regarding SRC re-determination as proposed with certain modifications
discussed below. We are not adopting requirements, as suggested by
several commenters, to re-determine filer status, EGC status, or FPI
status upon the completion of a de-SPAC transaction. We are providing
guidance, however, concerning FPI status, as discussed further below.
Currently, most SPACs qualify as SRCs,\665\ and Commission rules
permit a post-business combination company after a de-SPAC transaction
\666\ to retain this status until its next annual determination date in
cases where the legal entity that was the SPAC is the legal entity that
is the combined company in connection with the de-SPAC transaction.
Under current rules, the absence of a re-determination of SRC status
upon the completion of these de-SPAC transactions has permitted certain
post-business combination companies to avail themselves of scaled
disclosure and other accommodations when they otherwise would not have
qualified as a SRC had they become public companies through a
traditional IPO. The final rules will help level the playing field with
a traditional IPO in this respect and reduce information asymmetries
that result when a target company
[[Page 14219]]
chooses to go public through a de-SPAC transaction.\667\
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\665\ Based on data from SPACInsider (using fields ``IPO Date''
(2021) and ``SPAC Status'' (Searching)), the Commission staff
observed that out of 163 SPACs that had an IPO in 2021 and had not
found a target company by the end of 2021, only two SPACs had
outstanding shares of more than 70,000,000. Assuming a per share
price of $10 at the time of the IPO and no changes in outstanding
shares since the time of the IPO, the Commission staff views this
data as indicating that the 161 other SPACs among that cohort did
not have a float at the time of IPO of more than $700 million, the
threshold under paragraph (2)(ii) of the definition of ``smaller
reporting company'' in Rule 12b-2. (In an actual public float
calculation for purposes of the ``smaller reporting company''
definition, affiliate shares would be subtracted from total
outstanding shares used in this example, resulting in a lower value
than produced in this example, because the applicable value would be
multiplied by fewer shares.) With respect to the $100 million
revenue test under paragraph (2) of the definition of ``smaller
reporting company'' in Rule 12b-2, income statement items such as
``Interest earned on marketable securities held in trust account''
and ``Unrealized gain on marketable securities held in trust
account'' are generally not revenue for SPACs and SPACs typically do
not record revenue.
\666\ See Item 10(f)(2) of Regulation S-K; Securities Act Rule
405; Exchange Act Rule 12b-2.
\667\ In the Proposing Release, the Commission said, if a SPAC
qualified as an SRC 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 SRCs when filing a registration statement between
the re-determination date and the post-business combination
company's first periodic report. Proposing Release, supra note 7, at
29480. For the avoidance of any doubt on the part of registrants
related to the references to ``legal acquirer'' in the Proposing
Release, the Commission is clarifying that the final rules we are
adopting--that provide re-determined SRC status be reflected in
filings 45 days after consummation of the de-SPAC transaction--are
not strictly limited to that particular transaction structure for
the de-SPAC transaction and apply to any post-de-SPAC transaction
combined company registrant that is the same legal entity as the
legal entity that was a SPAC (prior to the de-SPAC transaction)
regardless of the structure of the de-SPAC transaction.
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As adopted, a post-de-SPAC transaction registrant must re-determine
its SRC status prior to the time it makes its first Commission filing,
other than the Form 8-K filed with Form 10 information, with public
float measured as of a date within four business days after the
consummation of the de-SPAC transaction and annual revenues measured
using the annual revenues of the target company as of the most recently
completed fiscal year reported in such Form 8-K.
We disagree with the commenter who recommended an alternative
approach similar to the SRC determination for IPO companies under Item
10(f)(2)(ii) of Regulation S-K but based on the revenues and public
float of the target company that will be the predecessor for financial
reporting purposes.\668\ In an IPO, with respect to public float, Item
10(f)(2)(ii) looks to: the estimated offering price per share at the
time of filing of the registration statement; the number of shares of
common stock outstanding that are held by non-affiliates before the
offering; and the number of shares of common stock to be sold at the
estimated offering price. Item 10(f)(2) of Regulation S-K also gives
the registrant the option to recalculate its public float at the time
the company completes the IPO. As described above, under the
commenter's suggested approach, the SRC determination would be made
prior to the filing of the de-SPAC registration statement or proxy
statement using an ``agreed value'' method.\669\ Although Item
10(f)(2)(ii) does allow for the use of estimations in the IPO context,
we believe that the approach we are adopting, which focuses on a
determination of SRC status based on actual post-transaction public
float, is a more effective measure of the registrant's size in the
context of a de-SPAC transaction. While in many cases the commenter's
suggested recalculation after closing to capture the actual number of
shares outstanding would result in the same determination of SRC status
post-transaction, the adopted approach helps to ensure the appropriate
level of disclosures to investors both before and after the closing of
the transaction.
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\668\ Letter from Vinson & Elkins. See supra notes 646, 647, and
648 and accompanying text.
\669\ See id.
---------------------------------------------------------------------------
Pursuant to the final rules, the four-business-day window to
calculate the public float threshold following a de-SPAC transaction
would begin the first business day after the day of closing of the de-
SPAC transaction and end four business days later (on the due date for
the Form 8-K with Form 10 information that the post-de-SPAC transaction
combined company registrant is required to file after the completion of
a de-SPAC transaction). Each of the number of shares outstanding that
are held by non-affiliates and the price per share would be determined
on the same day within the four-business-day window. This window will
provide some flexibility for issuers to measure public float compared
to the annual re-determination of SRC status (which is determined based
on a single business day, the last business day of the most recently
completed second fiscal quarter). This four-business-day window will
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.
Under the proposed rule, a post-de-SPAC transaction registrant
would be required to reflect its re-determined SRC status in its next
periodic report after the filing of the Form 8-K with Form 10
information (often referred to as a ``super 8-K''). We are aware that,
if a registrant loses SRC status upon re-determination, there may be
certain ramifications. Several commenters observed that one such
ramification is that a registration statement filed after the point at
which non-SRC status must be reflected could require incremental
disclosure for a non-SRC, such as an additional year of financial
statements beyond what was provided in the Form S-4 in connection with
a de-SPAC transaction.\670\ Inclusion of such incremental disclosure as
a result of losing SRC status might present challenges for some
registrants in situations where a periodic report becomes due shortly
after the closing of the de-SPAC transaction.\671\
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\670\ Letters from Ernst & Young, Grant Thornton, Vinson &
Elkins. See supra note 649.
\671\ See letters from Vinson & Elkins (indicating that the
issue is particularly acute ``if the post-closing company's first
annual report is due shortly after closing or the company is
required to file a registration statement after the company's first
periodic report,'' and advocating for a redetermination based on
Item 10(f)(2)(ii) (as discussed above), but stating that ``longer
periods or accommodations could ameliorate the issues with the
proposed amendments to S-K Item 10(f)''), Ernst & Young (indicating
that ``companies [could be] required to provide additional
information in a follow-on registration statement as soon as four
days after the de-SPAC transaction'').
---------------------------------------------------------------------------
In response to these comments, in a change from the proposal, the
final rules provide that a registrant does not need to reflect non-SRC
status in any filing that is due in the 45-day period following the
consummation of the de-SPAC transaction; the registrant would begin to
reflect non-SRC status in filings made no later than after the end of
this 45-day period. In contrast, under the proposal, a registrant would
have needed to reflect non-SRC status in its next periodic report that
could be due as soon as one day after the filing of the ``super 8-K,''
which is due a maximum of four days after the consummation of the de-
SPAC transaction. We believe the final rule represents a reasonable
compromise between the proposed rule's transition period (until the
next periodic report, which could be as soon as one day after the de-
SPAC transaction) and a commenter's recommended transition period
(until filing of the next Form 10-K, which could be as long as nearly
15 months). Another benefit of affording this additional time to
registrants that lose SRC status upon re-determination is that, where
the registrant intends to file a resale registration statement shortly
after the de-SPAC transaction, the registrant will retain its SRC
status for purposes of any such resale registration statement filed
during this additional time period.\672\
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\672\ Section 230.401(a) of title 17 of the CFR states that a
registration statement shall conform to the applicable rules and
forms in effect on the initial filing date of such registration
statement, and the rule would apply to SRC status. Accordingly, if
the registrant is an SRC at the initial public filing date of the
resale registration statement, then it may comply with rules for an
SRC in subsequent amendments of that registration statement.
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We are not adopting the commenter's recommendation to exclude, in
post-de-SPAC transaction filings, any financial statements that predate
the financial statements presented in the Form S-4.\673\ In our view a
registrant that is re-determined to be a non-SRC should not be able to
avail itself of the scaled-down requirements applicable to SRCs.
[[Page 14220]]
Furthermore, we believe the adopted approach will provide registrants
with sufficient time to prepare the additional incremental information
that may be required in a situation where the registrant has lost its
SRC status. We further note that a registrant that loses SRC
eligibility may continue to be an EGC, which includes certain scaled
reporting accommodations. In light of new Rule 15-01(b), which requires
a business combining with a shell company to comply with Regulation S-X
as if the transaction were an IPO of common equity securities, we
believe that if the registrant retained its EGC status after the
transaction, then the registrant would not be required to present
audited financial statements for any period prior to the earliest
audited period presented in connection with the de-SPAC transaction. We
evaluated whether a minimum transition period should be longer or
shorter than 45 days. We concluded that 45 days provided an appropriate
balance between providing investors with the scaled-up information as
soon as reasonably possible and providing registrants with time to
prepare for compliance and the ability, in a limited number of
instances,\674\ to avoid the costs of preparing an additional year of
audited financial statements beyond what was required in the Form S-4.
---------------------------------------------------------------------------
\673\ Letter from Grant Thornton. See supra note 652 and
accompanying text.
\674\ We understand that most post-de-SPAC registrants would be
EGCs and would not be required to file the additional year of
financial statements in reliance on the EGC accommodations.
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Commenters also requested guidance on certain issues. One commenter
recommended that the Commission clarify whether an amendment to a
``super 8-K'' could be the first periodic report for the purposes of
effectiveness of the SRC status.\675\ Under the final rules, any filing
made 45 days after the consummation of the de-SPAC transaction must
reflect re-determined SRC status, including a filing to amend a ``super
8-K.''
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\675\ Letter from Grant Thornton. See supra note 653.
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Unrelated to SRC re-determination, other commenters recommended
codification of, or revisions to, staff guidance relating to the
position that a SPAC's need to file an amended Form 8-K to update the
target company's financial statements for its most recent
year[hyphen]end is the equivalent to the first annual report \676\ and,
separately, the guidance in FRM 5230.1, which summarizes the
Commission's basis for requiring Form 10 information under Item 2.01(f)
of Form 8-K and how the staff looks to the accounting acquirer's SRC-
eligibility at the time of the transaction for purposes of the
disclosure in the Form 8-K.\677\ We do not believe that such
codification or revisiting of the referenced staff guidance is
necessary in connection with the final amendments. We believe the
guidance in FRM 5230.1 is consistent with the final rules because the
final rules look to the target company's SRC-eligibility in all shell
company transactions, including where the target company is the
accounting acquirer.
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\676\ Letter from BDO that references Division of Corporation
Finance, Compliance and Disclosure Interpretations: Regulation S-K,
Section 215.02, which discusses the application of management's
assessment of internal control over financial reporting (ICFR) in
Item 308(a) of Regulation S-K when there has been a reverse
acquisition between an issuer and a private operating company. See
further discussion of the application of ICFR at infra note 685.
\677\ Letter from Vinson & Elkins.
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Rule 12b-2 provides the definitions of accelerated filer and large
accelerated filer, including requisite conditions.\678\ Accelerated
filer and large accelerated filer status are re-determined annually as
of the end of the issuer's fiscal year.\679\ For a new registrant that
just completed an IPO, however, a period of at least twelve months
would need to elapse before it would be required to comply with rules
as an accelerated filer or a large accelerated filer.\680\ In contrast,
after consummation of the de-SPAC transaction, depending on the timing
of the SPAC IPO and the de-SPAC transaction, because of the SPAC's
reporting history, where the legal entity that was the SPAC is the same
legal entity that is the post-de-SPAC transaction combined company, the
post-de SPAC transaction combined company may not have the same period
until it must make filings pursuant to accelerated filer or large
accelerated filer status as compared to a registrant that just
completed an IPO.\681\ By virtue of being an accelerated or large
accelerated filer, among other differences compared to a non-
accelerated or non-large accelerated filer, the post-de-SPAC
transaction combined registrant would be required to: (a) file its
periodic reports sooner than otherwise required; \682\ and (b) subject
its management's assessment of internal controls over financial
reporting to auditor attestation.\683\ As noted above, several
commenters recommended that the Commission put post-de-SPAC transaction
registrants on the same footing with respect to filer status as a
company that has recently undertaken an IPO.\684\
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\678\ The four existing conditions for qualifying as an
accelerated filer are that an issuer: (i) had an aggregate worldwide
public float of $75 million or more, but less than $700 million, as
of the last business day of the issuer's most recently completed
second fiscal quarter; (ii) has been subject to the requirements of
15 U.S.C. 78m (Exchange Act section 13(a)) or 15 U.S.C. 78o(d)
(Exchange Act section 15(d)) for a period of at least twelve
calendar months; (iii) has filed at least one annual report pursuant
to those sections; and (iv) the issuer is not eligible to use the
requirements for SRCs under the revenue test in paragraph (2) or
(3)(iii)(B) of the ``smaller reporting company'' definition in Rule
12b-2, as applicable. For a large accelerated filer, conditions (ii)
through (iv) are the same, but condition (i) is that an issuer had
an aggregate worldwide public float of $700 million or more, as of
the last business day of the issuer's most recently completed second
fiscal quarter. See paragraphs (1) and (2) in the definition of
``accelerated filer and large accelerated filer'' in Rule 12b-2.
\679\ See paragraphs (1), (2), and (3) in the definition of
``accelerated filer and large accelerated filer'' in Rule 12b-2.
\680\ See paragraph (1)(ii) in the definition of ``accelerated
filer and large accelerated filer'' in Rule 12b-2 (``The issuer has
been subject to the requirements of section 13(a) or 15(d) of the
Act (15 U.S.C. 78m or 78o(d)) for a period of at least twelve
calendar months;'') and paragraph (2) in the definition.
\681\ If a new holding company is created to effect the de-SPAC
transaction and the new holding company is the post-de-SPAC
transaction combined company that will continue to be an Exchange
Act reporting company, the same logic applies because the holding
company would be the Exchange Act reporting successor to the SPAC.
See definition of ``Succession'' in Exchange Act Rule 12b-2, 17 CFR
240.12g-3.
\682\ See Form 10-Q, General Instruction A.1; Form 10-K, General
Instruction A(2).
\683\ 17 CFR 229.308(b). A registrant's status as an accelerated
filer or a large accelerated filer triggers the requirement
contained in section 404(b) of the Sarbanes-Oxley Act to have the
auditor provide an attestation report on internal control over
financial reporting.
\684\ See letters from BDO, Ernst & Young, Fenwick, Vinson &
Elkins.
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One of the main consequences of the approach suggested by these
comments--that the reporting history of the SPAC should be disregarded
such that the post-de-SPAC transaction combined company could
recommence the 12-month period that must elapse (pursuant to paragraphs
(1)(ii) and (2)(ii) in the definition of ``accelerated filer and large
accelerated filer'' in Rule 12b-2) before it is possible to acquire
accelerated or large accelerated filer status--would be to delay
management's assessment of internal control over financial reporting
and outside auditor attestation of management's assessment for
companies that are not EGCs. We do not believe it is necessary or
appropriate to amend the filer status requirements for this reason;
however, we note that the Commission staff has taken the position that
under certain conditions, the Commission staff would not object if the
post-combination registrant were to exclude management's assessment of
internal control over financial reporting in the Form 10-K covering the
fiscal
[[Page 14221]]
year in which the transaction was consummated.\685\ Since the staff
position about management's assessment of internal control over
financial reporting is broader than the transactions covered by this
rulemaking, as it applies to reverse acquisitions between an issuer and
a private operating company, we did not codify it as part of this
rulemaking.
---------------------------------------------------------------------------
\685\ See Division of Corporation Finance, Compliance and
Disclosure Interpretations: Regulation S-K, Section 215.02,
available at https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm, which states that the staff would not object if a
surviving issuer in a reverse acquisition were to exclude
management's assessment of internal control over financial reporting
(ICFR) in the Form 10-K covering the fiscal year in which the
reverse acquisition was consummated when it is not possible to
conduct an assessment of the private operating company's ICFR in the
period between the consummation date of the reverse acquisition and
the date of management's assessment of ICFR required by Item 308(a)
of Regulation S-K and when the internal controls of the shell
company may be insignificant when compared to the consolidated
entity.
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In 2012, the Jumpstart Our Business Startups Act amended the
Securities Act and Exchange Act to add provisions regarding and to
define an ``emerging growth company.'' \686\ Commission rules also
define an ``emerging growth company.'' \687\ The Commission has amended
the definition of ``emerging growth company'' in the past to adjust the
total annual revenue threshold in these rules for inflation.\688\
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\686\ Section 101(a) of the JOBS Act amended the Securities Act
and the Exchange Act to provide in section 2(a)(19) of the
Securities Act (15 U.S.C. 77b(a)(19)) and section 3(a)(80) of the
Exchange Act (15 U.S.C. 78c(a)(80)) a definition of ``emerging
growth company.'' These statutes provided as follows. An ``emerging
growth company'' is an issuer that had total annual gross revenues
of less than $1,000,000,000 (as such amount is indexed for inflation
every 5 years by the Commission to reflect the change in the
Consumer Price Index for All Urban Consumers published by the Bureau
of Labor Statistics, setting the threshold to the nearest 1,000,000)
during its most recently completed fiscal year. An issuer that is an
emerging growth company as of the first day of that fiscal year
shall continue to be deemed an emerging growth company until the
earliest of--(A) the last day of the fiscal year of the issuer
during which it had total annual gross revenues of $1,000,000,000
(as such amount is indexed for inflation every 5 years by the
Commission to reflect the change in the Consumer Price Index for All
Urban Consumers published by the Bureau of Labor Statistics, setting
the threshold to the nearest 1,000,000) or more; (B) the last day of
the fiscal year of the issuer following the fifth anniversary of the
date of the first sale of common equity securities of the issuer
pursuant to an effective registration statement under this
subchapter; (C) the date on which such issuer has, during the
previous 3-year period, issued more than $1,000,000,000 in non-
convertible debt; or (D) the date on which such issuer is deemed to
be a ``large accelerated filer'', as defined in 17 CFR 240.12b-2, or
any successor thereto.
\687\ Pursuant to Securities Act Rule 405 and Exchange Act Rule
12b-2, the term ``emerging growth company'' means an issuer that had
total annual gross revenues of less than $1.235 billion during its
most recently completed fiscal year. Pursuant to these rules, if an
issuer qualifies as an ``emerging growth company'' on the first day
of its fiscal year, it maintains that status until the earliest of:
(i) the last day of the fiscal year of the issuer during which it
had total annual gross revenues of $1.235 billion or more; (ii) 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 under the Securities Act; (iii) the date on
which the issuer has, during the previous three-year period, issued
more than $1 billion in nonconvertible debt; or (iv) the date on
which the issuer is deemed to be a ``large accelerated filer'' (as
defined in Exchange Act Rule 12b-2).
\688\ In 2017, the Commission changed the $1 billion revenue
threshold in these rules to $1.07 billion to account for inflation
and, effective Sept. 20, 2022, the Commission further changed this
$1.07 billon threshold to account for inflation to $1.235 billion.
See Inflation Adjustments and Other Technical Amendments Under
Titles I and III of the Jobs Act, Release No. 33-10332 (Mar. 31,
2017) [82 FR 17545 (Apr. 12, 2017)]; Inflation Adjustments under
Titles I and III of the JOBS Act, Release No. 33-11098 (Sept. 9,
2022) [87 FR 57394 (Sept. 20, 2022)].
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A SPAC typically qualifies as an EGC.\689\ A post-de-SPAC
transaction combined company would lose EGC status on the last day of
its fiscal year following the fifth anniversary of the first sale of
its common equity securities pursuant to an effective Securities Act
registration statement.\690\ A post-de-SPAC transaction combined
company may also lose EGC status on the last day of a fiscal year
during which it had total annual gross revenues of $1.235 billion or on
the date on which it has issued more than $1 billion in nonconvertible
debt during the previous three-year period.\691\ Finally, a post-de-
SPAC transaction combined company may also lose EGC status on the date
on which it is deemed to be a ``large accelerated filer'' (as defined
in Exchange Act Rule 12b-2).\692\
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\689\ With respect to the $1.235 billion revenue threshold in
the definition of ``emerging growth company'' under Securities Act
Rule 405 and Exchange Act Rule 12b-2, a pre-IPO SPAC may have
limited or no revenue and post-IPO SPACs typically do not record
revenue (because income statement items such as ``Interest earned on
marketable securities held in trust account'' and ``Unrealized gain
on marketable securities held in trust account'' are generally not
revenue). With respect to the large accelerated filer provision in
these rules: (a) paragraph (2)(ii) in the definition of
``accelerated filer and large accelerated filer'' in Rule 12b-2
requires that the issuer has been subject to the requirements of
Exchange Act section 13(a) or 15(d) for a period of at least twelve
calendar months, a period that generally would not yet have elapsed
for a newly public SPAC after an IPO and (b) paragraph (2)(i) in the
definition of ``accelerated filer and large accelerated filer'' in
Rule 12b-2 requires aggregate worldwide market value of the voting
and non-voting common equity held by non-affiliates be $700 million
or more, as of the last business day of the issuer's most recently
completed second fiscal quarter, a value threshold that many SPACs
may be below. See supra note 665 (discussing frequency of SPACs with
a market capitalization of greater than $700 million).
\690\ Paragraph (2)(ii) of the definition of ``emerging growth
company'' under Securities Act Rule 405 and Exchange Act Rule 12b-2.
For example, in a case where the legal entity that is the SPAC
becomes the post-de-SPAC transaction combined company, the five-year
reference period would run from the date of the IPO of the SPAC and
not the date of the de-SPAC transaction.
\691\ Paragraphs (2)(i) and (iii) of the definition of
``emerging growth company'' under Securities Act Rule 405 and
Exchange Act Rule 12b-2.
\692\ Paragraph (2)(iv) of the definition of ``emerging growth
company'' under Securities Act Rule 405 and Exchange Act Rule 12b-2.
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Several commenters recommended that the EGC status of the combined
company following a de-SPAC transaction should be re-determined upon
consummation of the de-SPAC transaction.\693\ As with filer status, we
are not adopting any amendments concerning EGC status at this time but
will consider whether future adjustments are appropriate.
---------------------------------------------------------------------------
\693\ See letters from Ernst & Young, KPMG, PwC, Vinson &
Elkins, supra note 660.
---------------------------------------------------------------------------
Several commenters addressed determination of FPI status issues
raised in a request for comment.\694\
---------------------------------------------------------------------------
\694\ Proposing Release, supra note 7, at 29481 (request for
comment number 74). See letters from Ernst & Young, KPMG, Vinson &
Elkins.
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A new registrant, such as a SPAC in an IPO, makes the determination
of its FPI status \695\ as of a date within 30 days prior to filing its
initial registration statement.\696\ A reporting registrant that seeks
to file as an FPI is required to determine its FPI status once a year
on the last business day of its second fiscal quarter.\697\ A
registrant that qualifies as an FPI upon such determination is
immediately able to use the forms and rules designated for FPIs.\698\
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\695\ See supra note 442.
\696\ Paragraph (2) of the definition of ``foreign private
issuer'' in Securities Act Rule 405.
\697\ Paragraph (3) of the definition of ``foreign private
issuer'' in Securities Act Rule 405.
\698\ Paragraph (3) of the definition of ``foreign private
issuer'' in Securities Act Rule 405.
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A domestic SPAC (e.g., incorporated in a U.S. State) that intends
to enter a de-SPAC transaction with a foreign target company would be
required to file a Form S-4 (and not a Form F-4), because a domestic
issuer cannot qualify as an FPI.\699\ Accordingly, where a domestic
SPAC combines with a target company that is an FPI, the financial
statements of the foreign target company would have to be presented in
accordance with U.S. GAAP in Form S-4,\700\ among other differences
that exist
[[Page 14222]]
between the requirements of Form S-4 and Form F-4.\701\
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\699\ See definitions of ``foreign issuer'' and ``foreign
private issuer'' in Securities Act Rule 405.
\700\ As the target will be the predecessor to the SPAC and will
report as a domestic registrant after the de-SPAC transaction,
including reporting its financial statements on an Item 2.01 Form 8-
K within four business days after the transaction, the target should
comply with Regulation S-X and provide financial statements in
accordance with U.S. GAAP.
\701\ Item 17 of Form S-4.
---------------------------------------------------------------------------
If such a domestic SPAC registrant were to reincorporate under the
laws of a foreign country prior to the filing of the registration
statement in connection with a de-SPAC transaction, that
reincorporation may require the foreign SPAC, as a new entity, to file
an initial registration statement. The new entity's FPI status would be
determined as of a date within 30 days prior to the filing of the
initial registration statement, as described above. If the new foreign
entity were to qualify as an FPI, it may be eligible to file a Form F-4
registration statement in connection with the de-SPAC transaction.
Currently, the FPI status of the post-de-SPAC transaction combined
company would not affect the registration form to be filed in
connection with the de-SPAC transaction, regardless of whether the SPAC
was an existing registrant or a new foreign entity. Also, currently,
where the legal entity that was the SPAC is not an FPI and is the legal
entity that is the combined company following the de-SPAC transaction,
even where the combined company may meet the definition of an FPI after
the de-SPAC transaction, the combined company would need to wait until
the end of the next second fiscal quarter to re-determine its status as
an FPI.
Several commenters recommended that we should provide for re-
determination of FPI status in connection with a de-SPAC
transaction.\702\
---------------------------------------------------------------------------
\702\ Letters from Ernst & Young, Freshfields, KPMG, Vinson &
Elkins. See supra notes 662, 663, and 664 and accompanying text.
---------------------------------------------------------------------------
We have considered these comments and recognize that, depending on
the structure of a specific de-SPAC transaction, there may be some
fact-specific circumstances in which an FPI registration statement may
be used. For example, a SPAC's use of an FPI registration statement
(e.g., Form F-4) and compliance with FPI rules in connection with the
de-SPAC transaction may be appropriate when, as of a date within 30
days prior to the filing of the de-SPAC transaction registration
statement, the SPAC is a foreign issuer that is entering a de-SPAC
transaction with a target company that is an FPI but is not a shell
company, the legal entity that is the SPAC will be the legal entity
that is the combined company registrant following the de-SPAC
transaction, and the combined company registrant created in connection
with the de-SPAC transaction is expected to be an FPI at the time of
consummation of the de-SPAC transaction.
Contrary to the suggestion of some commenters,\703\ we believe that
earlier re-determination of FPI status would be inappropriate when a
SPAC is a domestic SPAC (and therefore not a foreign issuer) prior to
the de-SPAC transaction but enters a de-SPAC transaction with an FPI
target company. If the legal entity that is the SPAC is a domestic
entity, the combined company following the de-SPAC transaction would
also be a domestic entity, in which case use of FPI forms would not be
appropriate.
---------------------------------------------------------------------------
\703\ Letters from Freshfields, Vinson & Elkins. See supra notes
663 and 664 and accompanying text.
---------------------------------------------------------------------------
E. PSLRA Safe Harbor
1. Proposed Rules
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 conditions, the forward-looking statement is identified as such
and is accompanied by meaningful cautionary statements.\704\ Under the
PSLRA, the safe harbor is not available, however, when a forward-
looking statement is made in connection with, among other things, an
offering by a blank check company, an offering by an issuer of penny
stock, or an IPO.\705\
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\704\ 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.
\705\ Section 27A(b) of the Securities Act and section 21E(b) of
the Exchange Act. 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. SPACs
that raise more than $5 million in a firm commitment underwritten
IPO may be excluded from this definition of ``blank check company''
because they are not selling ``penny stock.'' See Penny Stock
Definition for Purposes of Blank Check Rule, Release No. 33-7024
(Oct. 25, 1993) [58 FR 58099 (Oct. 29, 1993)]. The Commission's
definition of ``blank check company'' in Rule 419 was adopted in
1992 to implement provisions of the Penny Stock Reform Act relating
to registration statements filed by blank check companies offering
penny stock. This definition predates the PSLRA (which was enacted
in 1995) and has not been amended since it was adopted by the
Commission.
---------------------------------------------------------------------------
The Proposing Release discussed the Commission's concerns about the
use of forward-looking statements, such as projections, in connection
with de-SPAC transactions.\706\ The Commission stated that some market
participants in de-SPAC transactions may not exercise the same level of
care in preparing forward-looking statements, such as projections, as
in a traditional IPO.\707\ The Commission also noted that a number of
commentators had raised concerns about the use of projections that they
believe to be unreasonable in de-SPAC transactions.\708\ In addition,
the Commission stated that it saw 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 IPO and thus are not selling penny stock.\709\
---------------------------------------------------------------------------
\706\ Proposing Release, supra note 7, at 29482.
\707\ Proposing Release, supra note 7, at 29482, n.162 and
preceding text, citing, 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,
Wall St. J., Mar. 15, 2021; Public Statement on SPACs, IPOs and
Liability Risk under the Securities Laws (Division of Corporation
Finance, Apr. 8, 2021).
\708\ Proposing Release, supra note 7, at 29482, n.163 and
preceding text, citing, see, e.g., Dambra, Even-Tov & George, supra
note 36; AFR Letter, supra note 30; Park Testimony, supra note 30;
Usha R. Rodrigues & Michael Stegemoller, SPACs: Insider IPOs (SSRN
Working Paper, 2021).
\709\ Proposing Release, supra note 7, at 29482.
---------------------------------------------------------------------------
To address these concerns, the Commission proposed using its
statutory authority under the PSLRA to amend the definition of ``blank
check company'' \710\ to include companies that would otherwise meet
the Securities Act Rule 419 definition of ``blank check company,''
except that they are not issuers of penny stock (such as a SPAC in a
de-SPAC transaction).\711\ Specifically, the Commission proposed a
revised definition of ``blank check company'' to be located in
Securities Act Rule 405 that would, for purposes of the PSLRA, remove
the ``penny stock'' condition from the rule and 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.'' \712\
---------------------------------------------------------------------------
\710\ See, e.g., Securities Act section 27A(b)(7) (``The terms
`blank check company', `rollup transaction', `partnership', `limited
liability company', `executive officer of an entity' and `direct
participation investment program', have the meanings given those
terms by rule or regulation of the Commission.'').
\711\ The target company typically cannot rely on the PSLRA safe
harbor because at the time the statement is made it is not subject
to the reporting requirements of section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 and thus does not meet the
requirements of section 27A(a)(1) of the Securities Act.
\712\ The Commission also proposed to amend the definition to
remove the reference to ``development stage company'' on the basis
that the reference was unnecessary for purposes of the proposed
definition.
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[[Page 14223]]
The Commission proposed corresponding technical changes to Rule
419, the rule the Commission adopted to implement provisions of the
Penny Stock Reform Act relating to registration statements filed by
blank check companies offering penny stock, that were intended to
maintain consistency with that rule's historic scope which is limited
to blank check companies that issue penny stock. Similarly, the
Commission proposed a new definition in Rule 405, ``Blank check company
issuing penny stock,'' and proposed conforming amendments to existing
references to ``blank check company'' as defined in Rule 419 in various
Securities Act rules in order to maintain the scope of those
rules.\713\
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\713\ Proposed amendments to 17 CFR 230.137 (``Rule 137''),
230.138 (``Rule 138''), 230.139 (``Rule 139''), 230.163A (``Rule
163A''), 230.164 (``Rule 164''), 230.174 (``Rule 174''), 230.430B
(``Rule 430B''), and 230.437a (``Rule 437a''). The Commission
proposed that the term ``blank check company issuing penny stock''
be defined as a company that is subject to Rule 419. Due to current
Federal Register formatting requirements, the Commission also
proposed technical changes to Rules 163A and 164 to move the
Preliminary Note(s) in these rules to introductory paragraphs of the
respective rules.
---------------------------------------------------------------------------
2. Comments
A number of commenters expressed general support for the
proposal.\714\ One of these commenters said, ``Both the regular IPO and
de-SPAC approaches for taking a new, emerging company public should be
treated similarly in this critical area for market integrity--the
legitimacy of forward-looking projections.'' \715\ Other commenters
said they did not see a reason SPACs should be treated differently than
traditional IPO participants \716\ or companies that issue penny stock
\717\ with respect to forward-looking statements. One commenter focused
on the benefits of mitigating the risk of harm to investors, stating
that the proposal ``would significantly curb SPAC sponsors' abilities
to make overblown and false projections, and increase their liability
when this fraud occurs.'' \718\ Another commenter said that ``[t]his
safe harbor enables SPAC sponsors and underwriters to make future
projections of the performance of the SPAC to investors with relative
impunity. This legal loophole enables SPAC sponsors to sell investors
on bold projections that have little basis in reality. These legal
loopholes, including the PSLRA safe harbor, among others, have created
a regulatory arbitraged race-to-the-bottom IPO model. . . .'' \719\
This commenter further said, ``It is clear that far too many SPAC
sponsors have utilized the PSLRA safe harbor to paint bold and enticing
pictures of the financial outlook of their post-merger companies that
were divorced from reality. . . . The safe harbor from the PSLRA for
forward-looking statements in de-SPAC transactions has fueled this
trend, undermined public confidence in our capital markets, and harmed
investors by enabling SPAC sponsors to make reckless projections about
future financial performance. In any final rule, the Proposal must
retain the clarification that the PSLRA safe harbor does not apply in
connection with de-SPAC transactions.'' A separate commenter similarly
said that ``amending the definition of a `blank check' company in The
Private Securities Litigation Reform Act of 1995 would prevent SPACs
from exploiting the safe harbor provision to make overblown and
fraudulent projections.'' \720\ Another commenter said the proposal
``would resolve ambiguities about how the law applies in this context
and promote accountability for SPAC market participants.'' \721\
---------------------------------------------------------------------------
\714\ Letters from Andrew Tuch, Americans for Financial Reform
Education Fund (``Amending the definition of a `blank check company'
and ensuring that the forward-looking projections of SPACs are
subject to the same level of legal liability that currently exists
for IPOs is an important step to protect investors.''), Better
Markets (``Perhaps one of the most important provisions in the
Proposal is the provision clarifying that the statutory safe harbor
in the PSLRA does not apply to forward-looking statements made in
connection with a de-SPAC transaction.''), CFA Institute, CII,
Consumer Federation, Senator Elizabeth Warren, ICGN, NASAA.
\715\ Letter from CFA Institute.
\716\ Letter from NASAA.
\717\ Letters from Consumer Federation, NASAA.
\718\ Letter from Senator Elizabeth Warren.
\719\ Letter from Better Markets.
\720\ Letter from Senator Elizabeth Warren.
\721\ Letter from Consumer Federation.
---------------------------------------------------------------------------
A number of commenters suggested that unreasonably optimistic or
inflated projections are prevalent in de-SPAC transactions.\722\ One of
these commenters said that SPACs sometimes make ``utterly absurd
forward-looking projections.'' \723\ This commenter also said, ``Post-
merger investors in SPACs, who are predominantly retail investors, are
often lured by ambitious projections of growth--made with the
protection of the safe harbor--and unfortunately have already lost
significant amounts of money as a result.'' A different commenter said,
``In fact, it is nearly impossible to ignore the research and findings
of the wild and indiscriminate use of projections in de-SPAC
transactions by sponsors with seemingly little care given to the
accuracy or reality of those projections.'' \724\ Another of these
commenters said that ``too many of these de-SPAC forward-looking
statements are an exercise in creative writing, baseless hype and
embellishment.'' \725\ Another commenter said, ``We believe historical
uncertainty surrounding the availability of the safe harbor may have
contributed to the proliferation of unreasonably optimistic forward
projections that would not have been made if liability had more clearly
paralleled the traditional IPO regime.'' \726\ Finally, one commenter
said that ``SPACs are rife with disclosures that border on or cross
into outright fraud'' and that ``there have been multiple cases where
companies used inflated information about their financials, their
future business, or even their underlying technology.'' \727\
---------------------------------------------------------------------------
\722\ Letters from Americans for Financial Reform Education
Fund, Better Markets, CFA Institute, CII, Senator Elizabeth Warren.
\723\ Letter from Americans for Financial Reform Education Fund.
\724\ Letter from Better Markets.
\725\ Letter from CFA Institute.
\726\ Letter from CII.
\727\ Letter from Senator Elizabeth Warren.
---------------------------------------------------------------------------
Several commenters expressed support for the proposal because they
believed it would curb the use of unrealistic and potentially
misleading projections that harm investors.\728\ One of these
commenters said, ``We support the proposal's revision to the definition
of `blank check company' to ensure that the safe harbor against a
private right of action for forward-looking statements under the PSLRA
is not available. We believe this clarification may reduce the
inclusion of unreasonably optimistic forward projections in SEC
filings, which may in turn help SPAC investors avoid overestimating
future revenues and other measures of future company performance.''
\729\ Another of these commenters said that ``the proposal's approach
to amend the definition of blank check company for purposes of the
PSLRA safe harbor for forward-looking statements'' would ``strengthen
incentives for SPACs to avoid potentially unrealistic and potentially
misleading forward-looking statements and to expend more effort or care
in the preparation and review of forward-looking statements.'' \730\
Another commenter said, ``The Commission's proposal to amend the
definition of `blank check company' to remove the safe harbor in the
Private Securities Litigation Reform Act of 1995 for
[[Page 14224]]
forward-looking statements would significantly curb SPAC sponsors'
abilities to make overblown and false projections, and increase their
liability when this fraud occurs.'' \731\
---------------------------------------------------------------------------
\728\ Letters from Better Markets, CII, Consumer Federation,
Senator Elizabeth Warren. See also letter from Anonymous (Oct. 11,
2022) (``Please do not permit SPAC sponsors, their CEO or their
board members to engage with the public in such a way that could
create a false representation of . . . [p]rojections of value. . .
.'').
\729\ Letter from CII.
\730\ Letter from Consumer Federation.
\731\ Letter from Senator Elizabeth Warren.
---------------------------------------------------------------------------
Other commenters were generally opposed to the proposal.\732\ Some
commenters who expressed general opposition to the proposal discussed
the value of forward-looking information to investors. One of these
commenters said, ``This safe harbor incentivizes the disclosure of
potentially valuable information as to a company's future outlook.''
\733\ Another of these commenters said, ``By removing the safe harbor
provisions from SPAC mergers, the proposed rules would replicate the
biggest flaw of IPOs, hindering investor visibility toward management
expectations and related future prospects.'' \734\ A number of
commenters focused on comparing de-SPAC transactions to other kinds of
transactions in their comments. One of the commenters who expressed
general opposition to the proposal said, ``We believe there are
important distinctions between a De-SPAC Transaction and a traditional
IPO that justify maintaining the PSLRA safe harbor in the form enacted
by Congress.'' This commenter said, ``The PSLRA safe harbor . . . does
not cover all forward-looking statements. It contains a number of
exclusions. . . . [One] category of exclusions cover[s] situations--
like tender offers, roll-up and going-private transactions--where
companies are compelled by law to share projections with investors. In
such situations, there is less risk that liability will chill
disclosure and the safe harbor exclusion can be understood as an effort
to increase the accuracy of disclosures.'' Further, this commenter
said, ``Projections disclosure in De-SPAC Transactions fall under this
. . . category.'' \735\ Another commenter who generally opposed the
proposal questioned whether it would benefit investors, stating that
``the Commission's proposal to remove the PSLRA safe-harbor for de-SPAC
transactions is unnecessarily broad with no real benefit to
investors.'' \736\
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\732\ Letters from ABA; Amanda M. Rose, Professor of Law,
Vanderbilt University Law School (June 16, 2022) (``Amanda Rose'');
American Securities Association; Bullet Point Network; Cato
Institute; Cowen; Goodwin; Job Creators Network; Loeb & Loeb;
Michael Dambra, Omri Even-Tov, and Kimberlyn George; Jennifer W.
Han, Executive Vice President, Chief Counsel & Head of Regulatory
Affairs, Managed Funds Association (June 13, 2022) (``Managed Funds
Association''); NYC Bar; Paul Swegle; SPAC Association; Kristi
Marvin, SPACInsider (June 13, 2022) (``SPACInsider''); Vinson &
Elkins; Winston & Strawn. Also, the Small Business Capital Formation
Advisory Committee recommended that projections in de-SPAC
transactions should be covered by the liability safe harbor
provisions of the PSLRA, supra note 40.
\733\ Letter from Cato Institute.
\734\ Letter from SPAC Association.
\735\ Letter from Goodwin.
\736\ Letter from Cowen.
---------------------------------------------------------------------------
A number of commenters on the proposal provided views related to
the statutory authority of the Commission to amend the definition of
blank check company as proposed. These comments fell into two main
categories. First, some of these commenters suggested the Commission
does not have discretion to adopt or amend a definition of blank check
company for purposes of the PSLRA that differs from the current Rule
419 definition (which includes the qualification the relevant company
is issuing penny stock).\737\ One of these commenters said, ``The
elimination of the safe harbor for forward-looking statements under the
Private Securities Litigation Reform Act (PSLRA) is unlawful. The
Proposal would--without any authorization by Congress--amend the
definition of a `blank check' company under the PSLRA to prevent SPACs
from utilizing the PSLRA safe harbor for forward-looking statements.
Given that de-SPAC transactions necessarily involve making a good deal
of projections, there has been an underlying assumption that the PSLRA
safe harbor applies to such projections. . . . The SEC should drop this
idea and recognize that it has no legal authority under law to change
Congressional statutes on its own.'' \738\ Another of these commenters
said that ``this change alters the scope and effect of the PSLRA by
substantially revising the definition that Congress relied on when it
wrote the statute. Such an alteration to the statute's scope should be
made by Congress, not the Commission.'' \739\ Another of these
commenters said, ``I believe the SEC would be overreaching its
authority in eliminating the availability of the PSLRA safe harbor for
forward-looking statements in de-SPAC transactions. The Projection
Proposal would change the existing definition of `blank check company'
for purposes of the PSLRA by removing the `penny stock' condition. That
was the definition Congress specifically relied upon when it wrote the
PSLRA. I believe it would be improper for the SEC to willfully ignore
statutory language in this manner.'' \740\ Another commenter said that
``de-SPAC transactions were not within the scope of issuers and
transactions excluded from the PSLRA by Congress. The PSLRA excludes
from the safe harbor, among other things, forward-looking statements
made in connection with an IPO, and an offering of securities by a
blank check company or by an issuer that issues penny stock.'' \741\
This commenter also said that SPACs are not blank check companies
subject to Rule 419 nor do SPACs issue penny stock. This commenter also
stated, ``In transactions where the de-SPAC transaction is structured
with the SPAC as the surviving company, the transaction is not an IPO
of the SPAC. As a result, we believe the proposed expansion of the
exclusions from the PSLRA that were legislated by Congress are not
merely clarifying or interpretive in nature; rather, they go beyond the
Commission's rulemaking authority and should be addressed by statute.''
Finally, one commenter said the proposed changes regarding the
definition of blank check company ``appears inconsistent with the
exemptive authority found in Section 27A(g) and (h), which makes clear
the Commission's ability to extend the scope of the safe harbor
protections rather than narrow them.'' \742\
---------------------------------------------------------------------------
\737\ Letters from ABA, Cato Institute, Paul Swegle, Winston &
Strawn.
\738\ Letter from American Securities Association.
\739\ Letter from Cato Institute.
\740\ Letter from Paul Swegle.
\741\ Letter from Winston & Strawn.
\742\ Letter from ABA. See also letter from Goodwin.
---------------------------------------------------------------------------
Second, some commenters suggested that the Commission's proposed
definition of blank check company is inconsistent with the Penny Stock
Reform Act's statutory definition of blank check company, which
includes the qualification that the relevant company is issuing penny
stock and which predated the PSLRA.\743\ One of these commenters
stated, ``As the Commission noted, the current definition of `blank
check company' predates the enactment of the PSLRA in 1995 and
evidences a clear intent to exclude from that definition SPACs that
raise more than $5 million in a firm commitment underwritten IPO for
not selling `penny stock.' '' \744\ Another of these commenters said
that ``the SPAC Proposal's proposed elimination of the PSLRA safe
harbor . . . is illegal for
[[Page 14225]]
[the] reason [that]: it proposes an unreasonable definition of `blank
check company.' The PSLRA generally provides a safe harbor for forward-
looking statements, but the safe harbor is not available for `blank
check companies.' The PSLRA states that the term `blank check company'
has `the meaning[ ] given . . . by rule or regulation of the
Commission,' but of course the SEC does not have carte blanche to
define the term however it wants--its proposal must be `reasonable.' ''
\745\ The commenter also said, ``The SEC's discretion in defining blank
check company is accordingly cabined and informed by other relevant
statutory provisions.'' \746\ This commenter also said, ``In
particular, Congress has already defined a blank check company in the
Securities Act, and the only absolute requirement in that definition is
that the company issue `penny stocks.' '' \747\ This commenter further
stated that ``the SPAC Proposal would eliminate the penny stock
requirement, even though Congress has made clear that that requirement
is the core aspect that defines a blank check company. The SPAC
Proposal's definition of blank check company is hardly `reasonable'
when it eliminates the core of Congress's definition of that term
within the same statutory regime, nor is it `consistent with the
statute's purpose' to allow the SEC to relabel any entity it chooses as
a blank check company by disregarding the core aspect of what makes a
blank check company.'' \748\ Another of these commenters said, ``The
Proposal to redefine `blank check company' is not a clarification of
existing law. We disagree with the Commission that the proposed
amendment to the definition of `blank check company' is a clarification
that the statutory safe harbor of the PSLRA is not available for
forward-looking statements made in connection with offerings by SPACs.
As noted by the Commission, the current definition of a `blank check
company' predates the enactment of the PSLRA and this amendment changes
the applicability of the PSLRA safe harbor.'' \749\
---------------------------------------------------------------------------
\743\ Letters from ABA, Job Creators Network, Kirkland & Ellis.
Section 508 of the Penny Stock Reform Act amended Securities Act
section 7 to provide for new section 7(b)(3) that provides: ``For
purposes of paragraph (1) of this subsection, the term `blank check
company' means any development stage company that is issuing a penny
stock (within the meaning of section 3(a)(51) of the Securities
Exchange Act of 1934) and that--(A) has no specific business plan or
purpose; or (B) has indicated that its business plan is to merge
with an unidentified company or companies.''
\744\ Letter from ABA.
\745\ Letter from Job Creators Network, citing Chevron, U.S.A.,
Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 844 (1984)
(statutory citations have been omitted from the quotation).
\746\ Id., citing see, e.g., Van Hollen, Jr. v. FEC, 811 F.3d
486, 492 (D.C. Cir. 2016) (for the principle, according to the
commenter, that ``[at] Chevron step two, courts look at how Congress
`elsewhere defines' the specific term at issue'').
\747\ Id. (statutory citation omitted).
\748\ Id., citing Chem. Mfrs. Ass'n v. EPA, 919 F.2d 158, 163
(D.C. Cir. 1990) (footnotes omitted).
\749\ Letter from Kirkland & Ellis.
---------------------------------------------------------------------------
Finally, in addition to these two main groups of comments related
to statutory authority issues, one commenter expressed the view that
the proposed changes to the definition of ``blank check company'' are
contrary to the Administrative Procedure Act of 1946 \750\ because
``the SEC is seeking to amend the PSLRA on its own without any explicit
statutory authority or directive from Congress.'' \751\ A different
commenter argued that the proposal was ``unlawful, arbitrary, and
capricious'' because Congress already defined blank check company in
the Securities Act and ``the only absolute requirement in that
definition is that the company issue `` `penny stocks.' '' \752\
---------------------------------------------------------------------------
\750\ 5 U.S.C. 551 et seq.
\751\ Letter from American Securities Association.
\752\ Letter from Job Creators Network.
---------------------------------------------------------------------------
A number of commenters focused on comparing de-SPAC transactions to
two categories of other kinds of transactions: (1) traditional IPOs and
(2) other business combinations. Some commenters supported the proposal
with respect to rules related to the PSLRA safe harbor on the basis
that it would level the playing field with IPOs.\753\ Other commenters,
however, expressed concerns regarding how the playing field for
traditional IPOs operates with respect to the interaction of issuers
who provide projections, research analysts, and investors. These
commenters generally observed that, in traditional IPOs, issuers often
provide projections to securities analysts who often share these
projections with certain institutional investors (on a private and
informal basis, i.e., not in the form of published research reports)
but these issuers do not make this information available to other
investors, particularly retail investors.\754\ One commenter said,
``The [PSLRA] Safe Harbor, and subsequently Regulation FD, . . . had
the desirable effect of leveling the playing field so that certain
investors with access to management meetings and sell-side research
analysts do not have an information advantage over less well-resourced
retail investors.'' \755\ But the commenter indicated that, because
``IPOs . . . are expressly excluded from the [PSLRA] Safe Harbor and
Regulation FD is only applicable to companies that are already public,
. . . companies do not provide any projections or forward-looking
statements in the S-1s relating to their IPOs but generally do hold
private meetings with qualified institutional investors.'' Some
commenters suggested that, instead of the proposed rule changes, IPO
regulation should be put on a level playing field with de-SPAC
transactions by Commission rule amendments or through statutory
amendment to extend the PSLRA safe harbor to IPOs.\756\
---------------------------------------------------------------------------
\753\ Letters from Bullet Point Network, CFA Institute (``both
the regular IPO and de-SPAC approaches for taking a new, emerging
company public should be treated similarly in this critical area for
market integrity--the legitimacy of forward-looking projections.''),
NASAA (``We see no reason why de-SPAC transactions should be treated
differently than penny stock issuers or traditional IPO participants
with respect to forward looking statements.'').
\754\ Letters from Bullet Point Network (expressing the view
that the inapplicability of the PSLRA safe harbor to traditional
IPOs ``effectively prohibit[s] management projections from S-1
filings'' and that ``[t]his relegates the topic to the game of `20
questions' privileged investors play. Asking the right questions in
the right way allows these investors to get valuable information
others don't get, while technically staying on the right side of the
published rules. Issuers can essentially transmit projections by
helping research analysts employed by their underwriters develop
financial estimates, the substance of which are communicated
verbally to privileged investors in private meetings ahead of an
IPO.''); SPACInsider (``It's quite common for a company that is
going through the traditional IPO process to talk to a bank's
research analyst, discuss their forward earnings, at which point,
the analyst then models out the company into the future and then . .
. ONLY distributes that information to the bank's key and favored
clients (which usually pay the bank a lot of money in trading fees).
This is a far less democratic and equitable process to the investing
public, and in particular, retail investors . . . . This is in
contrast to the SPAC process in which all investors get a free look
at projections by filing them publicly, not just the wealthiest
investors.'' (Emphasis in the original)); Ropes & Gray (``a key
challenge of the traditional IPO market is that it ends up depriving
retail investors from participating in IPOs through an IPO
allocation, and such investors are often unable to purchase at the
same price as institutional investors. Retail investors in companies
that access the public markets through traditional IPOs also do not
have the same access to third-party analysis as larger institutional
investors who have ready access to the research analyst community.
SPAC transactions have served to democratize the process in enabling
prospective investors to have the ability to participate on equal
footing with initial investors . . . by way of . . . access to
information.''); SPAC Association (``we believe that an opposite
result may take place if these proposed rules were to be
promulgated: the public may be deprived of potentially helpful
information and that same information will only be made available to
institutional investors in private settings, like what happens in
the IPO market . . . . ''); Vinson & Elkins (``Projections are used
in IPOs--they are just customarily not included in the registration
statement and prospectus. Instead, they are disclosed to analysts at
the investment banks, who use them to assist in pricing the
securities and in building the analysts' models for disclosure to
institutional investors.''); White & Case (``issuers in IPOs
indirectly provide investors with financial projections by sharing
their financial models, including projections, with research
analysts, who then provide their models to their institutional
investor clients considering whether to participate in the IPO.'').
\755\ Letter from Bullet Point Network. See also letter from
Ropes & Gray (``if these proposed rules were to be promulgated: the
public may be deprived of potentially helpful information and that
same information will only be made available to institutional
investors in private settings, like what happens in the IPO
market'').
\756\ Letters from Bullet Point Network (recommending that the
PSLRA safe harbors ``should be available for IPOs of all Types
[defined by the commenter as traditional IPOs, SPAC business
combinations and Direct Listings], but should only be available for
projections that serve the public interest by clearly communicating
the risk and uncertainty associated with the projections in a
standardized format.''), Loeb & Loeb, Kirkland & Ellis, SPACInsider.
See also letter from ABA (``This also appears inconsistent with the
exemptive authority found in Section 27A(g) and (h), which makes
clear the Commission's ability to extend the scope of the safe
harbor protections rather than narrow them.''), Amanda Rose
(discussing ``serious questions about the wisdom of the existing
exclusion for communications made in connection with an IPO, which
has the practical effect of silencing nearly all public disclosure
of management projections in connection with IPOs to the detriment
of reasonable investors''), SPAC Association (``By removing the safe
harbor provisions from SPAC mergers, the proposed rules would
replicate the biggest flaw of IPOs, hindering investor visibility
toward management expectations and related future prospects.'').
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[[Page 14226]]
Other commenters, however, suggested de-SPAC transactions should be
treated differently than IPOs because de-SPAC transactions involve
business combinations, which may be subject to disclosure obligations
under State law.\757\ One of these commenters said that ``unlike
companies undertaking a traditional IPO, SPACs are compelled by a
combination of federal securities regulation and state corporate law to
share Target projections with stockholders.'' \758\ This commenter also
said, ``To truly place De-SPAC Transactions on a `level playing field'
with traditional IPOs in connection with forward-looking statements,
the Commission would have to change its disclosure requirements in
connection with De-SPAC Transactions and somehow override the state
fiduciary obligations that compel disclosure of projections.'' Another
of these commenters said that ``SPACs will not be able to avoid
liability by refraining from speaking, as many traditional IPOs do.
SPAC sponsors generally must provide forward-looking information in
connection with the de-SPAC transaction to satisfy state fiduciary
requirements in connection with mergers.'' \759\ Another of these
commenters said, ``With respect to forward looking statements, the
SEC's `de-SPAC transactions are merely IPOs of the target company'
theory has flaws. Specifically, the SPAC is a publicly traded company .
. . and the directors and officers of the SPAC have fiduciary duties.
They are required to conduct substantial diligence (arguably more than
underwriters in an IPO), and are required to disclose the material
reasons for approving and proposing the de-SPAC transactions to the
SPAC's shareholders, which frequently include projections provided to
the directors in connection with their evaluation of the de-SPAC
transaction.'' \760\ Another of these commenters said that
``traditional IPOs and de-SPAC transactions are fundamentally different
transactions. Financial projections are not required to be included,
and are rarely included, in IPO registration statements. On the other
hand, both Delaware jurisprudence and the Commission's staff now
require inclusion of management projections in proxy statements and
registration statements on Form S-4/F-4 where such projections were
relied upon by a board of directors in approving a transaction.'' \761\
This commenter also said, ``The projections included in the de-SPAC
transaction registration statement or proxy statement are not included
in order to promote capital formation. In fact, such projections are
generally only current as of the date a board of directors approved the
execution of the acquisition agreement. Such projections are not
typically updated because they are being provided to SPAC shareholders
to evaluate the board of directors' recommendation to approve the de-
SPAC transaction, rather than to solicit a new investment. As such,
projections are often out of date, or `stale', by the time the SPAC's
shareholders receive them. Issuers generally include disclosure to the
effect that investors should not consider projections to be financial
guidance, and investors are generally cautioned not to place undue
reliance on such projections.'' Another commenter said, ``Under
Delaware case law, the Board has a fiduciary duty to disclose to
investors in a merger proxy (often in an S-4 registration statement)
the projections it utilized in making its decision. Moreover, if the
SPAC receives a fairness opinion from a financial advisor (as the
proposing release suggests will be required) that fairness opinion will
be based on projections, which will have to be disclosed to investors.
Therefore, unlike a typical IPO, in the vast majority of de-SPAC
transactions, projections will have to be disclosed, which further
underscores the reasonableness of giving such statements PSLRA safe
harbor protection, just as they would have in a typical M&A transaction
that was not a de-SPAC.'' \762\
---------------------------------------------------------------------------
\757\ Letters from ABA, Amanda Rose, Cato Institute, Cowen,
Goodwin, Vinson & Elkins, NYC Bar. Also, the Small Business Capital
Formation Advisory Committee recommended that projections in de-SPAC
transactions should be covered by the liability safe harbor
provisions of the PSLRA, because management projections are an
important part of the rationale for companies in determining whether
to engage in a merger with a SPAC and they are necessary when
financial intermediaries provide fairness opinions related to de-
SPAC transactions. See supra note 40.
\758\ Letter from ABA.
\759\ Letter from Cato Institute (footnotes omitted).
\760\ Letter from Vinson & Elkins.
\761\ Letter from NYC Bar.
\762\ Letter from Cowen.
---------------------------------------------------------------------------
Furthermore, other commenters suggested de-SPAC transactions should
be treated differently than IPOs, because of concerns about the
interaction of the proposed changes regarding availability of the PSLRA
safe harbor with other proposals in the Proposing Release.\763\ One of
these commenters said, ``This aspect of the Proposal is in direct
opposition to the provisions of the Proposal that require the SPAC to
disclose the material reasons for which the SPAC believes its proposed
de-SPAC transaction is fair to its public shareholders.'' \764\ Another
of these commenters said, ``The combination of removing the safe harbor
while adding amendments to Item 10(b) of Regulation S-K and Item 1609
of Regulation [S-K] essentially mandating some level of [forward-
looking statement] projections, goes beyond leveling de-SPACs with
IPOs.'' \765\
---------------------------------------------------------------------------
\763\ Letters from American Securities Association; CFA
Institute; Cowen (``if the SPAC receives a fairness opinion from a
financial advisor (as the proposing release suggests will be
required) that fairness opinion will be based on projections, which
will have to be disclosed to investors.'').
\764\ Letter from American Securities Association.
\765\ Letter from CFA Institute.
---------------------------------------------------------------------------
Some commenters suggested the proposal would create inconsistency
by making the PSLRA safe harbor unavailable for one kind of business
combination transaction (de-SPAC transactions) but not for other kinds
of business combination transactions.\766\ One of these commenters
said, ``The Commission stated that the proposed change to the PSLRA
definition is necessary to align traditional IPOs more closely with de-
SPAC transactions. However, the Commission's position is inconsistent
with the provisions of Regulation M-A, which actually require
disclosure of target company projections if the SPAC's board relied on
such projections when approving the de-SPAC transaction. There is no
similar requirement in the IPO context. We can see no justification for
treating a de-SPAC transaction differently from any other stock-for-
stock merger for this purpose.'' \767\
---------------------------------------------------------------------------
\766\ Letters from Cowen, SPAC Association, Winston & Strawn.
\767\ Letter from Winston & Strawn.
---------------------------------------------------------------------------
A number of commenters suggested the proposal would have a chilling
effect on the use of projections that investors find useful.\768\ One
of the
[[Page 14227]]
commenters said that ``we believe the removal of the PSLRA safe harbor
would have a significant chilling effect on De-SPAC Transactions'' and
that this ``chilling effect is also demonstrated by the fact that IPO
issuers rarely publicly include projections in the registration
statement.'' \769\ One of these commenters said the proposal
``undoubtedly will'' reduce ``the amount of potentially relevant
information presented to investors'' and suggested this would
negatively affect investor ability to accurately value combined
companies in de-SPAC transactions.\770\ Another of the commenters said
that ``the proposed amendment may discourage the disclosure of
projections--especially given the Commission's broad statements on
potential underwriter liability.'' \771\ A different commenter referred
to an article that said, ``Offering [mandated forward-looking]
disclosures safe harbor protection may decrease their accuracy relative
to a world in which safe harbor protection were not available, if
companies emboldened by the liability shield approach the preparation
of such disclosures with less care or honesty than they otherwise
would. But it could also increase the quality of the disclosures by
reducing an incentive that might otherwise exist to negatively bias
projections or obfuscate them, which has the twin effects of making
them less vulnerable to attack in litigation and less useful to
investors.'' \772\ The same article also said allowing a safe harbor to
apply to forward-looking statements in de-SPAC transactions ``might
also work to lower liability insurance premiums.'' \773\
---------------------------------------------------------------------------
\768\ Letters from ABA, Amanda Rose, Cato Institute, CFA
Institute, Goodwin, Kirkland & Ellis, Managed Funds Association, NYC
Bar, SPAC Association, Vinson & Elkins, Winston & Strawn. See also
letter from Davis Polk (stating that the absence of the safe harbor
will not ``have a substantial impact'' but may ``be an additional
factor that will cause many investment banks to refuse to
participate in de-SPAC transactions to avoid liability'').
\769\ Letter from ABA.
\770\ Letter from Cato Institute.
\771\ Letter from Kirkland & Ellis.
\772\ Letter from Amanda Rose, including attachment of a
forthcoming article that was published as: Amanda M. Rose, SPAC
Mergers, IPOs, and the PSLRA's Safe Harbor: Unpacking Claims of
Regulatory Arbitrage, 64 William & Mary L. Rev. 1757, 1806 (2023),
available at https://scholarship.law.wm.edu/cgi/viewcontent.cgi?article=3995&context=wmlr (emphasis in original).
\773\ Id. at 1806.
---------------------------------------------------------------------------
Commenters also expressed concerns about the combined effect of the
proposed change in PSLRA safe harbor availability and proposed 17 CFR
230.140a (``Rule 140a'') concerning underwriters.\774\ One of these
commenters said, ``In particular, when coupled with other proposed
amendments that would require disclosure of a fairness determination
(effectively mandating the provision of projections) as well as impose
underwriter liability in a De-SPAC Transaction, we believe removal of
the PSLRA safe harbor protections would have a chilling effect on De-
SPAC Transactions and significantly disadvantage a De-SPAC Transaction
compared to a traditional IPO.'' \775\ Another of these commenters
said, ``We do have a concern that the proposed amendment may discourage
the disclosure of projections--especially given the Commission's broad
statements on potential underwriter liability.'' \776\ Another of these
commenters said, ``The elimination of the PSLRA safe harbor, combined
with the Commission's proposed Rule 140a, may have a chilling effect on
the use of projections in de-SPAC transactions, which may preclude
investors from receiving information that sponsors and boards of
directors rely in part on in connection with valuation determination.''
\777\
---------------------------------------------------------------------------
\774\ Letters from ABA, Kirkland & Ellis, NYC Bar. See also
letter from Vinson & Elkins (``However, the expansion of underwriter
liability to cover de-SPAC transactions may cause an increased focus
on projections, and more thorough discussion regarding the
assumptions and considerations underlying the projections, as well
as material risks that could cause such projections to not be
satisfied. Where projections are not a material consideration for a
SPAC board, under the Proposed Rules that SPAC will be less likely
to disclose projections.'').
\775\ Letter from ABA.
\776\ Letter from Kirkland & Ellis.
\777\ Letter from NYC Bar.
---------------------------------------------------------------------------
Other commenters, however, expressed the view that PSLRA safe
harbor availability does not meaningfully affect existing disclosure
practices.\778\ One of these commenters said that ``the availability of
the PSLRA safe harbor may not be a significant factor in determining
the use of forward-looking statements in de-SPACs.'' \779\ Another of
these commenters said that ``the safe harbor has never provided a
meaningful shield from liability'' and that ``we do not expect that the
absence of the safe harbor will have a substantial impact on current
market disclosure practices and we do not object to the disapplication
of the safe harbor to de-SPAC transactions.'' \780\ Another of these
commenters said, ``In our experience, the availability of the PSLRA
safe harbor for forward-looking statements in certain de-SPAC
transactions does not alter the decision on the presentation of
projections. Conversely, where the safe harbor is clearly available,
such as for follow-on offerings by existing public companies, it
remains rare to see the inclusion of projections in the actual offering
documents.'' \781\
---------------------------------------------------------------------------
\778\ Letters from Andrew Tuch, Davis Polk, Kirkland & Ellis.
See also letter from Jeffrey M. Solomon, Chair and Chief Executive
Officer, Cowen Inc. (June 8, 2022) (``Cowen'') (``If the perceived
`problem' is unreasonable projections or projections not being made
in good faith, it should be noted that such unreasonable, bad-faith
projections would not qualify for PSLRA (or any other) safe harbor
protection in the first instance, irrespective of the stay of
discovery. . . .'').
\779\ Letter from Andrew Tuch.
\780\ Letter from Davis Polk.
\781\ Letter from Kirkland & Ellis.
---------------------------------------------------------------------------
Several commenters observed that other safe harbors in Commission
rules and legal doctrines protecting against liability under common law
would continue to be available with respect to forward-looking
statements notwithstanding the proposed changes regarding the
availability of the PSLRA safe harbor.\782\ One of these commenters
said, ``An issuer's ability to rely on the judicial `bespeaks caution'
doctrine may mitigate to some extent liability concerns associated with
providing projections.'' \783\ Another of these commenters said that 17
CFR 230.175 (``Rule 175'' under the Securities Act) and 17 CFR 240.3b-6
(``Rule 3b-6'' under the Exchange Act), which were ``adopted . . .
prior to the PSLRA . . . provide safe harbor protection similar to that
of the PSLRA safe harbor.'' \784\ This commenter also said that under
the ``judicially-created `bespeaks caution' doctrine . . . now accepted
in 11 federal judicial circuits . . . forward-looking statements
accompanied by sufficient cautionary language'' are rendered ``non-
actionable under securities laws if such statements are proved
incorrect in the future.'' Under the bespeaks caution doctrine, this
commenter said, ``Essentially, the same requirements apply as would
under the PSLRA to obtain protection--that the forward-looking
statements be accompanied by `meaningful cautionary language.' ''
Another of these commenters said that ``even if the proposed amendment
is adopted, under the so-called `bespeaks caution' doctrine, SPACs
should still be able to make forward-looking statements in the absence
of the PSLRA safe harbor.'' \785\ A different commenter stated that the
main difference between the PSLRA and the other safe harbors is that
``the PSLRA safe harbor provides a stay of discovery while a motion to
dismiss based upon the safe harbor protections is under review by the
court,'' and that
[[Page 14228]]
``[t]he Commission's proposal, in stripping away the protection of the
PSLRA safe harbor for projections in de-SPAC transactions, has in
actuality not increased anyone's exposure for the projections--it has
simply increased the cost of defense.'' \786\ Another of these
commenters expressed the view that the proposal ``would only increase
transaction costs and administrative burdens on de-SPAC transactions.''
\787\
---------------------------------------------------------------------------
\782\ Letters from ABA, Cowen, Winston & Strawn.
\783\ Letter from ABA.
\784\ Letter from Cowen. Securities Act Rule 175 and Exchange
Act Rule 3b-6 were adopted in 1979. See Safe Harbor for Projections,
Release No. 33-6084 (June 25, 1979) [44 FR 38810 (July 2, 1979)].
The PSLRA was enacted in 1995.
\785\ Letter from Winston & Strawn.
\786\ Letter from Cowen.
\787\ Letter from Winston & Strawn.
---------------------------------------------------------------------------
Some commenters questioned the need for the amendments, expressing
the view that investors are well-capable of assessing the
reasonableness of projections used by SPACs.\788\ One of these
commenters said, ``The Commission is concerned that investors are
misled by forward-looking statements, but some researchers have found
that hype, if present, does not sway investors and that forecasts are
often related to positive outcomes. These types of findings should lead
the Commission to question whether an effective prohibition on forward-
looking disclosure in traditional IPOs is itself a good policy idea
where it may inhibit price discovery and capital formation.'' \789\
Another commenter said that ``the proposed amendment with respect to
the PSLRA will not meaningfully affect the quality of projections made
available for the review of the SPAC's board of directors and PIPE
investors, if any'' and that, ``the proposed revisions to Item 10(b)
and Item 1609(a) will assist in the comparability of projections
included in the disclosure of materials reviewed by the board of
directors of a SPAC. In this way, investors will be able to assess for
themselves whether underlying assumptions are reasonable rather than
rely on the assertions of commentators in the market.'' \790\ Another
of these commenters said, ``It is also already standard practice to
disclose key underlying risks and assumptions regarding projections and
I find it hard to believe that investors are incapable of thoughtfully
weighing projections together with a company's other disclosures in
their decision-making processes.'' \791\
---------------------------------------------------------------------------
\788\ Letters from Cato Institute, Jonathan Kornblatt (``It is
arguably much better to have a responsible party issuing projections
rather than have a void of such filled by bloggers or posters on
social media. Individual investors may be far better served by
having the C-suite as an accountable source of information instead
of an anonymous chat room. I hope the Commission will keep in mind
that the purpose of the PSLRA safe harbor was to encourage companies
to share their forecasts with investors, and that shielding the
liability risk was necessary to encourage such disclosure.''),
Kirkland & Ellis, Paul Swegle.
\789\ Letter from Cato Institute.
\790\ Letter from Kirkland & Ellis.
\791\ Letter from Paul Swegle.
---------------------------------------------------------------------------
Some commenters suggested that the need to alter the availability
of the PSLRA safe harbor is overstated.\792\ One of these commenters
said that, because target companies may register securities in a de-
SPAC transaction, in that situation, the PSLRA safe harbor is already
not available to them.\793\ This commenter also suggested the need to
alter the availability of the PSLRA is overstated because boards of
directors of SPACs review projections, including related assumptions
and cautionary language, consistent with their fiduciary duty of
care.\794\ A different commenter suggested the need to alter the
availability of the PSLRA safe harbor is overstated because the PSLRA
safe harbor only affects private litigation and does not prevent the
Commission from pursuing claims for misleading disclosure.\795\
---------------------------------------------------------------------------
\792\ Letters from Kirkland & Ellis, Winston & Strawn.
\793\ Letter from Kirkland & Ellis.
\794\ Letter from Kirkland & Ellis.
\795\ Letter from Winston & Strawn.
---------------------------------------------------------------------------
Several commenters suggested that the proposal would invite
litigation against SPACs.\796\ One commenter said, ``The intent of
removing the safe harbor for de-SPAC transactions is undeniable--it
would open SPACs to a flood of private litigation that, when added to
other provisions of the Proposal, would effectively kill the existing
SPAC market.'' \797\
---------------------------------------------------------------------------
\796\ Letters from American Securities Association, Anonymous
(Apr. 7, 2022). In addition, one commenter discussed generally the
occurrence of litigation as a check against ``inaccurate
projections'' already under the status quo. See letter from Vinson &
Elkins (stating, ``We do not believe an amendment (and the proposed
change is not a `clarification') would improve the quality of
projections in connection with de-SPAC transactions. SPACs and
target companies already have strong incentives to make sure that
the projections are as reasonable as possible. They may face suits
over inaccurate projections . . .,'' and noting in a footnote, ``The
PSLRA safe harbor only protects against civil suits, and in a civil
case it is not a shield against a fraud claim.'') (Other footnotes
omitted).
\797\ Letter from American Securities Association.
---------------------------------------------------------------------------
Other commenters suggested alternative policy approaches and other
recommendations in connection with projection disclosure. One commenter
suggested the Commission should restrict the use of projections because
``[a]s written, the Proposal would leave the door open for projections
for which there are little to no reasonable basis, when an issuer has
no historical operations, and when the company or asset acquisition is
speculative in nature without any disclosure'' and because
``[s]ponsors, target companies and underwriters that would become
liable under the Proposal may attempt to evade liability by combining
boilerplate risk factors with forward looking cautionary information
that prefaces claims of unreasonable upside potential to investors.''
\798\ Other commenters suggested the Commission should mandate
qualifying language or additional disclosure around the use of
projections.\799\ One of these commenters said, ``Rather than barring
forward-looking projections entirely, we recommend that the Commission
instead consider requiring any such projections to include appropriate
qualifying language, including the background and assumptions
underlying such projections, along with any downside case analysis that
was done in preparation of such projections.'' \800\ This commenter
said, ``We believe that such an approach would be consistent with the
disclosure-based approach the Commission has used in similar
circumstances, including in the case of Regulation G [12 CFR part 244]
with respect to the regulation of the use of financial measures that
vary from those included within generally accepted accounting
principles.'' Another of these commenters said that ``rather than
barring such young growth firms from providing forward looking
information, we feel that additional disclosure should be provided
around these forecasts.'' \801\
---------------------------------------------------------------------------
\798\ Letter from NASAA.
\799\ Letters from Managed Funds Association; Michael Dambra,
Omri Even-Tov, and Kimberlyn George.
\800\ Letter from Managed Funds Association.
\801\ Letter from Michael Dambra, Omri Even-Tov, and Kimberlyn
George.
---------------------------------------------------------------------------
One commenter suggested that, instead of adopting the PSLRA
proposal, the Commission should require that earnings statements
include a comparison of past projections in earning statements to
actual results in order to enhance issuer accountability.\802\ Other
commenters suggested that market forces would hold accountable issuers
with unmet projections by preventing future capital access.\803\
---------------------------------------------------------------------------
\802\ Letter from SPAC Association.
\803\ Letters from Jonathan Kornblatt, Vinson & Elkins.
---------------------------------------------------------------------------
Two other alternative policy approaches suggested by commenters
were that: (a) the safe harbor should be made unavailable only to the
``maker'' of the statement but that others such as ``underwriters (or
sellers) could continue to enjoy the full protection of the PSLRA;''
\804\ and (b) the safe harbor
[[Page 14229]]
should be unavailable for longer-term projections (where the commenter
provided the example of a statement ``we will penetrate 50% of [total
addressable market] in 10 years'') but available for short-term
projections (where the commenter provided the example of a statement
``we expect to make revenue in 1 year or have positive [free cash flow]
in 2 years'').\805\
---------------------------------------------------------------------------
\804\ Letter from Cowen.
\805\ Letter from Charles Pieper.
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One commenter said the Commission should ``monitor the effects of
the safe harbor removal for de-SPACs on the availability and quality of
forward-looking information critical for SPAC investor decisions on
merger approval votes and exercising redemption rights.'' \806\
Finally, one commenter said, ``While some de-SPAC transactions are in
form `initial public offering[s]' (e.g., where the target or a new
company is formed to acquire the SPAC), it is inappropriate to deem a
de-SPAC transaction where an existing public company stays public
(e.g., where the SPAC survives the de-SPAC transaction as the publicly
traded company) as an `initial public offering.' '' This commenter
suggested the Commission should provide an interpretation that de-SPAC
transactions are ``tender offers'' which would make the PSLRA safe
harbor unavailable.\807\
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\806\ Letter from CFA Institute.
\807\ Letter from Vinson & Elkins (footnotes omitted).
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3. Final Rules
After considering the comments received, we are adopting a new
definition of ``blank check company'' in Securities Act Rule 405 and
Exchange Act Rule 12b-2 under the PSLRA. The new definition of ``blank
check company'' in Rule 405 provides that for purposes of section 27A
of the Securities Act of 1933 (15 U.S.C. 77z-2), 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. The new definition of ``blank check company'' in Rule 12b-2
provides that for purposes of section 21E of the Securities and
Exchange Act of 1934 (15 U.S.C. 78u-5), 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.
We are not amending Securities Act Rule 419 as proposed. Instead,
as discussed in detail below, we are adopting a definition of ``blank
check company'' under the PSLRA in Securities Act Rule 405 and Exchange
Act Rule 12b-2 to clarify that such definitions are solely for purposes
of the PSLRA and not for purposes of any other rules (including rules
the Commission adopted pursuant to mandates under the Penny Stock
Reform Act, such as Securities Act Rule 419). The final rules have the
same substantive effect as the proposal, notwithstanding the different
approach taken.\808\
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\808\ The final rules and concomitant unavailability of the
PSLRA safe harbor for forward-looking statements are not intended to
have any retroactive effect related to forward-looking statements
made prior to the effective date of the final rules.
---------------------------------------------------------------------------
We also are not adopting any amendments as proposed to Securities
Act Rules 137, 138, 139, 163A, 164, 174, 405, 430B, and 437a, because
the definition of blank check company in Rule 419 that these rules
cross-reference will not be changed as a result of the final rules. In
addition, we also are not adopting a definition of ``blank check
company issuing penny stock'' in Securities Act Rule 405 as proposed.
This proposed amendment is also unnecessary since the definition of
``blank check company'' in Rule 419 will not change.
Having considered the comments received, we continue to believe
that it is appropriate that forward-looking statements made in
connection with de-SPAC transactions should be treated similarly with
forward-looking statements made in traditional IPOs, because the de-
SPAC transaction results in public shareholders acquiring a formerly
private company, similar to an IPO. In both IPOs and de-SPAC
transactions, similar informational asymmetries exist between issuers
(and their insiders and early investors) and public investors and there
are similar risks of generating unfounded interest on the part of
investors. In both IPOs and de-SPAC transactions, there is no track
record of public disclosure to help investors evaluate projections.
Moreover, these risks do not disappear merely because a blank check
company raised more than $5 million in a firm commitment underwritten
IPO (and therefore may not be issuing penny stock). The definitions of
``blank check company'' we are adopting and the concomitant changes to
the availability of the PSLRA will help protect investors because blank
check companies \809\ may take more care in avoiding the use of
forward-looking statements that are unreasonable. As we discuss in
detail below, we are not barring the use of forward-looking statements
and recognize that forward-looking statements can provide useful and
necessary disclosure.\810\
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\809\ In this subsection III.E.3, where we refer to ``blank
check companies'' in connection with our discussion of the final
rules, unless otherwise indicated, we are referring to blank check
companies that are not limited by any qualification that the company
is an issuer of penny stock.
\810\ Depending on specific facts and circumstances, protections
other than the PSLRA safe harbors may apply in connection with
forward-looking statements. See letters from ABA, Cowen, Winston &
Strawn, supra notes 782, 783, 784, and 785 and accompanying text,
and discussion below proximate to note 840.
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We disagree, based on the text of the PSLRA, with the commenters
who expressed the view that the PSLRA does not give the Commission
authority to amend the Commission's definition of ``blank check
company'' that existed at the time the PSLRA was adopted. On the
contrary, in providing in the PSLRA that definitions, including blank
check company, ``have the meanings given those terms by rule or
regulation of the Commission,'' Congress expressly provided the
Commission the authority to define these terms and to amend those
definitions, consistent with the text, structure, and purpose of the
PSLRA.
The text of the PSLRA demonstrates in other ways as well that the
Commission has the authority to define, and amend its definition of,
``blank check company.'' For example, Congress did not use tracking
language in the PSLRA to define blank check companies, such as by a
statutory definition of blank check company that closely resembles or
mirrors the definition in the rules of the Commission at the time of
the legislation. In contrast, with respect to other defined terms in
the PSLRA, Congress did provide long-form definitions (rather than
cross-referencing by citation an existing Commission rule) that closely
resemble the content of definitions in Commission rules.\811\ Congress
also did not define the term blank check company in the PSLRA by
referencing the statutory definition in section 7(b)(3) of the
Securities Act, as Congress did elsewhere in the PSLRA where it defined
terms related to forward-looking statement safe harbors by cross-
referencing to those terms.\812\ The absence in the PSLRA of such a
[[Page 14230]]
statutory cross-reference to define the term blank check company is
consistent with Congress's express grant of authority to the
Commission, as discussed above, to define these terms and amend them
consistent with the text, structure, and purpose of the PSLRA.
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\811\ For example, the definition of ``forward-looking
statement'' in the PSLRA is similar to the content of Securities Act
Rule 175 (which pre-dated the PSLRA). Compare Securities Act section
27A(i)(1) (15 U.S.C. 77z-2(i)(1)), with 17 CFR 230.175(c).
\812\ See infra note 818 and accompanying text.
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In addition, the PSLRA safe harbors provide that they are
unavailable to issuers that issue ``penny stock.'' \813\ The 1995
version of the definition of blank check company in Securities Act Rule
419 contained (and still contains) a restriction that it applies only
to companies issuing penny stock. This suggests that Congress did not
intend to permanently fix the Commission's definition of ``blank check
company'' to the 1995 version of that definition in Securities Act Rule
419, because it would have been redundant for Congress to include a
carve-out for blank check companies that are penny stock issuers and
also carve out penny stock issuers.
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\813\ 15 U.S.C. 77z-2(b)(1)(C); 15 U.S.C. 78u-5(b)(1)(C).
---------------------------------------------------------------------------
Furthermore, we also do not agree, based on the legislative history
of the PSLRA, with commenters that asserted that Congress fixed the
definition of ``blank check company'' to the Commission's rules as they
existed in 1995, when the PSLRA was enacted. Commission staff reviewed
the complete legislative history of the PSLRA and found no evidence of
any intent on the part of Congress to fix the definition of ``blank
check company'' as the term was defined in Securities Act Rule 419 at
the time of the adoption of the PSLRA in 1995.\814\ The staff also
found no evidence in the legislative history of the PSLRA of any intent
on the part of Congress to restrict the authority of the Commission to
amend the definition of this term.
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\814\ See, e.g., S. Rep. No. 104-98 (1995); H.R. Rep. No. 104-
369 (1995) (Conf. Rep.).
---------------------------------------------------------------------------
One commenter said the proposed change regarding the definition of
blank check company ``appears inconsistent with the exemptive authority
found in section 27A(g) and (h), which makes clear the Commission's
ability to extend the scope of the safe harbor protections rather than
narrow them.'' \815\ We disagree. While Securities Act sections 27A(g)
and 27A(h) and Exchange Act sections 21E(g) and 21E(h) provide the
Commission with authority to create new exemptions, subject to the
conditions that they are in the public interest and protect investors,
and clarify that the PSLRA did not limit the ability of the Commission
to create new safe harbors for forward-looking statements, there is no
limitation in these provisions on the express authority provided under
Securities Act section 27A(i)(7) and Exchange Act section 21E(i)(5) to
define ``blank check company.'' \816\
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\815\ Letter from ABA. See also letter from Goodwin. Securities
Act section 27A(g) (15 U.S.C. 77z(g)) provides: ``In addition to the
exemptions provided for in this section, the Commission may, by rule
or regulation, provide exemptions from or under any provision of
this title, including with respect to liability that is based on a
statement or that is based on projections or other forward-looking
information, if and to the extent that any such exemption is
consistent with the public interest and the protection of investors,
as determined by the Commission.'' Securities Act section 27A(h) (15
U.S.C. 77z(h)) provides: ``Nothing in this section limits, either
expressly or by implication, the authority of the Commission to
exercise similar authority or to adopt similar rules and regulations
with respect to forward-looking statements under any other statute
under which the Commission exercises rulemaking authority.''
\816\ Regarding Securities Act section 27A(b)(7), see supra note
710.
---------------------------------------------------------------------------
With respect to the commenters who expressed the view that the
Commission's definition of ``blank check company'' under the PSLRA may
not be broader than the statutory definition of this term in the Penny
Stock Reform Act, nothing in the text of either statute limits the
Commission's definition for the term ``blank check company'' for
purposes of the PSLRA to be no broader (i.e., not contain a
qualification that the issuer issue penny stock) than how this term is
defined in the Penny Stock Reform Act (i.e., containing a qualification
that the issuer issue penny stock).
Congress did not define ``blank check company'' in the PSLRA with
language that tracks the definition of ``blank check company'' under
the Penny Stock Reform Act.\817\ In contrast, with respect to other
defined terms in the PSLRA, Congress did define terms using language
that closely tracks existing definitions in other sources, such as the
definition of ``forward-looking statement'' in the PSLRA which is
similar to Securities Act Rule 175 and Exchange Act Rule 3b-6 (which
both pre-dated the PSLRA).
---------------------------------------------------------------------------
\817\ See supra note 710.
---------------------------------------------------------------------------
Also, Congress did not define ``blank check company'' in the PSLRA
by cross-referencing the definition of ``blank check company'' in
Securities Act section 7(b)(3) that was added by the Penny Stock Reform
Act, but, instead, Congress defined ``blank check company'' and other
defined terms in the PSLRA as having ``the meanings given those terms
by rule or regulation of the Commission.'' In contrast, with respect to
other defined terms in the PSLRA, Congress did cross-reference existing
statutes as a means of supplying definitions for those terms.\818\
---------------------------------------------------------------------------
\818\ For example, Congress defined the terms ``penny stock''
and ``investment company'' in the PSLRA by cross-referencing
existing statutory provisions providing definitions of those terms.
The PSLRA added Securities Act section 27A(i)(2) (15 U.S.C. 77z-
2(i)(2)) (``The term `investment company' has the same meaning as in
section 3(a) of the Investment Company Act of 1940.'') and section
27A(i)(3) (15 U.S.C. 77z-2(i)(3)) (``The term `penny stock' has the
same meaning as in section 3(a)(51) of the Securities Exchange Act
of 1934, and the rules and regulations, or orders issued pursuant to
that section.'').
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Furthermore, the PSLRA legislative history does not evidence an
intent by Congress to require the Commission's PSLRA ``blank check
company'' definition to be fixed to a specific definition (e.g., to be
no broader than the Penny Stock Reform Act definition). In contrast,
Congress did fix the definition in the Penny Stock Reform Act. The
legislative history of the Penny Stock Reform Act documents Congress's
concerns that overbroad restrictions on ``blank check company''
issuances, with respect to penny stock abuses, could interfere with
legitimate capital raising in connection with that statute. The
legislative history of the Penny Stock Reform Act--which mandated the
Commission to adopt restrictions on blank check companies and
ultimately led the Commission to adopt Rule 419 \819\--documents that
Congress was concerned about blank check companies in connection with
penny stock abuses (the focus of the legislation) because blank check
companies were viewed as providing a large inventory of securities that
fed into the market for penny stocks.\820\ The legislative history of
the
[[Page 14231]]
Penny Stock Reform Act indicates that members of Congress were aware of
concerns expressed by hearing witnesses that, if regulation of blank
check companies were unduly restrictive, this could disrupt funding for
investment vehicles such as private equity investment entities,
particularly in real estate, hydrocarbons and technology sectors.\821\
---------------------------------------------------------------------------
\819\ H.R. Rep. No. 101-617, at 23 (1990) (``The bill thus
mandates that the Commission adopt new blank check rules which the
Committee expects will contain at least three critical elements: (1)
information regarding the company to be acquired by the blank check
company prior to or after the date the registration becomes
effective; (2) limitations on the use of proceeds of blank check
offerings and the distribution of the securities of the issuer until
such time as adequate disclosure has been made; and (3) a right of
rescission for shareholders who disapprove of the disclosed
acquisition.''); Penny Stock Reform Act of 1990, H.R. 4497, 101st
Cong., sec. 9(a)(2) (1990).
\820\ H.R. Rep. No. 101-617, at 22 (1990) (``nearly 70 percent
of all penny stock issues offered in 1988 and through the third
quarter of 1989 were blank checks; money raised with no purpose
stated for its use.''); Penny Stock Market Fraud (Part 2): Hearing
on H.R. 4497 Before the Subcomm. on Telecomm. and Fin. of the Comm.
on Energy and Com., 101st Cong. 31 (1990) (Statement of Hon. Richard
C. Breeden, Chairman, Securities and Exchange Commission) (``The
Commission recognizes that blank check offerings have been used
extensively for abusive and fraudulent practices in the penny stock
market. We empathize with the desire to ban these types of
offerings.''); The Securities Law Enforcement Remedies Act of 1989:
Hearing on S. 647 Before the Subcomm. on Sec. of the Comm. On
Banking, Housing, and Urban Aff., 101st Cong. 351 (1990) (testimony
of Joseph Goldstein, Associate Director, Division of Enforcement,
Securities and Exchange Commission, stating that ``from the
enforcement side, we have seen widespread abuse with blank checks.
They are a very popular vehicle for committing penny stock
fraud.'').
\821\ Penny Stock Market Fraud (Part 2): Hearing on H.R. 4497
Before the Subcomm. on Telecomm. and Fin. of the Comm. on Energy and
Com., 101st Cong. 31-32 (1990) (Statement of Hon. Richard C.
Breeden, Chairman, Securities and Exchange Commission) (``If blank
checks were outlawed, it would be relatively easy for promoters to
specify a particular field of investment, essentially turning what
had been a blank check offering into a blind pool. While these, too,
could be barred, the blind pool financing approach has been used for
years by legitimate issuers in venture capital, real estate, oil and
gas exploration, and equipment leasing programs. Thus, a proven
mechanism for raising capital for productive uses could be
eliminated or, at least, subjected to costs and additional
regulation. While the bill grants the Commission powers to define
which issuers could be subject to regulation we are concerned that,
at least as it is currently written, any such definition would most
likely be circumvented by unethical issuers.''); Penny Stock Market
Fraud (Part 2): Hearing on H.R. 4497 Before the Subcomm. on
Telecomm. and Fin. of the Comm. on Energy and Com., 101st Cong. 47-
48 (1990) (Testimony of Richard C. Breeden, Chairman, U.S.
Securities and Exchange Commission) (``H.R. 4497 would prohibit both
blank check and certain blind pool offerings. However, blind pool
financings have been used for years by issuers in venture capital,
real estate, oil and gas exploration programs, equipment leasing and
other areas. Thus, substantial costs and burdens could be imposed on
this kind of financing technique for which disclosure regulation has
been adequate in the past, and which has been an important source of
producing capital.'') Penny Stock Market Fraud (Part 2): Hearing on
H.R. 4497 Before the Subcomm. on Telecomm. and Fin. of the Comm. on
Energy and Com., 101st Cong. 189 (1990) (Statement of John Guion,
President, National Association of Publicly Traded Companies)
(``There has been much said about blank check and blind pools. Our
comment here is that they have been used legitimately by some
organizations, particularly in gas and oil exploration, and I would
assume that the subcommittee would take that into consideration in
resolving that particular area.''). The U.S. House of
Representatives documented these concerns in House Report No. 101-
617 (1990) to accompany H.R. 4497. See H.R. Rep. No. 101-617, at 22
(1990) (``While Commission Chairman Richard Breeden and NASD
enforcement director John Pinto agreed that blank check offerings
were a source of problems, they were also of the view that blank
check offerings could be and were used in legitimate business
transactions outside of the penny stock arena. Accordingly, they
opposed an outright ban of all blank check offerings.''). Ultimately
H.R. 4497 was not approved by the House of Representatives. The
House of Representatives and the Senate approved the same versions
of S. 647, which became law when it was signed by the President. See
govtrack (regarding H.R. 4497 and S. 647 in the 101st Congress),
available at https://www.govtrack.us/congress/bills/101/s647 and
https://www.govtrack.us/congress/bills/101/hr4497.
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Some commenters suggested that the proposed changes to the
definition of ``blank check company'' are contrary to the
Administrative Procedure Act of 1946, because the Commission does not
have explicit statutory authority to make the changes.\822\ The final
rules are consistent with the express statutory authority of the
Commission as discussed above.
---------------------------------------------------------------------------
\822\ Letter from American Securities Association, supra note
751. See also letter from Job Creators Network, supra note 751.
---------------------------------------------------------------------------
Notwithstanding the foregoing, the final rules include technical
changes from the proposal to clarify that the definitions of ``blank
check company'' that we are adopting are solely for purposes of the
PSLRA and not for purposes of any rules the Commission adopted pursuant
to mandates under the Penny Stock Reform Act, such as Rule 419. In the
Proposing Release, the Commission proposed moving the definition of
blank check company out of Rule 419 (into Rule 405) and amending Rule
419 to use the proposed blank check company definition with a
qualification in Rule 419 (that would be outside of that definition)
limiting the applicability of Rule 419 to issuers of penny stocks.\823\
We are adopting a definition of ``blank check company'' that will be
located in Securities Act Rule 405, as proposed, but that includes
revised language stating that the definition is ``For purposes of
section 27A of the Securities Act of 1933 (15 U.S.C. 77z-2).'' As a
result, we are not amending Rule 419 as the Commission proposed; thus,
the existing definition of ``blank check company'' in Rule 419 will
remain unchanged.\824\ We are also adding to Exchange Act Rule 12b-2 a
nearly identical definition of ``blank check company'' as with the
final Securities Act Rule 405 definition, except that it provides that
the definition is ``For purposes of section 21E of the Securities and
Exchange Act of 1934 (15 U.S.C. 78u-5).'' \825\
---------------------------------------------------------------------------
\823\ Proposing Release, supra note 7, at 29481-29482.
\824\ The Proposing Release requested comment on the following:
``Should we consider retaining a separate definition of ``blank
check company'' for purposes of Rule 419?'' See Proposing Release,
supra note 7, at 29482 (request for comment number 78).
\825\ Notwithstanding several references to section 21E of the
Exchange Act in the Proposing Release, we did not propose an
Exchange Act rules definition of ``blank check company'' in the
Proposing Release to accompany the proposed amendments to the
Securities Act rules and Regulation S-K. We are adopting an Exchange
Act rule definition of ``blank check company'' as well as a
Securities Act rule definition, because this approach should be
clearer for registrants and other relevant parties and is more
consistent with how the Commission has traditionally exercised its
authority to define terms in the acts.
---------------------------------------------------------------------------
As discussed above, some commenters did not support the proposal or
expressed a view it is inappropriate to adopt the proposal because of
concerns related to the definition of ``blank check company'' in the
Penny Stock Reform Act.\826\ We do not agree with the commenters that
suggested we could not adopt the proposed definition of blank check
company on these grounds. However, in order to make clear that we are
using our authority to define terms under the PSLRA and not under the
Penny Stock Reform Act, we are not amending Rule 419 as proposed.
Rather, we are amending Securities Act Rule 405 and Exchange Act Rule
12b-2, as discussed above. The final rules have the same substantive
effect as the proposal notwithstanding the different approach taken.
---------------------------------------------------------------------------
\826\ Letters from ABA, Job Creators Network. See supra notes
743, 744, 745, 746, 747, and 748 and accompanying text. See also
letter from Kirkland & Ellis, supra note 749 and accompanying text.
---------------------------------------------------------------------------
As discussed above, some commenters suggested that projections are
rarely used in traditional IPOs.\827\ Traditional IPOs, however, may
include projections. IPO issuers commonly provide certain disclosures
about the future in their registration statements, including estimates
in historical financial statements and disclosure provided pursuant to
17 CFR 229.303 (``Item 303'' of Regulation S-K) (Management's
Discussion and Analysis of Financial Condition and Results of
Operations) and Items 5 and 9 of Form 20-F. In an IPO, disclosures
under Item 303 of Regulation S-K (for example, which may include
statements about the effects of changing prices and future economic
performance) are outside the bounds of the PSLRA safe harbor (which is
not applicable to IPOs pursuant to Securities Act section
27A(b)(2)(D)). In any offering, including an IPO, estimates in
financial statements prepared in accordance with generally accepted
accounting principles are outside the bounds of the PSLRA safe harbor
pursuant to Securities Act section 27A(b)(2)(A).
---------------------------------------------------------------------------
\827\ Letter from Cato Institute, supra note 759 and
accompanying text; letter from NYC Bar, supra note 761 and
accompanying text.
---------------------------------------------------------------------------
Issuers in certain types of IPOs also often include industry- or
offering-specific projections. For example, Commission staff has
observed that real estate investment trusts may disclose dividend
distribution plans and anticipated cash available for distribution
(sometimes referred to by industry participants as the ``Magic Page'').
One commenter also noted that ``while it may not be common in certain
[[Page 14232]]
industries, many types of IPO issuers (e.g., REITs [real estate
investment trusts], yieldcos, and master limited partnerships) do
regularly disclose projections in their IPO registration statements and
those projections are expected, and relied upon, by underwriters and
institutional and retail investors.'' \828\ Furthermore, the fact that
registrants in traditional IPOs (where there is no PSLRA safe harbor
available) provide projections voluntarily and provide them to comply
with applicable requirements reinforces our view that blank check
companies will be able to provide projections where they may be
required to disclose projections they have relied upon under Commission
rules or may be required to disclose projections under State law.\829\
---------------------------------------------------------------------------
\828\ Letter from Winston & Strawn.
\829\ In connection with the disclosure of any determination of
a board of directors under Item 1606(a), Item 1606(b) requires a
discussion of financial projections relied upon by the board of
directors. See supra section II.G. In certain situations, it is also
possible a fair summary of projections would be required under State
law. See, e.g., In re Pure Resources Inc. S'holders Litig., 808 A.2d
421, 449 (Del. Ch. 2002) (requiring a fair summary of the
substantive work performed by investment bankers advising a board of
directors); In re Netsmart Technologies, Inc. S'holders Litig., 924
A.2d 171, 176 (Del. Ch. 2007) (``In the context of a cash-out
merger, reliable management projections of the company's future
prospects are of obvious materiality to the electorate.''); Louden
v. Archer-Daniels-Midland Co., 700 A.2d 135, 145 (Del. 1997)
(``Speculation is not an appropriate subject for a proxy
disclosure.''); In re PNB Holding Co. S'holders Litig., 2006 WL
2403999, at *16 (Del. Ch. Aug. 18, 2006) (``our law has refused to
deem projections material unless the circumstances of their
preparation support the conclusion that they are reliable enough to
aid the stockholders in making an informed judgment.'').
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Some commenters expressed concern with the proposal because State
law may require disclosure of certain projections \830\ or because of
the interaction of the proposed change in safe harbor availability with
other aspects of the proposal, such as Item 1609.\831\ We do not
believe, under the final rules, that registrants will be unable to
provide a fair summary \832\ of any projections considered material and
reliable that the registrant considers to be required to be disclosed
under State law or will be unable to provide the disclosure required by
Item 1609. As discussed in detail below, the final rules we are
adopting do not bar SPACs from making forward-looking statements or any
required disclosures. The changes to the availability of the PSLRA safe
harbor in connection with the definition of blank check company we are
adopting will help protect investors by incentivizing SPACs to take
more care in avoiding the use of forward-looking statements that are
unreasonable.
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\830\ Letters from ABA, Amanda Rose, Cato Institute, Cowen,
Goodwin, Vinson & Elkins, NYC Bar. See supra notes 757, 758, 759,
760, 761, and 762 and accompanying text. See also recommendation of
the Small Business Capital Formation Advisory Committee, supra note
40.
\831\ Letters from American Securities Association, CFA
Institute, Cowen. See supra note 763.
\832\ See supra note 829.
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In addition, investors are likely to understand the difference
between: (i) on one hand, third-party projections provided to the
management of a SPAC about a target company prior to the business
combination agreement with the target company; and (ii) on the other
hand, disclosure by registrants in registration statements in
connection with de-SPAC transactions that include SPAC or target
company management projections regarding certain financial statement
line items or financial measures in future years with respect to the
target company that is intended to guide investors in connection with
the de-SPAC transaction.\833\ To the extent a SPAC is concerned that
security holders may rely on a summary of third-party projections that
the SPAC believes it is required to disclose under State law in
instances where the SPAC believes the projections are no longer
reliable, a SPAC could provide supplemental disclosure advising and
alerting security holders of this fact.\834\
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\833\ One commenter expressed similar views in connection with
their comments on proposed Item 1609. See letter from Freshfields
(``The projections are included in the de-SPAC offering document in
order to describe the basis upon which the board of directors of the
SPAC approved the de-SPAC transaction--not to serve as a basis for
investors to make an investment decision.'').
\834\ For example, final Item 1609 requires certain disclosure
where projections no longer reflect the views of a SPAC's or a
target company's management or board of directors (or similar
governing body) regarding the future performance of their respective
companies.
---------------------------------------------------------------------------
Some commenters suggested that the proposal potentially would have
a chilling effect on the use of projections in de-SPAC transactions and
give rise to one of the perceived downsides of an IPO, where a limited
group of institutional investors may receive issuer projections
indirectly (i.e., from securities analysts who have received
projections directly from the issuer).\835\ While we acknowledge that
there may be increased liability for projections disclosed in
connection with de-SPAC transactions, we believe the rules we are
adopting are necessary to protect investors receiving such projections.
As we discuss in connection with other comments expressing concerns
there may be a chilling effect on projection use, the final rules do
not prohibit the use of projections in connection with blank check
company business combinations. As in an IPO and as SPACs have done in
the past, SPACs will continue to be able to disclose projections in
connection with de-SPAC transactions after the effective date of the
final rules, and securities analysts may elect to use such forward-
looking statements as appropriate. In some cases, a SPAC may decide to
qualify its disclosure to put it in the proper context.\836\
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\835\ Letters from Bullet Point Network, Ropes & Gray,
SPACInsider, SPAC Association, Vinson & Elkins, White & Case. See
supra note 754. In addition, certain comments also expressed
concerns about the potential chilling effect on the use of
projections in the SPAC market due to the combination of the change
in the PSLRA safe harbor availability and proposed Rule 140a
concerning underwriters. We expect the same incentives to take more
care in avoiding the use of unreasonable forward-looking statements
will apply to underwriters. See letter from NYC Bar, supra note 777
and accompanying text. See also letter from Vinson & Elkins, supra
note 774.
\836\ See supra note 834 regarding required disclosures where
projections no longer reflect views on future performance.
---------------------------------------------------------------------------
Some commenters suggested the proposal would create inconsistency
by making the PSLRA safe harbor unavailable for one kind of business
combination transaction (de-SPAC transactions) but not for other kinds
of business combination transactions.\837\ In contrast, another
commenter said that ``[t]he rationale for treating SPAC business
combinations differently from other mergers with respect to the
disclosure of projections is exactly that the SPAC is a shell company
designed exclusively to merge with a private company seeking public
listing and SPAC shareholders have an unconditional right to redeem for
the initial price per share paid (typically $10 per share).'' \838\
---------------------------------------------------------------------------
\837\ Letters from SPAC Association, Winston & Strawn.
\838\ Letter from Bullet Point Network.
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As discussed above, there are certain differences between SPACs and
other business combination transactions due to the hybrid nature of de-
SPAC transactions.\839\ In light of these differences, we believe it is
appropriate to take a different regulatory approach with respect to de-
SPAC transactions--including in connection with the final definitions
of ``blank check company'' we are adopting--in order to ensure that
investors in these hybrid transactions are adequately protected.
---------------------------------------------------------------------------
\839\ See supra section III.C.
---------------------------------------------------------------------------
As discussed above, several commenters addressed protections from
liability in Commission rules and in common law other than the PSLRA
safe harbor.\840\ We agree with commenters that these protections for
defendants
[[Page 14233]]
remain potentially applicable, depending upon specific facts and
circumstances.\841\ We disagree, however, with the commenters who
stated that adopting a new definition of blank check company under the
PSLRA will merely increase costs such as by eliminating the stay of
discovery during the pendency of a motion for summary judgment.\842\
Rather, we believe that removal of the procedural protections under the
PSLRA will incentivize SPACs and other blank check companies to take
greater care to avoid the use of forward-looking statements that are
unreasonable. We analyze the impact of costs related to the final
definition of blank check company in section VII (Economic Analysis).
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\840\ Letters from ABA, Cowen, Winston & Strawn. See supra notes
782, 783, 784, 785, 786, and 787 and accompanying text.
\841\ With respect to Securities Act Rule 175, which defines the
term fraudulent statement to include, among other things, a
statement which is an untrue statement of a material fact and a
statement false or misleading with respect to any material fact,
see, e.g., Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 513
(7th Cir. 1989) (court determined that Rule 175 applies to actions
under Securities Act section 11 even though liability under that
section does not depend on fraud). See also Arazi v. Mullane, 2 F.3d
1456, 1468 (7th Cir. 1993) (``Bally's public statements fell within
the safe harbor created by Exchange Act Rule 3b-6, and the
plaintiffs have failed to allege with the particularity required by
Fed.R.Civ.P. 9(b) that these statements lacked a reasonable
basis.''), Roots Partnership v. Lands' End, Inc., 965 F.2d 1411 (7th
Cir. 1992) (``Defendants . . . are entitled to dismissal under Rule
175. . . .''). With respect to the bespeaks caution doctrine, see,
e.g., In re Donald J. Trump Casino Sec. Litig.-Taj Mahal Litig., 7
F.3d 357, 371-373 (3d Cir. 1993) (upholding district court grant of
defendant's motion to dismiss claims that included section 11 claims
and applying bespeaks caution doctrine), In re Worlds of Wonder Sec.
Litig., 35 F.3d 1407, 1427 n.3 (9th Cir. 1994) (``The plaintiffs
appear to contend that, if the bespeaks caution doctrine is viable,
it applies only to section 10(b) claims and not to section 11
claims. This argument is plainly wrong. . . . [C]ourts have applied
the doctrine to section 11 claims as well as section 10(b)
claims.''), I. Meyer Pincus & Assoc., P.C. v. Oppenheimer & Co.,
Inc., 936 F.2d 759, 763 (2d Cir. 1991) (``The statements contained
within the prospectus clearly `bespeak caution'. . . .'' and ``We
conclude that Pincus can prove no set of facts which would
demonstrate that the language . . . of the prospectus, read in
context, is materially misleading. . . . The complaint thus fails to
state a claim under either Section 11 of the 1933 Act [or] Section
10(b) of the 1934 Act.'').
\842\ 15 U.S.C. 77z-2(f), 15 U.S.C. 78u-5(f). See letters from
Cowen, Winston & Strawn. See supra notes 786 and 787 and
accompanying text. We note these final rules do not affect the stay
of discovery during the pendency of a decision on a motion to
dismiss under Securities Act section 27(b)(1) (15 U.S.C. 77z-
1(b)(1)) or Exchange Act section 21D(b)(3)(B) (15 U.S.C. 78u-
4(b)(3)(B).
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With respect to commenters that expressed the view that the PSLRA
safe harbor availability does not meaningfully affect existing
disclosure practices,\843\ we do not agree that the PSLRA safe harbor
has no effect on the accuracy and reliability of disclosure. For
example, with respect to knowingly misleading statements, courts are
split on whether knowingly false or even fraudulent forward-looking
statements are protected by the PSLRA safe harbor; \844\ whereas
removing any doubt about the applicability of the safe harbor would
incentivize parties to take care to avoid the use of unreasonable
forward-looking statements. We do agree, however, as discussed above,
that the removal of the PSLRA safe harbor will not eliminate forward-
looking statements.
---------------------------------------------------------------------------
\843\ Letters from Andrew Tuch, Davis Polk, Kirkland & Ellis.
See supra notes 778, 779, 780, and 781 and accompanying text. See
also letter from Cowen, supra note 778.
\844\ Compare Miller v. Champion Enters., Inc., 346 F.3d 660,
672 (6th Cir. 2003) (``[I]f the statement qualifies as `forward-
looking' and is accompanied by sufficient cautionary language, a
defendant's statement is protected regardless of the actual state of
mind.''), and Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir.
1999) (``[I]f a statement is accompanied by `meaningful cautionary
language,' the defendants' state of mind is irrelevant.''), with
Lormand v. US Unwired, Inc., 565 F.3d 228, 244 (5th Cir. 2009)
(``Because the plaintiff adequately alleges that the defendants
actually knew that their statements were misleading at the time they
were made, the safe harbor provision is inapplicable to all alleged
misrepresentations.''), and In re Enron Corp. Securities, Derivative
& ERISA Litigation, 235 F.Supp.2d 549, 576 (S.D. Tex. 2002) (``The
safe harbor provision does not apply where the defendants knew at
the time that they were issuing statements that the statements
contained false and misleading information and thus lacked any
reasonable basis for making them.''). Compare also Brief for
Securities and Exchange Commission as Amicus Curiae, Slayton v. Am.
Express Co., No. 08-5442-cv (2d Cir. 2010) (``[T]o remove a forward-
looking statement from the protection of the safe harbor, a
plaintiff must show that the defendant (i) actually knew (ii) that
the statement was misleading.''), with Amanda M. Rose, SPAC Mergers,
IPOs, and the PSLRA's Safe Harbor: Unpacking Claims of Regulatory
Arbitrage (May 19, 2022), at 26-27, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3945975, submitted as
attachment to letter from Amanda Rose (``Prongs A and B of the
PSLRA's safe harbor are written in the disjunctive, meaning that if
either prong is met the suit must be dismissed. . . . This reading
of the safe harbor was critiqued by some as giving rise to a `right
to lie' on the part of defendants, but it can be defended from a
public policy perspective in light of the broader goals of the
legislation . . . mistaken scienter determinations are a real risk
in suits challenging forward-looking statements due to the
phenomenon of hindsight bias, and the need to fight over this fact-
laden issue may preclude early termination of the case, inviting
strike suit litigation.'').
---------------------------------------------------------------------------
Some commenters suggested the need to alter the availability of the
PSLRA safe harbor is overstated.\845\ One of these commenters said
that, because target companies may register securities in a de-SPAC
transaction, in that situation, the PSLRA safe harbor is already not
available to them.\846\ We agree that, since the PSLRA safe harbor is
not applicable to non-reporting companies and is not applicable to
IPOs, in certain deal structures where a non-publicly traded target
company is registering securities that it is offering in the de-SPAC
transaction, the PSLRA safe harbor is already unavailable. There are,
however, a number of de-SPAC transactions that are not structured in
this manner.
---------------------------------------------------------------------------
\845\ Letters from Kirkland & Ellis, Winston & Strawn.
\846\ Letter from Kirkland & Ellis. See also letter from Andrew
Tuch (``Just as the legal structure of de-SPACs determines the
threat of liability to transaction participants, it also determines
the application of the PSLRA safe harbor.'').
---------------------------------------------------------------------------
This commenter also suggested the need to alter the availability of
the PSLRA is overstated because boards of directors of SPACs review
projections, including related assumptions and cautionary language,
consistent with their fiduciary duty of care.\847\ Despite these
existing fiduciary duties, as discussed by commentators cited in the
Proposing Release and by several commenters on the Proposing Release,
there have been uses of projections in de-SPAC transactions that appear
to be unreasonable, unfounded, or potentially misleading, particularly
where the target company is an early stage company with no or limited
sales, products, or operations.\848\ Therefore, we believe that the
final rules will supplement such State legal or equitable doctrines
imposing fiduciary duties and help ensure blank check companies take
more care to avoid the use of unreasonable forward-looking statements.
---------------------------------------------------------------------------
\847\ Letter from Kirkland & Ellis.
\848\ Proposing Release, supra note 7, at 29462, n.33, and at
29482; letters from Americans for Financial Reform Education Fund,
Better Markets, CFA Institute, CII, Senator Elizabeth Warren, supra
notes 722-727 and accompanying text. The Commission has brought a
number of enforcement actions involving SPACs alleging the use of
baseless or unsupported projections about future revenues and the
use of materially misleading underlying financial projections. See,
e.g., SEC v. Ulrich Kranz and Paul Balciunas, No. 23-cv-06332 (C.D.
Cal. filed Aug. 4, 2023); In the Matter of Momentus, Inc., et. al.,
Exchange Act Release 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, Exchange Act Release No. 34-86164
(June 20, 2019); SEC vs. Milton, Case No. 1:21-cv-6445 (S.D.N.Y.,
filed July 29, 2021).
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A different commenter suggested the need to alter the availability
of the PSLRA safe harbor is overstated because the PSLRA safe harbor
only affects private litigation and does not prevent the Commission
from pursuing claims for misleading disclosure.\849\ We disagree with
this view to the extent that it implies there is no need for investor
private rights of action under the Federal securities laws when
Commission enforcement actions are available. We consider that view to
be inconsistent with the Federal securities
[[Page 14234]]
law statutory scheme, which provides for several private rights of
action.\850\
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\849\ Letter from Winston & Strawn.
\850\ See, e.g., Securities Act section 11 (15 U.S.C. 77k);
Securities Act section 12 (15 U.S.C. 77l).
---------------------------------------------------------------------------
Several commenters suggested that the proposal regarding the change
in availability of the PSLRA safe harbor would invite litigation
against SPACs.\851\ While it is possible that litigation may increase
as a result of the removal of the PSLRA safe harbor protections, it is
also possible litigation may not increase or may decrease if some
issuers who otherwise would have provided unreasonable projections
instead provide reasonable projections as a result of the final
rules.\852\
---------------------------------------------------------------------------
\851\ Letters from Anonymous (Apr. 7, 2022), American Securities
Association, Vinson & Elkins.
\852\ See also supra note 844 (discussing splits among courts on
whether knowingly false or fraudulent forward-looking statements are
protected by the PSLRA safe harbor).
---------------------------------------------------------------------------
Several commenters provided a range of views on how the proposal
could or should change the current use of forward-looking statements,
such as projections. Some commenters expressed concerns that the
proposal would bar issuers from using projections.\853\ These
commenters suggested that, rather than barring the use of projections,
the Commission should mandate qualifying language or additional
disclosure around the use of projections.\854\ Other commenters
expressed concerns that the proposal would have a chilling effect on
the use of projections.\855\ Another commenter suggested the Commission
should restrict the use of projections.\856\ Other commenters asked the
Commission to expand the PSLRA safe harbor to cover IPOs.\857\
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\853\ Letters from Managed Funds Association (referring to the
proposal as ``barring forward-looking projections entirely'');
Michael Dambra, Omri Even-Tov, and Kimberlyn George (referring to
the proposal as ``barring . . . young growth firms from providing
forward looking information.''). See supra notes 800 and 801 and
accompanying text.
\854\ Id.
\855\ Letters from ABA, Amanda Rose, Cato Institute, CFA
Institute, Goodwin, Kirkland & Ellis, NYC Bar, SPAC Association,
Vinson & Elkins, Winston & Strawn. See supra notes 768, 769, 770,
771, and 772 and accompanying text.
\856\ Letter from NASAA. See supra note 798 and accompanying
text.
\857\ See supra note 756 (letters from Bullet Point Network,
Loeb & Loeb, Kirkland & Ellis, SPACInsider). See also letters from
ABA, Amanda Rose, SPAC Association, supra note 756.
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The final definition of ``blank check company'' we are adopting
would not prohibit the use of projections in SPAC registration
statements. In this respect, the final rules are not a departure from
the Commission's general policies towards projections held since 1973
when the Commission moved away from its previous ``long standing policy
generally not to permit projections to be included in prospectuses and
reports filed with the Commission.'' \858\ That the final definition of
``blank check company'' does not prohibit projections is also
consistent with existing 17 CFR 229.10(b) (``Item 10(b)'' of Regulation
S-K), which we are amending in this release, and new Regulation S-K
Item 1609. These rules both relate to the use of projections, including
those of SPACs--rules which would be unnecessary if projections were
barred in registration statements of blank check companies.
---------------------------------------------------------------------------
\858\ Disclosure of Projections of Future Economic Performance,
Release No. 33-5362 (Feb. 2, 1973) [38 FR 7220 (Mar. 19, 1973)].
With respect to development of policies towards projections, see
also Guides for Disclosure of Projections of Future Economic
Performance, Release No. 33-5992 (Nov. 7, 1978) [43 FR 53246 (Nov.
15, 1978)]; Rescission of Guides and Redesignation of Industry
Guides, Release No. 33-6384 (Mar. 16, 1982) [47 FR 11476 (Mar. 16,
1982)].
---------------------------------------------------------------------------
We recognize that forward-looking statements can provide useful and
necessary disclosure to investors, and that such statements may be
mandated by State and/or fiduciary legal obligations. We also recognize
that removing certain liability protections for these forward-looking
statements could lead some blank check companies to provide fewer
forward-looking statements or no forward-looking statements compared
with what they might have provided in the absence of the final rules.
However, we believe the definition of ``blank check company'' that we
are adopting and the concomitant impact on the availability of the
PSLRA safe harbors are necessary and appropriate to help address
concerns over the misuse of forward-looking statements in de-SPAC
transactions and other business combinations involving blank check
companies.\859\ These risks to investors are present in de-SPAC
transactions just as in IPOs; in both transactions, there is no track
record of public disclosure for a target company to help investors
evaluate forward-looking statements.\860\ The final definition of
``blank check company'' we are adopting will better protect these
investors by incentivizing blank check companies to take more care in
avoiding the use of unreasonable forward-looking statements. In
addition, we note that the final rules require a discussion of
qualifying information, such as assumptions, in connection with the use
of projections in de-SPAC transactions as recommended by one of the
commenters, which will further enhance investor protections in
connection with such forward-looking statements.\861\
---------------------------------------------------------------------------
\859\ See letters from Americans for Financial Reform Education
Fund, Better Markets, CFA Institute, CII, Senator Elizabeth Warren,
supra notes 722-727 and accompanying text.
\860\ For the same reason, we disagree with the commenters who
suggested the Commission should expand the PSLRA safe harbor to
apply to IPOs. See letters from Bullet Point Network, Loeb & Loeb,
Kirkland & Ellis, SPACInsider, supra note 756 and accompanying text.
See also letters from ABA, Amanda Rose, SPAC Association, supra note
756. The concerns we have about the use of forward-looking
statements in de-SPAC transactions and other business combinations
involving blank check companies discussed above are equally
prevalent in traditional IPOs.
\861\ See Item 1609 of Regulation S-K. See also letter from
Managed Funds Association supra note 800.
---------------------------------------------------------------------------
Some commenters suggested that market forces would hold issuers
with unmet projections accountable by preventing future capital
access.\862\ While accountability-imposing market reactions potentially
could limit future capital-raising ability of some SPACs that provide
unreasonable projections, relying solely on such market-based
protections would not provide investors with any recourse at the time
the projections are made. In addition, some companies may not return to
the capital markets in the future to raise additional cash. In such
cases, to the extent that market accountability mechanisms may operate
in the manner suggested by these commenters, we believe that the
passage of time creates risks that such accountability mechanisms may
be less likely to operate as theorized.
---------------------------------------------------------------------------
\862\ Letters from Jonathan Kornblatt, Vinson & Elkins.
---------------------------------------------------------------------------
One commenter suggested allowing the PSLRA safe-harbor to apply to
de-SPAC transactions might lower liability insurance premiums.\863\ We
recognize that removal of PSLRA safe-harbor protection from SPACs could
result in increased insurance costs for target companies. Based on
Commission staff's experience, companies that enter business
combination agreements with blank check companies may have directors
and officers insurance, and such business combination agreements may
contain provisions regarding the provision of directors and officers
insurance to company officials.\864\ As a result, any increased costs
incurred by companies in connection with business combinations with
blank check companies with respect to directors and officers insurance
under the final rules will be incremental to those already
[[Page 14235]]
incurred. Furthermore, we believe these incremental costs are justified
by the enhanced investor protections that will be realized by the
incentives created by the final rules for blank check companies to take
care to avoid the use of forward-looking statements that are
unreasonable. We discuss our analysis of the costs and benefits of the
final rules in more detail in section VIII below.
---------------------------------------------------------------------------
\863\ See letter from Amanda Rose.
\864\ Business combination agreements (such as merger
agreements) between a company and a blank check company commonly
contain a company covenant, representation, or similar provision
that the company will maintain its directors and officers insurance
or contain a representation or warranty that the company's directors
and officers insurance listed on the company's disclosure schedules
to the agreement is in force and effect.
---------------------------------------------------------------------------
One commenter suggested the Commission should require that earnings
statements include a comparison of past projections to actual results
in order to enhance issuer accountability.\865\ While we recognize the
potential benefits of such disclosure, in order to achieve our goals of
incentivizing SPACs and other blank check companies to take more care
in avoiding the use of unreasonable forward-looking statements, we do
not believe it is necessary to adopt the commenter's suggestion and
believe that these goals will be achieved by the final rules.
---------------------------------------------------------------------------
\865\ Letter from SPAC Association.
---------------------------------------------------------------------------
Another commenter suggested that the safe harbor should be made
unavailable only to the ``maker'' of the statement but that others such
as ``underwriters (or sellers) could continue to enjoy the full
protection of the PSLRA.'' \866\ ``Sellers'' are not one of the
enumerated persons whose forward looking statements are covered by the
PSLRA safe harbors.\867\ With respect to underwriters, Securities Act
section 27A(a)(4) provides that section 27A's safe harbor for forward-
looking statements applies only to a forward-looking statement ``made
by'' certain persons, including ``an underwriter, with respect to
information provided by such issuer or information derived from
information provided by the issuer.'' Exchange Act section 21E(a)(4)
contains similar provisions. Sections 27A(a)(4) and 21E(a)(4) do not
explicitly discuss situations where an underwriter is not the maker of
the statement. Securities Act section 27A(g) and Exchange Act section
21E(g) give the Commission exemptive authority to adopt rules or
regulations to provide exemptions from or under any provision of the
PSLRA ``with respect to liability that is based on a statement or that
is based on projections or other forward-looking information if and to
the extent that any such exemption is consistent with the public
interest and the protection of investors, as determined by the
Commission.'' We are not exercising that authority and are not adopting
the commenter's suggestion with respect to sellers and underwriters
because we do not believe that it is consistent with the public
interest and the protection of investors to expand the protections of
the PSLRA safe harbors in this manner and believe it would be
inconsistent with the purpose of the final rules to incentivize blank
check companies to take more care in avoiding the use of unreasonable
forward-looking statements.\868\
---------------------------------------------------------------------------
\866\ Letter from Cowen.
\867\ See, e.g., Securities Act section 27A(a) (15 U.S.C. 77z-
2(a)) (``This section shall apply only to a forward-looking
statement made by--(1) an issuer that, at the time that the
statement is made, is subject to the reporting requirements of
section 78m(a) or section 78o(d) of this title; (2) a person acting
on behalf of such issuer; (3) an outside reviewer retained by such
issuer making a statement on behalf of such issuer; or (4) an
underwriter, with respect to information provided by such issuer or
information derived from information provided by the issuer.'').
Exchange section 21E(a) contains similar provisions.
\868\ As noted by a commenter and as discussed above, other safe
harbors, such as Securities Act Rule 175 and Exchange Act Rule 3b-6
and the bespeaks caution may continue to apply, depending on
specific facts and circumstances. In contrast to the PSLRA, Rules
175 and 3b-6 do not explicitly refer to statements made by
underwriters. Rules 175 and 3b-6 apply to statements ``made by or on
behalf of an issuer or by an outside reviewer retained by the
issuer.''
---------------------------------------------------------------------------
Another commenter suggested that the safe harbor should be
unavailable for longer-term projections (where the commenter provided
the example of a statement, ``we will penetrate 50% of [total
addressable market] in 10 years'') but available for short-term
projections (where the commenter provided the example of a statement,
``we expect to make revenue in 1 year or have positive [free cash flow]
in 2 years.'') \869\ We believe that it is equally important for
investor protection purposes that blank check companies take care to
avoid the use of unreasonable short-term projections as well as
unreasonable longer-term projections.\870\ Therefore, we are not
adopting this suggestion.
---------------------------------------------------------------------------
\869\ Letter from Charles Pieper.
\870\ We note that 17 CFR 229.10(b)(1), as amended in this
release, sets out the policy of the Commission that registrant
assessments of future performance must have a reasonable basis. In
addition, 17 CFR 229.10(b)(2), as amended in this release, provides:
``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.'' Blank check companies should
consider whether projections that extend a substantial period into
the future, such as the 10-year projection provided in the
commenter's example, are consistent with this policy.
---------------------------------------------------------------------------
One commenter said it is inappropriate to deem a transaction to be
a de-SPAC transaction where the SPAC survives as an IPO and suggested
the Commission should provide an interpretation that de-SPAC
transactions are ``tender offers'' which would make the PSLRA safe
harbor unavailable.\871\ We disagree with the view de-SPAC transactions
should not be considered the IPO of the target company. As we discuss
in detail in this release,\872\ the de-SPAC transaction is functionally
the IPO of the target company. While redemption rights exercisable by
security holders in connection with the de-SPAC transaction (or
extension of the timeframe to complete a de-SPAC transaction) generally
have indicia of a tender offer,\873\ the business combination component
of the de-SPAC transaction is typically structured as a statutory
merger, and not as a tender offer. Therefore, we disagree with the
commenter's suggestion that entire de-SPAC transactions could be
interpreted or viewed as tender offers.
---------------------------------------------------------------------------
\871\ Letter from Vinson & Elkins. See supra note 807.
\872\ In particular, see supra section III.C and infra section
IV.A.
\873\ Proposing Release, supra note 7, at 29461, n.21.
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F. Underwriter Status and Liability in Securities Transactions
1. Proposed Rule
The Commission proposed Rule 140a to clarify that anyone who acts
as an underwriter in a SPAC IPO and participates in the distribution
associated with a de-SPAC transaction by taking steps to facilitate
such transaction, or any related financing transaction, or otherwise
participates (directly or indirectly) in the de-SPAC transaction is
engaged in the distribution of securities of the surviving public
entity and, therefore, is an ``underwriter'' within the meaning of
section 2(a)(11) of the Securities Act.\874\ In this way, the proposed
rule was intended to clarify that liability protections similar to
those in traditional underwritten IPOs would apply to de-SPAC
transactions in which a statutory underwriter has participated. The
Commission also described in the Proposing Release some of the
activities sufficient to establish a SPAC IPO underwriter as a
participant in the distribution of target company securities, as
securities of the combined company.\875\ The Proposing Release stated
that the discussion of such activities was non-exhaustive and not
intended to limit the definition of underwriter for purposes of section
2(a)(11) of the Securities Act.
---------------------------------------------------------------------------
\874\ Proposing Release, supra note 7, at 29483.
\875\ See Proposing Release, supra note 7, at 29486.
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[[Page 14236]]
2. Comments
Several commenters generally supported proposed Rule 140a.\876\
However, several other commenters expressed concerns about the
potential impact on transaction participants and the overall market if
proposed Rule 140a were adopted.\877\ Several commenters also expressed
concerns about increased costs if proposed Rule 140a were adopted.\878\
In addition, numerous commenters expressed concerns that the proposed
rule could result in increased liability and/or litigation risk for
transaction participants.\879\ Several commenters also expressed
broader concerns about the effects of proposed Rule 140a on M&A
transactions other than de-SPAC transactions.\880\ A Commission
advisory committee recommended that participants who would have
underwriter liability should be clearly identified and participants
should be held accountable to the same extent they would be in
traditional IPOs.\881\
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\876\ Letters from Andrew Tuch, Americans for Financial Reform
Education Fund, Better Markets, Bullet Point Network, CII, Consumer
Federation, Senator Elizabeth Warren, ICGN, Mohammed Ali Rashid (May
7, 2022) (``Mohammed Ali Rashid''), NASAA, Public Citizen.
\877\ Letters from Andrew Tuch, ABA, Anonymous (May 9, 2022)
(``Anonymous (May 9, 2022)''), American Securities Association,
Committee on Capital Markets Regulation, CFA, Cleary Gottlieb Steen
& Hamilton LLP (June 13, 2022) (``Cleary Gottlieb''), Cowen, Davis
Polk, Fenwick, Freshfields, Goodwin, ICGN, Cato Institute, Job
Creators Network, King & Wood Mallesons, Kirkland & Ellis, Loeb &
Loeb, Managed Funds Association, NYC Bar, Paul Swegle, Ropes & Gray,
Securities Industry and Financial Markets Association (June 10,
2022) (``SIFMA''), Skadden, SPAC Association, Usha Rodrigues and
Mike Stegemoller (May 31, 2022) (``Usha Rodrigues and Mike
Stegemoller''), Vinson & Elkins, White & Case, Winston & Strawn.
\878\ Letters from ABA, Anonymous (May 9, 2022), Committee on
Capital Markets Regulation, Cowen, Davis Polk, Goodwin, Cato
Institute, Managed Funds Association, Paul Swegle, SIFMA, Skadden,
Vinson & Elkins.
\879\ Letters from ABA, Anonymous (May 9, 2022), American
Securities Association, Cleary Gottlieb, Cowen, Davis Polk,
Freshfields, Goodwin, King & Wood Mallesons, Kirkland & Ellis, Loeb
& Loeb, Managed Funds Association, NYC Bar, Ropes & Gray, SIFMA,
Skadden, Tony Crom (May 18, 2022), Usha Rodrigues and Mike
Stegemoller, Vinson & Elkins, White & Case, Winston & Strawn.
\880\ Letters from Andrew Tuch, ABA, Davis Polk, Ropes & Gray,
White & Case.
\881\ See Small Business Capital Formation Advisory Committee
recommendations, supra note 40.
---------------------------------------------------------------------------
Several commenters disagreed with the discussion in the Proposing
Release regarding what it means to participate in a distribution.\882\
A number of commenters asserted that proposed Rule 140a was
inconsistent with the statutory text of section 2(a)(11), other
Commission rules, and case law construing the application of section 11
to parties other than named underwriters.\883\ In particular,
commenters argued that the term ``underwriter'' as used in section
2(a)(11) does not have unlimited applicability to capture anyone
associated with an issuance of securities within its meaning.\884\ Some
commenters argued that no person in a de-SPAC transaction purchases
with a view to distribution or sells for an issuer or participates in
any purchase, offer, or sale of securities for distribution or that a
de-SPAC transaction generally does not involve underwriters.\885\
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\882\ Letters from Davis Polk, Kirkland & Ellis, NYC Bar, SIFMA,
Vinson & Elkins.
\883\ Letters from ABA, Cleary Gottlieb, Cowen, Davis Polk,
Freshfields, Goodwin, SIFMA.
\884\ Letters from ABA, Cleary Gottlieb, Cowen, Davis Polk,
Freshfields, Goodwin, SIFMA.
\885\ Letters from ABA, SIFMA.
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Some commenters questioned the scope of the section 11 liability
that would attach to any underwriter under the proposed rule.\886\ In
addition, commenters questioned how a court would apportion damages
among underwriters were Rule 140a to be adopted as proposed.\887\ While
some commenters stated that underwriter status would improve diligence
performed by parties in a de-SPAC transaction,\888\ other commenters
disagreed that proposed Rule 140a would improve diligence performed in
de-SPAC transactions.\889\
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\886\ Letters from ABA, American Securities Association, CFA,
Cowen, Cleary Gottlieb, Davis Polk, Freshfields, Goodwin, Kirkland &
Ellis, Managed Funds Association, Ropes & Gray, SIFMA, Skadden,
Vinson & Elkins, White & Case, Winston & Strawn.
\887\ Letter from Cowen.
\888\ Letters from Americans for Financial Reform Education
Fund, Better Markets, Consumer Federation, ICGN, Mohammed Ali
Rashid, Managed Funds Association, NASAA.
\889\ Letters from ABA, Davis Polk, Freshfields, Goodwin,
Kirkland & Ellis, Managed Funds Association, Skadden, Vinson &
Elkins.
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To the extent the Commission were to adopt Rule 140a, some
commenters requested specific changes or additional provisions related
to the rule. Several commenters asked the Commission to limit the scope
of proposed Rule 140a underwriter liability in a de-SPAC transaction to
disclosures akin to those in a traditional IPO.\890\
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\890\ Letters from ABA, Better Markets, Davis Polk, ICGN, Ropes
& Gray, Vinson & Elkins, White & Case.
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Several commenters proposed alternatives to adopting Rule 140a,
including:
Relying on statutory ``seller'' liability under Securities
Act section 12(a)(2); \891\
---------------------------------------------------------------------------
\891\ Letter from Cowen.
---------------------------------------------------------------------------
Requiring a SPAC to file a current report upon
announcement of a signed agreement to consummate a de-SPAC
Transaction;'' \892\
---------------------------------------------------------------------------
\892\ Letter from NYC Bar.
---------------------------------------------------------------------------
Mandating ``a new role for an investment bank in de-SPAC
transactions for all exchange-listed SPACs;'' \893\ and
---------------------------------------------------------------------------
\893\ Letter from Vinson & Elkins.
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Establishing a maximum threshold on redemptions in order
for a de-SPAC transaction to proceed.\894\
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\894\ Letter from Usha Rodrigues and Mike Stegemoller.
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Finally, several commenters asked the Commission to apply proposed
Rule 140a on a prospective basis or to adopt a phase in period.\895\
---------------------------------------------------------------------------
\895\ Letters from ABA, Committee on Capital Markets Regulation,
Davis Polk, Ropes & Gray, SIFMA, Winston & Strawn.
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3. Declining To Adopt Proposed Rule 140a; Commission Guidance on
Underwriter Status in De-SPAC Transactions
As discussed in the Proposing Release, underwriters play an
important role in the U.S. financial markets, acting as gatekeepers for
the investing public in the distribution of a new issuer's securities
to the public markets for the first time.\896\ Section 2(a)(11) of the
Securities Act defines underwriter as ``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.'' \897\ The Commission and courts
generally have emphasized that such concepts should be applied broadly
and not formulaically.\898\
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\896\ New High Risk Ventures, Release No. 33-5275 (July 27,
1972) [37 FR 16011, 16013 (Aug. 9, 1972)] (``Also unique is the
importance of the underwriter in the distribution of the securities.
His role is central as the intermediary between the issuer and the
investing public. Correspondingly, the public looks to the
underwriter for protection and expects him to verify the accuracy of
the statements in the registration statement.'').
\897\ 15 U.S.C. 77b(a)(11).
\898\ See Definition of Terms ``Underwriter'' and ``Brokers'
Transactions,'' Release No. 33-5223 (Jan. 11, 1972) [37 FR 591, 592
(Jan. 14, 1972)] (``Rule 144 Adopting Release'') (``The term
underwriter is broadly defined in section 2[(a)](11) of the Act. . .
. Thus, an investment banking firm which arranges with an issuer for
the public sale of its securities is clearly an `underwriter' under
that section. Not so well understood is the fact that individual
investors who are not professionals in the securities business may
be `underwriters' within the meaning of that term as used in the Act
if they act as links in a chain of transactions through which
securities move from an issuer to the public.''). See also Harden v.
Raffensperger, Hughes & Co., 65 F.3d 1392, 1400 (7th Cir. 1995)
(``Both the Supreme Court and this court have interpreted broadly
the phrases `participate in' and `participation' found in 15 U.S.C.
77b(11). In Pinter v. Dahl, 486 U.S. 622, 108 S. Ct. 2063, 100
L.Ed.2d 658 (1988), for example, the Supreme Court discussed whether
the Congress intended to impose liability under section 12[(a)](1)
of the Securities Act on those collateral to the offer or sale of a
security. Rejecting the possibility, the Court commented, in dictum,
that `Congress knew of the collateral participation concept and
employed it in the Securities Act. . . . Liabilities and obligations
expressly grounded in participation are found elsewhere in the Act,
see, e.g., 15 U.S.C. 77b(11).' Dahl, 486 U.S. at 650 n. 26, 108 S.
Ct. at 2080 n. 26. The Court's footnoted discussion makes clear
that, in its view, one who `participates,' or `takes part in,' an
underwriting is subject to section 11 liability.'').
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[[Page 14237]]
Having considered the comments received on proposed Rule 140a and
given the broad nature of the definition of underwriter in section
2(a)(11), we are not adopting Rule 140a. Although we agree with
commenters that the term underwriter does not have ``unlimited
applicability,'' as further explained below, the statutory definition
of underwriter, itself, encompasses any person who sells for the issuer
or participates in a distribution associated with a de-SPAC
transaction. To assist parties in applying section 2(a)(11) to de-SPAC
transactions, we are providing the following general guidance regarding
statutory underwriter status. For the avoidance of doubt, this guidance
does not implement proposed Rule 140a. Rather than promulgate a rule
clarifying when a specific party is an underwriter for de-SPAC
transactions, we intend to follow the Commission's longstanding
practice of applying the statutory terms ``distribution'' and
``underwriter'' broadly and flexibly, as the facts and circumstances of
any transaction may warrant.
i. A De-SPAC Transaction Is a Distribution of Securities
The concept of distribution within section 2(a)(11) is not limited
to a transaction taking the form of a traditional IPO or traditional
capital raising. For example, a spin-off is not traditional capital
raising; yet, in certain circumstances, has been found to constitute a
distribution of securities for the purposes of section 2(a)(11).\899\
In the Proposing Release, the Commission stated that the de-SPAC
transaction marks the introduction of the private operating company to
the public capital markets 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.\900\
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\899\ A ``spin-off'' is a transaction by which a parent company
distributes shares of a subsidiary to the parent company's
shareholders. These transactions are frequently accompanied by the
creation of a public market for the subsidiary's securities via
listing on a national securities exchange. See, e.g., Spin Offs and
Shell Corporations, Release No. 33-4982 (July 14, 1969) [34 FR 11581
(July 15, 1969)] (``Spin Offs Release'') (``It is accordingly the
Commission's position that the shares which are distributed in
certain spin offs involve the participation of a statutory
underwriter and are thus, in those transactions, subject to the
registration requirements of the Act. . . .''). See also Revisions
to Rules 144 and 145, Release No. 33-8869 (Dec. 6, 2007) [72 FR
71546, 71559 (Dec. 17, 2007)] (``The presumptive underwriter
provision in Rule 145 is no longer necessary in most circumstances.
However, based on our experience with transactions involving shell
companies that have resulted in abusive sales of securities, we
believe that there continues to be a need to apply the presumptive
underwriter provision to reporting and non-reporting shell companies
and their affiliates and promoters.'').
\900\ Proposing Release, supra note 7, at 29485.
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Some commenters asked the Commission to better explain the
distribution that occurs in a de-SPAC transaction.\901\ Although the
word ``distribution'' has no definition in the Securities Act, the term
``distribution'' refers to the entire process in a public offering
through which a block of securities is dispersed and ultimately comes
to rest in the hands of the investing public.\902\ In a traditional
IPO, an underwriter distributes shares in a private company to
investors thereby providing access to capital and the public markets.
Although different in form from traditional capital raising in an IPO,
the purpose of a de-SPAC transaction is to provide the target company
with capital and access to the public markets.\903\ In the course of
such a transaction, regardless of the transaction structure, public
shareholders of the SPAC become owners of the combined operating
company through the business combination.\904\ Given this, in the
context of a de-SPAC transaction, interests in the typically private
target company are dispersed to the public via a business combination
with a SPAC. The distribution is therefore the process by which the
SPAC's investors, and therefore the public, receive interests in the
combined operating company.
---------------------------------------------------------------------------
\901\ Letter from ABA.
\902\ See Geiger v. SEC, 363 F.3d 481, 487 (D.C. Cir. 2004)
(finding that 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 a distribution ``comprises the
entire process by which in the course of a public offering the block
of securities is dispersed and ultimately comes to rest in the hands
of the investing public'') (internal quotation marks omitted).
\903\ Such transactions historically have been known as ``going
public through the back door.'' See, e.g., Leib Orlanski, Going
Public Through the Back Door and the Shell Game, 58 Va. L. Rev. 1451
(1972), available at https://heinonline.org/HOL/Page?public=true&handle=hein.journals/valr58&div=72&start_page=1451&collection=usjournals&set_as_cursor=0&men_tab=srchresults.
\904\ For example, shareholders of a SPAC become shareholders of
a combined operating company by operation of State or local law in a
statutory merger.
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One commenter asserted that not every de-SPAC transaction would
involve a distribution of securities because in at least some de-SPAC
transactions the target company is not ``selling'' or ``distributing''
any securities in the transaction.\905\ As discussed elsewhere in this
release, however, the statutory concepts of offer and sale have a very
broad meaning and can encompass situations in which there is no actual
exchange of securities.\906\ However, assuming, for the sake of
addressing this commenter's argument, that a distribution requires a
``sale'' that meets the definition of such term under section 2(a)(3),
we are adopting Rule 145a, which deems there to be a sale from the
combined company to the SPAC's existing shareholders even in de-SPAC
transaction structures where the target company is not ``selling'' or
``distributing'' its own securities into the market.\907\
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\905\ Letter from ABA.
\906\ See the discussion regarding the broad definition of
``sale'' in section 2(a)(3) and the related examples in infra
section IV.A.3.i.
\907\ See infra section IV.A. As discussed below, Rule 145a
applies regardless of the structure the de-SPAC transaction may
take.
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ii. Statutory Underwriters in De-SPAC Transactions
While one commenter asserted that there is not always a
distribution of securities associated with a de-SPAC transaction,\908\
another asserted that the de-SPAC distribution ``occurs directly from
the issuer to the counterparties to the business combination, without
the involvement of underwriters.'' \909\ It is well established that
the statutory definition of underwriter is not limited to traditional
underwriters in firm commitment IPOs, but also includes anyone who
otherwise meets the statutory definition.\910\ Anyone in this second
category is generally known as a ``statutory underwriter'' because,
although they may not be named as an underwriter in a given offering
and may not engage in activities typical of a
[[Page 14238]]
named underwriter, they nevertheless meet the definition of underwriter
in the statute. As such, the statute applies to such parties in the
same way as it would to a named underwriter in a firm commitment
offering. In addition, the Commission has previously stated 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, does not participate or have a direct
or indirect participation in any such undertaking, and does not
participate or have a participation in the direct or indirect
underwriting of such an undertaking.'' \911\
---------------------------------------------------------------------------
\908\ Letter from ABA.
\909\ Letter from SIFMA.
\910\ See 2 Louis Loss, Joel Seligman & 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.'').
\911\ Rule 144 Adopting Release, supra note 898, at 596.
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Several commenters disagreed with the discussion in the Proposing
Release regarding what it means to participate in a distribution.\912\
These commenters asserted that some courts have adopted a narrower view
of the concept of ``participation'' than what was discussed in the
Proposing Release.\913\ We acknowledge that some courts have declined
to find that parties other than named underwriters were acting as
distribution participants. These cases, however, arose in more
conventional capital raising contexts and were based on the particular
facts and circumstances before the court. It is far from clear that the
cases cited by the commenters should be determinative of how the
concepts of ``distribution'' and ``underwriter'' apply in the context
of a de-SPAC transaction, which combines elements of both a traditional
IPO and an M&A transaction.
---------------------------------------------------------------------------
\912\ Letters from Davis Polk, Kirkland & Ellis, NYC Bar, SIFMA,
Vinson & Elkins.
\913\ Many such commenters have pointed to In re Lehman Bros.
Mortgage-Backed Sec. Litig., 650 F.3d 167 (2d Cir. 2011) as evidence
that the Second Circuit has more narrowly defined the concept of
participant in a distribution. See letters from ABA, Cleary
Gottlieb, Committee on Capital Markets Regulation, Kirkland & Ellis,
SIFMA, Skadden, Vinson & Elkins, Winston & Strawn. There, the Court
held that the various credit rating agency defendants could not be
liable as underwriters section 2(a)(11). See also commenter
references to Silvercreek Mgmt., Inc. v. Citigroup, Inc., 346 F.
Supp. 3d 473, 507-09 (S.D.N.Y. 2018); In re REFCO, Inc. Sec. Litig.,
2008 WL 3843343, at *4 (S.D.N.Y. Aug. 14, 2008).
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We acknowledge that in a de-SPAC transaction, there is generally no
single party accepting securities from the issuer with a view to resell
such securities to the public in a distribution in the same manner as a
traditional underwriter in traditional capital raising. Nevertheless,
in a de-SPAC distribution, 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. Depending on the facts and circumstances, such an
entity could be deemed a ``statutory underwriter'' even though it may
not be named as an underwriter in any given offering or may not be
engaged in activities typical of a named underwriter in traditional
capital raising. Section 11 would apply as it would to anyone acting as
underwriter with respect to a registered de-SPAC transaction, and such
person will have liability for any material misstatement or omission in
the registration statement.\914\ Similarly such person would have any
defenses available to the parties upon whom the statute imposes
liability.\915\
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\914\ 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. 15 U.S.C. 77l(a)(2).
\915\ See the defenses to section 11 liability in 15 U.S.C.
77k(b).
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The prior discussion is not intended to signal that we believe that
every de-SPAC transaction or offering of securities generally involves
or needs the involvement of an underwriter. But where a distribution
and an underwriter are present, the party acting as underwriter will
need to perform the necessary due diligence of the disclosures made in
connection with the registered offering of securities or face full
exposure to liability without the benefit of the due diligence defense
under the Securities Act of 1933.\916\
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\916\ 15 U.S.C. 77k(b)(3).
---------------------------------------------------------------------------
iii. A De-SPAC Transaction Is Distinguishable From Other M&A
Transactions
By its terms, proposed Rule 140a would have applied only to SPAC
IPO underwriters that took steps to facilitate a de-SPAC transaction or
any related financing transaction, or otherwise participated (directly
or indirectly) in the de-SPAC transaction. However, as noted above,
commenters indicated that the proposal raised numerous questions about
whether other parties that similarly facilitate de-SPAC transactions
would be subject to liability and, whether a similar analysis applies
to other types of transactions, such as more ``traditional'' M&A
transactions (i.e., those not involving a SPAC).\917\
---------------------------------------------------------------------------
\917\ Letters from ABA, Andrew Tuch, Davis Polk, Ropes & Gray,
White & Case.
---------------------------------------------------------------------------
In response to these comments, we note that Rule 140a was not
intended to address any business combination transaction not involving
a de-SPAC transaction. Similarly, the guidance presented in this
release is not intended to influence current practice in traditional
M&A, as the two situations are readily distinguishable. As discussed
above,\918\ although de-SPAC transactions have many of the same
features of traditional M&A transactions, they have a different
purpose. While they take the form of a business combination, de-SPAC
transactions serve as the means by which a private company may enter
the public market for the first time and thus are the equivalent of an
IPO by the target company. Indeed, it is in recognition of this unique
method of conducting a public offering that we are adopting Rule 145a
and the co-registration requirements to account for the fact that the
combined company in a de-SPAC transaction is effectively acting as an
issuer engaged in a sale of its securities to the public shareholders
of the SPAC. We reiterate, however, that nothing in this release is
intended to limit or alter the definition of underwriter for purposes
of section 2(a)(11) of the Securities Act.
---------------------------------------------------------------------------
\918\ See supra section I and infra section IV.A.3.
---------------------------------------------------------------------------
IV. Business Combinations Involving Shell Companies
In response to concerns regarding the use of shell companies \919\
as a means of accessing the U.S. capital markets, the Commission
proposed new rules that would apply to business combination
transactions involving shell companies, which include de-SPAC
transactions. First, the Commission proposed 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. The Commission is adopting that rule as proposed as
discussed below. Second, the Commission proposed 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
[[Page 14239]]
in registration statements on Form S-1 or F-1 for an IPO.\920\ The
Commission is adopting those rules mostly as proposed, with certain
changes discussed below. The issues the Commission is addressing with
the adoption of both of these sets of final rules are common to these
shell company transactions, regardless of whether the shell company is
a SPAC.
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\919\ 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 41 for the
definition of ``reporting shell company.''
\920\ 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 18990 (May 6, 1985)].
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A. Shell Company Business Combinations and the Securities Act of 1933
1. Proposed Rule
The Commission proposed Rule 145a to address the use of reporting
shell companies as a means to enter the U.S. capital markets without
Securities Act registration and the related disclosures which are
intended to protect investors. The rule was proposed due to the
significant increase in such reporting shell company business
combination transactions, including through the use of a SPAC, in an
effort to provide reporting shell company shareholders with more
consistent Securities Act protections regardless of transaction
structure.\921\ Proposed Rule 145a would deem 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 to involve a sale of securities to the
reporting shell company's shareholders. While 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, the Commission stated that the exemption under
section 3(a)(9) of the Securities Act generally would not be available
for the sales covered by the proposed rule.\922\ The proposed rule
would not apply to the merger of an existing reporting shell company
into a new shell company where the surviving company remains a shell.
---------------------------------------------------------------------------
\921\ See Proposing Release, supra note 7, at 29488.
\922\ Id. at 29489.
---------------------------------------------------------------------------
2. Comments
Several commenters generally supported proposed Rule 145a.\923\
Some of these commenters pointed to investor protection concerns
related to SPACs and de-SPAC transactions and the benefits associated
with registration under the Securities Act.\924\ In this regard, some
commenters pointed out that the reform contemplated by Rule 145a would
help prevent certain disparities in regulation for transactions that
vary in legal structure but not in economic substance, ensuring that
unaffiliated security holders enjoy the protections that come from
investing in a registered offering.\925\ Other commenters noted that
the likely registration of de-SPAC transactions as a result of Rule
145a would result in enhanced liabilities for signatories to any
registration statement and underwriter and expert liability, thereby
ensuring investors receive fair and reliable information.\926\
---------------------------------------------------------------------------
\923\ Letters from Andrew Tuch, Bullet Point Network, ICGN,
Public Citizen. See also letter from Jorge Stolfi (May 30, 2022)
(``Jorge Stolfi'') (``Ideally, ANY merger involving a publicly
traded company should require evaluation and approval of the stock
of the proposed merged company's stock by the SEC, as if it was a
new security.'').
\924\ Letters from Andrew Tuch, ICGN, Jorge Stolfi, Public
Citizen.
\925\ Letter from Andrew Tuch.
\926\ Letter from IGCN.
---------------------------------------------------------------------------
Other commenters generally opposed, or expressed concerns
regarding, proposed Rule 145a.\927\ Some commenters discussed the
potential costs and effects of proposed Rule 145a.\928\ Certain
commenters questioned the Commission's authority to adopt Rule 145a
where, in commenters' views, no distribution of securities actually
occurs \929\ or for situations in which there is neither a vote nor any
securities changing hands as there is no traditional ``investment
decision.'' \930\ Some commenters asserted that proposed Rule 145a is
unnecessary for the protection of investors and that de-SPAC
transactions, in particular, are already accompanied by a full set of
disclosures.\931\ Other commenters asserted that proposed Rule 145a
conflicted with proposed Rule 140a because proposed Rule 140a implied
that there is a single distribution occurring between a SPAC's IPO and
the de-SPAC transaction.\932\
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\927\ Letters from ABA, Freshfields, Kirkland & Ellis, NYC Bar,
Vinson & Elkins, Winston & Strawn.
\928\ Letters from ABA, Freshfields, Loeb & Loeb, Vinson &
Elkins. See infra section VIII.
\929\ Letter from Vinson & Elkins.
\930\ Letter from ABA.
\931\ Letters from Freshfields, Kirkland & Ellis, NYC Bar,
Vinson & Elkins.
\932\ Letters from ABA, Kirkland & Ellis, SIFMA.
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One commenter asserted that not all shell company business
combinations are similar and, in particular, that de-SPAC transactions
are not comparable to shell company transactions with microcap
companies.\933\ Another commenter stated that it is unclear to them why
de-SPAC transactions should be treated differently than other reverse
mergers.\934\
---------------------------------------------------------------------------
\933\ Letter from Kirkland & Ellis.
\934\ Letter from Winston & Strawn.
---------------------------------------------------------------------------
A number of commenters requested that the Commission clarify and/or
modify aspects of proposed Rule 145a. In particular, a commenter
requested, if Rule 145a were adopted, that ``[i]n the spirit of
aligning treatment of IPOs and de-SPAC transactions, Rule 145 [17 CFR
230.145] should be revised to not apply to any transaction that Rule
145a applies to.'' \935\ The same commenter requested that the
Commission limit the scope of proposed Rule 145a so as not to apply to
business combination related shell companies.\936\ Another commenter
asked us to further clarify the application or operation of proposed
Rule 145a.\937\ In particular, this commenter asked that the Commission
clarify the intended trigger for the application of Rule 145a in a de-
SPAC transaction.
---------------------------------------------------------------------------
\935\ Letter from Vinson & Elkins.
\936\ Id.
\937\ Letter from ABA.
---------------------------------------------------------------------------
Finally, certain commenters questioned the Commission's explanation
of the application of section 3(a)(9) in Rule 145a transactions.\938\
In particular one commenter stated that they did not agree that the
``deemed exchange'' should be integrated with the exchange of the
private company's securities for interests in the SPAC, such that
section 3(a)(9) would be unavailable because a proxy solicitor is paid
to solicit proxies from SPAC shareholders in connection with the
shareholder vote on a de-SPAC transaction.\939\ The commenter asserted
that any vote associated with the de-SPAC transaction and the related
proxy solicitation is irrelevant to whether the transaction would be
deemed a sale under existing rules. A different commenter asserted that
if there is an exchange it is embodied in the redemption decision, not
the vote in connection with a de-SPAC transaction, and thus payment of
compensation for a proxy solicitor should not prevent reliance on
Securities Act section 3(a)(9).\940\
---------------------------------------------------------------------------
\938\ Letters from Kirkland & Ellis, Vinson & Elkins.
\939\ Letter from Kirkland & Ellis.
\940\ Letter from Vinson & Elkins.
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[[Page 14240]]
3. Final Rule
We are adopting Rule 145a as proposed. Currently, investors in
reporting shell companies may not always receive the disclosures and
other protections afforded by the Securities Act at the time when there
is a fundamental change in the nature of their investment due to the
business combination involving another entity that is not a shell
company.\941\
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\941\ Although other private liability may apply in situations
where disclosures are provided to investors in connection with
business combinations involving reporting shell companies, such
liability is not as extensive as the protections investors receive
under the Securities Act. See Douglas & Bates, supra note 581.
---------------------------------------------------------------------------
To address this, Rule 145a specifies that a sale occurs from the
post-transaction company to the existing shareholders of a reporting
shell company in situations where a reporting shell company that is not
a business combination related shell company enters into a business
combination transaction involving another entity that is not a shell
company.\942\ In these situations, Rule 145a deems there to be a share
exchange implicating the requirements and protections of section 5 of
the Securities Act because the interests the former reporting shell
company shareholders owned have been exchanged for something entirely
different--interests in an operating company in the course of a
transaction whereby the former reporting shell company provides the
operating company with access to the public markets. The sale
identified by the rule occurs regardless of whether securities are
changing hands in the business combination transaction, and thus the
transaction will need to be registered in accordance with the
Securities Act unless an exemption from registration is available. The
final rule also applies regardless of transaction structure or the form
of business combination (e.g., statutory merger, share exchange, stock
purchase, asset purchase, etc.).
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\942\ As noted above, certain commenters asserted that proposed
Rule 145a was inconsistent with proposed Rule 140a because proposed
Rule 140a implied that there is a single distribution occurring
between a SPAC's IPO and its de-SPAC transaction. Letters from ABA,
Kirkland & Ellis, SIFMA. As discussed in further detail above, we
are not adopting proposed Rule 140a; rather, we have noted that the
statutory definition of underwriter is sufficient to encompass any
person who sells for the issuer or participates in a distribution
associated with a de-SPAC transaction. See supra section III.F.
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As discussed in the Proposing Release, Rule 145a will apply to any
reporting shell company that has assumed the appearance of having more
than ``nominal'' assets or operations.\943\ However, as proposed and
for the avoidance of doubt, the final rule will not have any impact on
traditional business combination transactions between operating
businesses, including transactions structured as traditional reverse
mergers and traditional business combination transactions that make use
of only business combination related shells.\944\ In addition, we note
that Rule 145a is not intended to change the treatment of any
transaction, whether or not involving a shell company, under State or
other Federal laws, including, but not limited to, State corporate law
and the Internal Revenue Code. Finally, because it is premised upon the
change in the nature of a security when a reporting shell company
changes its status to an operating company, Rule 145a specifically does
not apply to a transaction where a reporting shell company combines
with another shell company. Below we respond to various objections
raised by commenters regarding the proposal and provide additional
explanation to clarify the scope and application of Rule 145a.
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\943\ Proposing Release, supra note 7, at 29489. We reiterate
the Commission's previous position on structuring transactions to
avoid shell company status in adopting the 2005 shell company
limitations. 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, 42236,
n.32 (July 21, 2005)] (``Shell Company Adopting Release''). Rule
145a as well as any other requirements applicable to reporting shell
company business combinations apply in situations where, in
substance, a shell company business combination is used to convert a
private company into a public company. For example, the requirements
applicable to reporting shell company business combinations adopted
herein will apply to any company that sells or otherwise disposes of
its historical assets or operations in connection with or as part of
a plan to combine with a non-shell private company in order to
convert the private company into a public one. This is true
regardless of whether such sale or disposal of the legacy assets or
operations occurs prior to or after the consummation of the business
combination.
\944\ By its terms, Rule 145a only impacts business combinations
involving shell companies that are not business combination related
shell companies. 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.'' Neither a
SPAC nor any entity formed for facilitating a transaction with a
SPAC is ever a business combination related shell company because
neither of these entities would be 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. See
Proposing Release, supra note 7, at 29489, n.243.
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i. Arguments Regarding No Investment or Vote
Some commenters questioned the Commission's authority to adopt Rule
145a because, in the commenters' view, a sale cannot be deemed to occur
in situations where no actual distribution of securities occurs \945\
or there is no traditional ``investment decision.'' \946\ Section
2(a)(3) of the Securities Act broadly defines the terms ``sale'' or
``sell'' to include every contract of sale or disposition of a security
or interest in a security, for value.\947\ Finding it necessary for
investors to have the protections of the Securities Act, the Commission
has previously applied this definition broadly, including in cases
where there is no affirmative decision from investors to buy or sell
securities. For example, the Commission has previously determined that
the following transactions may involve a sale even where there is no
vote or investment decision: spin-offs, split-offs and similar
transactions; \948\ short-form mergers; \949\ and distributions of
``free stock.'' \950\
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\945\ See letter from Vinson & Elkins.
\946\ See letter from ABA.
\947\ 15 U.S.C. 77b(a)(3).
\948\ See Spin Offs Release, supra note 899, at 11581 (The
Commission explained that the theory had been advanced that since a
sale is not involved in the distribution of the shares in a spin off
that registration is not required and that even if it is required,
no purpose would be served by filing a registration statement and
requiring the delivery of a prospectus since the persons receiving
the shares are not called upon to make an investment judgment.
However, such a theory ignores what appears to be the primary
purpose of the spin off in numerous circumstances which is to create
quickly, and without the disclosure required by registration, a
trading market in the shares of the issuer. As the Commission
explained, devices of this kind contravene the purpose, as well as
the specific provisions, of the Securities Act, which are to provide
full and fair disclosure of the character of the securities sold in
interstate and foreign commerce and through the mails, and to
prevent frauds in the sale thereof.).
\949\ See Registration of Certain Transactions Involving
Mergers, Consolidations and Acquisitions of Assets, Release No. 33-
5316 (Oct. 6, 1972) [37 FR 23631, 23633 (Nov. 7, 1972)] (Short form
mergers that do not require a vote or consent are not within the
scope of Rule 145(a). However, if a security is to be issued in such
short form mergers, the Commission stated that it is of the opinion
that the transaction involves an ``offer,'' ``offer to sell,''
``offer for sale,'' or ``sale,'' within the meaning of section
2(a)(3) of the Securities Act, and accordingly that such
transactions are subject to the registration provisions of the
Securities Act unless an exemption is available.).
\950\ See, e.g., In the Matter of Capital General Corp., Release
No. 33-7008 (July 23, 1993) (``Capital General'') in which the
Commission concluded that Capital General's unregistered
distributions of securities in a shell company as purported gifts
were a sale in violation of section 5 because value accrued to the
defendants ``by virtue of the creation of a public market for the
issuer's securities, and the fact that, as a public company, the
issuer could be sold for greater consideration.''
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[[Page 14241]]
Similarly, here, we have concluded that, notwithstanding the fact
that there may be no traditional investment decision or vote in
connection with a business combination transaction where a shell
company changes its status from a shell company to an operating company
through a business combination, such a change is nonetheless a sale of
securities for the purposes of section 2(a)(3) because investors are
exchanging their interests in a shell company for interests in a
combined public operating company, which is a transaction ``for
value.''
a. The ``For Value'' Requirement
Several commenters questioned whether the constructive sale would
be ``for value,'' within the meaning of this term in section
2(a)(3).\951\ We disagree with the commenter that asserted that,
similar to an ordinary M&A transaction, a de-SPAC transaction will not
result in a fundamental change in the nature of the security held by
SPAC stockholders that would constitute an exchange of value and, thus,
should not be deemed to constitute consideration in connection with the
business combination.\952\ Likewise, we disagree with the commenter
that asserted that even though the specific target company is
unidentified at the time of the SPAC's IPO, when acquired, a SPAC
security represents an investment in a target company because the sole
purpose of a SPAC is to engage in a business combination.\953\
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\951\ Letters from ABA, Kirkland & Ellis.
\952\ Letter from ABA.
\953\ Letter from Kirkland & Ellis.
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A change in a reporting shell company's status via a business
combination with an operating company results in the reporting shell
company investors effectively exchanging their security representing an
interest in the reporting shell company, an entity that has no or
nominal operations and 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, for a new security representing an interest in a combined
operating company.\954\ This is a change in the nature of the
investment, which does not occur in traditional M&A transactions.\955\
Although shell company shareholders may not actually be receiving
shares from the combined public operating company, they have
surrendered ``value'' for purposes of section 2(a)(3) because, unlike a
business combination not involving a reporting shell company and an
operating company, they have effectively surrendered their shares in a
public shell company for shares in a fundamentally different company, a
combined operating company. In addition, unlike a business combination
that does not involve a reporting shell company and an operating
company, such a transaction involves the use of a public shell to
create a public market for the combined operating company.\956\
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\954\ 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.
\955\ As discussed above, Rule 145a is limited to business
combinations that involve reporting shell companies. See supra
section IV.A.3.
\956\ See SEC v. Datronics Engineers, Inc., 490 F.2d 250 (4th
Cir. 1973) cert. denied, 416 U.S. 937 (1974) (``Datronics'')
(finding a sale under the Securities Act requiring registration or
an exemption from registration when a parent company, Datronics,
created shell subsidiaries for the purpose of merging them with
private companies. Datronics reserved approximately one-third of the
shares of the post-merger subsidiary for itself and distributed the
remainder to its shareholders without registration. Secondary market
trading of the shares began promptly. Datronics' only business
purpose was to create a trading market for the shares). See also SEC
v. Harwyn Industries Corp., 326 F. Supp. 943 (S.D.N.Y. 1971)
(``Harwyn''). In Harwyn, the court found a sale under the Securities
Act requiring registration or an exemption from registration when
each of several subsidiaries of the public parent acquired assets
from a corporation in exchange for a controlling interest in the
subsidiary. The parent then spun off shares of the subsidiaries to
its stockholders in an unregistered transaction, creating over-the-
counter trading markets in the shares. The court stated that
``value'' was received by Harwyn and other insiders ``in the form of
a contribution of substantially new assets to each subsidiary and
the creation of a public market in the shares.''
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Moreover, courts \957\ and the Commission \958\ have determined
that it does not matter what party in the course of a transaction
receives value--as long as any party receives value, the ``for value''
requirement in section 2(a)(3) is satisfied. In particular,
transactions involving the use of public shells to provide access to
the public markets have been found to constitute a sale under section
2(a)(3) of the Securities Act.\959\ We view a reporting shell company
(that is not a business combination related shell company) merging with
a private operating company as similarly providing access to the public
markets, and thus creating value. Therefore, the business combination
transaction is a sale which entitles the reporting shell company's
existing shareholders, who are the investors acquiring securities in
this sale, to all applicable protections provided by the Securities
Act.
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\957\ See Datronics, supra note 956, at 253-254 (``Value accrued
to Datronics in several ways. First, a market for the stock was
created by its transfer to so many new assignees--at least 1000,
some of whom were stockbroker-dealers, residing in various States.
Sales by them followed at once--the District Judge noting that `in
each instance dealing promptly began in the spun-off shares'. [sic]
This result redounded to the benefit not only of Datronics but, as
well, to its officers and agents who had received some of the spun-
off stock as compensation for legal or other services to the spin-
off corporations. Likewise, the stock retained by Datronics was
thereby given an added increment of value.''); Harwyn, supra note
956, at 954 (``We see no reason to construe Sec. Sec. 2[(a)](3) and
5 as requiring that the `value' requiring registration must flow
from the immediate parties who received the stock, in this case
Harwyn's shareholders.'').
\958\ See Capital General, supra note 950, at *11 (The
Commission found that ``the analysis of whether a sale occurred
focuses not only on whether the recipient of the securities gives
something of value in exchange for the securities, but also on
whether value is received from any other source. Harwyn Industries
and Datronics also make clear that the analysis must include the
entire transaction--the distribution of the issuer's shares, and
subsequent change in control of the issuer--to determine whether
value was received from the distribution.'').
\959\ Id.
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Finally, one commenter asked that we clarify within the rule text
that the sale contemplated by Rule 145a would be ``a disposition of a
security or an interest in a security . . . for value.'' \960\
Although, as we explain above, we agree with the commenter that such a
transaction would be ``for value,'' we do not believe it is necessary
to add that detail within the text of Rule 145a because the Securities
Act, itself, already contains the ``for value'' requirement in section
2(a)(3).\961\
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\960\ Letter from ICGN.
\961\ See 15 U.S.C. 77b(a)(3).
---------------------------------------------------------------------------
ii. No Additional Registration Statement Required Where a Shell Company
Business Combination Is Already Registered
If, in the course of a business combination with a reporting shell
company, the exchange of the shell company shares for securities of the
surviving combined operating business is already being registered, then
there is no need to register any additional transaction under the
Securities Act to comply with Rule 145a because the transaction that is
recognized as a sale by Rule 145a is already being registered. For
example, in many de-SPAC transactions, an actual exchange of securities
between the SPAC's existing shareholders and the target company or a
new holding company is already being registered at the time of the
business
[[Page 14242]]
combination transaction.\962\ In these circumstances, the transaction
that Rule 145a construes as a sale is typically already being
registered because the SPAC's existing shareholders are receiving
securities of the combined company in exchange for their shares of the
SPAC. Where Securities Act registration of this transaction is already
occurring, Rule 145a would not require the filing of an additional
registration statement. However, Rule 145a only applies with respect to
a shell company's existing security holders. The surviving company in a
de-SPAC transaction must give separate consideration as to whether a
registration statement or exemption would be required for any offer and
sale of securities to the target company's security holders.
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\962\ Share exchanges in which the target company survives the
business combination as the public entity are commonly referred to
as ``Target-on-Top'' structures. Alternatively, the combining
entities may also form a new holding company such that both holders
of the SPAC and the target company receive securities in the holding
company in exchange for their existing interests in the target
company.
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iii. Where Rule 145a Requires Registration in the Absence of an
Exemption
However, in transaction structures where reporting shell company
shareholders are not actually exchanging their shell company shares for
securities of a combined operating company, the parties will need to
consider Rule 145a in structuring the transaction. For example, in a
de-SPAC transaction structured such that the shareholders of the SPAC
keep their existing shares in the SPAC throughout the business
combination transaction, and those interests change into interests in
the combined company, the parties would need to consider the impact of
Rule 145a on the transaction and either register the transaction or
find an exemption for the constructive exchange between the shell
company's pre-transaction shareholders and the surviving combined
company.\963\ Such transactions would be situations implicating a Rule
145a constructive sale.
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\963\ This would typically be any transaction where the SPAC
survives the business combination as the public company. Such
transactions are commonly referred to ``SPAC-on-Top.'' Where
registration is required for a Rule 145a constructive sale, the
registration statement should register the exchange of the number of
outstanding shares that represent the interests of all shareholders
of the shell company immediately preceding the business combination.
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iv. Investor Protection and Liability
While we acknowledge, as several commenters have argued,\964\ that
certain transactions, such as de-SPAC transactions, may already be
accompanied by a set of disclosures provided to the reporting shell
company's shareholders, the timing and nature of such disclosures may
not be equivalent,\965\ and such disclosures do not have equivalent
levels of investor protection as there currently would be in a
transaction involving Securities Act registration. To the extent that
Rule 145a transactions are registered, registration would result in
enhanced liabilities for the registrant and other parties who have
liability under the Federal securities laws with respect to the
registration statement, including potential underwriter liability (as
described elsewhere in this release) and liability under Securities Act
section 11(a)(4) for experts. Given the change in the nature of an
investor's security when a reporting shell company engages in a
business combination transaction with an operating company, Rule 145a
is designed to ensure that shareholders more consistently receive the
full protections of Securities Act disclosure and liability provisions,
as applicable, and that such investor protections will apply regardless
of transaction structure.
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\964\ Letters from Freshfields, Kirkland & Ellis, NYC Bar,
Vinson & Elkins.
\965\ For example, investors in a reporting shell company
undergoing a business combination in which there is no shareholder
vote and no redemption feature currently may receive no disclosure
about the pending business combination until four business days
after closing at which time the shell company would be required to
file a Form 8-K to provide the disclosure required by Items 5.06 and
9.01. Even though pursuant to these items shareholders will receive
the equivalent of Form 10 information about the combined company,
investors will still not receive certain transaction-specific
information that would be required in a Securities Act registration
statement. For example, a Securities Act registration statement
would require disclosure of a summary of the terms of the
acquisition agreement and the reasons of the registrant and of the
company being acquired for engaging in the transaction. See Items
4(a)(1) and (2) of Form S-4.
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v. Market for Shell Company Mergers
A commenter asserted that the Commission had not previously found
it necessary to adopt a provision like Rule 145a to regulate shell
company mergers ``and was amenable at that time to allow such
transactions to proceed so long as public investors were given current
and complete information about the new business they owned.'' \966\ The
commenter further asserted that proposed Rule 145a no longer reflects
this Commission position on shell company mergers and can be expected
``to shut down [the shell company] market.'' \967\ We disagree.
Although the Commission adopted rules and rule amendments addressing
the use of Form S-8, Form 8-K, and Form 20-F by shell companies,\968\
the Commission is not precluded from revisiting shell company
transactions and considering the investor protections applicable to
these transactions. In this regard, we believe Rule 145a complements
the disclosure protections that the Commission adopted in 2005.\969\ In
addition, we do not believe that a requirement to register a
transaction or find an applicable exemption when a reporting shell
company becomes an operating company, would ``shut down the market.''
Indeed, depending on the structure, many business combinations
involving reporting shell companies are already registered under the
Securities Act.
---------------------------------------------------------------------------
\966\ See letter from Loeb & Loeb.
\967\ See id.
\968\ See Shell Company Adopting Release, supra note 943.
\969\ See id.
---------------------------------------------------------------------------
vi. Perceived Conflicts Between Non-SPAC Reporting Shell Companies and
SPACs
A commenter stated that an investment in a SPAC transaction is not
comparable to other reporting shell company business combinations.\970\
In particular, the commenter indicated that an investor in a non-SPAC
reporting shell company does not necessarily invest in a company
seeking a business combination opportunity. While we acknowledge that
non-SPAC shell companies typically have some investors that predated
the company's shell company status, this distinction is not relevant
for this purpose because the effect of a business combination
transaction in both cases is the same. Both involve a situation where a
public shell company is no longer going to be a shell company and the
nature of the investor's shares has changed to an investment in an
entirely new operating business. Moreover, the purpose of the
transaction is to provide the formerly private company with access to
the public markets. As such, the concerns that we are addressing in
adopting Rule 145a are present in both non-SPAC reporting shell company
business combinations and de-SPAC transactions.
---------------------------------------------------------------------------
\970\ See letter from Kirkland & Ellis.
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vii. Perceived Analogies to Traditional Reverse Mergers
A commenter argued that de-SPAC transactions should not be
distinguished
[[Page 14243]]
from other reverse mergers because the accounting predecessor in a
reverse merger is not currently deemed to be engaged in a distribution
of its securities to stockholders of the non-predecessor entity.\971\
We do not agree with the commenter's analogy because in traditional
mergers, regardless of the accounting treatment of the respective
parties, the issuer of securities whose offer and sale is registered is
the entity whose securities are being sold to investors (e.g., in a
share exchange, the entity whose securities are being offered in
exchange for outstanding securities of another entity).\972\ The
commenter further asserted that if the SPAC is not actually issuing
securities, the SPAC should not be a ``registrant'' and that, to the
extent Rule 145a is adopted, only the target should be considered a
registrant. We disagree, in part, with this argument. While we agree
that the target company must be a registrant in all registered de-SPAC
transactions,\973\ we see no basis to disregard the SPAC's status as a
registrant, where applicable, even in cases where the SPAC is issuing
securities only within the meaning of Rule 145a. Rule 145a is designed
to identify a sale between the combined company and pre-business
combination shareholders of the reporting shell company. For the
reasons discussed above, we view this to be a sale even if the
reporting shell company is not actually issuing securities. Given that
this constructive sale occurs even if shares do not actually change
hands, we decline to narrow Rule 145a by concluding that a sale occurs
in a de-SPAC transaction only by the target company. To the extent that
the choice of transaction structure may impact who is a registrant that
must sign a registration statement, that is a separate analysis.\974\
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\971\ Letter from Winston & Strawn.
\972\ Although the commenter seeks to analogize de-SPAC
transactions to reverse mergers in traditional M&A, such
transactions are readily distinguishable. With respect to other
reverse mergers not involving shell companies, although the entity
surviving the transaction may acquire new assets or new lines of
business as a result of the transaction, it is not changing the
actual nature of the investment--from a company with no operations
to an operating company--and it is not a means to provide a company
access to the public markets for the first time.
\973\ See supra section III.C.
\974\ Id.
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Additionally, some commenters asked for clarification regarding the
intended trigger for the application of Rule 145a in a de-SPAC
transaction \975\ and who would be the exchanging parties in a Rule
145a constructive sale.\976\ As discussed above, Rule 145a specifies
that a sale occurs from the post-transaction company to the existing
shareholders of a reporting shell company in situations where a
reporting shell company that is not a business combination related
shell company enters into a business combination transaction involving
another entity that is not a shell company. Pursuant to Rule 145a, all
existing holders of the reporting shell company's shares, at the time
of the business combination, are constructively exchanging their
securities for securities in the combined company, whether or not these
investors are actually exchanging any shares to complete the business
combination.\977\ The surviving public company will be the entity that
is constructively selling the securities of the combined company.
---------------------------------------------------------------------------
\975\ Letter from ABA.
\976\ Letter from Winston & Strawn.
\977\ See supra section IV.A.3.iii regarding when a shell
company must consider registering the sale identified by Rule 145a.
---------------------------------------------------------------------------
viii. Section 3(a)(9) Does Not Apply to Rule 145a Constructive Sales
Having considered the views of commenters regarding the application
of the section 3(a)(9) exemption in Rule 145a constructive sales,\978\
we continue to believe section 3(a)(9) would not be available for a
transaction that is a Rule 145a constructive sale. There are several
features of these transactions which cast doubt on the availability of
the exemption. In particular, section 3(a)(9) was designed to
facilitate ``certain voluntary readjustment[s] of [an issuer's]
obligations.'' \979\ A reporting shell company business combination
with an operating company is not merely a voluntary readjustment, but
the combination of such an entity with an entirely new business.
---------------------------------------------------------------------------
\978\ Letters from Kirkland & Ellis, Vinson & Elkins.
\979\ H.R. Rep. No. 152, 73rd Cong. 1st Sess. 25 (1933).
---------------------------------------------------------------------------
In addition, the four requirements of an exchange qualifying for
the section 3(a)(9) exemption are as follows:
Same issuer--the issuer of the old securities being
surrendered must be the same as the issuer of the new securities;
No additional consideration from the security holder;
Offer must be made exclusively with existing security
holders; and
No commission or compensation may be paid for soliciting
the exchange.
The failure to meet any single one of these requirements would be
enough to preclude use of the section 3(a)(9) exemption.
First, section 3(a)(9) is limited to securities exchanged by the
issuer with its existing shareholders. In the case where shareholders
of a reporting shell company constructively exchange their shares with
securities of the combined entity, we view the combined entity to be a
different issuer than the shell that originally issued the securities
even if the reporting shell company is the entity that survives the
merger. Although the combined company may retain the legal identity of
the shell for the purposes of State or local law, it is substantively a
new entity. To hold otherwise would place form over substance, given
that the use of the section 3(a)(9) exemption is premised upon an
investor's familiarity with the company in which they have already
invested.\980\
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\980\ The Commission has stated that the rationale for the
section 3(a)(9) exemption, in part, is that the market already has
adequate familiarity with the issuer, and thus, the protections
under the registration provisions of the Securities Act are not
necessary. See, e.g., Form for Registration of Securities When
Issuers Qualify Under Certain Proposed Rule, Release No. 33-5011
(Oct. 7, 1969) [34 FR 17033, 17033 (Oct. 18, 1969)] (``[T]he
exemption in section 3(a)(9) of the Act applies only where the
issuer of the convertible security and the security issuable on
conversion is the same. In such a situation the information
available to the trading markets through periodic reports filed by
the issuer under the Securities Exchange Act should provide an
adequate substitute for the disclosure which would be provided by
the registration and prospectus delivery provisions of the
Securities Act.'').
---------------------------------------------------------------------------
Second, the section 3(a)(9) exemption would not be available where
the Rule 145a constructive sale occurs in connection with the offer and
sale of securities to target company security holders. Such a sale
would not occur exclusively to the reporting shell company's existing
security holders. Thus, where interests in the existing reporting shell
are also being exchanged with the target company's shareholders, the
exchange would not be exclusively with the reporting shell company's
existing security holders and section 3(a)(9) would not be available to
exempt the deemed sale to the reporting shell company shareholders.
Finally, section 3(a)(9) is not available where a commission or
other remuneration is paid or given directly or indirectly for
soliciting participation in the deemed exchange. This would occur, for
example, if a proxy solicitor is compensated to solicit the reporting
shell company's shareholders for proxy votes in connection with the
business combination. Certain commenters asserted that section 3(a)(9)
of the Securities Act should not be rendered unavailable simply because
a proxy solicitor is paid to solicit proxies from SPAC shareholders in
connection with the shareholder vote on a de-SPAC transaction.\981\ As
discussed above, Rule 145a deems there to be a share exchange in
situations, such as de-SPAC
[[Page 14244]]
transactions, where a reporting shell company that is not a business
combination related shell company enters into a business combination
transaction involving another entity that is not a shell company. In
our view, if shareholder approval is being solicited on a matter that
is required to accomplish a reporting shell company business
combination,\982\ and compensation is being paid for such solicitation,
then that is, in substance, a solicitation for approval of the Rule
145a transaction. This is consistent with views the Commission
previously has expressed in analogous contexts. For example, the
Commission has previously taken the position that where a solicitation
of security holders is for the purpose of approving the authorization
of additional securities which are to be used to acquire another
specified company, and the security holders will not have a separate
opportunity to vote upon the transaction, the solicitation to authorize
the securities is also a solicitation with respect to the
acquisition.\983\ Accordingly, if a proxy solicitor is compensated to
solicit the reporting shell company's shareholders for proxy votes in
connection with the shareholder vote on a de-SPAC transaction, such
solicitation would mean the transaction would not qualify for the
section 3(a)(9) exemption for the Rule 145a constructive sale.
---------------------------------------------------------------------------
\981\ Letters from Kirkland & Ellis, Vinson & Elkins.
\982\ For example, approval of the business combination, the
authorization of additional shares, revisions to the articles of
incorporation, or a reincorporation to a different jurisdiction.
\983\ See, e.g., Note A to Schedule 14A (``Where any item calls
for information with respect to any matter to be acted upon and such
matter involves other matters with respect to which information is
called for by other items of this schedule, the information called
for by such other items also shall be given. For example, where a
solicitation of security holders is for the purpose of approving the
authorization of additional securities which are to be used to
acquire another specified company, and the registrants' security
holders will not have a separate opportunity to vote upon the
transaction, the solicitation to authorize the securities is also a
solicitation with respect to the acquisition.'').
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B. Financial Statement Requirements in Business Combination
Transactions Involving Shell Companies
After a business combination involving a shell company, the
financial statements of a business \984\ that will be a predecessor
\985\ to the shell company registrant become those of the registrant
for financial reporting purposes.
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\984\ We use the term ``business'' throughout, rather than
``private operating company'' (or ``target company'') as it
encompasses both terms. In the Proposing Release, the Commission
stated, in a business combination transaction involving a shell
company, the private operating company would meet the definition of
a ``business'' in Rule 11-01(d) of Regulation S-X. Proposing
Release, supra note 7, at 29491, n.253. In connection with the
adoption of final Rule 15-01(b) in this release, we reiterate that,
in a business combination transaction involving a shell company, a
``business'' includes but is not limited to a private operating
company or a target company that is not an asset acquisition.
\985\ 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.
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How a business 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 or F-1 (for IPOs) and the
requirements of registration statements on Form S-4 or F-4 (regarding
business combination transactions). 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.
In the Proposing Release, the Commission proposed amendments to its
forms and rules to more closely align the financial statement reporting
requirements in business combinations involving a shell company
registrant and a business with those in traditional IPOs.\986\ The
financial statement requirements that are being adopted under the final
amendments are based, in part, on current Commission staff guidance for
transactions involving shell companies.\987\ In proposing to codify
this guidance, the Commission sought to reduce any asymmetries between
financial statement disclosures in business combination transactions
involving shell companies and traditional IPOs.
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\986\ See Proposing Release, supra note 7, at 29490-29494. See
also proposed amendments to Forms S-4, F-4, and 8-K and to
Regulation S-X.
\987\ Commission staff has provided informal guidance to address
practical questions related to financial reporting issues for shell
company mergers in the FRM.
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1. Proposed Rule 15-01(a), Rule 1-02(d), and Form Instructions: Audit
Requirements
In the Proposing Release, the Commission proposed Rule 15-01(a),
amendments to Rule 1-02(d), and related new instructions to Forms S-4
and F-4.\988\ The Commission noted in the Proposing Release that these
changes would align the level of audit assurance required for the
target business in business combination transactions involving a shell
company with the audit requirements for an IPO.\989\ Specifically,
proposed Rule 15-01(a) provided that the term ``audit (or
examination),'' when used with respect to financial statements of a
business that is or will be a predecessor to a shell company,\990\
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. The Commission also proposed
to amend Rule 1-02(d) to include the following new provision: ``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).'' The combined effect of the proposals would be
that a predecessor to a shell company, including one that is a target
private operating company, would be required to comply with the same
definition of audit as in Rule 1-02(d) of Regulation S-X for its
audited financial statements as if it were filing for an IPO.
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\988\ See proposed Rule 15-01(a) of Regulation S-X, proposed
Rule 1-02(d), proposed Instruction 1 to Item 17(b)(7) of Form S-4
(adding requirement, in a de-SPAC transaction to provide the
financial statements required by Sec. 240.15-01 (Rule 15-01 of
Regulation S-X)), proposed Instruction 1 to Item 17(b)(5) of Form F-
4 (adding requirement, in a de-SPAC transaction to provide the
financial statements required by Sec. 240.15-01 (Rule 15-01 of
Regulation S-X) at Proposing Release, supra note 7, at 29491.
\989\ See Proposing Release supra note 39, at 29491.
\990\ See definition of the term ``business combination related
shell company'' in Securities Act Rule 405 and Exchange Act Rule
12b-2.
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2. Comments: Rule 15-01(a), Rule 1-02(d), and Form Instructions: Audit
Requirements
We received comments from several commenters that were supportive
of proposed Rule 15-01(a), because it would codify existing staff
guidance.\991\ No commenters opposed proposed Rule 15-01(a), the
proposed amendments to Rule 1-02(d), or the proposed new instructions
to Forms S-4 and F-4. One commenter recommended that we adopt an
exception to the audit requirements applicable to SPACs to permit the
audits of the financial statements of target companies that would
otherwise be eligible for multijurisdictional disclosure system
(``MJDS'') reporting to be able to use Canadian Generally Accepted
Auditing Standards (``Canadian GAAS'').\992\
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\991\ Letters from PwC, RSM US LLP (May 25, 2022) (``RSM'')
(``We believe the proposed rule, if finalized, would appropriately
codify current SEC staff guidance and align the level of audit
assurance required for the target private operating company in
business combination transactions involving a shell company with the
current requirements for an audit of a private operating company in
a traditional IPO to be performed in accordance with the standards
of the Public Company Accounting Oversight Board.''), Vinson &
Elkins.
\992\ Letter from ABA.
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As noted in section III.C above, one commenter said that co-
registration
[[Page 14245]]
would result in disclosure requirements that are inconsistent with the
proposed revisions to Regulation S-X, raising the issue of whether, if
there were multiple target companies, each company would be required to
provide financial statements audited in accordance with PCAOB standards
in the de-SPAC registration statement, rather than solely the
predecessor pursuant to proposed Rule 15-01(a) of Regulation S-X.\993\
This commenter indicated that co-registration would result in
inconsistencies with IPOs where there are multiple target companies.
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\993\ Letter from Vinson & Elkins.
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3. Final Rule 15-01(a), Rule 1-02(d), and Form Instructions: Audit
Requirements
After considering the comments, we are adopting Rule 15-01(a), the
amendments to Rule 1-02(d), and the instructions to Forms S-4 and F-4
largely as proposed, with a few modifications discussed below.
In the past, the Commission staff has advised shell companies that
it expects the financial statements of the predecessor, including a
private operating company, in a transaction involving a shell company,
to be audited under the same standards as a registrant in an IPO,
because, at consummation, the financial statements of the business
become that of the shell company.\994\ As noted in section III.C above,
the amendments to Form S-4 and Form F-4 will result in each business
that is reported as a company being acquired on Form S-4 or F-4 being
an issuer under section 2(a)(7) of the Sarbanes-Oxley Act. The final
amendments to Rule 1-02(d) have been modified to refer any entity that
is involved in a combination with a shell company to Rule 15-01(a),
which in turn provides rules as to the level of audit assurance
required depending on whether the entity in the combination is a
predecessor or non-predecessor. Consistent with existing staff guidance
and the proposal, an entity that is or will be a predecessor, whether
it is part of a shell company transaction or an issuer under the
amendments to Form S-4 and Form F-4 that is part of a shell company
transaction, will be required to have its financial statements audited
by an independent accountant in accordance with the standards of the
PCAOB. Consistent with the level of assurance in an IPO involving
multiple businesses today, the financial statements of an entity that
is not a predecessor that are included in a registration statement or
proxy statement \995\ filed for a combination with an issuer that is a
shell company may be audited in accordance with either the standards of
the PCAOB or U.S. GAAS as specified or permitted in the regulations and
forms applicable to those entities for the purpose of expressing an
opinion thereon.\996\ The final rule has been revised from that
proposed in order to codify existing staff practice that the
predecessor in a shell company transaction that does not involve a SPAC
and is not an issuer be audited by an independent accountant registered
with the PCAOB.\997\ In addition, the final rule refers to ``entity''
instead of ``issuer,'' as proposed, in order for the rule to apply to
shell company business combinations that are not de-SPAC transactions.
All issuers in a de-SPAC transaction would still need a PCAOB-
registered audit firm in accordance with section 102 of the Sarbanes-
Oxley Act to perform the audit. Further, these amendments that permit
U.S. GAAS audits for the financial statements of an issuer that is not
the predecessor apply to a small subset of de-SPAC transactions
involving multiple target companies where there may be an issuer that
is a not a predecessor.\998\
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\994\ See FRM at Sections 1140.5 and 2200.7 that discusses
``Audit Requirement for Non-Reporting Target'' in relation to Form
S-4 or F-4 when the registrant is a SPAC. In addition, Section
4110.5 includes a chart that outlines the staff's views on the
application of certain PCAOB requirements in various filings with
the SEC, which includes transactions involving a shell company.
\995\ For ease of reference, when we refer to disclosures in a
``proxy statement,'' the same discussion applies to ``information
statement.'' Information statements call for the same information as
a proxy statement. See Item 1 of Sec. 240.14c-101 (Schedule 14C).
\996\ See supra section III.C for additional discussion
regarding the definition of audit for issuers that are not
predecessors in business combination transactions with a shell
company involving multiple targets.
\997\ See FRM at Section 12250.1, which stipulates in a reverse
recapitalization by a non-public company with a public shell
company, the financial statements of the non-public company filed in
the Form 8-K or Form 20-F must be audited by a public accounting
firm registered with the PCAOB. Further, the auditor would need to
be independent under PCAOB and Commission independence rules for all
years required to be in the Form 8-K. For Form 20-F, the auditor of
the non-public company that is an FPI must comply with the PCAOB and
Commission independence rules for at least the latest fiscal year as
long as the auditor is independent in accordance with home-country
standards for earlier periods.
\998\ See infra section VIII.A. There were approximately 17 out
of 583 de-SPAC transactions between 1990-2022 that had two or more
targets.
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We are not adopting amendments to permit the use of Canadian GAAS
in connection with de-SPAC transactions involving a Canadian business.
Under current rules, a registrant must meet the MJDS requirements and
register on an MJDS form in order to rely on such accommodations.\999\
Also, under current rules, a SPAC that satisfies the MJDS-eligibility
requirements and is involved in a de-SPAC transaction involving a
Canadian business that also meets the MJDS-eligibility requirements
once combined is permitted to use Canadian GAAS post-combination if it
files on an MJDS form. Moreover, virtually all MJDS issuers provide
audit opinions under PCAOB standards, even though they are able to
provide audit opinions under Canadian GAAS, so it is unclear whether
any Canadian registrants would provide audit opinions under Canadian
GAAS even if that were an option at the time of filing the registration
statement.\1000\ MJDS accommodations go beyond the use of Canadian
GAAS.
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\999\ See Multijurisdictional Disclosure and Modifications to
the Current Registration and Reporting System for Canadian Issuers,
Release No. 33-6902 (June 21, 1991) [56 FR 30036 (July 1, 1991)]
(adopting the MJDS system).
\1000\ See General Instruction B to Form 40-F.
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In final Rule 1-02(d), we have deleted the proposed term
``financial statements of a company'' and replaced it with the term
``financial statements of an issuer.'' The use of ``issuer'' rather
than ``company'' will ensure consistency with related provisions in
Rule 15-01.
We have revised proposed Instruction 1 to Item 17(b)(7) of Form S-4
and Instruction 4 to Item 8 of Form 20-F by replacing ``provide the
financial statements required by Sec. 240.15-01 (Rule 15-01 of
Regulation S-X)'' with ``see Sec. 240.15-01 (Rule 15-01 of Regulation
S-X),'' because the financial statement requirements extend beyond Rule
15-01. We further revised Instruction 4 to Item 8 of Form 20-F by
clarifying that it is applicable for filings on Form 20-F filed
pursuant to General Instruction A.(d) of this form and for registration
statements, so that a shell company would not consider Rule 15-01 when
it is filing its annual report in due course before acquiring a
business. Also, for this Instruction 4, we revised ``shell company that
will acquire a business'' to ``shell company that is combining with a
business,'' in order for the reference to Rule 15-01 to apply in more
structures. Lastly, we have revised each of these instructions to
remove reference to the predecessor because the instruction would apply
to a non-predecessor as well.
4. Proposed Rule 15-01(b): Number of Years of Financial Statements
Currently, a registration statement in connection with a de-SPAC
transaction on Form S-4 or F-4 and a proxy or information statement
must include financial statements of the target
[[Page 14246]]
company for the same number of years as would be required by the target
company in an annual report and any subsequent interim periods, which
could require three years of comprehensive income, changes in
stockholders' equity, and cash flows even if the target company
qualifies as an EGC.\1001\ In contrast, in a traditional IPO under the
Securities Act, a registrant that qualifies to be an EGC may provide
only two years of these financial statements.\1002\
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\1001\ 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. Balance sheets as of the end of the
two most recent fiscal years are always required.
\1002\ Only two years of these financial statements may be
required in other scenarios, such as when the registrant is an SRC.
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In the Proposing Release, the Commission proposed Rule 15-01(b) in
order to align the number of fiscal years required to be included in
the financial statements for a business \1003\ that will be the
predecessor(s) in a shell company business combination with the
financial statements required to be included in a Securities Act
registration statement for an IPO of equity securities.\1004\ Proposed
Rule 15-01(b) provided that when the registrant is a shell company, and
the financial statements of a business that will be a predecessor(s) to
the shell company registrant are required in a registration statement
or proxy statement, the shell company registrant must file financial
statements of that business(es) in accordance with Sec. Sec. 210.3-01
through 210.3-12 and 210.10-01 (Articles 3 and 10 of Regulation S-X) or
Sec. Sec. 210.8-01 through 210.8-08 (Article 8), if applicable, as if
the filing were a Securities Act registration statement for the IPO of
that business's equity securities. The effect of proposed Rule 15-01(b)
would be that, when the registrant filing is a shell company (which
would include, but not be limited to, any SPAC), the Forms S-4 or F-4
or proxy statement may include only two years of statements of
comprehensive income, changes in stockholders' equity, and cash flows
for the business(es) that would be the predecessor when those
business(es) would qualify as an EGC and/or SRC if it were doing its
own IPO for equity securities.
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\1003\ The Commission proposed to use the term ``business'' in
this context, rather than ``private operating company'' (or ``target
company'' which would have been a different, potentially narrower,
set of persons than a ``business'' in the context of the proposed
rule's reference to ``any shell company,'' which thereby was not
limited to SPACs) 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.
\1004\ See Proposing Release, supra note 39, at 29491.
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5. Comments: Rule 15-01(b): Number of Years of Financial Statements
Several commenters supported this proposed rule, noting generally
that it would align the number of fiscal years required to be included
in the financial statements for a private company that will be the
predecessor in a shell company combination with those that would be
required for a traditional IPO.\1005\ No commenters opposed the
proposed rule.
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\1005\ Letters from Ernst & Young, PwC, RSM.
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6. Final Rule 15-01(b): Number of Years of Financial Statements
Having considered the comments received, we are adopting Rule 15-
01(b) largely as proposed, except for certain revisions, in order to
align the number of fiscal years required to be included in the
financial statements for a business that will combine with a shell
company registrant with the financial statements required to be
included in a Securities Act registration statement for an IPO of
equity securities. We are clarifying that a business that is combining
with a shell company registrant, beyond just the predecessor, must
comply with the financial statement requirements of Regulation S-X as
if the filing were a registration statement for its own IPO by removing
the reference to predecessor in this rule. Absent this revision, three
years of financial statements for a business that would be an EGC but
is not a predecessor may be required, which would exceed the two years
required for a predecessor that qualifies as an EGC.\1006\ We believe
that the predecessor and another business combining with the shell
company registrant should both be subject to Rule 15-01(b). Further, we
are replacing the proposed term ``the registrant'' with ``such
registrant'' to recognize there may be multiple registrants and promote
readability. Also, in the final sentence of the rule, we have revised
the phrase ``if it were filing a registration statement itself'' to
delete the word ``itself'' and replace it with the word ``alone''; we
believe the term ``alone'' will more clearly convey the intent of the
rule.\1007\ Last, we added to final Rule 15-01(b), as well as Rule 15-
01(c) and (d), ``for which audited financial statements are available''
to ``most recently completed fiscal year'' in order to conform to its
usage in Item 10(f)(2) of Regulation S-K.
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\1006\ Financial statements being provided under Rule 3-05 or 8-
04 of Regulation S-X, 17 CFR 210.8-06 (``Rule 8-06'' of Regulation
S-X), or Rule 3-14 of Regulation S-X for a business being acquired
by the predecessor are addressed in Rule 15-01(d) and the number of
years of financial statements provided would be based on the
significance test in those rules, which is two years or less.
\1007\ See supra sections III.C and IV.A. (discussing co-
registration of target companies and Rule 145a respectively).
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7. Proposed Rule 15-01(c): Age of Financial Statements
In the Proposing Release, the Commission proposed Rule 15-01(c)
regarding the age of predecessor financial statements. The proposed
rule provided that the financial statements of a business that will be
the predecessor to a shell company must comply with the requirements in
17 CFR 210.3-12 (``Rule 3-12'' of Regulation S-X) (Rule 8-08 when that
business would qualify to be an SRC based on its annual revenues as of
the most recently completed fiscal year, if it were filing a
registration statement alone) in determining the age of the financial
statements of the predecessor business in the registration statement or
proxy statement of the registrant.
8. Comments: Rule 15-01(c): Age of Financial Statements
Several commenters indicated support for proposed Rule 15-
01(c).\1008\ No commenters opposed the proposed rule.
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\1008\ Letters from ABA, PwC, RSM.
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9. Final Rule 15-01(c): Age of Financial Statements
We are adopting Rule 15-01(c) largely as proposed, with certain
modifications discussed below.
Currently--with respect to companies being acquired that do not
meet Form S-3 use requirements and are not subject to the reporting
requirements of either section 13(a) or 15(d) of the Exchange Act,
which is the case with most target companies in de-SPAC transactions--
Form S-4 (under Item 17(b)(7)) requires inclusion of financial
statements that would be required in an annual report sent to security
holders under 17 CFR 240.14a-3(b)(1) and (2) (Rule 14a-3(b)(1) and
(2)), if an annual report is required. In summary, Rule 14a-3(b)(1) and
(2) require the inclusion of consolidated audited balance sheets as of
the end of the two most recent fiscal years and consolidated audited
statements of income and cash flows for each of the three most recent
fiscal years prepared in accordance with Regulation S-X. Form F-4 is
similar in this respect.\1009\ The position of the
[[Page 14247]]
Commission's staff is that the requirement to update target company
financial statements in a Form S-4 is based on the obligation of the
registrant filing the Form S-4 to update under Rule 3-12 (or Rule 8-08
for a smaller reporting company). Rule 3-12 addresses the age of
financial statements at the effective date of a registration statement
or at the mailing date of a proxy statement.\1010\ A registration
statement on Form S-1 for an IPO would also require application of Rule
3-12 \1011\ (or Rule 8-08 \1012\ for SRCs), regarding the age of
financial statements at the effective date of a registration statement
or at the mailing date of a proxy statement. However, Rule 3-12
requires application of Rule 3-01(c), which permits reporting companies
45 more days to update annual financial statements when certain
conditions are met.
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\1009\ See Form F-4, Item 17(b)(5) (for company being acquired
that may not use Form F-3 and is not a reporting company, include
financial statements that would have been required to be included in
an annual report on Form 20-F); Form 20-F, Item 17(b) (The financial
statements shall disclose an information content substantially
similar to financial statements that comply with U.S. generally
accepted accounting principles and Regulation S-X.).
\1010\ See FRM 2200.8. As further described in Section 2045.5 of
the FRM, while the age of financial statements is dependent on the
registrant's requirements and eligibility for relief under Rule 3-
01(c) of Regulation S-X, after a reverse acquisition accounted for
as a business combination, the position of the Commission's staff is
that the accounting acquirer's ability to meet those requirements
should be considered in determining the need to update.
\1011\ See Rule 3-12 of Regulation S-X, which stipulates for
registrants that are not FPIs and are not large accelerated filers
or accelerated filers that the balance sheet date in an initial
registration statement must not be more than 134 days old, except
that third quarter data is timely through the 45th day after the
most recent fiscal year-end. For FPIs, Rule 3-12 requires compliance
with the age requirements in Form 20-F. Form 20-F requires financial
statements of an FPI must be as of a date within nine months of the
effective date of a registration statement, and audited financial
statements for the most recently completed fiscal year must be
included in registration statements declared effective three months
or more after fiscal year-end.
\1012\ See 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.
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Absent this amendment, the required financial statements of each
company being acquired in a Form S-4, because the shell company is a
reporting company, would not have the same age requirements as those in
the context of an initial registration statement.
Thus, in order to align the age requirements for financial
statements for each business involved in a business combination with a
shell company filed on Form S-4 or F-4 with those for an issuer in an
IPO on Form S-1 or F-1, we are adopting final Rule 15-01(c). Further,
we revised the rule to clarify that Rule 3-12 or 8-08 must be applied
to each business involved in a business combination with a shell
company as if the financial statements were included in an initial
registration statement. Based on the Commission staff's experience
reviewing filings in de-SPAC transactions and other shell company
business combination transactions, Rule 15-01(c) is consistent with
existing market practice for the age of financial statements, where
they are updated similar to an IPO. We further revised the rule to
clarify that the rule applies to any business being acquired by a shell
company, and not only a predecessor, that is included in registration
statement under Item 17 of Form S-4, in order to ensure that the
financial statements of non-predecessors are subject to the same age
requirements. Also, in the parenthetical in the final sentence of the
rule, we have revised the phrase ``if it were filing a registration
statement itself'' to delete the word ``itself'' and replace it with
the word ``alone''; we believe the term ``alone'' will more clearly
convey the intent of the rule.\1013\
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\1013\ See supra sections III.C and IV.A. (discussing co-
registration of target companies and Rule 145a respectively).
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10. Proposed Rules: 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-
14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a
Predecessor
Currently, the financial statements of a business 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.\1014\ Aside from the predecessor, the financial statements
of any other businesses that have been, or are probable to be, acquired
may also be required.\1015\ For example, ``Shell Company A'' and
``Target Business B'' are part of a business combination and a Form S-4
registration statement is filed. Target Business B, the predecessor,
acquired ``Company C'' before the Form S-4 was filed, so Company C is
not another company being acquired by Shell Company A (the registrant)
as Company C will have been subsumed into Target Business B before the
Form S-4 is filed. The proposed rules and amendments addressed the
financial reporting required for Company C in this non-exclusive
example.
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\1014\ See Item 17 of Form S-4 and Form F-4; Sec. 240.14A-3(b);
Items 13 and 14 of Schedule 14A.
\1015\ See 17 CFR 230.408(a) (``Rule 408(a)'' under the
Securities Act); 17 CFR 240.12b-20 (``Rule 12b-20'' under the
Exchange Act).
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Commission staff has taken the position that existing Securities
Act Rule 408(a) and Exchange Act Rule 12b-20, elicit financial
statements of a business (e.g., ``Company C'' in the above example)
acquired or probable of being acquired by the target business (e.g.,
``Target Business B'' in the example) in a shell company business
combination filed in a registration statement or proxy statement only
when omission of those financial statements would render the target
business's financial statements substantially incomplete or
misleading.\1016\ The Commission proposed Rule 15-01(d) of Regulation
S-X to reduce the judgment required in determining when to include
financial statements of a business other than the shell company
registrant or its predecessor and instead provide certainty by
requiring application of Rule 3-05 or Rule 8-04 of Regulation S-
X,\1017\ aligning with the reporting in an IPO when there is a similar
acquisition. These provisions would dictate when the financial
statements of a non-predecessor business \1018\ that has been acquired,
or is probable to be acquired, by a shell company registrant or its
predecessor should be included in the registration statements or proxy
statements related to the business combination.
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\1016\ See FRM at Section 2005.5. If a company being acquired
that is not the predecessor acquired a business, the registrant must
evaluate Securities Act Rule 408 and disclose the financial
statements for that acquired business when omission of those
financial statements would render the financial statements for the
company being acquired substantially incomplete or misleading.
\1017\ Rule 8-04 applies when the registrant or, depending on
the context, its predecessor would qualify to be an SRC based on its
annual revenues as of the most recently completed fiscal year if it
were filing a registration statement alone.
\1018\ For ease of reference, in this section, when we refer to
``business,'' we also mean ``real estate operation.'' When we refer
to ``Rule 3-05,'' we also mean Rule 3-14 of Regulation S-X. When we
refer to ``Rule 8-04,'' we also mean 17 CFR 210.8-06 (``Rule 8-06''
of Regulation S-X).
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Since proposed Rule 15-01(d) would require the application of Rule
3-05 or 8-04, which in turn would require application of 17 CFR 210.1-
02(w)(1) (``Rule 1-02(w)(1)'' of Regulation S-X) in measuring
significance, the Commission also proposed amendments to Rule 1-
02(w)(1) and a new Rule 15-01(d)(1) to change how significance is
measured in a shell company business combination transaction.
The existing significance tests in 17 CFR 210.1-02(w) (``Rule 1-
02(w)'' of Regulation S-X), as applied to acquisitions involving shell
companies where significance would be measured
[[Page 14248]]
against the shell company registrant, appeared inconsistent with the
reasons underlying the sliding scale approach adopted in Rule 3-05 (or
Rule 8-04). The sliding scale approach recognizes that certain
acquisitions have a greater impact on a company than others and those
acquisitions should result in additional financial information about
the acquired business. The significance tests in Rule 1-02(w) \1019\ do
not address the scenario when there is both a shell company registrant
and a business that is or will be its predecessor. Because a shell
company has nominal activity and therefore the denominator for the
tests would be minimal, the application of such tests generally result
in an acquisition being significant at the maximum level, which
suggests that the existing sliding scale for business acquisitions may
not be effective in the context of a shell company business combination
transaction.\1020\ In order to address the ineffectiveness of the
existing sliding scale in these specific transactions, the proposed
amendments to Rule 1-02(w) would require the significance of the
acquired business that is not the predecessor to be calculated using
the predecessor's financial information as the denominator instead of
that of the shell company registrant.
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\1019\ 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.
\1020\ See Proposing Release, supra note 7, at 29492.
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The Commission also proposed Rule 15-01(d)(2) to specify when the
proposed Rule 15-01(d)-required financial statements, through
application of Rule 3-05 (or Rule 8-04), for a business that is not the
predecessor to a shell company, would be required to be filed if such
financial statements are properly omitted from a registration,
information, or proxy statement under Regulation S-X. Specifically, 17
CFR 210.3-05(b)(4)(i) (``Rule 3-05(b)(4)(i)'' of Regulation S-X)
provides that financial statements of a recently acquired or to be
acquired business may be omitted from a registration or proxy statement
when the significance of that acquisition, under the required
significance tests in Rule 3-05, is measured at 50% or less. Rule 3-05
further provides that such omitted financial statements must be filed
under cover of Form 8-K within 75 days after consummation of the
acquisition.\1021\ A company that is not required to register a class
of securities under the Exchange Act is not required to file a current
event report, such as Form 8-K, and we are not changing that in our
final rules.\1022\ However, the Commission proposed in Rule 15-01(d)(2)
that the financial statements of the business acquired by the shell
company or the predecessor that were properly omitted under Rule 3-05
from the previously-filed registration or proxy statement would be
required as part of the already-required Item 2.01(f) Form 8-K filed
with Form 10 information within four business days of the de-SPAC
transaction. The Commission also proposed amendments to Rules 3-05 and
3-14 to refer to Rule 15-01(d)(2) for completeness and to avoid
confusion on when such financial statements are due when a shell
company business combination transaction is involved.
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\1021\ See Rule 3-05 (generally requiring the filing of
financial statements of an acquired business when the conditions in
Rule 1-02(w) related to significant subsidiary exceed 20%).
\1022\ As a co-registrant, target companies will have an
Exchange Act reporting obligation. See supra sections III.C and IV.A
(discussing co-registration of target companies and Rule 145a
respectively).
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11. Comments: Rules 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-
14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a
Predecessor
Several commenters expressed general support for proposed Rule 15-
01(d) or general support for proposed changes to Regulation S-X.\1023\
However, each of the commenters who were generally supportive of Rule
15-01(d) and a few other commenters suggested changes to Rule 15-
01(d)(2).\1024\ Specifically, these commenters observed that the
proposed rule could accelerate the filing of financial statements of an
acquired business in a Form 8-K that have previously been omitted from
a registration statement, compared to the timing that would be required
after an IPO, and recommended that we conform the timing.\1025\ After
an IPO, a registrant must file the omitted financial statements no
later than 75 days after consummation of the acquisition.\1026\ In
contrast, commenters suggested the proposed rule could give the
combined company insufficient time to prepare the financial statements
of the acquired business because the proposed rule could require the
omitted financial statements to be filed sooner than 75 days after the
relevant acquisition in cases where the Form 8-K filed in connection
with the consummation of the de-SPAC transaction is filed earlier than
71 days after such acquisition.\1027\
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\1023\ Letters from ABA (expressing support for Rule 15-01(d)
but suggesting changes to Rule 15-01(d)(2)), Freshfields (expressing
support for Rule 15-01(d)(1) but suggested changes to proposed Rule
15-01(d)(2)), ICGN (supporting Article 15), PwC (expressing support
for Regulation S-X changes to align with an IPO with respect to
acquisitions by a predecessor but suggesting changes be made to
proposed Rule 15-01(d)(2)), Vinson & Elkins (expressing support for
Rule 15-01 but suggesting changes to proposed Rules 15-01(d)(2) and
15-01(e)), Winston & Strawn (expressing general support for
Regulation S-X proposed amendments but suggesting changes to
proposed Rule 15-01(d)(2)). See also letters from BDO, Deloitte &
Touche LLP (June 7, 2022) (``Deloitte''), Ernst & Young, KPMG, Loeb
& Loeb, RSM (expressing general support for proposed Regulation S-X
amendments).
\1024\ Letters from ABA, BDO, Freshfields, Goodwin, PwC, Vinson
& Elkins, Winston & Strawn.
\1025\ Id.
\1026\ Rule 3-05(b)(4)(ii) of Regulation S-X.
\1027\ Letters from ABA, Freshfields, Goodwin, Vinson & Elkins,
Winston & Strawn.
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One commenter recommended ``that the Commission address the
interaction between proposed Rule 15-01(d)(2) of Regulation S-X and the
company's reporting requirements under section 15(d) as it relates to
recently acquired businesses (or real estate operations) which are
excluded from a registration or proxy or information statement prepared
in connection with the de-SPAC transaction.'' \1028\
---------------------------------------------------------------------------
\1028\ Letter from PwC.
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This same commenter also recommended that Rule 15-01(d) reference
Rule 3-14 for real estate operations the same way the proposed rule
referenced Rules 3-05 and 8-04 for businesses so that the acquisition
of real estate operations is explicitly addressed.\1029\
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\1029\ Id.
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Several commenters supported,\1030\ and no commenters opposed, the
proposed amendments to Rule 1-02(w)(1) that required that the
significance of acquired businesses be measured using the predecessor's
financial information as the denominator, instead of the shell
company's, because use of the predecessor's financial statements for
the denominator should produce results more consistent with the sliding
scale approach in Rule 3-05.
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\1030\ Letters from ABA, Freshfields, PwC, RSM, Vinson & Elkins.
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12. Final Rules 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-14(b)(3)(ii):
Acquisition of a Business or Real Estate Operation by a Predecessor
We are adopting new Rule 15-01(d) introductory text and (d)(1) and
(2), as well as the amendments to Rules 1-02(w)(1), 3-05, and 3-14,
substantially as proposed, except for certain modifications discussed
below. New Rule 15-01(d) and corresponding amendments more closely
align the financial reporting of an acquired business in a shell
company business combination transaction reported on
[[Page 14249]]
Form S-4 or F-4 or proxy statement with that in an IPO by requiring
application of Rule 3-05 or 8-04 of Regulation S-X to acquisitions of a
business or real estate operation, respectively, by a predecessor to
the shell company. They are also consistent with the Commission staff
observations that current market practice applies Rule 3-05 (or Rule 8-
04) to acquisitions by the business that will be the predecessor.
In the context of a registration statement on Form S-4 or F-4, the
acquired business financial statements addressed in Rule 15-01(d) that
are filed pursuant to Rule 3-05 do not represent financial statements
of a company being acquired that would be a co-registrant in a shell
company business combination.\1031\ For example, the financial
statements of a business when its acquisition is cross-conditioned on
the acquisition of a predecessor would ordinarily fall under Item 17 of
Form S-4 or Form F-4, rather than under Rule 3-05. Judgment may be
required in other examples when determining whether the financial
statements of a business would be required under Item 17 of Form S-4 or
Form F-4 \1032\ as a ``company being acquired'' or under the provisions
of Rule 3-05 for a significant acquisition.
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\1031\ See infra section III.C.
\1032\ We are adopting as proposed the amendment to Instructions
to paragraph (b)(5) and (b)(6) of Item 17 of Form F-4. This
amendment requires a reconciliation under Item 18 of Form 20-F when
a shell company acquires a foreign business that will be a
predecessor that prepares financial statements on the basis of a
comprehensive body of accounting principles other than U.S. GAAP.
Absent this amendment, the foreign business being acquired would
present a reconciliation under Item 17 of Form 20-F, which does not
include the disclosures required under U.S. GAAP. A predecessor that
applies IFRS, as adopted by the IASB, in financial statements
presented in Form F-4 would not have to present a reconciliation to
U.S. GAAP, pursuant to Item 17(c) of Form 20-F.
---------------------------------------------------------------------------
New Rule 15-01(d)(1) directs registrants to Rule 1-02(w)(1) in
order to determine how significance is measured in certain shell
company business combination transactions. New Rule 15-01(d)(2)
clarifies when and how financial statements for a recently acquired or
to be acquired business should be filed.
We have made a few revisions to the final rule in response to
comments received and some other revisions to improve the clarity of
the final rules. First, consistent with commenters' suggestions,\1033\
we revised Rule 15-01(d)(2) from the proposal so that when the
financial statements of a recently acquired business that is not or
will not be the predecessor to the shell company are omitted from a
registration statement or proxy statement pursuant to Rule 3-
05(b)(4)(i) of Regulation S-X, those financial statements must be filed
in a Form 8-K by the later of the filing of the Form 8-K filed pursuant
to Item 2.01(f) or 75 days after consummation of the acquisition. This
revision does not accelerate the filing of such financial statements
when compared to the application of Rule 3-05(b)(4)(i) outside of a
shell company transaction.
---------------------------------------------------------------------------
\1033\ Letters from ABA, Freshfields, Vinson & Elkins, Winston &
Strawn. See supra note 1027.
---------------------------------------------------------------------------
In response to a comment about the interaction of this rule and
section 15(d) of the Exchange Act,\1034\ which includes requirements
relating to periodic reporting on Forms 10-K and 10-Q and current
reporting on Form 8-K, the revised rule specifies that a business whose
financial statements are omitted from the registration statement in
reliance on Rule 3-05(b)(4)(i) will be required to file those financial
statements in a Form 8-K.
---------------------------------------------------------------------------
\1034\ Letter from PwC.
---------------------------------------------------------------------------
Next, we have revised Rule 15-01(d) to add references to Rule 3-14
and Rule 8-06 regarding real estate operations, which were
inadvertently omitted from the proposal, as noted by a commenter.\1035\
For similar reasons we have also revised Rule 15-01(d)(2) to change the
reference from ``recently acquired business'' to ``recently acquired
business or real estate operation.'' We reference ``real estate
operation'' in the context of Rule 15-01(d) and not the other rules in
Article 15 because a real estate operation can meet the definition of a
business under 17 CFR 210.11-01(d) (``Rule 11-01(d)'' of Regulation S-
X), but the permitted financial statement presentation for an acquired
real estate operation (Rule 3-14) is different than that for other
acquired businesses (Rule 3-05). Where the rules in Article 15, other
than Rule 15-01(d), refer to ``business,'' such references contemplate
a real estate operation.
---------------------------------------------------------------------------
\1035\ Id.
---------------------------------------------------------------------------
Unrelated to commenter feedback, we revised the parenthetical in
Rule 15-01(d) related to when Rules 8-04 and 8-06 for SRCs will apply
to clarify that these rules would apply when the predecessor qualifies
as an SRC.
We also made several technical changes to improve the clarity of
each of final Rule 15-01(d) introductory text and (d)(1) and (2). In
final Rule 15-01(d), in place of the proposed term ``when that
business,'' we have inserted instead the term ``when the predecessor.''
This change will help clarify which entity's SRC status is being
referred to. Also, we have changed the term ``itself'' to ``alone'' for
the same reasons the same change was made in Rule 15-01(b) and (c) as
discussed above.\1036\
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\1036\ We also changed the plural term ``businesses'' to
singular ``business'' and changed the related plural verb ``are'' to
singular ``is'' in Rule 15-01(d), as well as in Rule 15-01(d)(1), in
order to be consistent throughout Rule 15-01(d).
---------------------------------------------------------------------------
We also removed from final Rule 15-01(d) references to acquisitions
by a shell company, because we determined that the financial statements
for acquisitions by a shell company would be required by Item 17 of
Form S-4 or F-4 as a ``company being acquired'' and not required
through application of Rule 3-05 or 3-14. Relatedly, we revised Rules
1-02(w), 3-05, and 3-14 so that they pertain to acquisitions by a
predecessor rather than an acquisition by a shell company. Lastly, we
reorganized some of the language in Rule 15-01(d)(2) to improve the
readability of the requirement.
We are adopting the amendments to Rule 1-02(w) largely as proposed,
except for two modifications discussed below. Final Rule 1-02(w)
provides for the use of the predecessor's financial statements as the
denominator in the significance tests, which determine when financial
statements are required for an acquired business, instead of those of
the shell company registrant. We expect the rule will produce results
more consistent with the objective of the sliding scale approach in
Rule 3-05 and appropriately differentiate for investors those
acquisitions that have a greater impact to the predecessor than others.
In the final rule, we made some technical changes and the
modification already discussed above, in relation to final Rule 15-
01(d), to remove the reference to acquisitions by a shell company. In
the final rule, we also added the terms ``consolidated'' before
``predecessor'' and ``those of'' before ``the shell company
registrant'' as well as eliminated ``the subsidiaries consolidated''
for clarity. We also added ``shell company'' before ``registrant'' in
order to clarify which registrant should not be used as part of the
significance test.
13. Proposed Rule 15-01(e): Financial Statements of a Shell Company
Registrant After the Combination With Predecessor
In recent years, the Commission staff has received questions on
whether the historical financial statements of a shell company
registrant are required in filings made after a business combination.
The Commission proposed new Rule 15-01(e) to allow a shell company,
including a SPAC, to exclude
[[Page 14250]]
the financial statements of the shell company, for periods prior to a
business combination that results in the combined entity no longer
being a shell company, once the following conditions have been met: (1)
the financial statements of the predecessor, as that term is used in
financial reporting, have been filed for all required periods through
the acquisition date, and (2) the financial statements of the combined
entity registrant include the period in which the acquisition was
consummated, which would also include the accounting for the business
combination.
In the example of a de-SPAC transaction, assuming the first
condition is met, the financial statements of the SPAC, as a shell
company, would generally no longer be relevant or meaningful to an
investor once the financial statements of the registrant include the
period in which the de-SPAC transaction was consummated for any
filing.\1037\
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\1037\ 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.
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14. Comments: Rule 15-01(e): Financial Statements of a Shell Company
Registrant After the Combination With Predecessor
Several commenters were supportive of the proposed rule.\1038\ One
of these commenters expressed the view that shell company financial
statements would no longer be relevant or meaningful once the financial
statements of the registrant include the period in which the
combination was consummated.\1039\
---------------------------------------------------------------------------
\1038\ Letters from Ernst & Young, PwC, RSM.
\1039\ Letter from RSM.
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Two commenters, however, asserted that the financial statements of
the shell company should no longer be required in any filings made
after consummation of a transaction because the shell company's
financial statements would no longer be relevant or material.\1040\ Two
commenters highlighted an inconsistency between the proposed rule text
and the discussion of the proposed rule in the Proposing Release as it
relates to one of the conditions for when the shell company's financial
statements may be omitted.\1041\
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\1040\ Letters from Ernst & Young, Freshfields. See also letter
from Vinson & Elkins, which stated: ``We disagree that financial
statements of the SPAC could ever be material to an investor in the
combined company, as surmised by the SEC in the Proposing Release,
but if they were material then Exchange Act Rule 12b-20 or
Securities Act Rule 408(a) would require their disclosure.''
\1041\ Letters from Freshfields, Vinson & Elkins (both
highlighting that Rule 15-01(e), as proposed, would permit the
financial statements of the shell company for periods prior to the
consummation of the acquisition to be omitted once the financial
statements of the predecessor have been filed for all required
periods through the acquisition date, whereas the Proposing Release
refers to financial statements of the shell company (and not the
predecessor)). See Proposing Release, supra note 7, at 29493.
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15. Final Rule 15-01(e): Financial Statements of a Shell Company
Registrant After the Combination With Predecessor
We are adopting Rule 15-01(e) substantially as proposed, except for
modifications discussed further below. The final rules reflect our
belief that the financial statements of a shell company would be
necessary and material to an investor until such time that the combined
registrant's financial statements include the period in which the
acquisition was consummated.
We disagree with commenters' assertions that the shell company's
financial statements would provide no material information prior to the
point in time when the financial statements of the combined entity
registrant include the period in which the acquisition was consummated.
Specifically, we note that the shell company's financial statements may
include material information about its equity or outstanding derivative
financial instruments. While we understand, as a commenter
asserted,\1042\ that application of Securities Act Rule 408(a) may
result in inclusion of the shell company's financial statements in a
registration statement because of a determination that they are
material, we believe that the new rule appropriately eliminates a
determination that could result in the financial statements' exclusion
and the related regulatory uncertainty involved in such judgment
because we believe the shell company's financial statements would be
material. The staff has not objected to the registrant excluding the
historical financial statements of the shell company from periodic
reports once the financial statements include the period in which the
acquisition or recapitalization was consummated.\1043\ Further, in the
staff's experience with reviewing these filings, the registrant has
continued to include the historical shell company's financial
statements until that time period. Thus, the new rule codifies the
existing staff view and current practice.
---------------------------------------------------------------------------
\1042\ Letter from Vinson & Elkins.
\1043\ Proposing Release, supra note 7, at 29493.
---------------------------------------------------------------------------
In response to the comments on the inconsistency between the
proposed rule text and the discussion in the Proposing Release, we
added ``registrant'' to ``shell company'' for clarity that the shell
company in this rule represented a registrant. As a registrant, the
shell company is required to file financial statements for all required
periods through the acquisition date under Exchange Act section 13(a)
or 15(d) and rules thereunder.
In final Rule 15-01(e), we have made a change from the proposal to
include a provision that has a similar effect as the proposed
amendments to Rule 11-01(d) would have had if we had adopted them. This
added provision states that if a registrant \1044\ is to acquire or has
acquired a shell company, the financial statements of the shell company
are required to be included in any filing that requires the
registrant's financial statements, as if the shell company were the
registrant for the filing, unless the financial statements of the
registrant include the period in which the acquisition of the shell
company was consummated. As also discussed below, as a result of this
change, it is unnecessary to adopt proposed Rule 11-01(d) which would
have had a similar effect.
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\1044\ A registrant that would be required to include the
financial statements of a shell company is a new holding company
that is created where a SPAC and a target company merge into that
new holding company.
---------------------------------------------------------------------------
The final rule will provide clarity as to when the financial
statements of a shell company are required after a shell company
business combination transaction. The final rule applies regardless of
whether the business combination is accounted for by the shell company
as a forward acquisition of the business, which may be a private
operating company, or as a reverse recapitalization of the
business.\1045\ Under the final rule, the historical financial
statements of the shell company will be required in all filings that
require financial statements (including registration statements and the
Form 8-K with Form 10 information filed following the de-SPAC
transaction) filed prior to the first periodic report, such as Form 10-
Q, that includes those post-business combination financial
statements.\1046\ For example, under the final rule, registration
statements filed before the first periodic report filed with the post-
business combination financial statements, such as a registration
statement to register the resale of shares issued in connection with a
PIPE financing filed shortly after the de-SPAC
[[Page 14251]]
transaction, will require the SPAC's financial statements.
---------------------------------------------------------------------------
\1045\ A reverse recapitalization is considered to be an
equivalent to the issuance of stock by a private company for the net
monetary assets of a shell company accompanied by a
recapitalization.
\1046\ Proposing Release, supra note 7, at 29493.
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16. Proposed Rule 11-01(d)
The Commission proposed to amend Rule 11-01(d) of Regulation S-X to
state that 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.\1047\ The Commission noted in the Proposing
Release that, given the significant equity transactions generally
undertaken by a SPAC, the Commission believes 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.
---------------------------------------------------------------------------
\1047\ Proposing Release, supra note 7, at 29494.
---------------------------------------------------------------------------
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.\1048\
---------------------------------------------------------------------------
\1048\ Proposing Release, supra note 7, at 29493. By contrast,
application of Rule 3-05 to a significant business under Rule 11-
01(d) requires its financial statements to continue to be filed in
any subsequent registration statements until the acquired business
is included in the registrant's results for at least nine months
subsequent to acquisition. As proposed, the application of Rule 3-05
would require the SPAC financial statements for a longer duration
subsequent to the de-SPAC transaction than the application of
proposed Rule 15-01(e).
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Further, the proposed amendment to Rule 11-01(d) would change the
application of 17 CFR 210.11-01(b)(3)(i)(B) (``Rule 11-01(b)(3)(i)(B)''
of Regulation S-X) \1049\ by allowing the significance of a future
acquired business to be compared to the pro forma amounts related to
the shell company and target company business combination transaction
in filings made after the consummation of the business combination
transaction.\1050\ The impact of such application would be that the
shell company's financial statements, including its cash, would be part
of the pro forma financial information and would likely increase the
denominator in the significance tests compared to measuring the
significance of an acquisition against only the target private
operating company's financial information. While the Commission did not
propose amendments to Rule 11-01(b)(3)(i)(B), the Proposing Release
sought feedback on the potential change in its application as a result
of the proposed amendments to Rule 11-01(d).\1051\
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\1049\ 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.
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, 8-04, or 3-14 and the pro forma information
required by 17 CFR 210.11-01 through 210.11-02.
\1050\ Proposing Release, supra note 7, at 29493. The Commission
also said in the Proposing Release that, pursuant to the proposed
amendment to Rule 11-01(d) that would stipulate that the SPAC is a
business, an acquisition of the SPAC would be considered an
acquisition of a business, and the conditions under Rule 11-
01(b)(3)(i)(B) to use pro forma financial statements depicting the
acquisition as the denominator in the significance tests may be met.
Proposing Release, supra note 7, at 29493, n.273.
\1051\ Proposing Release, supra note 7, at 29494.
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17. Comments: Rule 11-01(d)
Several commenters opposed the proposed amendments to Rule 11-01(d)
that would treat the SPAC as a business for purposes of 17 CFR 210.11-
01.\1052\ One commenter, while not specifically referring to proposed
Rule 11-01(d), expressed views consistent with support for the
rule.\1053\
---------------------------------------------------------------------------
\1052\ Letters from Davis Polk, Vinson & Elkins, Ernst & Young.
\1053\ Letter from Freshfields.
---------------------------------------------------------------------------
One commenter that opposed the amendments said that the SPAC
historical financial statements are not relevant to the ongoing
business of the target operating company.\1054\ The commenter said that
the balance sheet of the combined public company will already reflect
the impact of the combination of the SPAC with the target operating
company.\1055\ The commenter also said that the proposed amendment
would result in significant additional compliance costs while resulting
in no substantive additional public disclosure.\1056\
---------------------------------------------------------------------------
\1054\ Letter from Davis Polk.
\1055\ Id.
\1056\ Id.
---------------------------------------------------------------------------
One commenter expressed the view that the proposed amendment is
contradictory to current Rule 11-01(d)'s requirement to evaluate
whether there is sufficient continuity of the acquired entity's
operations prior to and after the transaction so that disclosure of
prior financial information is material to an understanding of future
operations.\1057\ Another commenter expressed similar views, asserting
that, ``[i]n a de-SPAC transaction there is no continuity of operations
between the SPAC and the surviving company, and the SPAC's revenue
producing activities (interest on short term U.S. government securities
or money market funds investing in the same) do not continue post-
closing and are not material to investors in the surviving company.''
\1058\
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\1057\ Letter from Ernst & Young.
\1058\ Letter from Vinson & Elkins (also expressing the view
that Exchange Act Rule 12b-20 or Securities Act Rule 408(a) would
require disclosure of the SPAC's financial statements if they were
material).
---------------------------------------------------------------------------
This commenter also said, ``[w]hile there is a presumption that a
separate entity, such as a SPAC, is a business, none of the attributes
identified in S-X Rule 11-01(d)(2) for evaluation of whether a lesser
component of a business constitutes a business (i.e. physical
facilities, employee base, market distribution system, sales force,
customer base, operating rights, production techniques or trade names)
remain after the de-SPAC transaction.''
Current Rule 11-01(b)(3)(i)(B) permits pro forma information to be
used in the denominator of significance tests under certain
circumstances. This commenter also said that ``[t]he use of pro forma
financials should only be allowed to the extent they would be permitted
for an acquisition in connection with a pending or completed IPO.''
\1059\
---------------------------------------------------------------------------
\1059\ Id.
---------------------------------------------------------------------------
One commenter said that the proposed amendment to Rule 11-01(d) is
contradictory to proposed Rule 15-01(e), about which the Proposing
Release stated: ``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.'' \1060\ The commenter expressed a similar
view with respect to pro forma information as the foregoing, stating
that the historical financial statements of the SPAC are not necessary
for the purposes of the pro forma financial information. The commenter
said, ``[f]or example, the trust account amounts in the pro forma
information significantly differ from actual amounts due to transaction
costs and redemptions. Any private investment in public equity (PIPE)
transaction is also not reflected in the historical SPAC financials,
and much of the SPAC's historical income statement activity is
generally eliminated in the preparation of the pro forma financial
statements.''
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\1060\ Letter from Ernst & Young.
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One commenter, while not specifically referring to proposed Rule
11-01(d), expressed views consistent with proposed Rule 11-01(d).\1061\
The commenter said, ``we agree that the pro forma financial information
that gives effect to the shell company transaction
[[Page 14252]]
should be allowed to be used as the denominator in measuring the
significance of other acquisitions not involving a predecessor.'' The
commenter also indicated that the use of pro forma financial
information to measure significance should not be limited to
acquisitions that occur subsequent to a de-SPAC transaction. The
commenter said, ``[i]n most de-SPAC transactions there are numerous
other contemporaneous transactions occurring that affect the target's
capital structure and, as a result, using proforma financial statements
for measuring significance can produce a more accurate analysis of an
acquiree's significance.''
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\1061\ Letter from Freshfields.
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18. Decline To Adopt Rule 11-01(d)
After considering the comments received, we are not adopting the
proposed amendment of Rule 11-01(d), because we agree with a
commenter's feedback \1062\ that it would be contradictory to proposed
Rule 15-01(e). In this regard, the proposed amendment to Rule 11-01(d)
could require filing of the shell company's financial statements in
subsequent registration statements despite Rule 15-01(e) potentially
permitting their omission.\1063\ Instead we are making revisions to
proposed Rule 15-01(e) to require that, if a registrant is to acquire
or has acquired a shell company, the financial statements of the shell
company must be filed, as if the shell company were the registrant for
the filing, unless the financial statements of the registrant include
the period in which the acquisition was consummated. Accordingly, in
structures where another issuer is the legal acquirer of a shell
company, that issuer will look to final Rule 15-01(e), rather than
Rules 11-01(d) and 3-05, for determining whether financial statements
of the shell company are required in filings made subsequent to the
transaction. Final Rule 15-01(e) will require financial statements of
the SPAC in registration statements filed subsequent to the de-SPAC
transaction when the de-SPAC transaction has not yet been reflected in
in the financial statements filed by the registrant. In contrast to the
proposed rule,\1064\ the final rule would not require financial
statements of the SPAC once the de-SPAC transaction has been reported
on in the financial statements filed by the registrant. The final rules
reflect our view that the financial statements of the SPAC could be
material to an investor.
---------------------------------------------------------------------------
\1062\ Letter from Ernst & Young.
\1063\ See supra section IV.B.15.
\1064\ If Rule 3-05 were applied to the SPAC because the SPAC
was considered a business under Proposed Rule 11-01(d), then
financial statements of the SPAC may be required in registration
statements of the registrant until the SPAC has been included in the
registrant's financial statements for at least nine months.
---------------------------------------------------------------------------
As highlighted in the Proposing Release, application of the
proposed amendment to Rule 11-01(d) that would treat a shell company as
a business could have resulted in significance testing of a future
acquired business (i.e., numerator) being measured against pro forma
amounts that combine the shell company and target private operating
company (i.e., denominator).\1065\ Because the proposed amendment to
Rule 11-01(d) is not being adopted, the shell company will not be
included in the denominator, similar to how proceeds from an offering
would not be included in the comparison.
---------------------------------------------------------------------------
\1065\ Proposing Release, supra note 7, at 29493.
---------------------------------------------------------------------------
19. Proposed Item 2.01(f) of Form 8-K
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 under the Exchange Act. The
Commission proposed 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 for periods
prior to consummation of the acquisition and not the shell company
registrant.\1066\
---------------------------------------------------------------------------
\1066\ Proposing Release, supra note 7, at 29294.
---------------------------------------------------------------------------
20. Comments: Item 2.01(f) of Form 8-K
One commenter supported the proposed amendment to refer to
``acquired business'' instead of ``registrant.'' \1067\ Another
commenter recommended that we use the term ``predecessor,'' instead of
``acquired business,'' in order to avoid potential confusion with
acquired businesses that are not the predecessor.\1068\
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\1067\ Letter from PwC.
\1068\ Letter from Ernst & Young.
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Currently, a Form 8-K filed pursuant to Item 2.01(f) may require
three fiscal years of financial statements for an acquired business
that is the predecessor to a shell company, while only two fiscal years
may be required in the Form S-4 for the de-SPAC transaction for the
same company under Rule 15-01(b).\1069\ For example, an EGC that is not
an SRC would need to present an additional year of financial statements
within four business days of consummation of the de-SPAC transaction.
Several commenters responded to a request for comment that asked
whether we should amend the Form 8-K requirement to provide an
exception to the required Form 10 type-information so that the
financial statements of the acquired business need not be presented for
any period prior to the earliest audited period of that acquired
business previously presented in connection with a registration, proxy,
or information statement of the registrant.\1070\ Each of the
commenters that responded to the request for comment supported the
exception,\1071\ with one commenter stating that it was not clear why
an earlier annual period would be required in the Form 8-K filed after
consummation of the merger when such information was not considered
necessary for an investment decision by the SPAC's shareholders.\1072\
No commenters opposed such an exception.
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\1069\ As discussed above, we are adopting Rule 15-01(b) largely
as proposed, with certain technical modifications in the final rule.
\1070\ Proposing Release, supra note 7, at 29494 (request for
comment number 109).
\1071\ Letters from BDO, PwC, Deloitte, RSM, Freshfields, Vinson
& Elkins.
\1072\ Letter from BDO.
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21. Final Item 2.01(f) of Form 8-K
We are adopting the proposed amendments to Item 2.01 of Form 8-K,
with modifications made in response to comments received. We agree with
the commenter's recommendation that we use the term ``predecessor,''
instead of ``acquired business,'' in order to avoid potential confusion
with acquired businesses that are not the predecessor.\1073\
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\1073\ Letter from Ernst & Young. See supra note 1068.
---------------------------------------------------------------------------
We agree with the comments suggesting that, when the predecessor
meets the conditions of an EGC at the time of filing the Form 8-K, the
registrant should not be required to present audited financial
statements for any period prior to the earliest audited period
presented in the predecessor's financial statements in connection with
a de-SPAC registration or proxy statement of the registrant.\1074\ The
final rule provides that, when, at the time of filing of the Item
2.01(f) Form 8-K, the predecessor meets the conditions of an ``emerging
growth company,'' as defined in Securities Act Rule 405 or Exchange Act
Rule 12b-2, the registrant need not present audited financial
statements for the predecessor for any period prior to the earliest
audited period presented in its financial statements included in a
previously filed registration or proxy
[[Page 14253]]
statement for the transaction resulting in the loss of shell company
status.
---------------------------------------------------------------------------
\1074\ Letters from BDO, PwC, Deloitte, RSM, Freshfields, Vinson
& Elkins. See supra note 1071.
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22. Proposed Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of
Predecessors
Currently, 17 CFR 210.3-02 (``Rule 3-02'' of Regulation S-X)
requires that statements of comprehensive income be filed for the
registrant and its predecessors. Rules 3-01 and 8-02 and 17 CFR 210.10-
01(a)(1) (``Rule 10-01(a)(1)'' of Regulation S-X), however, specify
that balance sheets be filed for the registrant but do not specifically
refer to balance sheets of predecessors. In the Proposing Release, the
Commission proposed amendments to Rules 3-01, 8-02, and 10-01(a)(1) of
Regulation S-X to refer specifically to financial statements of
predecessors (consistent with the provision in current Rule 3-02
regarding statements of comprehensive income).\1075\
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\1075\ Proposing Release, supra note 7, at 29494.
---------------------------------------------------------------------------
23. Comments: Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of
Predecessors
One commenter expressed support for the proposed amendments.\1076\
No commenters opposed the proposed amendments.
---------------------------------------------------------------------------
\1076\ Letter from PwC.
---------------------------------------------------------------------------
24. Final Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of Predecessors
We are adopting the amendments largely as proposed, with a
technical modification discussed below. We do not believe the intent of
current Rules 3-02, 8-01, and 10-01(a)(1) is to require a predecessor's
statements of comprehensive income without the balance sheets as that
would not be considered a complete set of financial statements, which
would be inconsistent with Article 3 of Regulation S-X.
These final amendments are consistent with existing financial
reporting practices of registrants. We do not expect the final
amendments to result in any changes in disclosures.
Finally, we made a technical revision to Rule 8-02 to add ``and its
subsidiaries consolidated'' to ``registrant'' in order to conform to
Rule 3-01.
25. Other Shell Company Matters
In order to deter potential abuses involving shell company
transactions,\1077\ the Commission has adopted various rules and
limitations over the years, some of which apply to former shell
companies.\1078\ For example:
---------------------------------------------------------------------------
\1077\ See, e.g., Shell Company Adopting Release, supra note
943. Also affiliates of any non-issuer party to a transaction
identified in 17 CFR 230.145(a) must consider 17 CFR 230.145(c) and
(d).
\1078\ These rules and limitations generally do not apply to
shell companies that qualify as ``business combination related shell
companies'' as defined in Rule 405.
---------------------------------------------------------------------------
For a person to resell securities initially issued by a
shell company in reliance on 17 CFR 230.144, a former shell company
must satisfy the requirements of 17 CFR 230.144(i)(2); \1079\
---------------------------------------------------------------------------
\1079\ See 17 CFR 230.144(i), 17 CFR 230.145(c) and (d);
Revisions to Rules 144 and 145, Release No. 33-8869 (Dec. 6, 2007)
[72 FR 71546 (Dec. 17, 2007)].
---------------------------------------------------------------------------
A former shell company may not use Form S-8 until at least
60 calendar days after the company is no longer a shell company and has
filed current Form 10 information; \1080\
---------------------------------------------------------------------------
\1080\ See General Instruction A.1, Form S-8 (17 CFR 239.16b);
Shell Company Adopting Release, supra note 943.
---------------------------------------------------------------------------
For three years following the change in shell company
status, a former shell company is an ``ineligible issuer'' under Rule
405 that may not, among other things, use free writing prospectuses for
communications during a registered offering or rely on the safe harbor
of Rule 163A from section 5(c) of the Securities Act for pre-filing
communications; \1081\ and
---------------------------------------------------------------------------
\1081\ See 17 CFR 230.165(e)(2)(ii); 17 CFR 230.163A(b)(3)(ii);
Securities Offering Reform, Release No. 33-8591 (July 19, 2005) [70
FR 44722 (Aug. 3, 2005)].
---------------------------------------------------------------------------
For three years following the change in shell company
status, a broker-dealer may not rely on the safe harbors of Securities
Act Rules 137, 138, and 139 for research reports regarding a former
shell company.\1082\
---------------------------------------------------------------------------
\1082\ See 17 CFR 230.137(d)(2); 17 CFR 230.138(a)(4); 17 CFR
230.139(a)(1)(ii).
---------------------------------------------------------------------------
Several commenters asked the Commission to carve out a post-de-SPAC
transaction combined company from these and other former shell company
limitations and to make certain safe harbors available to the combined
company that are not available to former shell companies.\1083\
Generally, these commenters expressed the view that doing so would more
closely align the rules that apply to target companies that enter the
public markets through a de-SPAC transaction with the rules that apply
to companies that conduct a traditional IPO.
---------------------------------------------------------------------------
\1083\ See letters from ABA, American Securities Association,
Cowen, Ernst & Young, Fenwick, Freshfields, Goodwin, Vinson &
Elkins, White & Case, Winston & Strawn.
---------------------------------------------------------------------------
We are not adopting changes to these limitations or to other rules
and limitations related to former shell companies that may apply to the
combined company at this time. In light of the comments we received and
taking into account the rules being adopted herein and market practices
that may develop as a result, we believe that further consideration of
potential application of these rules and limitations to the combined
company is warranted.
V. Enhanced Projections Disclosure
A. Proposed Items 10(b) and 1609 of Regulation S-K
1. Proposed Rules
Current Item 10(b) of Regulation S-K provides Commission guidance
with respect to factors to be considered in formulating and disclosing
management's projections of future economic performance that applies to
all filings made with the Commission. The Commission proposed to amend
Item 10(b) of Regulation S-K to expand and update the Commission's
views on the use of such projections. The proposed amendments to Item
10(b) continued to state the Commission's view that projected financial
information included in filings must have a reasonable basis. To
address specific concerns with respect to the format of projections,
namely that some companies may present projections more prominently
than actual historical results (or the lack of historical results where
they have no operations at all) or use non-GAAP financial measures in
the projections without a clear explanation or definition of such
measures, the Commission proposed amending 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,\1084\ and an explanation why the
[[Page 14254]]
non-GAAP financial measure was used instead of a GAAP measure.\1085\
---------------------------------------------------------------------------
\1084\ The reference to the most closely related GAAP measure
called for by the proposed amendments to 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.
\1085\ 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)].
---------------------------------------------------------------------------
Finally, the Commission proposed amending Item 10(b) to clarify
that it would apply to a target company's projections when they are
presented to investors through the registrant's Commission filings.
Pursuant to the proposed amendments, the guidance in amended Item 10(b)
would apply to any projections of future economic performance of both
the registrant and persons other than the registrant (which would
include a target company in a de-SPAC transaction), that are included
in the registrant's Commission filings.
The Commission proposed Item 1609 of Regulation S-K, which would
apply only to de-SPAC transactions, to require a registrant to provide
the following disclosures:
With respect to any projections disclosed in the filing,
the purpose for which the projections were prepared and the party that
prepared the projections;
All material bases of the disclosed projections, all
material assumptions underlying the projections, and any factors that
may impact such assumptions (including 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);
and
Whether the disclosed projections reflect the view of the
board or management of the SPAC or target company, as applicable, as of
the date of the filing; if not, then a statement regarding the purpose
of disclosing the projections and the reasons for any continued
reliance by management or the board on the projections.
2. Comments
A number of commenters generally supported the proposed
items.\1086\ In addition, some of these commenters, in response to
issues raised in a request for comment in the Proposing Release,\1087\
indicated that the updated guidance in proposed Item 10(b) should apply
to all filings.\1088\
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\1086\ Letters from ABA (except for proposed Items 1609(b) and
(c)); Americans for Financial Reform Education Fund; Chris Barnard
(May 27, 2022) (``Chris Barnard''); Goodwin (except for proposed
Items 1609(b) and (c)); ICGN; Julianna Marandola (Apr. 30, 2002);
Michael Dambra, Omri Even-Tov, and Kimberlyn George.
\1087\ Proposing Release, supra note 7, at 29493 (request for
comment number 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?'').
\1088\ Letters from ABA; Chris Barnard; Goodwin; Michael Dambra,
Omri Even-Tov, and Kimberlyn George.
---------------------------------------------------------------------------
In a comment letter that addressed issues raised in a request for
comment in the Proposing Release, one group of commenters expressed
support for the proposals but stated that ``[w]e are opposed to
mandating the disclosure of certain financial statement line items
(e.g., revenue, EBITDA [earnings before interest, taxes, depreciation,
and amortization], etc.)'' and said, ``Some of the proposals regarding
Item 10(b) of Regulation S-K and Item 1609 . . . should also extend to
the investor presentations disclosed as an attachment to the Form 8-
K.'' \1089\ These commenters said their analysis and that of others
``suggests that the market response to a de-SPAC transaction and
financial projections occur at the time of the merger announcement.''
\1090\
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\1089\ Letter from Michael Dambra, Omri Even-Tov, and Kimberlyn
George (``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.); Proposing Release, supra note 7, at 29504 (request for
comment number 150) (``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?'').
\1090\ Letter from Michael Dambra, Omri Even-Tov, and Kimberlyn
George.
---------------------------------------------------------------------------
Several commenters addressed the reasonableness of projections made
concerning companies with no operating history. One of the commenters
who supported the proposed amendments recommended that we adopt an
additional provision providing that ``if a registrant does not have a
history of operations for the basis of the projections, then it is
possible to acquire an outside review of the projections as support for
the `reasonable' projections.'' \1091\ Another commenter said, ``As for
the proposed amendments to Regulation S-K on the use of projections, we
believe not only that non-GAAP metrics need to be conspicuously
highlighted and marked for investor review, but also that disclosures
should state succinctly that issuers with no historical operations or
completed negotiations for company/asset acquisitions do not have a
reasonable basis for projections.'' \1092\
---------------------------------------------------------------------------
\1091\ Letter from ICGN.
\1092\ Letter from NASAA.
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Another commenter recommended that Item 1609(b) include a
requirement to disclose sensitivity testing of the key assumptions
underlying the projections.\1093\
---------------------------------------------------------------------------
\1093\ Letter from Chris Barnard.
---------------------------------------------------------------------------
A few commenters also sought clarification that the staff guidance
provided in Questions 101.01, 101.02 and 101.03 of the Compliance and
Disclosure Interpretations relating to Non-GAAP Financial Measures
(last updated December 13, 2022) \1094\ will continue to apply,
notwithstanding adoption of proposed Item 10(b)(2)(iv).\1095\
---------------------------------------------------------------------------
\1094\ The interpretations relate to whether certain forecasts
are considered non-GAAP financial measures, as that term is used in
Item 10(e) of Regulation S-K and Regulation G.
\1095\ Letters from ABA, Goodwin.
---------------------------------------------------------------------------
In response to a request for comment,\1096\ one commenter stated
that we should not require projections to be presented in a separately
captioned section of a Commission filing because doing so would
``change the purpose'' for which the projections were prepared.\1097\
On the other hand, a few commenters stated that such a requirement
would be consistent with current practice and unlikely to lead to
significant changes in the information disclosed or create undue
burdens on registrants.\1098\
---------------------------------------------------------------------------
\1096\ Proposing Release, supra note 7, at 29496 (request for
comment number 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?'').
\1097\ Letter from Kirkland & Ellis.
\1098\ Letters from ABA, Goodwin.
---------------------------------------------------------------------------
In comment letters that addressed issues raised in a request for
comment in the Proposing Release,\1099\ some commenters suggested that
Item 1609 should apply to all filings,\1100\ while one commenter
expressed support for limiting the applicability of Item 1609 to de-
SPAC transaction filings only.\1101\ Some commenters who supported Item
1609 applying to all filings emphasized that Item 1609 should apply to
all companies that disclose financial projections in Commission filings
(and
[[Page 14255]]
not just to de-SPAC transactions as proposed) in connection with
business combinations in which the target is at an early stage and has
a limited financial track record and the transaction may involve more
significant dilution.\1102\
---------------------------------------------------------------------------
\1099\ Proposing Release, supra note 7, at 29496 (request for
comment number 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?'').
\1100\ Letters from ABA, Goodwin, Vinson & Elkins.
\1101\ Letter from Chris Barnard.
\1102\ Letters from ABA, Goodwin.
---------------------------------------------------------------------------
A few commenters indicated that proposed Item 1609(b) is likely to
reduce the disclosure of projections in Commission filings but
acknowledged that the rules are unlikely to ``significantly impact the
willingness of parties to De-SPAC Transactions to continue preparing
and disclosing projections'' because the disclosure of projections is
compelled by certain other Federal and State requirements.\1103\
---------------------------------------------------------------------------
\1103\ Letters from ABA, Goodwin.
---------------------------------------------------------------------------
A few commenters stated that the requirement in proposed Item
1609(b) to discuss the material bases and assumptions underlying
projections, despite the inclusion of a materiality qualifier, is
unduly prescriptive, may result in the inclusion of ``inputs and
assumptions that are not material to an investor's understanding of the
projections'' and may lead registrants towards a conservative approach
of disclosing growth rates or discount multiples in order to protect
against future claims that such inputs were material.\1104\ Another
commenter, however, said that ``asking for more clarity in assumptions
and identifying where they came from strike us as very sensible.''
\1105\
---------------------------------------------------------------------------
\1104\ Letters from ABA, Goodwin.
\1105\ Letter from Loeb & Loeb.
---------------------------------------------------------------------------
With respect to Item 1609(c), some commenters indicated that
registrants should not have to affirm the validity of projections as of
the date of the filing because it would be unduly burdensome and
inconsistent with the purpose of the preparation of the
projections.\1106\ The commenters also suggested that the disclosure
requirement may result in the need to prepare an updated set of
projections, which would be expensive and time-consuming.\1107\ Two
commenters suggested an alternative approach to Item 1609(c) involving
several elements.\1108\ First, they suggested requiring disclosure of
``(i) the date as of which the projections were prepared and (ii) the
views of the preparer of the projections as of such date of preparation
and, if different, the date upon which the SPAC board approved the
transaction.'' \1109\ Second, they suggested that registrants should be
permitted to ``disclaim any duty to update the projections as of a
later date except to the extent there is a material lapse in time and
change in circumstances.'' \1110\ Third, they suggested ``the
Commission may seek disclosure confirming whether the projections still
reflect management's views on future performance and/or describing what
consideration the board gave to obtaining updated projections or a lack
of reliance upon the projections.'' \1111\
---------------------------------------------------------------------------
\1106\ Letters from ABA, Freshfields, Goodwin, Kirkland & Ellis.
\1107\ Letters from ABA, Goodwin, Kirkland & Ellis.
\1108\ Letters from ABA, Goodwin.
\1109\ Id.
\1110\ Id.
\1111\ Id.
---------------------------------------------------------------------------
Also regarding Item 1609(c), one commenter expressed the view that
projections are included in a de-SPAC transaction disclosure document
to describe the basis upon which the directors of the SPAC approved the
transaction, not to serve as a basis for investors to make an
investment decision.\1112\ The commenter also indicated that
``projections are routinely disclosed in proxy statements and
registration statements as the basis for fairness opinions issued at
the time of the execution of the merger agreement of the public merger,
but the SEC has not historically required the parties to the merger to
confirm the projections in connection with each filing.'' \1113\
---------------------------------------------------------------------------
\1112\ Letter from Freshfields.
\1113\ Id.
---------------------------------------------------------------------------
Some commenters expressed the view that the proposed rule was not
sufficiently specific in its use of the phrase ``as of the date of the
filing'' and that the requirement could be interpreted to require
compliance with this item in the original filing and all subsequent
amendments.\1114\
---------------------------------------------------------------------------
\1114\ Letters from Freshfields, Kirkland & Ellis.
---------------------------------------------------------------------------
One commenter made a number of suggestions with respect to the
disclosure of projections in IPOs of all types, including in de-SPAC
transactions.\1115\ First, the commenter recommended requiring
disclosure of management's assessment of the probability of achieving
any forecasts provided and the major assumptions underlying all
forecasts provided.\1116\ Second, the commenter suggested that when
financial projections are disclosed, to qualify for the PSLRA safe
harbor, the directors, management and other affiliates must agree to a
lock-up on sales of shares until the combined company has released
audited financial statements for its first full fiscal year following
the transaction.\1117\ Third, the commenter suggested requiring
disclosure of the track record of the company, the sponsor, or the
chief executive officer or chief financial officer for meeting past
projections disclosed.\1118\
---------------------------------------------------------------------------
\1115\ Letter from Bullet Point Network.
\1116\ Id.
\1117\ Id.
\1118\ Id.
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3. Final Rules
We are adopting the amendment of Item 10(b) as proposed and new
Item 1609 substantially as proposed, except for clarifying revisions
that we discuss below.
With respect to the final amendment to Item 10(b), we note that the
rule is Commission guidance that already applies to all filings made
with the Commission and this aspect of Item 10(b) precedes the
revisions to the rule adopted in this release.\1119\ We also note that
Item 1609 applies only to de-SPAC transactions.
---------------------------------------------------------------------------
\1119\ Some commenters indicated that the updated guidance in
Item 10(b) should apply to all filings. See supra note 1088 and
accompanying text.
---------------------------------------------------------------------------
In response to one commenter's opposition to an obligation to
present certain specific line items in all projections,\1120\ we note
that the Commission guidance in Item 10(b) does not mandate the
inclusion of any specific line item. Instead, the final amendment to
Item 10(b) acknowledges that projections have traditionally included
certain line items, but registrants are free to determine which line
items are appropriate to include in projections.
---------------------------------------------------------------------------
\1120\ Letter from Michael Dambra, Omri Even-Tov, and Kimberlyn
George. See supra notes 1089-1090 and accompanying text.
---------------------------------------------------------------------------
With respect to the recommendation to revise the rule to allow a
company with no history of operations to obtain an outside review of
projections,\1121\ we note that neither Item 10(b) nor Item 1609
prevents companies from obtaining any such outside review.
---------------------------------------------------------------------------
\1121\ Letter from ICGN. See supra note 1091 and accompanying
text.
---------------------------------------------------------------------------
With respect to the suggestion from a commenter that non-GAAP
financial metrics should be highlighted for investor review,\1122\ we
believe the provisions of Item 10(e) already address this concern. With
respect to the same commenter's suggestion that we require a statement
from the registrant when a target company has no history of operations
or a negotiated acquisition that the projections disclosed do not have
a reasonable basis, we believe the provisions of Items 10(b) and 1609
and other rules adopted in this release will
[[Page 14256]]
provide sufficient information about the basis for any disclosed
projections.\1123\
---------------------------------------------------------------------------
\1122\ Letter from NASAA. See supra note 1092 and accompanying
text.
\1123\ See, e.g., Item 1605, Item 1606(b), and Item 1607.
---------------------------------------------------------------------------
With respect to commenters' request for clarification that certain
staff guidance will continue to apply notwithstanding adoption of
proposed Item 10(b)(2)(iv),\1124\ we confirm that the final rules do
not impact the staff's guidance in Questions 101.01, 101.02 and 101.03
of the Compliance and Disclosure Interpretations related to Non-GAAP
Financial Measures.
---------------------------------------------------------------------------
\1124\ Letters from ABA, Goodwin. See supra note 1095 and
accompanying text.
---------------------------------------------------------------------------
With respect to commenters' responses to our request for comment
that we should not require projections to be presented in a separately
captioned section of a filing,\1125\ we note that we have not added
such a requirement to the presentation of projections.
---------------------------------------------------------------------------
\1125\ Letter from Kirkland & Ellis. See supra note 1097 and
accompanying text.
---------------------------------------------------------------------------
In the final rules, we made three technical revisions to Item
10(b). First, in final Item 10(b)(2)(i), we replaced the term
``foregoing measures of income'' with the term ``foregoing measures of
income (loss).'' Second, in final Item 10(b)(2)(iii), we replaced the
term ``historical financial measure'' with the term ``historical
financial results.'' We believe these changes will enhance clarity and
avoid potential ambiguity. Third, we made revisions in final Item
10(b)(2)(iv) to require a description of the GAAP financial measure
``most directly comparable'' to the non-GAAP measure, rather than
``most closely related'' (as proposed). We made this change in final
Item 10(b)(2)(iv) to create consistency with the terms used in existing
Item 10(e)(1)(i)(A) of Regulation S-K, which requires the inclusion of
the directly comparable financial measure or measures calculated and
presented in accordance with GAAP whenever one or more non-GAAP
financial measures are included in a filing with the Commission.
With respect to commenters' views that Item 1609 should apply to
all companies that publicly disclose financial projections in
Commission filings,\1126\ we decline to expand the coverage of Item
1609 beyond SPACs since the specialized disclosure requirements in new
subpart 1600 of Regulation S-K are intended to only apply to SPAC IPOs
and de-SPAC transactions. Item 10(b), as updated in this release, will
continue to provide helpful guidance for all companies that publicly
disclose projections in Commission filings.
---------------------------------------------------------------------------
\1126\ Letters from ABA, Goodwin, Vinson & Elkins. See supra
note 1100 and accompanying text.
---------------------------------------------------------------------------
With respect to commenters who expressed concern there could be an
uncertain impact on the use of projections under Item 1609,\1127\ we
note that final Item 1609 does not restrict the registrant's ability to
disclose projections and is not intended to alter the registrant's
determination as to whether or not projections should be disclosed
under other Federal or State law requirements. Rather, if a registrant
determines to include projections in a filing in connection with a de-
SPAC transaction, Item 1609 creates a level of consistency for the
presentation of projections that would make the information more useful
to investors.
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\1127\ Letters from ABA, Goodwin. See supra notes 1103-1104 and
accompanying text.
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With respect to the recommendation that Item 1609(b) include a
requirement to disclose sensitivity testing of the key assumptions
underlying the projections,\1128\ we believe that such a requirement
would be inconsistent with the general approach of Item 1609, which
does not prescribe a specific format for the projections and does not
require specific line items to be included in the projections.
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\1128\ Letter from Chris Barnard. See supra note 1101 and
accompanying text.
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With respect to the comment that the requirement in Item 1609(b) to
discuss material growth rates or discount multiples used in preparing
the projections is unduly prescriptive and may result in the over-
inclusion of certain immaterial information,\1129\ we note that this
requirement includes a materiality qualifier, which makes clear that
Item 1609(b) is not intended to capture immaterial information and does
not require disclosure of growth rates or discount rates that are not
material.
---------------------------------------------------------------------------
\1129\ Letters from ABA, Goodwin. See supra note 1104 and
accompanying text.
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In final Item 1609(b), we have added a materiality qualifier to the
requirement to disclose any factors that may impact the material
assumptions underlying the projections to clarify that only material
factors are required to be disclosed. In final Item 1609(b), we have
also made two technical revisions to the proposal in order to improve
the clarity of this item and avoid potential ambiguity.\1130\ First, we
have replaced the proposed terms ``material growth rates'' with the
terms ``material growth or reduction rates'' throughout final Item
1609(b), because projections may involve some line items in financial
statements that are projected to increase and others that are projected
to decrease. Second, we have replaced the proposed term ``discount
multiples'' with the term ``discount rates'' throughout final Item
1609(b) to reflect more closely the terminology for the relevant
concept that is frequently used by valuation professionals.\1131\
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\1130\ In addition, in final Item 1609(b) we replaced the
proposed term ``impact'' with the term ``affect'' for clarity.
\1131\ Two examples of ``discount rates'' are: (1) the weighted
average cost of capital used to discount to present value the future
cash flows over the period of years projected in a discounted cash
flow analysis and (2) the rate applied to the terminal value in a
discounted cash flow analysis to calculate its present value.
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With respect to the proposed requirement in Item 1609(c)--to
include a statement regarding whether or not projections disclosed in a
filing reflect the current views of the SPAC or target company
management or board of directors as of the date of filing--commenters
expressed concerns that the requirement would be unduly burdensome, may
involve an expensive and time-consuming effort to update the
projections,\1132\ and would be inconsistent with the purpose of the
preparation of the projections and current market practice.\1133\ We
acknowledge that if the SPAC or the target company determines to affirm
that the projections disclosed in a filing reflect the current views of
the SPAC or target company management or board of directors, the SPAC
or the target company, as applicable, would likely undertake additional
analysis with respect to the projections, whether to provide updated
projections or otherwise. If the SPAC or the target company determines
to state that the disclosed projections do not reflect the current
views of the SPAC or target company management or board of directors,
we believe the additional burden created by final Item 1609(c) is
likely to be considerably less because the level of analysis
undertaken, if any, will be minimal as compared to the analysis
undertaken to affirm that the disclosed projections reflect the current
views of the SPAC or target company management or board of directors.
For example, if the target company chooses not to affirm that its
projections reflect the current view of management due to a significant
lapse of time, we do not believe target company management will update
the projections or rerun its analysis in order to make that choice. We
believe the required disclosure reflects an appropriate balance between
the benefits to investors of this
[[Page 14257]]
disclosure and the costs of compliance with the rule requirements. The
required disclosure should help investors better assess the continued
reliability of the projections through the current views of the SPAC or
target company management or board of directors. We also note that Item
1609(c) does not impose a duty to update the disclosed projections.
Item 1609(c) only requires a statement as to whether or not the
disclosed projections reflect the view of the SPAC or target company
management or board of directors about its future performance as of the
most recent practicable date prior to the date of the disclosure
document required to be disseminated to shareholders. We revised Item
1609(c) to replace the proposed terms ``state whether the projections''
and ``disclose whether the target company'' with the terms ``state
whether or not the projections'' and ``disclose whether or not the
target company'', respectively, for purposes of clarity.
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\1132\ Letters from ABA, Goodwin, Kirkland & Ellis. See supra
note 1107 and accompanying text.
\1133\ Letters from ABA, Goodwin, Freshfields, Kirkland & Ellis.
See supra notes 1106-1107 and 1112-1113 and accompanying text.
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In response to commenters who said that the proposed terms ``as of
the date of the filing'' were unclear and could be interpreted to
require compliance with this item in the original filing and all
subsequent amendments,\1134\ we are making one change to final Item
1609(c) to improve the clarity of this item and avoid potential
ambiguity. We replaced the proposed term ``as of the date of the
filing'' with the term ``as of the most recent practicable date prior
to the date of the disclosure document required to be disseminated to
security holders'' throughout final Item 1609(c). This change is
intended to clarify that the statement required by Item 1609(c) on
whether or not the projections reflect the view of management or the
board of directors (or similar governing body) about future performance
must be made as of a recent date prior to, and as close as is feasible
to, the date of the disclosure document disseminated to security
holders.\1135\ Thus, the Item 1609(c) statement is not required to be
made as of the filing date of the initial or preliminary filing and as
of each amendment thereto.
---------------------------------------------------------------------------
\1134\ Letters from Freshfields, Kirkland & Ellis. See supra
note 1114 and accompanying text.
\1135\ For example, a statement made in response to Item 1609(c)
as of the date of the final Form S-4 amendment prior to the
registrant's request for acceleration of effectiveness could be
considered to be made as of the ``most recent practicable date prior
to the date of the disclosure document required to be disseminated
to security holders'' if the date of the final prospectus
disseminated to shareholders is within five days following
effectiveness of the subject registration statement on Form S-4. If
additional disclosure is included in the Form S-4 amendment to
support the statement required by Item 1609(c), the Commission staff
will need adequate time to review the new disclosure before the
registrant's request for acceleration of effectiveness of the Form
S-4 is submitted as is the case currently when new disclosure is
included in a Form S-4 amendment.
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For several reasons we discuss below, we are not adopting the
alternative approach suggested by two commenters that involved several
elements, including: (1) that disclosure should be required that
provides the date the projections were prepared and the views of the
preparer of the projections as of the date of preparation, (2) that,
with certain exceptions, registrants should be permitted to disclaim
any duty to update the projections, and (3) that the Commission may
seek disclosure confirming whether the projections still reflect
management's views on future performance.\1136\ First, there is nothing
in final Item 1609 that prevents the disclosure of the date of the
projections or the projection preparer's views. Depending on the facts
and circumstances, this information could be material to investors. In
addition, we note that, where an outside party is the preparer of a
report, opinion, or appraisal that materially relates to any of certain
criteria set out in final Item 1607(a), final Item 1607(b)(6) requires
a summary of such report, opinion, or appraisal that includes, among
other things, a summary of findings and recommendations. Second, as we
discuss immediately above, Item 1609(c) does not impose a duty to
update the projections disclosed in a filing. Also, as we discuss above
in section III.E.3, to the extent a SPAC is concerned that security
holders may rely on the projections disclosed in a filing in instances
where the SPAC believes security holders should not rely on them, a
SPAC could provide supplemental disclosure advising and alerting
security holders of this fact, including by noting factors such as the
date of the projections (and discussing any staleness issues) and the
independence from the SPAC of the third-party that conducted the
analysis.\1137\ Third, we do not agree with the suggestion that having
the Commission seek disclosure confirming the ongoing reliability of
the projections included in the filing would better ensure that
investors have information about the ongoing reliability of those
projections than a disclosure rule. On the contrary, registrants will
be in a better position to know about the ongoing reliability of
projections concerning the SPAC or the target company and to make the
related disclosures under final Item 1609 than the Commission, which
would need to determine when it may be necessary to request the
confirmatory disclosure depending on the particular facts and
circumstances of the SPAC or the target company.
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\1136\ Letters from ABA, Goodwin. See supra notes 1108-1111 and
accompanying text.
\1137\ Section III.E.3 discusses final definitions of ``blank
check company'' and related availability of PSLRA safe harbors in
connection with comments received providing comparative analysis of
de-SPAC transactions to other types of transactions.
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For several reasons we discuss below, we are also not adopting the
following suggestions of one commenter with respect to the disclosure
of projections in IPOs of all types, including in de-SPAC transactions:
(1) requiring disclosure of management's assessment of the probability
of achieving any forecasts provided, (2) requiring as a condition to
qualify for the PSLRA safe harbor when projections are disclosed that
directors, management and other affiliates must agree to a lock-up on
sales of shares until the company has released audited financial
statements for its first full fiscal year following the transaction,
and (3) requiring disclosure of the track record of the company, the
sponsor, or the chief executive officer or chief financial officer for
meeting past projections disclosed.\1138\ First, we believe that
management's assessment of the probability of achieving any forecasts
provided would require a high degree of subjectivity and such
disclosure would likely not be useful to investors without significant
additional disclosure regarding the assessment, including the bases and
assumptions that underlie the assessment, which disclosure could be
distracting or confusing to investors. We also believe that such
disclosure may cause investors to place undue reliance on the
probability or projections disclosed. Second, we believe requiring a
long-term lock-up as a condition to qualify for the PSLRA safe harbor
has potential far-reaching implications for the parties involved and
the market that are uncertain. Third, we believe the track records for
meeting projections disclosed in prior transactions would not
necessarily be relevant to an investor's evaluation of the projections
disclosed with respect to the de-SPAC transaction that is the subject
of the filing and may not be useful without significant additional
disclosure regarding the facts and circumstances of the prior
transactions. Such additional disclosure, if added, could become
distracting or confusing for investors trying to evaluate the
projections disclosed with respect to the subject de-SPAC transaction.
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\1138\ Letter from Bullet Point Network.
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We are amending General Instruction B to Form 8-K to require the
[[Page 14258]]
information set forth in paragraphs (a) and (b) of Item 1609 in any
Form 8-K report or exhibit to such report that relates to a de-SPAC
transaction and includes projections that relate to the performance of
the SPAC or the target company. One commenter indicated that the market
response to a de-SPAC transaction and the disclosed financial
projections occurs at the time of the merger announcement, and ``[s]ome
of the proposals regarding Item 10(b) of Regulation S-K and Item 1609
as discussed above should also extend to the investor presentations
disclosed as an attachment to the Form 8-K.'' \1139\ The issue noted by
this comment raises significant investor protection concerns, and we
are amending the General Instructions to Form 8-K and revising proposed
Item 1609(a) in response. Based on the Commission staff's experience,
Form 8-K filings in connection with the announcement of a de-SPAC
transaction may contain projections in the exhibits to the Form 8-K
filings, including in investor presentation materials featuring
projections that also have been provided by the SPAC to PIPE investors.
These projections may begin to shape investors' decisions concerning
the de-SPAC transaction even before a registration or proxy statement
in connection with the de-SPAC transaction is filed. We believe
investors would benefit from the background and context provided by the
application of new Item 1609 to those projections.
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\1139\ Letter from Michael Dambra, Omri Even-Tov, and Kimberlyn
George. See supra notes 1089-1090 and accompanying text.
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Finally, we revised Item 1609(c) to replace the proposed term
``board'' with the terms ``board of directors (or similar governing
body)'' for purposes of clarity and consistency with other final rules.
VI. The Status of Spacs Under the Investment Company Act
A. Background
The Commission proposed Rule 3a-10 under the Investment Company
Act, which would have provided a safe harbor from the definition of
investment company under section 3(a)(1)(A) of the Investment Company
Act \1140\ for certain SPACs.\1141\ As discussed in the Proposing
Release, in recent years, the number of SPACs has grown
dramatically,\1142\ and some SPACs and their sponsors have sought to
operate SPACs in ways that suggest that SPACs and their sponsors should
increase their focus on evaluating when a SPAC could be an investment
company. Such developments sparked debate about the status of SPACs as
investment companies under the Investment Company Act.\1143\ For the
reasons discussed below, we are not adopting the proposed safe harbor.
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\1140\ 15 U.S.C. 80a-3(a)(1)(A). 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 be engaged primarily, in the
business of investing, reinvesting, or trading in securities. See
infra note 1146.
\1141\ For purposes of this section, the terms ``SPAC,'' ``De-
SPAC transaction,'' and ``target company'' have the same meaning as
set forth in Item 1601 of Regulation S-K. See supra section II.A
(Definitions).
\1142\ See, e.g., supra note 25 and accompanying text; see also
Proposing Release, supra note 7, at nn.7-8 and accompanying text.
\1143\ See Kristi Marvin, 49 Law Firms Unite and Push Back on
Recent SPAC Litigation, SPAC Insider (Aug. 27, 2021), available at
https://www.spacinsider.com/news/spacinsider/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).
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Instead, we are setting forth below our views on facts and
circumstances that are relevant to whether a SPAC meets the definition
of investment company under the Investment Company Act.\1144\ Like any
other issuer, depending on the facts and circumstances, a SPAC may meet
the definition of investment company under section 3(a)(1)(A) or
3(a)(1)(C) \1145\ or both. The views below are intended to assist SPACs
in analyzing their status under these sections, particularly with
regard to how SPACs may apply the five-factor test that is
traditionally used to determine whether an issuer is an investment
company under section 3(a)(1)(A) (known as the Tonopah factors).\1146\
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\1144\ This guidance is intended to address the status of a SPAC
from the time of the SPAC's initial offering until it completes its
de-SPAC transaction. The remaining company (or companies) after the
de-SPAC transaction may also raise separate questions of Investment
Company Act status.
\1145\ Section 3(a)(1)(C) 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 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. 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. If a SPAC owns or proposes
to acquire 40% or more of its total assets in investment securities,
it would likely need to register under the Investment Company Act
unless an exclusion from the definition applies.
\1146\ To assess an issuer's primary engagement under section
3(a)(1)(A), and in other contexts under the Investment Company Act,
we historically have looked at (1) the company's historical
development; (2) its public representations of policy; (3) the
activities of its officers and directors; (4) the nature of its
present assets; and (5) the sources of its present income (known as
the ``Tonopah factors''). See In the Matter of Tonopah Mining Co.,
26 SEC. 426 (July 21, 1947). 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).
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The Commission received comments that represented a range of views
and positions on proposed Rule 3a-10. While some commenters expressed
the view that SPACs are not investment companies,\1147\ others stated
that SPACs are unregistered investment companies.\1148\ Similarly,
while some commenters disagreed with the Commission's concern that
investors might view SPACs as fund-like investments,\1149\ other
commenters asserted that SPAC shareholders often treat SPACs like
investment companies \1150\ and should be regulated under the
Investment Company Act accordingly.\1151\
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\1147\ See, e.g., letters from ABA, Davis Polk, Goodwin.
\1148\ See, e.g., letters from Consumer Federation; Robert J.
Jackson, Jr. and Professor John Morley (June 13, 2022) (``Robert
Jackson and John Morley'').
\1149\ See, e.g., letters from Goodwin, Skadden, Vinson &
Elkins, White & Case.
\1150\ Letters from Consumer Federation (``From the time that a
SPAC goes public until the time a business combination with a
private company is completed, a SPAC functions like a mutual fund,
investing in Treasuries, money market funds, or other cash-like
securities, while providing initial investors a fixed income-
equivalent return. . . . `Nearly all' SPAC IPO investors treat SPACs
like mutual funds.''), Robert Jackson and John Morley (``SPAC
investors clearly understand SPACs to be substitutes for mutual
funds and other types of investment companies'' and noting that
``[i]n the median SPAC, nearly three quarters of investors choose to
redeem rather than hold their shares through the completion of the
SPAC's acquisition. When they redeem, they avoid any exposure to the
SPAC's future operations, taking only the return on the SPAC's
securities portfolio.'') (Emphasis in original). See also Alex
Wittenberg and Jack Pitcher, Saba Capital's Boaz Weinstein
Recommends SPACs, CDS as Fed Tightens, Bloomberg (January 28, 2022),
available at https://www.bloomberg.com/news/articles/2022-01-28/saba-s-weinstein-recommends-spacs-cds-as-fed-tightens#xj4y7vzkg
(SPACs are misunderstood because they're ``fixed-income products''
quoting Weinstein).
\1151\ Letters from Consumer Federation; Robert Jackson and John
Morley.
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Commenters also held varying views about the need for a Commission
safe harbor. Some commenters believed that a safe harbor would provide
clarity.\1152\
[[Page 14259]]
Other commenters, including some that believed SPACs are not investment
companies, believed the proposed safe harbor was unnecessary.\1153\ In
contrast, some commenters suggested that the proposed safe harbor was
unnecessary because SPACs are investment companies that should be
subject to the Investment Company Act.\1154\ Finally, one commenter
stated that it welcomed the Commission's efforts to provide clarity but
suggested that instead of adopting a safe harbor, the Commission should
issue interpretive guidance on the activities that SPACs could
undertake that would cause a SPAC to become an investment
company.\1155\
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\1152\ Letters from Skadden (stating that a safe harbor would
facilitate the ability to raise capital ``without the specter of
strike lawsuits'' but that some conditions included in the proposed
safe harbor were ``unnecessarily restrictive''), Robert Jackson and
John Morley (arguing that a safe harbor is ``necessary to eliminate
any doubt that the [Investment Company Act] applies to SPACs'' and,
among other things, that we should shorten the permitted acquisition
periods under the safe harbor). See also letter from Vinson & Elkins
(``We are supportive of a safe harbor, but believe proposed Rule 3a-
10 should be revised substantially.'').
\1153\ See, e.g., letters from ABA (``there is no apparent need
or basis for this safe harbor''), Loeb & Loeb (``we are not inclined
to consider the `safe harbor'. . . as either safe or necessary'').
See also letter from Ropes & Gray.
\1154\ Letter from Consumer Federation (``The proposed safe
harbor allows SPACs to function as investment companies without
having to comply with the investor protections afforded by the
Investment Company Act''). See also letter from Lucas Schwartz (``no
safe harbor should be carved out to create yet another privileged
investment instrument'').
\1155\ Letter from Davis Polk.
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Commenters also expressed differing opinions about the proposed
safe harbor's duration limits. Some commenters stated that the duration
limits were unnecessary and potentially harmful to SPACs and their
investors.\1156\ Some of these commenters suggested that if duration
limits are to be included in the safe harbor, the duration limits
should be lengthened to require SPACs to complete the de-SPAC
transaction within 36 months (with no interim target agreement duration
limit) to match national securities exchanges' current listing
standards.\1157\ In contrast, other commenters argued that the proposed
duration limits were too long, and suggested that the Commission should
require a SPAC to announce a de-SPAC transaction within 12 months and
complete the transaction within 18 months.\1158\ In their view, any
additional leeway would provide SPACs with special treatment not
afforded to ``transient investment companies'' as permitted under 17
CFR 270.3a-2 (``Rule 3a-2'' under the Investment Company Act), and thus
would not be consistent with the Commission's approach in that
rule.\1159\ One of these commenters also argued that shorter duration
limits would benefit investors by reducing the number of ``low quality
de-SPAC transactions to which investors are exposed.'' \1160\
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\1156\ See, e.g., letters from NYC Bar, Ropes & Gray. See also
recommendation of the Small Business Capital Formation Advisory
Committee, supra note 40.
\1157\ See, e.g., letters from ABA, Kirkland & Ellis, Managed
Funds Association.
\1158\ See, e.g., letters from Consumer Federation; Robert
Jackson and John Morley.
\1159\ See, e.g., letters from Better Markets; Consumer
Federation; Robert Jackson and John Morley.
\1160\ Letter from Robert Jackson and John Morley.
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As discussed above, depending upon the facts and circumstances, a
SPAC may meet the definition of ``investment company'' in section
3(a)(1) of the Investment Company Act.\1161\ Given the fact-based,
individualized nature of this determination and because, depending on
the facts and circumstances, a SPAC could be an investment company at
any stage of its operation such that a specific duration limitation may
not be appropriate, we have decided not to adopt proposed Rule 3a-10.
Rather, whether a SPAC is an investment company under section 3(a)(1)
is based on the particular facts and circumstances, which a SPAC should
evaluate both at its inception and throughout its existence. No one
specific duration period is the sole determinant of a SPAC's status
under the Investment Company Act. The duration of a SPAC, however,
should be considered in its analysis of the long-standing factors that
are considered in the determination of an issuer's status as an
investment company under section 3(a)(1)(A) of the Act, including, for
example, a SPAC's historical development and the activities of its
officers, directors and employees.\1162\
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\1161\ In addition, SPACs may also need to be mindful that
section 48(a) of the Investment Company Act generally makes it
unlawful for any person to do indirectly through another person or
entity what would be unlawful for the person to do directly.
\1162\ See supra note 1146 (discussion of factors considered in
determining an issuer's status as an investment company under
section 3(a)(1)(A)). As discussed below, a SPAC's activities may
become more difficult to distinguish from an investment company the
longer the SPAC takes to achieve its business purpose.
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B. SPAC Activities
Typically, a SPAC is organized for the purpose of merging with or
acquiring one or more operating companies.\1163\ The SPAC thereby
provides its shareholders with the opportunity to own interests in a
public entity that, in contrast to an investment company, will, as a
result of the de-SPAC transaction, either be an operating company, or
will, through a primarily controlled company, operate such operating
company. Nevertheless, a SPAC might engage in certain activities that
would raise serious questions about whether it is an investment company
under the Investment Company Act, including activities that would
affect a SPAC's analysis under the Tonopah factors. By way of
illustration, some activities of a SPAC that would raise concerns about
its status as an investment company under the Investment Company Act
include:
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\1163\ See supra note 5 and accompanying text.
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1. The Nature of SPAC Assets and Income
A SPAC may hold, or propose to hold, assets \1164\ that would weigh
heavily in favor of it being an investment company.\1165\ For example,
if a SPAC were to invest in corporate bonds, or not engage in a de-SPAC
transaction but instead acquire a minority interest in a company with
the intention of being a passive investor, such activities would affect
the analysis of the SPAC's status under section 3(a)(1)(C). In this
regard, a SPAC that owns or proposes to acquire 40% or more of its
total assets in investment securities would likely need to register
under the Investment Company Act unless an exclusion from the
definition applies. Such activities would also weigh in favor of a SPAC
being considered to be primarily engaged in the business of investing,
reinvesting, and trading in securities under section 3(a)(1)(A).\1166\
In addition, a SPAC whose income is substantially derived from such
assets would further suggest that the SPAC is an investment company
under section 3(a)(1)(A).\1167\
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\1164\ Any references to the SPAC's assets refer to both the
assets held in a trust or escrow account and any assets held by the
SPAC directly.
\1165\ A SPAC that does not hold any securities would generally
not implicate the Investment Company Act, unless it proposes to
engage in the business of being an investment company as defined in
section 3(a)(1) of the Investment Company Act. See Proposing
Release, supra note 7, at n. 550.
\1166\ As stated in the Proposing Release, a SPAC that purchases
multiple companies as part of a single transaction would not be
engaging in the types of activities that raise investor protection
concerns addressed by the Investment Company Act as it would still
be seeking to be primarily engaged in the business of an operating
company or companies after the de-SPAC transaction and not be
engaged in investment management activities. Proposing Release,
supra note 7, at 29500.
\1167\ See supra note 1146.
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A SPAC that holds only the sort of securities typically held by
SPACs today, such as U.S. Government securities, money market funds
\1168\ and cash items prior to the completion of the de-SPAC
transaction, and that does not
[[Page 14260]]
propose to acquire investment securities, would be more likely not to
be considered an investment company under section 3(a)(1)(C). While
U.S. Government securities and money market funds are securities for
purposes of section 3(a)(1)(A), asset composition is only one of the
factors that should be considered in analyzing a SPAC's status under
the Investment Company Act. For example, an issuer that holds these
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).
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\1168\ The term ``money market fund'' refers to those money
market funds registered under the Investment Company Act and
regulated pursuant to 17 CFR 270.2a-7 (Rule 2a-7 under the
Investment Company Act).
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2. Management Activities
Another significant factor in the analysis of whether a SPAC is an
investment company under section 3(a)(1)(A) is the actions of its
officers, directors, and employees.\1169\ For example, we would have
serious concerns if a SPAC held its investors' money in securities, but
the SPAC's officers, directors, and employees did not actively seek a
de-SPAC transaction or spent a considerable amount of their time \1170\
actively managing the SPAC's portfolio for the primary purpose of
achieving investment returns. Such activities would affect the analysis
as to whether the SPAC was primarily engaged in seeking to complete a
de-SPAC transaction and weigh more in favor of the SPAC being primarily
engaged in the business of investing, reinvesting, or trading in
securities such that it would be an investment company under the
Investment Company Act.
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\1169\ See supra note 1146.
\1170\ See In the Matter of Tonopah Mining Co., supra note 1146;
Daxor Corp., Initial Dec. Rel. 428 (Aug. 31, 2011) (``The Commission
next considers how and where the issuer's employees spend their time
and effort. Where employees spend considerable time managing the
investment securities, there is greater likelihood that the issuer
is primarily engaged in the investment business.'' (Citation
omitted)).
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Depending on the facts and circumstances, the management of a SPAC
also could cause SPAC sponsors to come within the definition of
``investment adviser'' in section 202(a)(11) of the Investment Advisers
Act of 1940.\1171\ That section generally defines an investment adviser
as any person who, for compensation, engages in the business of
advising others, either directly or through publications or writings,
as to the value of securities or as to the advisability of investing
in, purchasing, or selling securities, or any person who, for
compensation and as part of a regular business, issues or promulgates
analyses or reports concerning securities. The definition generally
includes three elements for determining whether a person is an
investment adviser: (i) the person provides advice, or issues analyses
or reports, concerning securities; (ii) the person is in the business
of providing such services; and (iii) the person provides such services
for compensation. Each element must be met in order for a person to be
deemed an investment adviser.\1172\
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\1171\ 15 U.S.C. 80b-2(a)(11).
\1172\ See Request for Comment on Certain Information Providers
Acting as Investment Advisers, Release No. IA-6050 (June 15, 2022)
[87 FR 37254 (June 22, 2022)].
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3. Duration
When evaluating whether it is an investment company under section
3(a)(1)(A), a SPAC whose assets and income are substantially composed
of, and derived from, securities should be mindful of the length of
time that it has been operating prior to entering into an agreement
with a target company and then completing the de-SPAC transaction with
that company.\1173\ While the duration of a SPAC is not the sole
determinant of its status under the Investment Company Act, a SPAC's
activities may become more difficult to distinguish from those of an
investment company the longer the SPAC takes to achieve its stated
business purpose.\1174\ For example, when a SPAC operates without
completing a de-SPAC transaction with a target company, particularly
where its assets are substantially composed of and its income derived
from securities, its duration may indicate that its historical
development is that of an investment company even if its
representations say otherwise. Similarly, the longer that a SPAC takes
to achieve its stated business purpose, the more questions arise as to
whether its officers, directors, and employees are more engaged in
achieving investment returns from the securities the SPAC holds rather
than in achieving the SPAC's stated business purpose. Accordingly,
after a certain period of time, a SPAC's historical development and
director, officer, and employee activities, together with its asset
composition and sources of income may suggest that the SPAC is
primarily engaged in the business of investing, reinvesting, and
trading in securities.
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\1173\ See supra note 1146 (discussion of Tonopah factors). As
discussed previously, given the other factors in the analysis,
however, we note that a SPAC could be an investment company at any
stage of its operation.
\1174\ See Proposing Release, supra note 7, at 29501; cf.
Goodwin (``We acknowledge that after some period of time without
[c]losing [a de-SPAC transaction], a SPAC will appear not to be
focused on consummating a De-SPAC transaction.'').
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In evaluating whether a SPAC has reached such a point in time, a
SPAC should consider how its duration falls within the framework of the
Investment Company Act, the rules thereunder, and past Commission
positions, including Rule 3a-2 under the Investment Company Act and the
Commission's position regarding Rule 419 under the Securities
Act.\1175\ 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. In addition, the Commission took the
position that accounts of certain blank check companies relying on Rule
419 need not be required to be regulated under the Investment Company
Act in part because, among other things, the rule limits the duration
of such accounts to 18 months and restricts the nature of
investments.\1176\ A SPAC that operates beyond these timelines raises
concerns that the SPAC may be an investment company, and these concerns
increase as the departure from these timelines lengthens. Thus, a SPAC
needs to be cognizant that, depending on the facts and circumstances,
it could be viewed as a fund-like investment if it operates beyond the
duration limits contemplated in other similar contexts. Accordingly, we
believe that a SPAC should reassess its status and analyze whether it
has become an investment company if it has, for example, failed to
enter into an agreement with a target company beyond such
timelines.\1177\
[[Page 14261]]
When considering its status under the Investment Company Act, a SPAC
should consider all relevant facts and circumstances, including, among
other things the length of time that it has been operating prior to
entering into an agreement with a target company and then completing
the de-SPAC transaction with that company.
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\1175\ See Investment Company Act Rule 3a-2 and Securities Act
Rule 419. We note that while exchange listing rules contemplate
potentially longer SPAC lifespans, those rules were adopted for a
different regulatory purpose and do not address investment company
status concerns.
\1176\ Specifically in adopting Rule 419, the Commission stated
that ``although [an escrow or trust account established by blank
check companies that comply with Rule 419 under the Securities Act]
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 [i.e., 18 months], 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 3,
at text accompanying n.32; see also 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.]''). As noted in the
Proposing Release, SPACs are not subject to the requirements of Rule
419. See Proposing Release, supra note 7, at nn.12-13 and
accompanying text.
\1177\ See Rules 3a-2 and 419.
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4. Holding Out
A SPAC that holds itself out in a manner that suggests that
investors should invest in its securities primarily to gain exposure to
its portfolio of securities prior to the de-SPAC transaction would
likely be an investment company under the definition in section
3(a)(1)(A). For example, if a SPAC were to market itself primarily as a
fixed-income investment, as an alternative to an investment in a mutual
fund, or as an opportunity to invest in Treasury securities or money
market funds, it would likely be holding itself out as being primarily
engaged in the business of investing, reinvesting, or trading in
securities. Accordingly, such a SPAC would likely be an investment
company under section 3(a)(1)(A).
5. Merging With an Investment Company
If a SPAC were to engage or propose to engage in a de-SPAC
transaction with a target company that meets the definition of
investment company, such as a closed-end fund or a business development
company, the SPAC is likely to be an investment company under section
3(a)(1)(A) of the Investment Company Act because it would be proposing
to be engaged in the business of investing, reinvesting and trading in
securities as set out in section 3(a) of that Act. A SPAC that seeks to
engage in a de-SPAC transaction with an investment company would, at
some point prior to the de-SPAC transaction, be proposing to engage in
the business of being an investment company.
C. Conclusion
Depending upon the facts and circumstances, a SPAC may meet the
definition of investment company in section 3(a)(1)(A) or 3(a)(1)(C)
(or both) of the Investment Company Act. To the extent that a SPAC's
activities--including any of those discussed above--may cause it to
fall within one or more of these definitions, a SPAC should consider
options that would bring it into compliance such as changing its
operations, winding down its operations, or registering as an
investment company under the Investment Company Act. The Investment
Company Act imposes registration, reporting, governance and minimum
capital requirements on investment companies. Issuers that meet the
definition of investment company but fail to comply with the Investment
Company Act's provisions, or otherwise qualify for an exclusion or
exemption from the provisions of the Act, could, among other things, be
subject to enforcement action by the Commission or to private
litigation.
VII. Other Matters
If any of the provisions of these rules, or the application thereof
to any person or circumstance, is held to be invalid, such invalidity
shall not affect other provisions or application of such provisions to
other persons or circumstances that can be given effect without the
invalid provision or application.
Pursuant to the Congressional Review Act, the Office of Information
and Regulatory Affairs has designated this rule as a ``major rule,'' as
defined by 5 U.S.C. 804(2).
VIII. Economic Analysis
We are mindful of the costs and benefits of these new rules and
amendments. The discussion below addresses the potential economic
effects of the new rules and amendments, including the likely benefits
and costs, as well as the potential effects on efficiency, competition,
and capital formation.\1178\ We have analyzed the expected economic
effects of the 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 and their
characteristics.
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\1178\ 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)) require the
Commission, when engaging in rulemaking where it is required to
consider or determine whether an action is necessary or appropriate
in the public interest and 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.
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A SPAC is a shell company organized for the purpose of combining
with one or more target companies.\1179\ Like traditional IPOs, SPACs
provide target companies with a way to raise capital through public
markets. To that end, as noted above, the SPAC process is unique in
that the de-SPAC transaction is a hybrid transaction that contains
elements of both an IPO and an M&A transaction.\1180\ Under the current
regulatory framework, the SPAC process allows the target company to
raise capital through public markets without requiring the same level
of disclosure or incurring the same liability as with a traditional
IPO.\1181\ As such, some commenters and academics have expressed the
view that, compared to traditional IPOs, de-SPAC transactions raise
additional ``adverse selection'' \1182\ concerns stemming from
information asymmetry and conflicts of interest between SPAC investors
and managers that are not fully resolved by market forces.\1183\
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\1179\ See discussion in section I. Like above, our discussion
of de-SPAC transactions and target companies generally focuses on
target companies that are private operating companies, but we also
address situations where the target company of a de-SPAC transaction
may comprise an operating company that is a public company, a
business, or assets, or combinations of multiple thereof. See Item
1601(d) of Regulation S-K.
\1180\ The SPAC process begins when a SPAC conducts an IPO and
ends when the SPAC combines with a target company in a de-SPAC
transaction.
\1181\ See, e.g., Sris Chatterjee, N.K. Chidambram & Gautam
Goswani, Security Design for a Non-Standard IPO: The Case of SPACs,
69 J. Int'l Money & Fin. 151 (2016).
\1182\ A well-known example of adverse selection is the ``market
for lemons,'' in which sellers of used cars know the quality of the
car, but buyers do not. Because buyers have less information than
sellers (information asymmetry) and cannot differentiate the
``good'' cars from the ``lemons,'' 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 the market to fall apart or
``unravel'' entirely, and no used cars to be purchased. See, e.g.,
George Akerlof, The Market for ``Lemons'': Quality Uncertainty and
the Market Mechanism, 84 Qtr. J. Econ. 488 (1970). For examples of
existing market solutions to this adverse selection, see Proposing
Release, supra note 7, at 29506.
\1183\ See, e.g., letters from Americans for Financial Reform
Education Fund; Better Markets; Robert Jackson and John Morley. See
also Lora Dimitrova, Perverse Incentives of Special Purpose
Acquisition Companies, the ``Poor Man's Private Equity Funds,'' 63
J. Acct. & Econ. 99 (2017); Klausner, Ohlrogge & Ruan, supra note
18.
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The final rules include a number of additional disclosure
requirements that help address information asymmetries between
investors \1184\ and the SPAC,\1185\ which will enable investors
[[Page 14262]]
to make more informed investment and voting decisions. For example, at
the SPAC IPO stage, as discussed in detail in the sections below, the
rules require disclosures about dilution, compensation, and conflicts
of interest, among other things. As another example, at the de-SPAC
transaction stage, the rules require disclosures related to the
information considered by the SPAC in its assessment of the
transaction, such as projections or assessments by third parties, among
other things.
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\1184\ Throughout this section, ``investor'' can refer to any
current or a potential security holder of a company, though it is
generally understood that costs and benefits may accrue to such
investors heterogeneously based on size, sophistication, and
affiliation.
\1185\ We refer to SPACs throughout this analysis as shorthand
but acknowledge that the various controlling parties of a SPAC that
are involved in the decision making of the SPAC (including the SPAC
sponsor, management, board, or other governing group) may have
disparate incentives, each adding their own complexity to the
principal-agent dynamic. However, the existence and general nature
of the relationship between investors and the SPAC ``agent'' is not
significantly different based on which specific agent is considered,
thus the reference to the SPAC broadly. When this generalization
does not hold, we provide more precise explanations.
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The final rules also include several provisions to help ensure that
shareholders more consistently receive the full protections of
Securities Act disclosure and liability provisions in connection with
the de-SPAC transaction. For example, because the target company is
effectively an ``issuer'' of the securities in any registered de-SPAC
transaction, the rules require that the target company sign the
registration statement filed in connection with the de-SPAC
transaction.\1186\ Because signatories are subject to section 11
liability for material omissions and misstatements, we expect this
requirement to increase incentives for targets to ensure the accuracy
of the disclosures in de-SPAC transaction registration statements. We
are also adopting definitions of ``blank check company'' for PSLRA safe
harbor purposes that would not contain a qualification that the company
issues penny stock. As a result, the safe harbor for forward-looking
statements under the PSLRA will be unavailable to SPACs and other blank
check companies, regardless of whether they would have qualified as an
issuer of penny stock. This approach will help incentivize such blank
check companies taken to take greater care when making forward-looking
statements.\1187\
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\1186\ See supra section III.C.
\1187\ See supra section III.E.
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Certain rules we are adopting are intended to align disclosures in
de-SPAC transactions more closely to those of traditional IPOs. For
example, certain non-financial disclosures regarding a target company
that are currently not filed by the company until a Form 8-K, within
four business days after the completion of a de-SPAC transaction, will
be required to be included in the disclosures that are filed in
connection with a de-SPAC transaction (on Form S-4 or F-4, a proxy or
information statement, or a Schedule TO).\1188\ Also, the combined
company following a de-SPAC transaction will be required to re-
determine its eligibility for SRC status and reflect any change in
status in its filings, beginning 45 days after consummation of the de-
SPAC transaction.\1189\
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\1188\ See supra section III.A.
\1189\ See supra section III.D.
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We are also adopting final rules that apply to shell companies more
broadly. Rule 145a deems any business combination involving a reporting
shell company and another entity that is not a shell company to involve
a sale of securities to the reporting shell company's shareholders.
Currently, investors in reporting shell companies may not always
receive the disclosures and other protections afforded by the
Securities Act at the time when there is a fundamental change in the
nature of their investment due to the business combination involving
another entity that is not a shell company. In addition, the amendments
to Regulation S-X more closely align the financial statement
requirements in business combinations between a shell company and a
non-shell company with those required in connection with traditional
IPOs.
As discussed in section I, market participants have raised concerns
that disclosures that currently accompany SPAC IPOs and de-SPAC
transactions do not provide investors with adequate information to
assess the potential risks of investing in SPACs and the ways in which
the SPAC sponsor and other affiliates stand to gain from these
transactions. We expect the final rules to elicit information regarding
SPAC transactions that is more consistent, useful, and readily
comparable.\1190\ As a result, investors will be able to make more
informed voting and investment decisions, resulting in more efficient
pricing of securities.\1191\ Moreover, by reducing information
asymmetry and agency costs, we expect the final rules to result in less
adverse selection than might otherwise occur at the de-SPAC transaction
stage, which should encourage greater investor participation. We
further anticipate that, by addressing the liability of various parties
in de-SPAC transactions and other shell company business combinations,
the final rules will incentivize parties to exercise greater care in
disclosing information in connection with relevant business
combinations, increasing the protections afforded to investors.
Overall, we expect the final rules will enhance the protection of
investors and promote market efficiency.
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\1190\ See, e.g., infra sections VIII.B.1.iii.c, VIII.B.3.
\1191\ 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 Acct. Rev. 1269 (2014), available at https://ssrn.com/abstract=2312812 (retrieved from SSRN Elsevier database) (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 (Research Paper No. 3126379, Mar. 1,
2018, last revised June 12, 2018), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3126379 (retrieved from
SSRN Elsevier database) (increased disclosure regimes lead to
increased liquidity and lower crash risk).
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SPACs and their target companies may incur costs related to the
public disclosure of the newly required information. The costs will be
lower for parties that already provide such disclosures voluntarily in
response to market demands.\1192\ We are also mindful that some aspects
of this rulemaking may deter some forms of communications or some
transactions that might otherwise be economically beneficial to issuers
or investors (or both). We discuss these considerations in more detail
below.
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\1192\ 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/.
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We received several comments specifically addressing the economic
analysis of the Proposing Release.\1193\ A number of commenters shared
the results of quantitative analyses that addressed SPAC-related issues
considered by the proposed rules.\1194\
[[Page 14263]]
We discuss these comments below in our analysis of the costs and
benefits of the final rules. We also discuss the anticipated impacts on
efficiency, competition, and capital formation and assess several
reasonable policy alternatives. Where possible, we have attempted to
quantify the economic effects of the final rules.\1195\ In many cases,
however, we are unable to do so because we lack access to data that
would allow us to quantify the effects with a reasonable degree of
accuracy. Further, even in cases where the Commission has some data,
quantification is not practicable due to the number and type of
assumptions necessary to quantify certain economic effects, which
render any such quantification unreliable. Where we are unable to
quantify the economic effects of the final rules, we provide a
qualitative assessment of the potential effects.
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\1193\ See letters from Virtu Financial Inc. (June 13, 2022)
(``Virtu''), Skadden, Kirkland & Ellis, Committee on Capital Markets
Regulation.
\1194\ See letters from Danial Hemmings, Institute of European
Finance, Bangor University and Aziz Jaafar, University of Sharjah
(June 29, 2023); Tom Nohel, Department of Finance, Imperial College
and Quinlan School of Business, Loyola University-Chicago, Felix
Feng, Michael G. Foster School of Business, University of
Washington, Xuan Tian, PBC School of Finance, Tsinghua University,
Wenyu Wang, Kelley School of Business, Indiana University, and
Yufeng Wu, Gies College of Business, University of Illinois Urbana-
Champaign (Feb. 7, 2023); Michael Goffman, Hebrew University of
Jerusalem and Yuchi Yao, University of Rochester (July 19, 2022 and
Dec. 31, 2022); Alexander Groh, Professor of Finance, EMLYON
Business School, France (Sept. 2, 2022 and Dec. 5, 2022); Michael
Klausner, Michael Ohlrogge, Amanda Rose and Emily Ruan (July 11,
2022); Michael Klausner, Michael Ohlrogge, and Harald Halbhuber;
Holger Spamann; Debarshi Nandy, Barbara and Richard M. Rosenberg
Professor of Global Finance, Brandeis International Business School,
Yaxuan Wen, Ph.D. Candidate in International Economics and Finance,
Brandeis International Business School, and Mengnan Zhu, Assistant
Professor of Finance, Dickinson College (June 7, 2022), citing
Yaxuan Wen & Mengnan ``Cliff'' Zhu, Is Going Public via SPAC
Regulatory Arbitrage? A Textual Analysis Approach (2022), https://ssrn.com/abstract=4066641 or https://dx.doi.org/10.2139/ssrn.4066641; Usha Rodrigues and Mike Stegemoller; Snehal Banerjee,
Associate Professor of Finance and Accounting, UC San Diego, and
Martin Szydlowski, Assistant Professor of Finance, University of
Minnesota (Apr. 1, 2022).
\1195\ For our estimates of the paperwork burdens associated
with the rules and amendments for purposes of the Paperwork
Reduction Act of 1995 (``PRA''), see infra section X. 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, as required by that Act. As a
result, these PRA estimates do not reflect the full economic effects
or full scope of economic costs of the rules and amendments that are
discussed in this analysis.
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A. Baseline and Affected Parties
The baseline against which the costs, benefits, and the effects on
efficiency, competition, and capital formation of the final rules and
amendments are measured consists of the current state of the SPAC
market, current practice as it relates to SPAC IPOs and subsequent
business combination transactions between SPACs and private operating
companies, and the current regulatory framework.
We begin by discussing current market practices related to SPAC
IPOs in section VIII.A.1. We then discuss de-SPAC transactions in
section VIII.A.2.
1. SPAC Initial Public Offerings
The parties most likely to be directly affected by the final rules
regarding specialized disclosure requirements for SPACs in IPOs and
other registered offerings are: SPAC sponsors and their affiliates or
potential SPAC sponsors intending to organize a new SPAC; current SPAC
officers, SPAC directors, or promoters; SPAC investors; and any other
market participants whose service or activities involve analysis of the
information, data, and disclosures related to SPACs in these offerings.
In addition, if the adoption of the final rules alters the
incentives for other parties (e.g., SPAC sponsors or underwriters) to
participate in or be involved with SPAC transactions, we would expect
secondary impacts on the prospects or opportunities of private
companies that would be potential target companies of such newly-
organized SPACs. The final rules also may affect parties who provide
advisory or other services to SPACs or SPAC sponsors in connection with
SPAC transactions through additional disclosures about the parties and
provided services or potential liability.
Table 2 shows the estimated number of SPAC IPOs since 1990. They
peaked in 2021, following a similar trend in traditional IPOs.\1196\ In
2023, there were an additional 31 SPAC IPOs.\1197\
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\1196\ See, e.g., letter from Committee on Capital Markets,
noting significant increases in the number of traditional IPOs in
2020 and especially 2021. See also data collected, cleaned, and made
available by Jay Ritter on SPAC IPOs and overall IPO activity
available at https://site.warrington.ufl.edu/ritter/ipo-data/ (last
accessed 10/24/2023).
\1197\ Data from Dealogic, based on IPO listing date for
offerings with a confirmed pricing date.
[GRAPHIC] [TIFF OMITTED] TR26FE24.003
The vast majority of SPACs claim either SRC or EGC status, with the
majority claiming both.\1198\ For example, all of the 86 SPAC IPOs in
2022 claimed EGC status and 84 claimed SRC status.\1199\
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\1198\ See also supra note 665.
\1199\ Based on status disclosed by SPACs in the financials
filed after the IPO, if available, otherwise from Form S-1 or Form
F-1.
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i. SPAC Exchange Listings
SPAC listings have migrated from the over-the-counter (OTC) market
to three national securities exchanges: first, NYSE American (formerly,
the American Stock Exchange (``AMEX'')); then, the Nasdaq Stock Market
(``Nasdaq'') and the New York Stock Exchange (``NYSE'') (see Table
2).\1200\
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\1200\ 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 proposed rule change to adopt listing standards to
permit the listing of SPACs on July 25, 2008. See Release No. 34-
57785 (May 6, 2008) [73 FR 27597 (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)] (SR-NYSEAmex-2010-103) (notice of
filing and immediate effectiveness of proposed rule change to adopt
additional criteria for the listing of SPACs).
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[[Page 14264]]
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 business combination.\1201\ Among other things, the
rules of 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.\1202\ The rules of these exchanges further require that,
within three years 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 a
business combination(s) having an aggregate fair market value of at
least 80% of the value of the net assets in the trust account excluding
certain costs.\1203\ The rules of NYSE, Nasdaq, and NYSE American
require that a business combination meeting this 80% requirement be
approved by a majority of the SPAC's independent directors.\1204\ The
rules of all three exchanges also require, if a shareholder vote is
held, that a majority of the shares voted at the shareholder meeting
approve a de-SPAC transaction meeting this 80% requirement.\1205\ In
addition, the rules of all three exchanges provide that, if a business
combination transaction meeting this 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 of taxes
and working capital disbursements.\1206\ Under the rules of all three
exchanges, if a shareholder vote on a business combination 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.\1207\
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\1201\ 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 described in
this section. See CBOE BZX Rule 14.2(b).
\1202\ NYSE Listed Company Manual Section 102.06; Nasdaq Listing
Rule IM-5101-2(a); NYSE American Company Guide Section 119(a).
\1203\ NYSE Listed Company Manual Section 102.06(e); Nasdaq
Listing Rule IM-5101-2(b); NYSE American Company Guide Section
119(b).
\1204\ NYSE Listed Company Manual Section 102.06(d); Nasdaq
Listing Rule IM-5101-2(c); NYSE American Company Guide Section
119(c).
\1205\ NYSE Listed Company Manual Section 102.06(a); Nasdaq
Listing Rule IM-5101-2(d); NYSE American Company Guide Section
119(d).
\1206\ Id.
\1207\ NYSE Listed Company Manual Section 102.06(c); Nasdaq
Listing Rule IM-5101-2(e); NYSE American Company Guide Section
119(e).
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ii. SPAC Sponsors
SPACs are managed by SPAC sponsors, who spend time and effort
managing the SPAC process and searching for a suitable target to
complete a de-SPAC transaction. Sponsors also invest in the SPAC and
are compensated with a portion of ownership in the combined company
that results from the de-SPAC transaction, which means that such
compensation will generally only be realized if a de-SPAC transaction
occurs. Commentators have suggested that one reason a SPAC might
provide a more attractive route to the public markets than a
traditional IPO is because the target company may benefit from the
leadership and professional advice from one or more individuals
composing the SPAC sponsor, including in some cases beyond the
consummation of the de-SPAC transaction and into the life of the
resulting combined public company.\1208\ Although the majority of
sponsors from 2019 through the first half of 2021 were financial
institutions, a sizable fraction (47%) of companies classified as SPACs
were self-reported as sponsored by individuals.\1209\ This percentage
has been increasing, as 66% of SPACs with IPOs in the second half of
2021 and 83% in 2022 were sponsored by individuals.\1210\
---------------------------------------------------------------------------
\1208\ See Robert Berger, SPACs: An Alternative Way to Access
the Public Markets, 20 J. Applied Corp. 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.'').
\1209\ See SPACInsider, 1H-2021 Report, available at https://mcusercontent.com/764dc55fe6da1e37d427265ad/files/b90cf236-0845-f778-e35c-db7417200d35/1H_2021_SPAC_Report.pdf.
\1210\ Based on staff analysis of data from SPACInsider. SPACs
with sponsor type ``Sponsor'' were counted as individually
sponsored.
---------------------------------------------------------------------------
iii. SPAC IPO Underwriters
Underwriters of SPAC IPOs may be affected by the final rules, to
the extent they are liable for IPO disclosures or any involvement in
de-SPAC transactions. During the period 1990-2022, the average number
of named underwriters participating in a SPAC IPO was 2.4.\1211\ In
2022, the average was 2.1. Although we are not aware of any database
listing investment banks that are willing to provide underwriting
services for SPACs, there were six investment banks that participated
in at least ten SPAC IPOs in 2021 that did not participate in any SPAC
IPOs in 2022 or in the first two quarters of 2023.\1212\ All of these
SPAC IPOs were done via a firm commitment underwriting.\1213\ The
average fee charged by SPAC IPO underwriters from 1990-2022 was
approximately 5.4% of IPO proceeds.\1214\ The average underwriting fee
has declined from approximately 6.9% in the 1990s and 2000s to
approximately 5.2% in the 2010s and 2020s.\1215\ The average
underwriting fee for SPACs in 2022 was 5.1%.\1216\ SPAC IPO
underwriters may provide services to a SPAC or its eventual target
company both before and after the completion of an IPO. For example, a
SPAC IPO underwriter may help a SPAC identify potential target
companies, provide financial advisory services to the SPAC or the
target company, or act as a PIPE placement agent. As discussed in the
Proposing Release, current SPAC IPO underwriter practice is to defer a
portion of the underwriting fee until, and conditioned upon, the
completion of the de-SPAC transaction.\1217\ Prior to 2004, SPAC IPO
[[Page 14265]]
underwriters typically did not defer their fee until completion of the
de-SPAC transaction.\1218\ During the period 2005-2022, we estimate
that the average size of the deferred SPAC IPO underwriting fee was
3.1% of IPO proceeds (3.4% if excluding the cases where there was no
deferred fee), or approximately 56% of total SPAC IPO underwriting
fees. We have not observed significant differences in the structure or
level of SPAC IPO underwriting fees and deferred fees, as disclosed at
the IPO stage, when comparing SPACs that have completed a de-SPAC
transaction versus SPACs that did not do so.
---------------------------------------------------------------------------
\1211\ This estimate is based on staff analysis of Dealogic of
SPAC IPOs registered with the SEC with a confirmed pricing date.
\1212\ Id. Some commenters asserted that underwriters may have
become more reluctant to participate in SPAC IPOs as a result of
proposed Rule 140a, which would have deemed a SPAC IPO underwriter
that 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 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. See Proposing Release, supra note 7, at 29486. See,
e.g., letter from White and Case. A decrease in the supply of
underwriters providing services to SPACs may have resulted in fewer
SPAC IPOs because SPAC IPOs are typically structured as underwritten
offerings. Conversely, it could also be the case that the decline in
SPACs activity during this period, which may be due to other
reasons, could naturally result in fewer underwriters.
\1213\ 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 3.
\1214\ This estimate is based on staff analysis of data as
described in supra note 1211. See also letter from Sagiv Shiv,
Managing Director, Head of MA and Advisory, ACP Capital Markets LLC
(March 24, 2023), noting that the SPAC underwriting fee percentage
is based on IPO proceeds, not the non-redeemed share of these
proceeds at the de-SPAC stage.
\1215\ See supra note 1214.
\1216\ Id.
\1217\ See Proposing Release, supra note 7, at 29486. This
practice has not changed since the proposal. The average deferred
fee in 2022 through the first two quarters of 2023 was 3.3% of IPO
proceeds.
\1218\ This conclusion is based on staff analysis. See supra
note 1211. See also Yochanan Shachmurove & Milos Vulanovic,
Specified Purpose Acquisition Company IPOs, in The Oxford Handbook
of IPOs 301 (Douglas Cumming & Sofia Johan eds., 2018).
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iv. Public Warrants
Most SPAC IPOs register the offering of a unit composed of a common
share, warrants, or fractions thereof, and--in some cases--
rights.\1219\ Currently, SPAC units usually include one common share
and one or more fractional out-of-the-money warrants.\1220\ Public
warrants, i.e., those issued to non-affiliated shareholders, give the
holder the right to purchase common stock, typically at an exercise
price of $11.50, for up to five years after the completion of the de-
SPAC transaction.\1221\
---------------------------------------------------------------------------
\1219\ See, e.g., G[uuml]l Okutan Nilsson, Incentive Structure
of Special Purpose Acquisition Companies, 19 Eur. Bus. Org. L. Rev.
253 (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.'').
\1220\ Early practice for SPACs often involved the offered unit
containing multiple in-the-money warrants. See, e.g., Lola Miranda
Hale, SPAC: A Financing Tool with Something for Everyone, J. of
Corp. Acct. & Fin. Jan./Feb. 2007, at 67 (``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, Summer 2008, at 8 (``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.''). Staff analysis of Dealogic data suggests
unit offerings of 1 common stock and two warrants was typical
between 2000 and 2005. Such structures reappear after 2020 but as a
much smaller proportion of all unit structures.
\1221\ See Gahng, Ritter & Zhang, supra note 30.
[GRAPHIC] [TIFF OMITTED] TR26FE24.000
As SPAC offerings have evolved, however, the dilutive potential of
the warrant component of a SPAC offering unit appears to have somewhat
diminished. As indicated in Figure 1, across all the years included in
Table 1, many SPACs offer units with fractional warrant components. In
more recent years (2019-2022, inclusive), the majority of SPACs that
have conducted an IPO offered units with fractional warrants
representing half a share or less. The result of this trend is that
warrant features have in some respects become less dilutive in more
recent years.\1222\ SPAC sponsors also often acquire warrants, with
some studies estimating the amount of those acquisitions representing
3-5% of the IPO proceeds.\1223\
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\1222\ Early SPACs typically offered one or two in-the-money
warrants. See supra note 1220. More recent SPAC structures offer
out-of-the-money fractional warrants. See supra note 1221.
\1223\ See, e.g., G[uuml]l Okutan Nilsson, Incentive Structure
of Special Purpose Acquisition Companies, 19 Eur. Bus. Org. L. Rev.
(2018), supra note 1219.
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2. De-SPAC Transactions
At the de-SPAC transaction stage, the primary parties affected by
the new disclosure requirements include SPACs, SPAC sponsors, investors
(including PIPE investors if any), and target companies. Additionally,
the final rules to amend or otherwise clarify the existing liability
framework would affect those same parties (and certain individuals at
those parties).
As illustrated in Table 3, based on staff analysis of SPAC IPOs
that registered a sale of securities between 1990 and 2023,
approximately two-
[[Page 14266]]
thirds (65%) of all SPACs following their IPOs announced a de-SPAC
transaction, and about one-half (49%) completed such
transactions.\1224\ It is possible that SPACs currently searching for
target companies may still identify target companies, complete de-SPAC
transactions, and thereby increase the fractions of SPACs with
announcements and completed transactions. This de-SPAC transaction
completion rate of approximately one-half is generally consistent with
previous research findings (which may have used different ranges or
filters for their samples).\1225\
---------------------------------------------------------------------------
\1224\ Staff analysis based on the sample of SPAC IPOs described
in Table 2 note a that reflect all confirmed, completed activity as
of Dec. 31, 2023.
\1225\ Studies performed in 2016 or later reviewing the 2003-
2013 cohort of SPACs found that approximately 51.5% of SPACs that
had an IPO during the decade successfully completed 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).
[GRAPHIC] [TIFF OMITTED] TR26FE24.004
Currently, the typical SPAC discloses in its IPO prospectus that it
is formed for the purpose of effecting a business combination with one
or more businesses. Most SPACs pursue only one target company for a de-
SPAC transaction. Of the 583 business combination transactions with
operating companies that occurred over the 1990-2022 period involving
SPAC IPOs approximately 3% of transactions (17 of 583) involved two or
more target companies (15 transactions involved two target companies
and two transactions involved three target companies).\1226\
---------------------------------------------------------------------------
\1226\ Target counts are from Dealogic's SPAC M&A data.
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i. PIPEs in Connection With De-SPAC Transactions
PIPEs have supported de-SPAC transactions since approximately
2005.\1227\ However, in some recent de-SPAC transactions, 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 on
SPAC shareholders and how well these dilutive effects might be
understood by other investors.
---------------------------------------------------------------------------
\1227\ 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 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, the
median cash raised through third-party PIPE investors was approximately
25% of the cash raised in the de-SPAC transactions.\1228\ The same
study found that, following these transactions, the median portion of
the post de-SPAC company owned by SPAC shareholders including the
sponsor was 35% and the median portion owned by the sponsor alone was
12%.\1229\ Because PIPE investors may receive confidential information
with which to make an investment decision (including one-on-one
conversations with the target company's management, which may convey
soft information that enables PIPE investors to assess management
abilities or determine their level of confidence in the management
team) and may also engage in extended and detailed due diligence on the
SPAC and target company,\1230\ their participation has at times been
considered a benefit to SPAC IPO investors, providing a positive signal
of the expected future financial performance of the post-de-SPAC
transaction combined company.
---------------------------------------------------------------------------
\1228\ See Klausner, Ohlrogge & Ruan, supra note 18. The authors
analyzed data for the 47 public company SPACs that entered into a
business combination with a target company, and thereby brought the
operating company public, between Jan. 2019 and June 2020.
\1229\ Id.
\1230\ Id.
---------------------------------------------------------------------------
As the SPAC market has evolved, so too has the role 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 ($316 million) and median
($210 million) amounts raised in PIPE financings were similar to the
average size of the SPAC trust account at the time of the IPO.\1231\
This may reflect that in more recent SPACs, in addition to enabling
larger deals, some PIPEs may provide capital to ensure that a deal that
otherwise may fail due to a high redemption rate can proceed to
completion, although many PIPE offerings in connection with a de-SPAC
transaction still appear to facilitate larger acquisitions rather than
replace SPAC share redemptions.\1232\ In these cases, the ownership
stake of the PIPE
[[Page 14267]]
investors in the combined company may exceed that of the non-redeeming
SPAC investors.\1233\ PIPE investors may, therefore, come to have a
larger stake in the combined company than SPAC IPO investors
anticipated when making an initial investment. In 2022, this trend may
have lessened slightly, with only 71% of de-SPAC transactions including
PIPE financing, and the average ($128 million) and median ($92 million)
amounts raised in PIPE financings were smaller than the average and
median (both $269 million) sizes of the SPAC trust account at the time
of the IPO.\1234\
---------------------------------------------------------------------------
\1231\ See Michael Levitt, Valerie Jacob, Sebastian Fain, Pamela
Marcogliese, Paul Tiger, & Andrea Basham, 2021 De-SPAC Debrief,
Freshfields.us (Jan. 24, 2022), available at https://blog.freshfields.us/post/102hgzy/2021-de-spac-debrief. The
difference between average and median PIPEs in this sample reflects
that the data is positively skewed, implying that, while some deals
may involve little or no additional financing via PIPEs, other deals
feature large investments outside the SPAC IPO process.
\1232\ See supra note 1203 which discusses de-SPAC transaction
80% minimum cash conditions. 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 billion) point to
PIPE offerings facilitating larger acquisitions. See Michael Levitt,
Valerie Jacob, Sebastian Fain, Pamela Marcogliese, Paul Tiger, &
Andrea Basham, 2021 De-SPAC Debrief, Freshfields.us (Jan. 24, 2022),
available at https://blog.freshfields.us/post/102hgzy/2021-de-spac-debrief.
\1233\ Assuming the price of shares sold to PIPE investors is
the same as or less than the IPO price, 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. 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 (raised from SPAC shareholders whose
shares were not redeemed) at the consummation of the de-SPAC
transaction. De-SPAC transactions were less reliant on funding
through PIPEs in 2022 than in 2021, according to one study, finding
PIPEs were less common in de-SPAC transactions (70% compared to 95%
in 2021) and were smaller in both absolute size (averaging
approximately $128 million in 2022, compared to $316 million for the
2021) and size relative to the SPAC trust account (less than 50% in
the 2022 deals, compared to nearly 100% in the 2021 deals). See
Freshfields, 2022 De-SPAC Debrief: A Comprehensive Review of All 102
De-SPAC Transactions that Closed in 2022, Freshfields.us (Jan.
2023), available at https://www.freshfields.us/490963/globalassets/noindex/documents/2022-de-spac-debrief.pdf.
\1234\ See Freshfields, 2022 De-SPAC Debrief: A Comprehensive
Review of All 102 De-SPAC Transactions that Closed in 2022,
Freshfields.us (Jan. 2023), available at https://www.freshfields.us/490963/globalassets/noindex/documents/2022-de-spac-debrief.pdf.
---------------------------------------------------------------------------
PIPEs are typically priced at a discount relative to the market
value of the publicly traded securities. For example, one study of PIPE
transactions (including but not limited to de-SPAC transactions)
indicates that the average discount for PIPE investors is 11.2%
(compared to the market value of those securities), and for the
subsample of PIPEs that do not include warrants, the average discount
is 5.7%.\1235\ Another study that focused on PIPEs in de-SPAC
transactions of SPACs that conducted an IPO in or after 2015 and that
completed a de-SPAC by March 2021 estimates that the mean discount for
PIPE investors was approximately 20%.\1236\
---------------------------------------------------------------------------
\1235\ 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 3,001 PIPE transactions by U.S.
firms listed on NYSE or Nasdaq between 2001 and 2015.
\1236\ See Gahng, Ritter & Zhang, supra note 30. We note that
discount calculations involve several methodological assumptions
regarding the valuation of warrants and the treatment of transfers.
For example, another study finds that between 2019 and June 2020,
the median discount received by PIPE investors was 5.5% relative to
the market value of the publicly traded SPAC shares and that, in 37%
of SPACs with PIPE deals, PIPE investors received a 10% discount or
more. See Klausner, Ohlrogge, & Ruan, supra note 18.
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ii. Use of Projections in Connection With De-SPAC Transactions
Item 1609 of Regulation S-K will require certain enhanced
disclosures about any projections disclosed in de-SPAC
transactions.\1237\ Hence, Item 1609 will potentially affect preparers
and users of financial projections related to de-SPAC transactions,
including SPACs, SPAC boards of directors, SPAC sponsors, target
companies, both sets of controlling shareholders and management, and
current and prospective investors.
---------------------------------------------------------------------------
\1237\ 17 CFR 229.1609.
---------------------------------------------------------------------------
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 SPACs with IPO dates from
2015 to 2020.\1238\ The authors found that 87% (249 out of 285) of 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. The authors restricted their
sample to transactions with a single target and excluded SPACs that
delisted before the merger effective date, traded on the OTC market, or
focused on the biotechnology industry, yielding a sample of 142
observations.\1239\ They identified 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.\1240\ The authors removed
companies ``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 three studies suggest that the use of
projections is common in de-SPAC transactions.
---------------------------------------------------------------------------
\1238\ See Kimball Chapman, Richard M. Frankel & Xiumin Martin,
SPACs and Forward-Looking Disclosure: Hype or Information? (Working
Paper, Oct. 20, 2021), available at https://ssrn.com/abstract=3920714 (retrieved from SSRN Elsevier database).
\1239\ See, e.g., Dambra, Even-Tov & George, supra note 36.
\1240\ See Elizabeth Blankespoor, Bradley E. Hendricks, Gregory
S. Miller & DJ Stockbridge, A Hard Look at SPAC Projections, 68
Mgmt. Sci. 4742 (2022), available at https://doi.org/10.1287/mnsc.2022.4385.
---------------------------------------------------------------------------
iii. Use of Fairness Opinions
Item 1607 of Regulation S-K will require disclosures related to any
report, opinion (other than an opinion of counsel) or appraisal
received by the SPAC or the SPAC sponsor from an outside party or
unaffiliated representative materially relating to, among other things,
the fairness of the de-SPAC transaction to the SPAC, its security
holders or SPAC sponsor if the SPAC or SPAC sponsor receives such a
report, opinion, or appraisal.\1241\ Third-party providers of fairness
opinions may factor the requirement for these disclosures into how they
price their services as well as the types of information included in
their reports and opinions. As such, this disclosure requirement may
affect SPACs' determination of whether to obtain fairness opinions.
---------------------------------------------------------------------------
\1241\ 17 CFR 229.1607(a)(4).
---------------------------------------------------------------------------
In 2021, only 15% of de-SPAC transactions disclosed that they were
supported by fairness opinions, according to one study.\1242\ In 2022,
that proportion increased to 32%.\1243\ In contrast, a broader study of
M&A transactions (not limited to SPACs) found that 85% of bidders
obtained fairness opinions.\1244\
---------------------------------------------------------------------------
\1242\ Michael Levitt, Valerie Jacob, Sebastian Fain, Pamela
Marcogliese, Paul Tiger, & Andrea Basham, supra note 1231.
\1243\ See supra note 1234.
\1244\ See Tingting Liu, The Wealth Effects of Fairness Opinions
in Takeovers, 53 Fin Rev. 533 (2018) (finding that fairness opinions
are positively related to bidders' shareholder value and post-merger
operating performance after the adoption of FINRA Rule 2290 in Dec.
2007 which regulates the identification and disclosure of conflicts
of interest of FINRA members--e.g., broker-dealers with investment
banking or valuation businesses--rendering fairness opinions.) The
study's sample is of deals that occurred between 1995 and 2015,
involving a publicly traded bidder that the study identified as
seeking 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, according to the authors, the
use of fairness opinions is required to be disclosed only if bidders
are required to file proxy statements in connection with the
solicitation of shareholder votes. They note that listing rules of
the NYSE, NYSE American (named Amex in the study), 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,
according to the authors, if the bidder issues less than 20% of its
outstanding shares or uses cash as consideration to pay for the
acquisition, the bidder would not be required to disclose the
fairness opinion even if the firm had obtained one.
---------------------------------------------------------------------------
iv. Changes in Jurisdiction of the Combined Company
In considering the potential economic effects of the final rules,
we have taken into consideration elements of both the
[[Page 14268]]
economic and the regulatory baseline, including consideration of
variations between the applicable legal frameworks in the jurisdictions
in which SPACs are organized. Table 4 presents information on the
jurisdiction of organization for each SPAC that conducted its IPO after
1990 and completed a de-SPAC transaction before 2022. The first two
columns state the percentage of SPACs that later had de-SPAC
transactions that were originally organized in each of six listed
jurisdictions at the time of their IPO. The second two columns state--
for each originating jurisdiction--the percentage of combined companies
that have their jurisdiction of organization in the listed
jurisdictions following a de-SPAC transaction.
While the majority of SPACs that subsequently consummated a de-SPAC
transaction remain organized in the same location, Table 4 indicates
that, for some SPACs, the jurisdiction of organization of the combined
company may change (compared to the SPAC's jurisdiction) 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
organization. To the extent that different jurisdictions have different
disclosure requirements and provide differing levels of investor
protections, the baseline regulatory framework will vary across SPACs
and may change upon the de-SPAC transaction. For example, the
incremental impact of the minimum dissemination period requirement may
vary by jurisdiction.\1245\
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\1245\ See infra note 1364.
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BILLING CODE 8011-01-P
[[Page 14269]]
[GRAPHIC] [TIFF OMITTED] TR26FE24.005
BILLING CODE 8011-01-C
3. Blank Check Companies
We are adopting final rules that define ``blank check company'' for
purposes of the PSLRA safe harbor provisions regarding forward-looking
statements.\1246\ The final rules will affect SPACs and any other
companies that would otherwise meet the Rule 419 definition of ``blank
check company'' except that they are not issuers of penny
[[Page 14270]]
stock, which currently seek to rely on the PSLRA safe harbor. The final
rules also may affect investors and other market participants' access
to the informational content of forward-looking statements or potential
remedies in the case of material omissions from, or material
misstatements in, a prospectus or registration statement or in
connection with the purchase or sale of a security.
---------------------------------------------------------------------------
\1246\ See supra section III.E.
---------------------------------------------------------------------------
We estimate that, in addition to potentially affected SPACs, as
previously discussed,\1247\ the final rules also may affect
approximately 32 non-SPAC entities that self-identified as blank check
companies but would not meet the current definition of ``blank check
company'' under Rule 419 given that they did not self-identify as penny
stock issuers.\1248\
---------------------------------------------------------------------------
\1247\ See supra sections VIII.A.3.
\1248\ This estimate is based on staff review of all
registrants, by unique CIK, that filed at least one registration
statement, or quarterly or annual report in 2022 and for which the
term ``penny stock'' did not appear in any of these filings
according to a text search from Intelligize. This approach to
identifying penny stock issuers may be subject to errors as studies
have found that self-reported SIC codes may contain errors that
could cause a higher number of issuers to be counted as affected
parties than should be counted. See, e.g., Murat Aydogdu, Chander
Shekhar & 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 for SIC code purposes versus when the
registrant is mistaken in its belief that it is a blank check
company for SIC code purposes. In the latter case, even if mistaken
about its blank check company status for SIC code purposes, the
party may still be affected by the final rules because they may
currently make, or believe they are able to make, forward-looking
statements that would fall under the PSLRA safe harbors.
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4. Shell Company Business Combinations
Securities Act Rule 145a and Article 15 of Regulation S-X may
affect SPACs and other shell companies (other than business combination
related shell companies) involved in business combination transactions.
To the extent that Rule 145a transactions are registered, investors
would receive disclosures in a registration statement, and registration
would result in enhanced liabilities for the registrant and other
parties who have liability under Securities Act section 11 with respect
to the registration statement. Article 15 of Regulation S-X will affect
the financial statements associated with business combinations
involving shell companies and thereby affect parties that are typically
associated with the preparation, review, and dissemination of financial
statements.\1249\
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\1249\ If a previously non-public shell company files a
registration statement, the financial statements included in the
registration statement would be required to comply with Regulation
S-X, including final Rule 15-01. We currently lack the data
necessary to estimate the number of shell companies that are private
that could be impacted by Article 15 if they file such a
registration statement. As a result, this data is not included in
the estimates discussed in our analysis.
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Table 5 below illustrates that the proportion of de-SPAC
transactions to non-SPAC reporting shell company business combinations
has increased due to the recent increase in the number of SPACs
entering the market and subsequently merging with target
companies.\1250\ In 2016, only 8% of all targets acquired by a
reporting shell company merged with a SPAC. The proportion increased to
76% in 2021 and 65% in 2022.
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\1250\ The portion of non-SPAC shell company mergers may be
overstated if some of the filings reflect changes in shell company
status that are not a result of a business combination, such as a
change in business model.
[GRAPHIC] [TIFF OMITTED] TR26FE24.006
We estimate that, in addition to existing SPACs that have yet to
complete a de-SPAC transaction (as of the end 2022, there were 324 such
SPACs according to the figures reported in Table 3), approximately 156
additional existing non-SPAC reporting shell companies may be affected
by the final rules.\1251\ Almost all of these non-SPAC reporting shell
companies trade in the OTC market and are smaller than SPACs in terms
of market capitalization and total assets.\1252\ We further estimate
that approximately 7.7% (12) of these shells may also be affected by
the definition of the term ``blank check company'' for purposes of the
PSLRA in the final rules.\1253\
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\1251\ 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 (Form 10-K, 20-F, or 40-F) or
an amendment thereto filed in calendar year 2022 by unique CIKs of
entities that are not already identified as SPACs.
\1252\ As of year-end 2021, the average market capitalization of
a non-SPAC shell company was $154,731,262 while the average market
capitalization of a SPAC was $306,204,218. Based on the most recent
periodic disclosure filed per registrant before Dec. 31, 2021, the
average total assets of a non-SPAC shell was $33,666,553 while the
average of total assets of a SPAC was $309,570,778.
\1253\ This estimate is based on a cross-tabulation, by unique
CIK, of potentially affected parties identified as blank check
companies (supra note 1248) and as shell companies (supra note
1251).
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B. Benefits and Costs of the Adopted Rules
1. Disclosure-Related Rules
i. Definitions (Item 1601)
New Item 1601 defines certain parties and transactions to which the
requirements of subpart 1600 of Regulation S-K apply. Defining the
terms ``special purpose acquisition company,'' ``de-SPAC transaction,''
``SPAC sponsor,'' and ``target company'' establishes the scope of the
parties and transactions subject to the requirements of subpart 1600
and any other rules, including other final rules, that rely on these
definitions and thereby provides both registrants and investors notice
of the associated obligations and expectations.\1254\
---------------------------------------------------------------------------
\1254\ See, e.g., General Instruction I.2 of Form S-4 (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, certain additional information with respect to the
target company must be provided).
---------------------------------------------------------------------------
As discussed above, in response to commenters, the Commission is
adopting Item 1601 with
[[Page 14271]]
modifications.\1255\ We have designed the rules with particular types
of parties and transactions in mind and we have endeavored to define
these parties and transactions in a way that is consistent with our
understanding of current market usage. Overly narrow definitions will
generally result in reduced costs and benefits. Conversely, overly
broad definitions may introduce unintended costs to market participants
without necessarily providing commensurate benefits, as they may be
less applicable to settings we are not explicitly contemplating today.
---------------------------------------------------------------------------
\1255\ See supra section II.A.
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ii. SPAC IPOs and Other Registered Offerings
At the SPAC IPO stage, there are information asymmetries between
potential SPAC investors and the SPAC, making it challenging for
investors to differentiate between SPACs and other investment options
and to differentiate among SPACs. A SPAC sponsor looking to secure IPO
investments may have incentives to obscure information that would be
relevant to potential investors.\1256\ Information regarding the
specifics of the SPAC that informs investors about the probability of
completion of a de-SPAC transaction and the potential payoffs to the
investor of such a transaction is important for investment decisions.
For example, information about the SPAC sponsor or potential conflicts
of interest of the SPAC sponsor may factor into investors'
decisions.\1257\ This information should also benefit investors
attempting to differentiate between investments in alternative SPACs.
---------------------------------------------------------------------------
\1256\ We acknowledge there may exist heterogeneity in risk
preferences among investors, but this does not substantially change
the incentive misalignment with the SPAC's incentives.
\1257\ See supra sections II.B and II.C.
---------------------------------------------------------------------------
a. Prospectus Cover Page, Summary, and Other Disclosures (Item 1602)
Item 1602 requires a prospectus filed in connection with a SPAC's
IPO to disclose information in plain English on certain features unique
to SPAC offerings and the potential associated risks, in addition to
the information currently required by Item 501 of Regulation S-K and 17
CFR 229.503(a) (Item 503 of Regulation S-K), on the prospectus cover
page and in the prospectus summary, as discussed above.\1258\ On the
cover page, SPACs will be required to disclose, among other
information: the proposed timeline of the SPAC to consummate a de-SPAC
transaction; redemption terms; compensation (including securities
issued to certain SPAC insiders); any actual or potential conflict of
interest of the SPAC sponsor, its affiliates, or promoters; and a
tabular disclosure of net tangible book value per share, as adjusted,
for various redemption levels. In the prospectus summary, SPACs will be
required to disclose, among other information, the manner in which the
SPAC will identify and evaluate potential business combination
candidates, period of time in which the SPAC intends to consummate a
de-SPAC transaction and its plans in the event it does not consummate
such a transaction within the time period including the timeline and
potential extensions, the material terms of the trust or escrow
account, plans to seek additional financing (and the impact on
shareholders), and details on the impact of compensation and securities
issuances on dilution. These additional disclosures are meant to reduce
the information asymmetry between the SPAC and potential investors.
These disclosures will provide enhanced information for investors to
assess their investment and voting decisions and to differentiate
between the SPAC and other investment options.
---------------------------------------------------------------------------
\1258\ See supra section II.E for more information about current
disclosure requirements.
---------------------------------------------------------------------------
We expect Item 1602 will also reduce SPAC investors' information
processing costs. Investors in SPACs vary in financial sophistication
and ability to process the information provided in SPAC IPO
prospectuses, and the potential benefits may accrue more to investors
that are less financially sophisticated. Specifically, because
investors are likely to allocate their attention selectively,\1259\
requiring disclosure regarding important features and associated risks
of SPAC investments on the prospectus cover page and in the prospectus
summary will increase the likelihood that investors focus on the
salient information by making it more noticeable and easier to
parse.\1260\ In addition, the new disclosures in the prospectus summary
may further reduce information processing costs by providing
information about important SPAC features in plain English and in a
concise format.\1261\
---------------------------------------------------------------------------
\1259\ See, e.g., George Loewenstein, Cass R. Sunstein & Russell
Golman, Disclosure: Psychology Changes Everything, 6 Ann. Rev. Econ.
391 (2014).
\1260\ 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).
\1261\ 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).
---------------------------------------------------------------------------
Item 1602(b)(6) will require tabular disclosure in the prospectus
summary regarding the nature and amount of the compensation received or
to be received by, as well as the amount of securities issued or to be
issued to, the SPAC sponsor, its affiliates, and promoters separately,
and the extent to which this may result in a material dilution of the
purchasers' equity interests. There is empirical evidence that
visualization improves individuals' perception of information.\1262\
For example, one experimental study shows that tabular reports can lead
to better decision-making.\1263\ Because information about compensation
received by and securities issued to SPAC sponsors and others may be
important to SPAC investor decision-making, the tabular format of these
required disclosures may help those investors (especially those that
are less financially sophisticated) more easily process the
implications of such compensation or securities issuances thereby
potentially improving their investment decisions.\1264\
---------------------------------------------------------------------------
\1262\ See, e.g., John Hattie, Visible Learning: A Synthesis of
Over 800 Meta-Analysis Related to Achievement (2008).
\1263\ See Izak Benbasat & Albert Dexter, An Investigation of
the Effectiveness of Color and Graphical Information Presentation
Under Varying Time Constraints, 10 MIS Q. 59 (1986).
\1264\ See infra section VIII.B.1.ii.b. for the discussion of
Item 1602(a)(4), which would require that the prospectus cover page
include a simplified dilution table depicting the estimated
remaining net tangible book value, as adjusted, per share at
quartile intervals up to the maximum redemption threshold.
---------------------------------------------------------------------------
More broadly, Item 1602 will standardize these disclosures across
all registration statements filed for SPAC IPOs, which may make it less
costly for investors to compare terms across offerings and thereby
promote better investment decisions to the extent these lower costs
facilitate broader or more comprehensive analysis.
Finally, to the extent the additional disclosures on the cover page
and in the prospectus summary would increase investors' awareness of
SPAC sponsors' incentives and potential conflicts of interest, they may
have an incremental disciplining effect on SPAC sponsors' behavior. For
example, if SPAC
[[Page 14272]]
sponsors face greater scrutiny from investors, they may take additional
care in finding and negotiating terms with various parties or take
steps to mitigate the extent of any conflict of interests they will
have to disclose.
The additional required disclosures on the prospectus cover page
and in the prospectus summary may increase compliance costs for SPACs
to the extent that they will need to provide more information in their
IPO prospectuses than they currently provide. We believe that SPACs are
likely to have this information readily available. In addition, based
on the experience of the Commission staff reviewing current SPAC
filings, SPACs often already disclose some of this information, such as
the time frame for the SPAC to consummate a de-SPAC transaction. Thus,
we expect that the additional compliance costs resulting from these new
items will not be significant.
Investors may also experience additional economic costs from these
new disclosures. In particular, it is possible that, by requiring more
items to be added to the cover page and the prospectus summary, the
salience of the current required disclosures on the cover page and in
the prospectus summary may be reduced because they will have to compete
with the new required disclosures for investors' attention, a concern
voiced by some commenters.\1265\ In addition, because Item 501(b) of
Regulation S-K limits the information on the outside cover page to one
page, it is possible that, under certain facts and circumstances, the
amount of information required to be included could reduce the
readability of the cover page. As a result, some investors may pay less
attention to the cover page as a whole. Conversely, it is possible that
investors may overweigh the salience of certain disclosures of
potential outcomes, such as tentative plans to seek additional
financing, potentially assuming them to be statements of greater
certainty than intended.\1266\ However, this potential cost could be
mitigated by firms providing clarity as to their assumptions and
expectations regarding these disclosures.
---------------------------------------------------------------------------
\1265\ Letters from ABA, Loeb & Loeb, Ropes & Gray, Vinson &
Elkins. See supra note 325 and accompanying text.
\1266\ A similar concern was raised by a letter from Vinson &
Elkins.
---------------------------------------------------------------------------
b. Dilution (Item 1602(a)(4) and (c))
SPAC investors may experience dilution from various transactions by
a number of parties at various stages of a SPAC's lifecycle, and
understanding these potential dilutive impacts is important for
investment and other decisions.\1267\ As an example of such a source of
dilution, in different transactions over the life cycle of the SPAC,
there may be variations in the amount of consideration paid in exchange
for shares of the SPAC that will cause dilutive or anti-dilutive
effects. One specific example of such variations involves the SPAC
sponsors' ``promote,'' which is typically obtained at a nominal value
(e.g., $25,000, which depending on specific facts and circumstances
could result in a per share purchase price of several cents) compared
to the SPAC IPO purchase price (typically $10 per share). SPAC IPO
shares are also commonly bundled with warrants and rights, resulting in
the potential future impacts on net tangible book value per share,
which may be dilutive or anti-dilutive of net tangible book value per
share depending on whether the exercise price exceeds net tangible book
value per share at the time.
---------------------------------------------------------------------------
\1267\ In this section and throughout the Economic Analysis,
references to dilution of SPAC investor interests refer to the
dilutive effects on non-redeeming public shareholders, unless
otherwise specified.
---------------------------------------------------------------------------
The impact of dilution is further magnified by a common feature in
many SPACs whereby public shareholders may redeem their shares before
the de-SPAC transaction and have their original investment returned
plus a pro-rata amount of earnings (typically interest) accrued on the
original investment proceeds held in the trust account. Following these
redemptions, the non-redeeming IPO investors will own a relatively
smaller portion of the SPAC relative to the portion owned by the SPAC
sponsor (SPAC sponsor shares are typically not redeemable). This change
in the relative portion of shares generally has a dilutive effect
because the IPO investors often contribute more per share to net
tangible book value (typically $10/share) than do SPAC sponsors
(typically several cents per share, as mentioned above).
To put the effects of redemption in context, we present the
historical redemption levels below in Figure 2. Figure 2 presents the
average realized redemptions from de-SPAC transactions between 2010 and
2022. As shown in Figure 2, typically just over half of the public
shareholders opt to redeem their shares on average before the de-SPAC
transaction (the average redemption level for de-SPACs from 2010 to
2022 was 55% and the median was 65%), but that the level of redemptions
is not consistent over time. For example, in 2022 the average
redemption level was 85%, whereas the average in 2020 and 2021 was 38%
and 45%, respectively. This time-series variation in average redemption
rates is not a result of variation in the average maximum redemption
rate, which has remained relatively steady at just above 90% since
2015.\1268\
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\1268\ Based on staff review, many SPACs set maximum redemption
thresholds to maintain a minimum of $5,000,000 net tangible assets
to avoid meeting the definition of a ``penny stock'' in 17 CFR
240.3a51-1(g)(1).
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[[Page 14273]]
[GRAPHIC] [TIFF OMITTED] TR26FE24.001
Understanding the sources and extent of dilution, including the
impact of potential redemptions, is important for investors to make
informed decisions and efficiently allocate capital. As discussed
above, the final rules require new disclosures about the sources and
extent of expected dilution, which we expect will reduce the
information asymmetry between the various SPAC participants by
providing information that investors can use to form their expectations
about the investment value of a SPAC.\1269\ Further, we are requiring
disclosures that demonstrate the changing effect on dilution that
various levels of redemptions might have.\1270\
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\1269\ See supra section II.D.
\1270\ Id.
---------------------------------------------------------------------------
The dilution disclosures in Item 1602(a)(4) and (c) require
measuring dilution using net tangible book value per share, adjusted as
if the offering (and assumed redemption levels) have occurred and
giving effect to material probable or consummated transactions (other
than the de-SPAC transaction itself). Net tangible book value per
share, as adjusted, captures effects from changes in net tangible book
value, as adjusted, in the numerator (for example, returning cash to
redeeming shareholders or other transactions that change the amount of
assets held in the SPAC trust account), and/or the number of shares
outstanding in the denominator (for example, redemptions of shares or
other transactions that change the total shares outstanding).
As a simple illustrative example of how net tangible book value per
share, as adjusted, reflects various dilutive effects, a hypothetical
SPAC might conduct an IPO at $10/share, and sell 80 shares, resulting
in $800 in the trust account. The SPAC sponsor might receive promote
shares equal to 25% of the IPO shares sold, or 20 shares, bringing the
total shares outstanding to 100 (for simplicity, we omit the typical
nominal amount SPAC sponsors often pay for their promote). Assuming no
other expenses, the net tangible book value per share, as adjusted, in
this simplified hypothetical would be $800/100 shares or $8/share. In
this hypothetical example, if 75% of public shareholders, representing
60 total shares, were to redeem their shares for $10/share, then $600
would be removed from the trust account and paid to those redeeming
shareholders, and the SPAC would be left with $200 in the trust
account, 20 shares owned by the public shareholders, and 20 shares
owned by the sponsor. In this case, the net tangible book value per
share, as adjusted, would be $200/40 or $5/share. This $5/share value
can be thought of as reflecting that, of the $10/share invested by
public investors in the IPO, only half remains to be invested in the
target. It can also be seen to reflect the fact that the SPAC sponsor
and the non-redeeming public investors now have an equal ownership
(where initially there was a 4:1 ownership ratio), and the SPAC sponsor
owns half of the remaining shares.\1271\
---------------------------------------------------------------------------
\1271\ We note that while this example suggests the redemptions
resulted in dilution as measured by net tangible book value per
share, as adjusted, the resultant concentration of ownership may be
seen by the non-redeeming shareholders as beneficial.
---------------------------------------------------------------------------
At the SPAC IPO stage, we expect that the tabular disclosure of net
tangible book value per share, as adjusted, under Item 1602(a)(4) and
(c) typically may include fewer sources of dilution that factor into
such calculation as compared to the number of sources of dilution that
factor into tabular disclosure of value.\1272\ While many SPACs adopt a
standard structure and set of governing terms, and we expect the
sources of dilution to be broadly similar across SPACs at the IPO
stage, we expect the final rules will enable investors to better
differentiate the SPAC from other investment opportunities and, where
they exist, identify differences among individual SPACs.
---------------------------------------------------------------------------
\1272\ See supra section II.D.
---------------------------------------------------------------------------
Specifically, Item 1602(a)(4) requires registration statements on
Form S-1 or Form F-1 filed by SPACs, including for an IPO, to include
on the cover page a tabular disclosure of net tangible book value per
share, as adjusted, as of the most recent balance sheet date at
quartile intervals based on the percentages of the maximum redemption
threshold, and the difference between this value and the offering
price.\1273\ This net tangible book value measure must be adjusted ``as
if'' the offering and assumed redemption levels, under Item 1602(a)(4),
have occurred and to give effect to material probable or consummated
transactions (other than the completion of the de-SPAC transaction
itself).
---------------------------------------------------------------------------
\1273\ Id.
---------------------------------------------------------------------------
[[Page 14274]]
Item 1602(a)(3) also requires a further cover page disclosure of
whether the compensation or issuance of securities described in Item
1602(a)(3) may result in material dilution of the purchasers' equity
interests. Item 1602(b)(6) requires in the prospectus summary similar
disclosure to that of Item 1602(a)(3) but specifies that the registrant
should describe the extent (rather than ``whether,'' as required in
Item 1602(a)(3)) to which the associated compensation or issuance of
securities may result in material dilution of the purchasers' equity
interests.
Item 1602(c) requires that registered offerings by SPACs (other
than de-SPAC transactions) provide a description of each material
potential source of future dilution following the registered offering
(e.g., a SPAC's IPO). The item also requires tabular disclosure for the
same quartile intervals as in Item 1602(a)(4) of the net tangible book
value per share, as adjusted, and the natures and amounts of dilution
used to determine the values in the tabular disclosure, as well as
other information necessary to understand the disclosure, among other
things.\1274\ These new disclosures will provide investors with more
detailed information on the potential sources of dilution which may
better enable them to form expectations regarding the future value of
their securities, including their shares should they opt not to redeem.
---------------------------------------------------------------------------
\1274\ See supra section II.D for a more detailed description of
the disclosure requirements.
---------------------------------------------------------------------------
We expect these dilution disclosures at the SPAC IPO stage will
facilitate investor differentiation between SPACs as an investment and
other non-SPAC investments by highlighting the sources of potential
dilution and demonstrating their effects for investors to incorporate
into their investment decisions. While some of this information is
available elsewhere as required by existing disclosures (e.g.,
outstanding share information),\1275\ these dilution disclosures
centralize and standardize that information, making it more salient and
readily available for investors to understand the material differences
in a SPAC in contrast with other investments. Similarly, we expect the
additional detail of potential sources of dilution and tabular
disclosure of net tangible book value per share, as adjusted, to
provide relevant comparison information to investors seeking to
differentiate between SPACs. Together, we expect this information will
help investors to better understand the effects of dilution on their
investments and ultimately to make better-informed investment
decisions.
---------------------------------------------------------------------------
\1275\ Some commenters raised this issue. See, e.g., letter from
Loeb & Loeb. See supra note 245 and accompanying text. With regard
to outstanding share information, see, e.g., 17 CFR 210.5-02 (Rule
5-02 of Regulation S-X) (requiring disclosure of the title of each
class of stock, the number authorized, the number outstanding, and
the dollar amount thereof) and Item 11(e) of Form S-1 (requiring
financial statements that meet the requirements of Regulation S-X).
---------------------------------------------------------------------------
We acknowledge that it is possible the dilution disclosures could
be interpreted by investors as conveying more certainty about the
sources or effects of dilution (or lack or omission thereof, where
those sources are not deemed probable) than is intended by the
SPAC.\1276\ However, the requirement in Item 1602(c) that the SPAC
include a ``description of the model, methods, assumptions, estimates,
and parameters necessary to understand the tabular disclosure'' should
mitigate this possibility, and provide investors sufficient context to
fully understand the disclosure's underlying assumptions and
limitations they impose.
---------------------------------------------------------------------------
\1276\ A similar concern was raised by a commenter. See letter
from White & Case.
---------------------------------------------------------------------------
We expect the dilution disclosures at the IPO stage to provide
valuable information to investors, both to compare between SPAC IPOs,
and as a baseline against which they can compare the de-SPAC dilution
disclosures, if and when a de-SPAC transaction is proposed. We expect
this dilution disclosure to be especially informative for SPAC
investors who remain investors in the combined company, as historically
they have been greatly impacted by the above-mentioned dilution
effects.\1277\ Further, if investors do not understand the full extent
of the dilution, it may not be fully reflected in market prices, and
thus we expect that requiring clear and concise dilution disclosures
will ameliorate this potential mispricing (especially so for potential
warrants or other derivative securities) and improve overall allocative
efficiency.\1278\
---------------------------------------------------------------------------
\1277\ See Klausner, Ohlrogge, & Ruan, supra note 30 (finding
that ``SPAC shareholders bear all costs'' associated with the
dilution of cash associated with the SPAC structure and redemptions,
based on empirical analysis of post-merger performance using the
sample of de-SPAC transactions occurring between Jan. 2019 and June
2020).
\1278\ See Gahng, Ritter & Zhang, supra note 30; Klausner,
Ohlrogge, & Ruan, supra note 30.
---------------------------------------------------------------------------
Given the empirical evidence that visualization improves
individuals' perception of information \1279\ and that any dilution
caused by redemption may have an adverse effect on investors who choose
not to redeem, we expect that the tabular format of these disclosures
will help investors (especially those that are less financially
sophisticated) more easily process the financial implications of
dilution and consequently improve their investment decisions.
---------------------------------------------------------------------------
\1279\ See Hattie, supra note 1262; Benbasat & Dexter, supra
note 1263.
---------------------------------------------------------------------------
Moreover, the required dilution disclosure should provide
prospective SPAC investors with information (with the aforementioned
benefits of the tabular format) that more accurately represents the
dilution that they might experience if they invest in the SPAC, as
compared to current Item 506 disclosures with regard to the effect of
potential redemptions.\1280\ SPACs currently disclose the potential
dilution pursuant to Item 506, and commonly focus solely on a single
maximum redemption scenario.\1281\ This single threshold may be less
useful to investors than the new tabular presentation of quartile
intervals of redemption levels because the actual redemptions in
connection with a de-SPAC transaction rarely reach the maximum
allowable amount. Commenters largely agreed with this assessment,\1282\
with one commenter noting that ``more detailed information on the
potential impact of dilution on the value of SPAC shares could help
investors better understand the various sources of dilution and the
extent to which their investments might drop in value'' and that this
information could ``factor into their decision making.'' \1283\
---------------------------------------------------------------------------
\1280\ See supra note 221.
\1281\ Id. SPAC IPO registration filings currently include
dilution disclosures, and these disclosures typically present
dilution given 100% redemption.
\1282\ See, e.g., letters from Bullet Point Network, CII,
Consumer Federation.
\1283\ Letter from Consumer Federation.
---------------------------------------------------------------------------
The reasoning that a tabular disclosure at multiple levels of
redemption will better inform expectations of the ultimate dilution is
supported by the evidence in Figure 2, which demonstrates that while
the maximum redemption level has been very stable over time, the actual
redemption levels have been typically far below the maximum threshold.
The final rules will provide investors with more granular information
about potential dilution across multiple redemption levels than
previously required, which should provide information more congruent
with the observed variation in dilution--such as that shown by the
variation from one year to another of average realized redemption
percentages in Figure 2. This, in turn, should allow investors to
better anticipate the effects of such dilution on future returns to
these investors from their investment and better inform their
investment decision-making.\1284\
---------------------------------------------------------------------------
\1284\ See Klausner, Ohlrogge & Ruan, supra note 18.
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[[Page 14275]]
The disclosures may not include some dilution effects in some SPAC
structures. For example, as one commenter explained, ``some de-SPAC
transactions are structured such that certain funding mechanisms, such
as backstop, forward purchase or PIPE arrangements, apply only in the
event of certain redemption thresholds.'' \1285\ We agree that there
are significant intricacies involved in SPAC structures that are not
known at the time of the SPAC IPO, and that those intricacies can
impact the extent and patterns of dilution faced by non-redeeming
shareholders. However, we believe there is still significant benefit to
investors in a tabular presentation of dilution at different redemption
levels for those sources of dilution that qualify as ``material
probable or consummated transactions'' as required under the final
rule. Further, we note that the requirement for non-tabular disclosure
of ``each material potential source of future dilution'' under Item
1602(c) may discuss a broader set of items than those that are included
for purposes of calculating the tabular dilution measure, which could
capture some of the complex effects explained by the commenter.
Further, the final rules regarding dilution disclosures should provide
more clarity into these complex effects than the current, more
simplified disclosures pursuant to Item 506.
---------------------------------------------------------------------------
\1285\ Letter from White & Case.
---------------------------------------------------------------------------
We expect the final rules to reduce the costs to investors of
conducting a dilution analysis. Without the tabular disclosures we are
requiring, each shareholder wishing to understand the net effects of
all the financing arrangements would have to calculate the various
conditions themselves--which would require a full understanding of the
terms and extents to which they interact--before being able to
calculate the ultimate impact on dilution. Under the final rules, this
process will be completed by the registrant, which already has the full
understanding of conditions and terms and is best suited to conduct
said calculations.
The tabular format of the disclosures required by Item 1602(a)(4)
and (c) will standardize the presentation of dilution information,
which we expect will allow investors to analyze and compare more easily
across SPACs. This increase in comparability should allow investors to
compare the structural differences in dilution across SPACs which, to
the extent relevant, should improve investment and capital allocation
decisions.
We expect the incremental compliance costs of the final dilution
disclosure requirements at the SPAC IPO stage to be low for two
reasons. 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 (especially
so since SPACs currently conduct a dilution calculation pursuant to
Item 506).
Second, while Item 1602(a)(4) and (c) require registrants to
account in the tabular disclosure for material probable sources of
dilution and analyze several levels of redemption, which may require
the services or input of quantitative specialists, the material
probable sources of dilution are generally common across SPAC offerings
and are generally well known and quantifiable. For example, sources of
dilution at the IPO stage may include shareholder redemptions, SPAC
sponsor compensation or ``promote,'' general and administrative
expenses, underwriting fees, warrants, and other convertible
securities.\1286\ Because of the consistency that a tabular format
should promote, it is likely that a standard approach based on best
practices will emerge, reducing registrant costs over time.
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\1286\ For a detailed discussion of certain potential sources of
dilution and the calculation of net tangible book value per share,
as adjusted, see supra section II.D.3. We note that many of these
sources of dilution captured by net tangible book value per share,
as adjusted, follow treatment under GAAP, thus the cost of
calculating them is expected to be low, and in many cases required
otherwise as part of the SPAC financial disclosures.
---------------------------------------------------------------------------
We are also amending Form S-1 to no longer require Item 506
dilution disclosures for SPAC filings because the dilution disclosures
required in Item 1602 will replace those generic dilution disclosures.
We believe these Item 506 disclosures are less informative in the SPAC
setting because, based on the Commission staff's experience reviewing
recent SPAC filings, SPACs classify the redeemable shares as temporary
equity and exclude the cash raised from sales of those shares from the
net tangible book value. This classification results in a dilution
measure that excludes the vast majority of the SPAC's cash
holdings.\1287\ Thus, to the extent that current Item 506 dilution
calculations are duplicative of or less relevant to investment
decisions than the dilution disclosures at the SPAC IPO required by the
final rules, we expect the exclusion of the Item 506 dilution
disclosures will lessen information acquisition costs for investors
without omitting important information.\1288\ Removing the Item 506
disclosure requirement will also remove any disclosures costs that
would have otherwise been incurred by registrants to produce those
disclosures.
---------------------------------------------------------------------------
\1287\ Several commenters similarly expressed the view that Item
506 net tangible book value is less relevant to SPAC investors. See,
e.g., letter from White & Case (stating that the current net
tangible book value calculation according to U.S. GAAP ``produces a
result that is not practically relevant to prospective investors in
the public shares whatsoever.'').
\1288\ The information acquisition costs mentioned would entail
gathering, processing, and incorporating the information from the
Item 506 dilution disclosure into investors' existing information
and decisions.
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c. Sponsors and Conflicts of Interest (Item 1603)
At the SPAC IPO, new Item 1603(a) requires disclosure of certain
information regarding a SPAC sponsor, its affiliates, and any
promoters. This item requires, among other information, disclosures
concerning the SPAC sponsor that include the following: name, form of
organization, controlling persons, general character of business, and
any arrangements or other agreements between the sponsor and the SPAC,
its officers, directors, or affiliates with respect to determining
whether to proceed with a de-SPAC transaction. This item also requires,
among other information, disclosures about the SPAC sponsor, its
affiliates, and promoters that include the following: their experience;
material roles and responsibilities and the nature and amounts of their
compensation and reimbursements and SPAC securities issued to them or
to be issued to them.\1289\ To the extent that such disclosures are not
already provided or are only partially provided, this new disclosure
requirement will provide investors with additional information related
to the experience and incentives (such as those due to characteristics
of the compensation structure) for the SPAC sponsor and the other
parties subject to these disclosures.\1290\
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\1289\ Additionally, Item 1602(a)(5) and (b)(7) will require
similar conflict of interest disclosures to be displayed prominently
on the prospectus cover page and summary, respectively. We expect
this prominence will further heighten the benefits discussed in this
section, while incurring limited additional compliance cost, as the
information is largely already disclosed elsewhere in Item 1603.
\1290\ See supra section II.B for more information about current
disclosure requirements.
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These disclosures about the SPAC sponsor, affiliates, and promoters
may benefit investors by enabling them to better evaluate the
circumstances that may impact their investment decision regarding a
specific SPAC.\1291\ Given
[[Page 14276]]
that investor expectations about the investment value of a SPAC
incorporate expectations about the target search process and resulting
de-SPAC transaction, investors assessments likely rely on specifics
about the SPAC sponsor and SPAC compensation structure, which these
disclosures should help ensure is available.
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\1291\ Academic literature provides some evidence that
characteristics of a SPAC sponsor, such as experience or network,
may be indicative of the SPAC's ability to select and execute
quality transactions. See, e.g., Chen Lin, Proposing Release, supra
note 7, at 29462, n.30. Additionally, the staff's general experience
in observing the SPAC industry is that market participants often
emphasize the skill or experience of the SPAC sponsor as important
to the performance of the SPAC.
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Item 1603(a) may increase compliance costs at the SPAC IPO, mainly
in the form of collecting, preparing, and filing the required
information for disclosures about SPAC sponsors, their affiliates, and
their promoters. While SPAC sponsors, their affiliates, and promoters
may be external to the SPAC, we believe the close relationships
typically between the SPAC and these parties will enable the SPAC to
request the data required to be disclosed under the final rules with
little additional difficulty compared to compiling the same information
from persons internal to the SPAC, such as its officers and directors
subject to the rules. Overall, we do not expect registrant compliance
costs to be substantial because most of this information should be
readily available; some of this information is currently being provided
by SPACs, as suggested by commenters.\1292\ The extent to which this
information is already being provided will affect both the additional
compliance costs and marginal information benefits commensurately. The
final rules will create a uniform and transparent framework across-the-
board, maintaining a minimum floor standard should market practice
change.
---------------------------------------------------------------------------
\1292\ See, e.g., supra notes 128 and 182.
---------------------------------------------------------------------------
Item 1603(b) requires disclosure of conflicts of interest between:
(1) a SPAC sponsor or its affiliates; the SPAC's officers, directors,
or promoters; or the target company's officers and directors and (2)
the unaffiliated security holders of the SPAC. We expect these
disclosure requirements will enable investors to better assess any
actual or potential material conflict of interest, including any
material conflict of interest that may arise in determining whether to
proceed with a de-SPAC transaction and any material conflict of
interest arising from the manner in which the SPAC compensates SPAC
sponsors, officers, and directors or the manner in which SPAC sponsors
compensate its officers and directors. Such enhanced ability to
evaluate conflicts should benefit investors by enabling them to more
accurately assess potential adverse selection risks, thereby
facilitating better investment decisions. Further, information about
conflicts of interest at the SPAC IPO stage should improve investors'
ability to differentiate investments in a SPAC from other investment
opportunities and to differentiate one SPAC from another SPAC.
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 conflict of
interest; (ii) developing and maintaining methods for tracking any such
conflict of interest; and (iii) seeking legal or other advice. While
the additional direct costs associated with Item 1603(b) disclosure
requirements will depend on the extent to which a SPAC already provides
this disclosure under current practices, we expect these costs to
generally be low.\1293\ SPACs may also incur additional indirect costs
if, although not required under Commission rules, they choose to take
actions to mitigate any identified conflict of interest as a result of
the final rule. For example, there may be cases where the SPAC would
not have otherwise reviewed the conflicts or in cases where the SPAC
would not have taken actions to mitigate any identified conflict of
interest but for the requirement to publicly disclose the conflicts.
However, to the extent a SPAC takes such mitigating actions, there will
also be an indirect benefit to investors who will face less adverse
selection costs as a result.
---------------------------------------------------------------------------
\1293\ 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. See Vijay M. Jog &
Chengye Sun, Blank Check IPOs: A Home Run for Management (Working
Paper, 2007), available at https://ssrn.com/abstract=1018242
(retrieved from SSRN Elsevier Database). This evidence suggests that
most SPACs are generally aware of these actual or potential
conflicts and would therefore only bear costs insofar as our new
requirements would involve providing greater detail or specificity
in the disclosures of conflicts of interest.
---------------------------------------------------------------------------
Item 1603(c) requires disclosure about the fiduciary duties that a
SPAC's officers and directors owe to other companies. We expect that
this disclosure will allow 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 competes with the SPAC. The extent that a SPAC's
officers or directors owe fiduciary duties to other companies may also
limit the attention that they are able to provide to the SPAC. We
expect that these disclosures will benefit investors by allowing them
to better assess the ability and incentives of the officers and
directors managing the SPAC.
We do not expect the disclosures of a SPAC officer's or director's
fiduciary duties to other companies pursuant to Item 1603(c) will
generally impose significant costs on SPACs. Officers and directors who
manage the business of the SPAC should know their own roles in
connection with other companies, so this information is likely known
and easily accessible to the SPAC. Depending on specific facts and
circumstances of a SPAC, however, the SPAC officers and directors may
incur costs to comply with Item 1603(c) if they must research or seek
the advice of counsel to determine whether a fiduciary relationship
with another company exists. These costs may be minimal where little or
no research or outside advice is required, such as in the absence of
any other fiduciary relationships or when those relationships are
already known. However, those costs are likely to increase as more
research or outside advice is required.\1294\ These additional costs
(and the corresponding benefits) will be mitigated to the extent a
newly formed SPAC would have provided Item 1603(c)-type disclosure even
in the absence of the final rule.
---------------------------------------------------------------------------
\1294\ There may be circumstances in which analysis of the law
and governing documents of another company may be required to
determine if a role at that company carries fiduciary obligations
(such as those that might be commonly owed by a director of a
corporation to stockholders depending upon applicable law). Examples
of this include situations in which: (1) the role at the other
company is an officer role, (2) the relationship with the other
company is as a controlling stockholder, or (3) the role is one
where the person is involved in governance of another company that
is an alternative entity (such as a limited liability company or
limited partnership).
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d. Structured Data Requirement (Item 1610)
Item 1610 requires all disclosures in Items 1601 through 1609 of
Regulation S-K to be tagged in Inline XBRL.\1295\ We expect that this
requirement will augment the informational benefits of the new
disclosure requirements at the SPAC IPO stage by making them easier to
retrieve, aggregate, compare, filter, and analyze.
---------------------------------------------------------------------------
\1295\ See supra section II.I.
---------------------------------------------------------------------------
These final rules should be especially beneficial for investors
differentiating between SPAC features, particularly due to the
standardization of SPAC IPO disclosures, as specified in Items 1602 and
1603. Together, we expect the adopted disclosure rules will facilitate
investors' ability to process more
[[Page 14277]]
information across a wider sample of SPAC IPOs (due to Items 1602 and
1603 requiring SPAC specific information in a standardized format) at a
lower relative cost (due to the tagging requirements in Item 1610).
Research evidence suggests that XBRL requirements for public
operating company financial statement disclosures mitigate information
asymmetry by reducing information processing costs, thereby making the
disclosures easier to access and analyze.\1296\ Reductions in
information processing costs may facilitate the monitoring of companies
by external parties, and, as a result, influence companies' behavior,
including their disclosure choices.\1297\
---------------------------------------------------------------------------
\1296\ 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 (2012) (finding
evidence that ``mandatory XBRL disclosure decreases information risk
and information asymmetry in both general and uncertain information
environments''); Yuyun Huang, Jerry Parwada, Yuan George Shan & Joey
(Wenling) Yang, Insider Profitability and Public Information:
Evidence from the XBRL Mandate (working paper, Sept. 17, 2019, last
revised May 28, 2020), available at https://ssrn.com/abstract=3455105 (retrieved from SSRN Elsevier database) (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''). We do not expect these
findings to materially differ with regards to Inline XBRL
requirements.
\1297\ See, e.g., Jeff Zeyun, 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, Jeon-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 (Am. Acct. Assoc. Annual Meeting
conference paper, Aug. 6, 2014) available at https://www.business.kaist.edu/_prog/seminar/download.php?file=seminar_1_1478854039.pdf&ori_filename=paper.pdf&filedr=kr (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), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3463897 (retrieved from SSRN Elsevier
database) (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 studies looked at operating company financial statement
disclosures rather than SPAC disclosures specifically, given the
general similarity in disclosure settings, the findings of these
studies suggest that the Inline XBRL requirements in the final rules
could directly or indirectly (i.e., through information
intermediaries, such as financial media, data aggregators, and
academic researchers) provide investors in SPACs with similar
benefits.
---------------------------------------------------------------------------
In addition, we expect Inline XBRL will facilitate increased
insight into the specialized SPAC IPO disclosures, and will allow for
easier, less costly comparisons with other SPACs by providing
additional functionality such as detailed filtering by criteria such as
offering size, dilutive impact, or SPAC sponsor name.\1298\ Also, as
with Inline XBRL tagging of financial statements and notes, the
specialized SPAC disclosures will include tagged narrative discussions
in addition to tagged quantitative values.\1299\ Tagging narrative
disclosures in the context of SPAC IPOs should facilitate beneficial
analyses, such as automatic comparison or redlining of these
disclosures against those provided by other SPACs or targeted
assessments of specific SPAC specialized disclosures. For example,
without Inline XBRL tagging, using the search term ``warrant'' to
search through the text of all SPAC IPO registration statements to
determine how many such offerings disclosed the inclusion of warrants
as part of the SPAC sponsor ``promote'' could return many narrative
disclosures outside of that discussion (e.g., disclosures related to
warrants offered to investors as part of the IPO).
---------------------------------------------------------------------------
\1298\ 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 (2018).
\1299\ For example, Item 1603 consists largely of narrative
disclosure regarding the SPAC sponsor but also includes quantitative
disclosure regarding the compensation paid (or to be paid) to the
SPAC sponsor, its affiliates, and any promoters.
---------------------------------------------------------------------------
We expect the requirement to tag SPAC-specific disclosures in
Inline XBRL will 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 notes) and cover
page information in certain registration statements and periodic
reports in Inline XBRL.\1300\ However, SPACs are currently 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.\1301\
---------------------------------------------------------------------------
\1300\ See supra section II.I.
\1301\ See 17 CFR 229.601(b)(101)(i)(A).
---------------------------------------------------------------------------
Various preparation solutions have been developed and used by
operating companies to fulfill XBRL tagging requirements, and some
evidence suggests that XBRL compliance costs have decreased over time
for smaller companies.\1302\ 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 are
shell companies, which have no or nominal operations, it may be more
likely that SPACs outsource their tagging obligations to a third-party
service provider. In such cases, a SPAC would avoid the aforementioned
software licensing and training costs but incur the costs of retaining
such third-party services.
---------------------------------------------------------------------------
\1302\ An AICPA survey of 1,032 reporting companies with $75
million or less in market capitalization in 2018 found, for fully
outsourced XBRL creation and filing, 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. This represented a 45% decline in average cost and
a 69% decline in median cost since 2014. See AICPA, XBRL Costs for
Small Companies Have Declined 45% Since 2014 (2018), available at
https://us.aicpa.org/content/dam/aicpa/interestareas/frc/accountingfinancialreporting/xbrl/downloadabledocuments/xbrl-costs-for-small-companies.pdf; 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)]
(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).
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iii. De-SPAC Transactions
Given the hybrid nature of the de-SPAC transaction (i.e., that it
contains elements of both an IPO and an M&A transaction), the de-SPAC
transaction involves information asymmetries and incentives that are
different from those present at the SPAC IPO stage or in traditional
IPOs. The de-SPAC transaction represents the introduction of the target
company to the SPAC shareholders, who typically vote on approval of the
de-SPAC transaction and decide whether to redeem their shares.\1303\ We
expect both voting and redemption decisions will benefit from the
informational improvements and liability protections arising from the
final rules.
---------------------------------------------------------------------------
\1303\ See supra note 31 and accompanying text.
---------------------------------------------------------------------------
a. Sponsors and Conflicts of Interest (Item 1603)
As discussed above, Item 1603 includes, among other things,
disclosure of details about the SPAC sponsor, its affiliates, and
promotors, and conflicts of interest generally between those parties
and SPAC shareholders. Similar to the final rule requirements that
apply
[[Page 14278]]
at the SPAC IPO stage discussed above, at the de-SPAC transaction
stage, Item 1604(a)(4) and (b)(3) require certain conflict of interest
disclosures to be displayed prominently on the prospectus outside front
cover page and in the summary.
We expect the benefits of Item 1603 (and Item 1604(a)(4) and
(b)(3)) in connection with disclosures at the de-SPAC transaction stage
on a proxy, information, or registration statement or on a Schedule TO
to be largely the same as the effects of the same Item 1603 disclosures
made in connection with the SPAC IPO, as discussed above.\1304\ These
benefits, however, may be incrementally greater insofar 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.\1305\ We similarly expect the costs of compliance with Item 1603
(and Item 1604(a)(4) and (b)(3)) to be comparable at the de-SPAC
transaction stage to the costs of compliance at the SPAC IPO stage, as
discussed above. However, because application of Item 1603 (and Item
1604(a)(4) and (b)(3)) at the SPAC IPO stage results in SPACs already
having prepared and disclosed much of the required information, the
costs of updating those disclosures for evolved circumstances at the
de-SPAC transaction stage should be lower.
---------------------------------------------------------------------------
\1304\ See supra section VIII.B.1.ii.
\1305\ Id.
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b. Prospectus Cover Page, Summary, and Other Disclosures (Item 1604)
Currently, a de-SPAC transaction may be registered on a Form S-4 or
Form F-4, and, to the extent that a de-SPAC registration statement must
be filed due to the operation of Rule 145a, we expect that there will
be additional registered de-SPAC transactions as a result of the final
rules. Item 1604(a) and (b) require any prospectus at the de-SPAC
transaction stage to include certain information about the de-SPAC
transaction on the outside front cover page and in the prospectus
summary, similar to the requirements of Item 1602 at the SPAC IPO
stage.\1306\ This includes disclosure on the cover page of, among other
information: the determination, if any, of the board of directors (or
similar governing body) of the SPAC disclosed in response to Item
1606(a) and, if applicable, that the SPAC or the SPAC sponsor received
a report, opinion, or appraisal referred to in Item 1607(a);
descriptions of certain material financing transactions; compensation
received or to be received by the SPAC sponsor, its affiliates and
promoters (including securities issued); and any actual or potential
conflict of interest between specified parties of the SPAC and target
on the one hand and unaffiliated security holders of the SPAC on the
other hand. In the prospectus summary, SPACs will be required to
include a brief description of, among other information: the background
and material terms of the de-SPAC transaction; the determination, if
any, of the board of directors (or similar governing body) of the SPAC
disclosed in response to Item 1606(a) and any reports, opinions or
appraisals referred to in Item 1607(a); any actual or potential
material conflict of interest between specified parties of the SPAC and
target on the one hand and unaffiliated security holders of the SPAC on
the other hand; compensation received or to be received by the SPAC
sponsor, its affiliates, and promoters (including securities issued) in
tabular format and the impact of these compensation and securities
issuances on dilution in narrative form; the material terms of certain
financing transactions; and the redemption rights of security holders
and the potential dilutive impact of redemptions on the value of the
securities owned by non-redeeming shareholders.
---------------------------------------------------------------------------
\1306\ See supra section II.E for more information about the
regulatory baseline. The prospectus is a part of the registration
statement.
---------------------------------------------------------------------------
We expect that final Item 1604(a) and (b) will have similar
potential direct benefits for investors as those we discussed for Item
1602 above--that is, the additional disclosures on the de-SPAC
transaction prospectus cover page and in the prospectus summary may
increase the likelihood that investors pay attention to and process
this information by making it more salient.\1307\ Additionally, the new
disclosures in the de-SPAC transaction prospectus summary may reduce
information-processing costs for investors, particularly less
financially sophisticated investors, by providing certain SPAC-specific
disclosures in a concise format. Moreover, as with Item 1602(b)(6) at
the IPO stage, Item 1604(b)(4) requires tabular disclosure in the
prospectus summary regarding the terms and amount of the compensation
received or to be received by the SPAC sponsor, its affiliates, and
promoters and the amount of securities issued or to be issued by the
SPAC to the SPAC sponsor, its affiliates, and promoters and the price
paid or to be paid for such securities in connection with the de-SPAC
transaction or any related financing transaction, and, outside of the
table, the extent to which that compensation and securities issuance
has resulted or may result in a material dilution of the equity
interests of non-redeeming shareholders of the SPAC. Presenting this
information in tabular format may further help reduce information-
processing costs for some investors.\1308\ Additionally, Item 1604(a)
and (b) 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 de-SPAC
transactions by different SPACs. Overall, because of the aforementioned
beneficial effects of increasing investors' attention and reducing
their information processing costs, we expect the additional
disclosures on the prospectus cover page and in the prospectus summary
will help improve the compounding of important information into
investors' investment decisions at a relatively lower cost.
---------------------------------------------------------------------------
\1307\ See discussion in supra section VIII.B.1.ii.b. Also note
that Item 1604(c) is discussed separately in the following section.
\1308\ See supra notes 1262 and 1263 and accompanying text.
---------------------------------------------------------------------------
In addition to the direct benefits discussed above, certain
information that Item 1604 requires registrants to disclose may 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, allowing them to identify and focus in on those conflicts they
deem potentially adverse to their own interests.\1309\ In turn, the
disclosures may have an ex ante disciplining effect on SPAC sponsors
and others whose conflicts must be disclosed that could mitigate the
potential costs to investors of those conflicts of interests.
---------------------------------------------------------------------------
\1309\ See supra section II.C for more detail on the specifics
of the required conflict of interest disclosures.
---------------------------------------------------------------------------
The additional information that Item 1604(a) and (b) require in the
de-SPAC transaction prospectus may increase compliance costs for SPACs
if it would result in SPACs needing to gather and disclose information
they would not otherwise have provided in a de-SPAC transaction.
Additionally, as with Item 1602, it is possible that the disclosures
required under Item 1604 could result in additional processing costs
for investors.\1310\ However, to the extent that a SPAC may have
otherwise intended to disclose information similar to that required
under Item 1604, which based on staff review of existing filings is
often the case, or where the SPAC has
[[Page 14279]]
this information readily available, these additional costs and benefits
would be mitigated.\1311\
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\1310\ See supra note 1265 and accompanying text.
\1311\ We note that even when SPACs would have otherwise
intended to disclose similar information, the final rules should
still provide value to the extent they result in more consistent
standardization than has, or would have, arisen organically.
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c. Dilution (Item 1604(a)(3), (b)(4), (5), and (6), (c))
By the time a SPAC finds a target company and prepares its de-SPAC
transaction, many facts and circumstances that affect dilution and the
financial position of the SPAC have changed, both when compared to the
SPAC at its IPO stage as well as when compared to other SPACs. The
result of this evolution is that, unlike at the SPAC IPO stage when
most SPACs exhibit similar features, de-SPAC transactions are often
more complex and idiosyncratic. By the time of the de-SPAC transaction,
many new sources of dilution are likely to have arisen. For example, a
SPAC may determine a potential PIPE investment or potential change to a
SPAC sponsor's compensation or securities issued to a SPAC sponsor is a
``material probable transaction.'' Pursuant to Item 1604(c), in
calculating dilution, a SPAC will be required to make adjustments to
net tangible book value per share, as adjusted, to reflect such events.
Item 1604(a)(3) requires the outside cover page of the prospectus
at the de-SPAC transaction stage to contain a statement as to whether
certain compensation and securities issuances disclosed pursuant to
this item 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. Item 1604(b)(4) requires
disclosure in the prospectus summary of the extent to which certain
compensation and securities issuances have resulted or may result in a
material dilution of the equity interests of non-redeeming shareholders
of the SPAC. Item 1604(b)(5) requires disclosure of the dilutive impact
on non-redeeming shareholders that any financing transactions
associated with the de-SPAC transaction may have. Item 1604(b)(6)
requires disclosure of the potential dilutive impact on non-redeeming
shareholders of the rights of security holders to redeem their
outstanding securities.
Item 1604(c) requires tabular disclosure of the impact from
dilutive sources on net tangible book value per share, as adjusted, at
intervals representing selected potential redemption levels that may
occur across a reasonably likely range of outcomes. Specifically, Item
1604(c) requires disclosure of the net tangible book value per share,
as adjusted, as if the selected redemption levels have occurred and to
give effect to, while excluding the de-SPAC transaction itself,
material probable or consummated transactions and other material
effects on the SPAC's net tangible book value per share, as adjusted,
from the de-SPAC transaction. The requirement in Item 1604(c) to
provide these disclosures across ``a reasonably likely range of
outcomes'' instead of the fixed quartiles required in Item 1602(c) will
allow registrants to account for facts and circumstances that are
unique to each SPAC and allow for more customized disclosures that
still conform to a consistent and comparable format.\1312\
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\1312\ At this later stage, the SPAC likely has more information
with which to estimate the number of shareholders it expects to
redeem their shares, potentially allowing for more informative
outcome choices in the tabular disclosure.
---------------------------------------------------------------------------
The tabular disclosure in Item 1604(c) is also required to include
separate quantification of the dilutive impact from each source of
dilution, which will provide detailed disaggregated information on the
various sources of dilution.\1313\ Lastly, Item 1604(c)(1) requires
disclosure at each redemption level of 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.
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\1313\ In this respect, Item 1604(c) tabular dilution disclosure
should be similar to Item 1602(c) tabular dilution disclosure as, in
order to quantify the source of dilution for purposes of the table,
registrants should present it as an individual line-item in the
calculations in the table.
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Generally, we expect Item 1604(c) to result in similar benefits and
costs as those discussed above with regard to dilution disclosures at
the SPAC IPO stage.\1314\ As the disclosure calculations in Item
1604(c) will likely include additional factors--such as ``material
probable transactions''--that were not included in the SPAC IPO stage
disclosures, we expect these disclosures at the de-SPAC transaction
stage will be more informative for investor expectations about
dilution. Consequently, our discussion below focuses on the novel
aspects of dilution disclosures at the de-SPAC transaction stage (as
compared to dilution disclosure at the IPO stage) and should be
considered in addition to our discussion above of the costs and
benefits of dilution information at the SPAC IPO stage.
---------------------------------------------------------------------------
\1314\ See supra section VIII.B.ii.b.
---------------------------------------------------------------------------
The dilution disclosure at redemption levels across a ``reasonably
likely range of outcomes'' required in Item 1604(c) will provide
investors with information that should more accurately represent the
dilution that they might experience if they choose not to redeem their
shares, as compared to current disclosures.\1315\ Further, the specific
redemption levels registrants choose to include in the table should
convey information about registrant expectations of redemption
scenarios that should allow investors to better anticipate the effects
of the dilution on their investment value.\1316\ In addition, as
discussed above, 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.\1317\
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\1315\ See supra note 221.
\1316\ The specific levels selected would be informative to the
extent registrants choose redemption levels specific to their
circumstances, rather than adopting fixed or industry standard
ranges.
\1317\ See Hattie, supra note 1262; Benbasat & Dexter, supra
note 1263.
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Allowing registrants discretion to select ``reasonably likely''
redemption levels may impact the comparability of these disclosures
across SPACs to the extent that the final rule results in tables with
different numbers of chosen redemption scenarios or at different values
or with differences in both respects. On the other hand, such allowance
should result in registrants selecting redemption levels based on
registrant-specific information (for example, if a PIPE investment has
a firm commitment to buy if redemption thresholds are reached), which
could result in disclosures that are more informative to investors. We
expect the informational value of de-SPAC-transaction-specific
redemption sensitivity will offset the reduced direct comparability
across SPACs.\1318\ Also, to the extent there is reduced direct
comparability, we expect this will be mitigated by some investors using
analytic techniques to infer dilution at redemption levels other than
those selected by registrants.
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\1318\ If, as mentioned above (supra note 1316), registrants
adopt industry standard redemption levels for the purposes of this
disclosure, then the decrease in registrant-specific information
will be concomitant with an increase in comparability due to the
industry standard.
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We expect some incremental compliance costs from Item 1604(c) for
registrants in future de-SPAC transactions that did not already intend
to provide disclosures similar in nature
[[Page 14280]]
to what is required by this item. Many of these incremental costs to
registrants are similar to those at the SPAC IPO stage discussed above,
such as the costs of aggregating data and employing quantitative
expertise. Factors that mitigate those costs are also similar to those
at the IPO stage discussed above, such as data availability and
adoption of standard practices.\1319\ To the extent the multiple
dilution disclosures at the de-SPAC transaction stage capture more
transactions and complexity than those at the IPO stage, we expect the
associated costs to registrants to be relatively higher than those
incurred by the SPAC at the IPO stage. However, we also expect these
Item 1604 dilution disclosures will have greater informational value to
investors at this later, more heterogeneous stage.
---------------------------------------------------------------------------
\1319\ See supra section VIII.B.1.ii.b.
---------------------------------------------------------------------------
d. Background, Material Terms, and Effects of the De-SPAC Transaction
(Item 1605)
Item 1605(a) through (c) of Regulation S-K require disclosure of
the background of the de-SPAC transaction (e.g., description of any
contacts, negotiations, transactions that have occurred), material
terms of the de-SPAC transaction, and effects of the de-SPAC
transaction and any related financing transactions. Item 1605(d)
requires disclosure of any material interests in the de-SPAC
transaction or any related financing transaction: (i) held by the SPAC
sponsor or the SPAC's officers or directors, including fiduciary or
contractual obligations to other entities as well as any interest in,
or affiliation with, the target company; or (ii) held by the target
company's officers or directors that consist of any interest in, or
affiliation with, the SPAC sponsor or the SPAC.\1320\ These disclosures
under Item 1605(a) through (d) should benefit investors by providing
them with detailed information about the de-SPAC transaction, thereby
enabling them to make more informed investment decisions (including
voting and redemption decisions, if allowed). For example, the required
disclosure could allow investors to assess whether the de-SPAC
transaction or any related financing transaction has been structured in
a manner that would benefit the SPAC sponsor to the detriment of the
other security holders of the SPAC.
---------------------------------------------------------------------------
\1320\ See supra section II.F.1 for information about the
regulatory baseline.
---------------------------------------------------------------------------
Item 1605(e) requires disclosure as to whether security holders are
entitled to any redemption or appraisal rights, and if so, a summary of
the redemption or appraisal rights. These disclosures should help
investors to better understand their rights and 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.\1321\
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\1321\ Redemption decisions by investors can have significant
impacts on the dilution faced by non-redeeming shareholders. See
supra sections VIII.B.1.ii.b and VIII.B.1.iii.c.
---------------------------------------------------------------------------
Item 1605 could increase registrants' compliance costs related to
de-SPAC transactions. The magnitude of the incremental increase in
these costs will depend on the amount of information that SPACs and
target companies would have intended to disclose in connection with
future de-SPAC transactions in the absence of the final rule. Based on
staff experience of market practice and current disclosure
requirements, we expect registrants to have already planned to disclose
much of what is required by Item 1605(a), (b), (d), and (e).\1322\ The
disclosures required by Item 1605(c) are not common practice in the
staff's experience; thus, they may result in additional costs to
registrants (for example, this disclosure may require additional legal
advice and management time to gather and analyze information to assess
the effects of the de-SPAC transaction). To the extent that registrants
already intended to disclose information required by Item 1605 or have
the information readily available, the incremental increase in these
costs and benefits would be mitigated.\1323\
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\1322\ This is also consistent with comments received. See supra
note 352.
\1323\ Again, we note that even when SPACs would have otherwise
intended to disclose similar information, the final rules should
still provide value to the extent they result in more consistent
standardization than has, or would have, arisen organically.
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e. Board Determination About the De-SPAC Transaction (Item 1606)
If the law of the jurisdiction in which the SPAC is organized
requires its board of directors (or similar governing body) to
determine whether the de-SPAC transaction is advisable and in the best
interests of the SPAC and its shareholders, or otherwise make any
comparable determination, Item 1606(a) requires disclosure of that
determination. Item 1606(b) requires a discussion of the material
factors considered in making the determination, including but not
limited to, to the extent considered, the target company valuation,
financial projections relied upon by the board of directors (or similar
governing body) of the SPAC, and the terms of financing materially
related to the de-SPAC transaction. Item 1606(c) through (e) require
disclosure about the de-SPAC transaction, including whether a majority
of unaffiliated security holders is required to approve the de-SPAC
transaction, the involvement of any unaffiliated representative acting
on behalf of unaffiliated security holders, whether the de-SPAC
transaction was approved by a majority of the directors (or members of
similar governing body) of the SPAC who are not employees of the SPAC,
and if known after making reasonably inquiry, the reason behind any
abstentions or votes against the transaction.
Investors should benefit from the requirements of Item 1606(a) and
(b) as disclosure thereunder will reduce information asymmetry between
the SPAC investors and the SPAC by providing information about the
board's determination and decision making regarding the de-SPAC
transaction. Information disclosed under Item 1606(c) through (e) will
benefit investors by providing further details about the de-SPAC
transaction bargaining and voting process, including important
information regarding potential dissenting director votes, which could
potentially mitigate conflicts of interest. These disclosures provide
information that collectively should allow investors to understand the
multiple factors undergirding the decisions of the board, thereby
improving investment decision-making by investors in connection with
the de-SPAC transaction.
We expect Item 1606(a) and (b) will result in limited increases in
compliance costs for registrants because this information should be
readily available to the SPAC as the directors are likely to have
already assembled the information necessary to provide these
disclosures in carrying out their fiduciary duties to the SPAC, and the
disclosure is only required if the law of the jurisdiction in which the
SPAC is organized requires such board determination.\1324\ Similarly,
we expect the compliance costs of Item 1606(c) through (e) to be
minimal as, again, the information is likely readily available, for
example because it is recorded in board meeting minutes or found in
governance documents. To the extent that registrants already intended
to disclose some of the information required by Item 1606 or have this
information readily available, the
[[Page 14281]]
incremental increase in the registrant's costs would be mitigated.
---------------------------------------------------------------------------
\1324\ Given the data in Table 4, this would apply to most
SPACs.
---------------------------------------------------------------------------
One commenter raised the possibility that requiring the
identification of members of the governing body that do not vote for
the transaction (and the reasoning for their abstention or vote
against) might disincentivize them to vote accordingly and ``could also
have the effect of inhibiting discussion among directors at board
meetings.'' \1325\ Directors are generally subject to fiduciary duties
imposed by State or foreign law. As a result, we expect that directors
will generally seek to make voting decisions consistent with those
fiduciary duties to shareholders or the company irrespective of whether
they will be identified as voting against the transaction or
abstaining. Further, while it is possible that directors could believe
they face increased cost to dissenting publicly (via their official
recorded vote) because of this requirement, we do not expect the final
rules will detrimentally limit any private conversations among the
board of directors, contrary to the assertion of the commenter.\1326\
Consequently, we do not believe this requirement will result in
significant instances of de-SPAC transactions being approved even when
the majority of directors would have voted against approval but for the
final rule, because in those cases, we expect the privately dissenting
majority to communicate their dissent and successfully vote to not
approve the transaction, in which case no disclosures would be required
for such failing votes.
---------------------------------------------------------------------------
\1325\ Letter from Freshfields.
\1326\ Id. The commenter did not provide reasoning nor evidence
for the conclusion that the final rule would inhibit private
discussion among board members, and we are not aware of any economic
cost imposed by the final rule that would affect such private
conversations.
---------------------------------------------------------------------------
f. Reports, Opinions, Appraisals, and Negotiations (Items 1607)
Item 1607(a) requires disclosure of the information required by
Item 1607(b) if the SPAC or the SPAC sponsor received any report,
opinion (other than an opinion of counsel), or appraisal from an
outside party or an unaffiliated representative referred to in Item
1606(d) that materially relates to any determination disclosed in
response to Item 1606(a), the approval of the de-SPAC transaction, the
consideration or fairness of the consideration to be offered to
security holders of the target company in the de-SPAC transaction, or
the fairness of the de-SPAC transaction to the SPAC, its security
holders, or SPAC sponsor. Item 1607(b) requires, among other things,
disclosure about the preparer of the reports, opinions or appraisals
referred to in Item 1607(a) or negotiations or reports described in
response to Item 1606(d), and a summary of those negotiations, reports,
opinions or appraisals.\1327\ Item 1607(c) requires all reports,
opinions, or appraisals referred to in Item 1607(a) and (b) to be filed
as exhibits to the registration statement (e.g., Form S-4, Form F-4) or
schedule or included in the schedule if the schedule does not have
exhibit filing requirements.\1328\
---------------------------------------------------------------------------
\1327\ See supra section II.G.12.
\1328\ The Item 1607(c) requirements to file reports, opinions,
or appraisals as exhibits to the schedule or to include them in the
schedule if the schedule does not have filing requirements are
relevant to Schedules TO, 14A and 14C.
---------------------------------------------------------------------------
The Item 1607 disclosures will help ensure that SPAC shareholders
have access to information that the SPAC or a SPAC sponsor received
from an outside party or unaffiliated representative (referred to in
Item 1606(d)) when determining whether to proceed with a de-SPAC
transaction. We expect this additional information will improve
investors' ability to make informed investment decisions and thus will
contribute to price efficiency of the combined company. Moreover, we
expect the reduction in asymmetric information will contribute to
improved liquidity of the combined company.
As discussed above, Item 1607 requires, among other things, with
respect to certain reports, opinions, or appraisals: a summary of
findings and recommendations; filing of the report, opinion, or
appraisal; and a summary of the bases for and methods of arriving at
the findings and recommendations. We expect the requirements of Item
1607 will improve investor investment decision-making. For example, the
summary of findings and recommendations should help investors
understand the report contents. Even where a report is brief, it may be
written in a particular standardized format that the outside party
requires in connection with all such reports they provide, which some
investors may have difficulty understanding. The summary version
disclosed in the filing may present the information in a narrative
fashion that enhances investor understanding. If investors prefer
additional details, they can consult the actual report filed with the
filing that contains the summary. Additionally, the requirement to
disclose the bases and methods underlying the findings should provide
important information to the investor that may not be part of the
report itself but may be necessary to understand the basis for the
report's conclusions.
The Item 1607 disclosures should also help investors assess the
reliability and relevance of the report. In particular, we expect
disclosure related to compensation, method of selection, and material
relationships will help investors understand the incentives, potential
conflicts of interest, or potential biases that could influence the
outside party in preparing the report, opinion, or appraisal.
Similarly, we expect the disclosure requirements related to identity,
qualifications, instructions, limitations on scope of the
investigation, will help investors assess the relevance of the report
to their assessment of the proposed combination.
We expect the cost of gathering the information necessary to make
the required Item 1607 disclosures related to identity, qualifications,
compensation, selection process, instructions and limitations on the
scope of the investigation will not be significant because we expect
that the information required will generally be readily available to
the registrant or the outside party that prepared the report or both.
Regarding material relationships, we expect the limited two-year
look-back period will limit the burden on the SPAC to research relevant
past relationships. We expect the SPAC and SPAC sponsor (or advisor or
other unaffiliated representative) will have this information readily
available in internal records, such as agreements between the relevant
persons or records of financial transactions. We expect, however, the
SPAC or its advisors will incur some costs to perform additional
research in order to ensure it has identified the affiliates of the
outside party.\1329\
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\1329\ With respect to affiliates of the SPAC sponsor, we do not
expect there will be information-gathering costs in addition to
those already incurred in connection with Item 1603(a)(7) (regarding
indirect material interests in the SPAC sponsor). We discuss those
costs above in connection with the discussion of Item 1603, supra
section VIII.B.1.ii.c.
---------------------------------------------------------------------------
The incremental costs and benefits of the final rules will be
somewhat mitigated to the extent that some of these disclosures would
otherwise be required to comply with other rules, such as Regulation M-
A or FINRA Rule 5150.
Item 1607(c) requires the filing of the relevant report, opinion,
or appraisal. As a result of this requirement, registrants will need to
ensure the report, opinion, or appraisal is formatted so it can be
filed in EDGAR. Based on the Commission staff's experience, we do not
expect registrants
[[Page 14282]]
to incur substantial costs in formatting or paying a vendor to format
the relevant material for filing in EDGAR.
The final rules may also impact the cost of obtaining third-party
reports.\1330\ For example, some parties may be concerned about
liability related to reliance on their report, which may prompt them to
increase the cost of providing the report.\1331\ Additionally,
disclosure requirements about the bases and methods underlying the
findings may prompt registrants to ask third parties to include fully
comprehensive descriptions of their methods and bases, which would
potentially increase the fees charged by those third parties. Finally,
the compensation disclosures could result in the revelation of
competitive business information, which may influence fees for these
services.
---------------------------------------------------------------------------
\1330\ In 2021, the average costs for fairness opinions obtained
by SPAC acquirers where such information was presented in an SEC
filing was approximately $270,000. See supra section VIII.A.2.
\1331\ See, e.g., letter from Goodwin (``Most professionals
preparing these materials are not trained to prepare these documents
in a manner that would be appropriate for public disclosure.'').
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Finally, while Item 1607 does not mandate registrants to obtain any
report, opinion, or appraisal, we acknowledge that it is possible that
the requirement could prompt some registrants to obtain reports,
opinions or appraisals to avoid the appearance of failing to adequately
assess the target companies' prospects and financial condition. As
discussed in the baseline, approximately 68% of de-SPAC transactions in
2022 did not disclose that a fairness opinion was obtained in
connection with the transaction. Conversely, the requirement may also
deter some SPACs from relying on third-party reports, choosing instead
to rely on internal assessments (as Item 1607 does not apply to
internal work product). As a result, some SPACs may fail to identify
low-quality targets during the due-diligence process, to the extent
that such internal assessments do not include the depth of analysis or
expertise that would ordinarily be reflected in a fairness opinion.
Finally, any impact of the rule on decisions to obtain third-party
opinions or valuations could depend on the prospects of the target
company. That is, sponsors may be more likely to seek third-party
opinions for deals that they view as being more likely to result in
favorable opinions.
g. Tender Offer Filing Obligations (Item 1608)
We are adopting Item 1608 of Regulation S-K to codify the staff
position that a Schedule TO filed in connection with a de-SPAC
transaction should contain substantially the same information about a
target 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 any transaction for which a Schedule TO is filed,
which includes extensions as well as de-SPAC transactions.\1332\ For
example, Item 1608 clarifies 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 requirements to keep the redemption
period open for at least 20 business days and to include a fixed
expiration date.\1333\
---------------------------------------------------------------------------
\1332\ See supra section II.H.
\1333\ Id.
---------------------------------------------------------------------------
There were 23 Schedule TOs filed by 21 SPACs from 2020 to
2022.\1334\ A minority of these Schedule TO filings (approximately 35%
or 8 Schedule TOs) occurred alone i.e., without the concurrent filing
of a proxy statement (Schedule 14A), information statement (Schedule
14C), or registration statement (Form S-4 or F-4) that would provide
additional disclosures regarding the de-SPAC transaction. These
findings are consistent with our review of Schedule TO filings from
2000-2021 in the Proposing Release.\1335\
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\1334\ A study of 462 de-SPAC transactions that were completed
in 2020 and 2021 found that approximately 99% of such transactions
were accompanied by proxy disclosures and 81% involved a related
filing of a registration statement on either Form S-4 or Form F-4.
Of the 81% 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. See Michael Levitt, Valerie Jacob, Sebastian Fain,
Pamela Marcogliese, Paul Tiger, & Andrea Basham, supra note 1231. In
a corresponding report covering transactions that were completed in
2022, approximately 87% of de-SPAC transactions involved a
registration statement filing on either Form S-4 or F-4, of which
approximately 91% were accompanied by a proxy statement and 9% by an
information statement as a result of a consent solicitation. See
Freshfields, 2022 De-SPAC Debrief: A Comprehensive Review of All 102
De-SPAC Transactions that Closed in 2022, Freshfields.us (Jan.
2023), available at https://www.freshfields.us/490963/globalassets/noindex/documents/2022-de-spac-debrief.pdf.
\1335\ See Proposing Release, supra note 7, at 29529, n.501. 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
1227 (``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, Yochanan Shachmurove & 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); Vulanovic, supra note 1225 (20% to 81.52%
from 2003-2013).
---------------------------------------------------------------------------
Given that the staff has historically expressed the view that a
Schedule TO \1336\ 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, Item 1608 is unlikely to result in a meaningful difference in
the nature or amount of information provided by registrants. Further,
Rule 145a may reduce the number of SPACs filing a standalone Schedule
TO in connection with a de-SPAC transaction thereby also reducing the
number of potential parties affected by Item 1608 going forward. While
we recognize that, for other redemption events where only a Schedule TO
is filed--for instance, when a SPAC intends to extend or is otherwise
not engaging in a concurrent de-SPAC transaction--an individual SPAC
may incur incremental additional transaction and logistic costs,\1337\
we nevertheless expect the aggregate costs associated with these
requirements to remain small because such events are rare.
---------------------------------------------------------------------------
\1336\ Additionally, relatively few de-SPAC transactions have
historically involved the filing of a Schedule TO alone. See supra
note 1335 and accompanying text.
\1337\ See letter from ABA.
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h. Enhanced Projections Disclosure Requirements (Item 1609)
Item 1609 complements the amendments to Item 10(b) of Regulation S-
K \1338\ and applies to projections made in a filing (or any exhibit
thereto) in connection with a de-SPAC transaction.\1339\ Item 1609
requires registrants to disclose the purpose for
[[Page 14283]]
which the projections were prepared and the party that prepared the
projections. It also requires a discussion of all material bases of the
disclosed projections and all material assumptions underlying the
projections, and any material factors that may affect such assumptions.
---------------------------------------------------------------------------
\1338\ See supra section V; infra section VIII.B.4.
\1339\ See supra section III. For additional information about
the regulatory baseline for Item 1609, see supra section V.A.
---------------------------------------------------------------------------
If the projections relate to the performance of the SPAC, the rule
requires a statement of whether or not the projections reflect the view
of the SPAC's management or board about its future performance as of
the most recent practicable date prior to the date of the disclosure
document required to be disseminated to security holders. If the
projections relate to the target company, the rule requires disclosure
of whether the target company has affirmed to the SPAC that its
projections reflect the view of the target company's management or
board about its future performance as of the most recent practicable
date prior to the date of the disclosure document required to be
disseminated to security holders. If the projections no longer reflect
the views of the SPAC's or the target company's management or board
regarding the future performance of their respective companies as of
the most recent practicable date prior to the date of the disclosure
document required to be disseminated to security holders, the rule
requires a statement of the purpose of disclosing the projections and
the reasons for any continued reliance by the management or board on
the projections.
We expect Item 1609, along with the amendments to Item 10(b), will
result in improved disclosure about forward-looking information
provided to investors, allowing them to better understand and consider
the disclosed projections when making their investment decisions. We
also expect that the final rules will result in increased
standardization of the presentation of projections, which will further
reduce information acquisition costs and facilitate comparisons across
SPACs.
The required disclosure of preparers' identities and purposes for
which the projections were prepared should mitigate information
asymmetry between the SPAC and investors as those disclosures may
reveal preparers' potential conflicts of interest or allow assessment
of their qualifications or abilities to perform projections. This is
expected to be beneficial as the existing academic literature provides
evidence that SPAC projections are common but often overly
optimistic.\1340\ Another study found that optimistic forecasts are
correlated with retail investor trading behavior but not so for
institutional investor trading, indicating that retail investors may
benefit more from the disclosures.\1341\
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\1340\ Blankespoor, Hendricks, Miller & Stockbridge, supra note
1240, empirically found that: revenue forecasts occur among 80% of
SPACs, only 35% of firms meet or beat those forecasts, and SPACs
have growth targets that are approximately three times larger than
expected (compared to a matched samples of IPO and established
firms).
\1341\ Michael Dambra, Omri Even-Tov & Kimberlyn Munevar, Are
SPAC Revenue Forecasts Informative? 98 Acct. Rev. 1 (2023),
empirically found that revenue forecasts are positively associated
with abnormal returns in a short window around the merger
announcement--and further, that this response is driven by retail
investors, with no such response from institutional investors (based
on 13F holding filings)--but negatively correlated over longer
horizons. The paper caveats that structural differences between
firms could also explain the retail investor trading trends, which
would dampen the extent to which protections accrue to retail
investors.
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We also expect the final rule will benefit investors by providing
them with the information necessary to better determine the degree to
which they may wish to rely on projections. Specifically, the
requirement to discuss material bases and assumptions and their
underlying rationales should enable investors to understand how the
projections were derived, and subsequently how investors may choose to
incorporate these projections into their expectations and decision-
making. The requirement to disclose whether any projections disclosed
in a filing still reflect the views of management or the board of the
SPAC or target company (as the case may be) may also help investors
evaluate the reliability of the projections. Because we expect the
company that is the subject of the projections to have more information
about itself than outsiders, this information also could reduce
information asymmetry between the SPAC and/or target company and
investors regarding the reliability of those projections. Overall, the
adopted disclosure under Item 1609 should benefit investors by helping
them assess whether and to what extent to rely on projections used in a
de-SPAC transaction in making voting, redemption, and investment
decisions.\1342\
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\1342\ D. Eric Hirst, Lisa Koonce & Shankar Venkataraman, How
Disaggregation Enhances the Credibility of Management Earnings
Forecasts, 45 J. Acct. Res. 811 (July 17, 2007), available at
https://doi.org/10.1111/j.1475-679X.2007.00252.x (experimentally
shows 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). See also, Zahn Bozanic,
Darren T. Roulstone, & Andrew Van Buskirk, Management Earnings
Forecasts and Other Forward-looking Statements, 65 J. Acct. & Econ.
1 (2018), available at https://doi.org/10.1016/j.jacceco.2017.11.008
(demonstrating that non-earnings-forecast of items other than
earnings forward-looking statements can generate significant
responses from both investors and analysts and finding that the
forward-looking statements, even statements unrelated to earnings,
can provide value-relevant information to the capital market
participants).
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As discussed above, Item 1609 requires registrants to identify
providers of projections. Studies of the behavior of auditors of
financial statements found that similar identification was associated
with audit quality increases and misreporting decreases.\1343\ We
expect Item 1609 will have analogous effects and will increase
preparers' sense of accountability and potentially increase preparers'
incentives to make reliable projections. We expect this benefit will
apply regardless of whether the projections are provided by the
management or board of the SPAC or the target company or a third-party
provider.
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\1343\ Auditing literature provides evidence that audit quality
increases and misreporting decreases when engagement 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) (documenting evidence that
audit quality and audit fees increase in the first year when
engagement 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 demonstrates that PCAOB's
requirement of disclosing engagement partners' identity can reduce
misreporting).
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We do not expect the direct compliance costs of Item 1609(a) and
(b) to be substantial because companies should have the required
information readily available given that the information required to be
disclosed largely is what is necessary to perform the projections in
the first place.
However, there may be indirect costs to these amendments, such as
registrants incurring increased liability costs \1344\ or increased
proprietary or other disclosure costs,\1345\ especially in
[[Page 14284]]
combination with the co-registration requirement and the definitions of
blank-check company for the purposes of the PSLRA we are also adopting.
If SPACs believe these indirect costs are sufficiently high, these
amendments could dampen their willingness to disclose projections,
which could lead to a decrease in the amount of forward-looking
information made available to investors. If this leads SPACs to omit
projections that are informative to investors, their absence could
result in increased valuation uncertainty. This effect could impact
some SPACs more than others, depending on the disclosure requirements
of their local jurisdictions, or on other factors.\1346\ In these
cases, if SPACs view these additional indirect costs to be too high,
this dampening effect could result in not only a decrease in disclosure
of projections, but a reduction in the utilization of projections by
the SPAC entirely. However, as the potential dampening is likely to
affect projections without reasonable bases more than those with
reasonable bases (because the former are likely to be more difficult
and costly to justify quantitatively and thus be seen as a larger
litigation risk), we expect the potential for this dampening to be
heightened in cases where the projections are more uncertain.
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\1344\ Increased liability costs could occur due to the adoption
of the PSLRA amendments resulting in projection disclosures no
longer being afforded protection under the PSLRA, thereby increasing
the expected costs to registrants of forward-looking disclosures.
See infra section VIII.B.2.ii.
\1345\ For example, if a target has a new product line it has
yet to announce, but factors the product line into its disclosed
projections, it may be required to disclose the product line as one
of the ``material bases'' for the projections. Consequently,
disclosure of this new product line could inform the target's
competitors about the new product line earlier than the target would
find otherwise optimal and result in the target choosing not to
undertake the action (i.e., go public) that would require such
disclosure. See, e.g., Michael Dambra, Laura Casares Field & Matthew
T. Gustafson, The JOBS Act and IPO Volume: Evidence That Disclosure
Costs Affect the IPO Decision, 116 J. Fin. Econ 121 (2015)
(presenting evidence that firms make decisions not to IPO because of
such proprietary costs). Such costs were discussed by commenters,
see letter from Michael Dambra, Omri Even-Tov, and Kimberlyn George,
citing Dambra, Even-Tov & Munevar, supra note 1341.
\1346\ See supra note 363 and accompanying text.
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We also acknowledge that the requirements of Item 1609(c) may
impose additional costs on SPACs due to the timing mismatch between the
original preparation of projections and their inclusion in subsequent
filings, as echoed by some commenters.\1347\ Further, given the co-
registrant rules and new definitions of blank check company,\1348\
disclosures made in response to Item 1609(c) will not benefit from the
PSLRA safe harbor and could be subject to greater litigation risk than
under the baseline, and thus could create further liability costs for
the SPAC and target. Therefore, the provisions of Item 1609(c) might
result in one or more of: (a) increased compliance costs due to
additional pre-filing verification of circumstances, data, assumptions,
etc., that underlie the projections (and updating if so \1349\); (b)
disclosure that the board continues to rely on the projections because
they have no expectation that circumstances have changed; or (c)
disclosure acknowledging that the projections were based on past facts
and circumstances, which may have changed and thus are no longer relied
upon by the SPAC, but are still being included to provide insight into
historical decision-making or for some other reason. These outcomes
might result in increased information in the projections (in the case
of (a) above), increased information about the projections (in the case
of (b) or (c) above), and/or increased liability costs for the
registrants (in the case of (b) or (c) above).\1350\
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\1347\ Letters from ABA, Freshfields, Goodwin Procter, Kirkland
& Ellis.
\1348\ See supra sections III.E, VIII.B.2.
\1349\ If SPACs determine that it is necessary to update their
projections, further costs might be incurred if they also believe
any fairness or best interest determination based on those
projections also requires updating, a concern voiced by one
commenter. See letter from Kirkland & Ellis.
\1350\ We differentiate between information in the projections,
such as the projections being updated to reflect new facts or
circumstances, and information about the projections, such as
investors being able to assess whether or how they should factor
those projections into their expectations (for example, knowing to
discount outdated projections).
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To the extent that Item 1609 elicits additional contextual
information disclosures related to SPAC projections, investors could
incur incremental costs in processing the added information.\1351\
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\1351\ 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
(2020). The authors 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.
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i. Structured Data Requirement (Item 1610)
As with the specialized disclosure requirements applicable to SPACs
at the IPO stage as discussed above, Item 1610 also requires that the
disclosures prepared in compliance with respective sections of subpart
1600 of Regulation S-K applicable to de-SPAC transactions be tagged in
Inline XBRL.\1352\ For the same reasons discussed above, we expect that
the tagging requirement for de-SPAC transaction disclosures will
augment the informational benefits to investors resulting from the new
disclosure requirements.\1353\ For example, tagging the disclosure of
terms and amounts of the compensation received or to be received by a
SPAC 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.
Additionally, the tagging requirement will make it easier to compare
both numeric values and narrative discussion to those presented at the
SPAC's IPO stage.
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\1352\ See supra sections II.I and VIII.B.1.ii.d.
\1353\ See supra section VIII.B.1.ii.d.
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Unlike the Inline XBRL tagging requirement being adopted for SPAC
specialized disclosures, which applies to registration statements for
IPOs, the tagging requirement being adopted for de-SPAC transaction
disclosures typically will not impose a tagging obligation on a SPAC to
which the SPAC was not previously subject because a SPAC would be
subject to Inline XBRL tagging obligations as of their first periodic
report on Form 10-Q, Form 20-F, or Form 40-F.\1354\ As such, the Inline
XBRL tagging requirement for de-SPAC transaction disclosures for the
SPAC will 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. The tagging requirement being adopted will impose compliance
costs on SPACs at an earlier stage of the SPAC life cycle than under
the baseline. As noted above, there is some indication that data-
tagging costs in general have trended downward in the years since the
initial adoption of XBRL requirements for SEC filings, and due to their
similarities we expect this trend to hold for Inline XBRL tagging costs
as well.\1355\
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\1354\ See supra note 476 and accompanying text.
\1355\ See supra note 1302 and accompanying text.
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j. Re-Determination of SRC Status
The final rules provide that, upon the consummation of a de-SPAC
transaction, an issuer must re-determine its status as an SRC 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 filings, beginning 45 days after
consummation of the de-SPAC transaction. As an example of the effect of
the final rules, consider a SPAC that qualifies as an SRC that conducts
a de-SPAC transaction with a target company that results in a post-
combination company that does not qualify as an SRC. Under current
rules, the company would retain the SRC status throughout the fiscal
year that includes its next re-determination date (at second fiscal
quarter-end of that fiscal year), which could be up to 18 months if the
de-SPAC transaction occurs at the beginning of the third quarter. In
contrast, that same target
[[Page 14285]]
company going public via a traditional IPO might not qualify for SRC
status at all. Under the final rules, the post-combination company will
have 45 days following the de-SPAC transaction before the loss of SRC
status will have to be reflected.
The final rules should result in a level of disclosure appropriate
to the post-combination entity's facts and circumstances and be similar
to those applicable in the traditional IPO setting. We expect this will
reduce any regulatory arbitrage by requiring a target company going
public through a de-SPAC transaction to provide an appropriate level of
information to investors as it would were it to conduct a traditional
IPO.\1356\ For larger target companies, this will require more
comprehensive and detailed disclosure to investors soon after the de-
SPAC transaction is consummated. Overall, we expect these final rules
will increase investor protection by allowing investors to assess the
combined company more thoroughly through access to information
appropriate to the post-combination company's float and revenues. Large
target companies may also reap the benefit of reduced cost of capital
insofar as providing additional historical periods of financial
statement data improves price efficiency.\1357\
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\1356\ See infra section III.D for more information on the
regulatory baseline.
\1357\ See supra note 1191.
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The re-determination of SRC status is based on annual revenues and
the public float on the measuring day, with such public float being
measured within the four-business day window following the de-SPAC
transaction. The calculation of public float depends on the market
price at which the common equity was last sold on that selected date,
or the average of the bid and asked prices of the common equity. The
public float calculation allows for secondary market trading to
determine the public float of the SPAC used for SRC re-determination.
To the extent that the secondary market might not reflect all the
information about the post-combination business within four business
days, this could result in an inappropriate determination of SRC status
or lack thereof. However, this reflection of market price in SRC status
determination exists at every second quarter-end \1358\ for public
companies, and thus does not reflect a cost relative to the baseline,
timing differences notwithstanding. Further, because the final rule
allows for up to four business days to re-determine this public float,
there is some flexibility for firms to avoid volatility they deem
temporary, although this discretion also implies potential information
asymmetry costs to the extent firm discretion would bias towards SRC
status.\1359\
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\1358\ See supra 633 and accompanying text.
\1359\ Because SRC status entails lower disclosure and
regulatory compliance costs, it is likely that firms would prefer to
have SRC status than not.
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The final rules will increase compliance costs compared to the
baseline for combined companies that do not meet the SRC definition as
of the accelerated re-determination date. Those companies may need to
provide more detailed disclosure to investors sooner after the de-SPAC
transaction than they would under current disclosure requirements. To
the extent that the amendment to the public float calculation timing
creates an effective difference between the IPO and de-SPAC transaction
settings, whereby the latter is affected by secondary market trading
where the former is not, the effect of this difference is not expected
to systematically generate inefficiencies with regards to the de-SPAC
transaction setting. This is because the effect of market trading on
the public float calculation could result in both increases and
decreases in post-de-SPAC transaction public float (based on
observations of historical de-SPAC outcomes).\1360\
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\1360\ Florian Kiesel, Nico Klingelh[ouml]fer, Dirk Schiereck &
Silvio Vismara, SPAC Merger Announcement Returns and Subsequent
Performance, 29 Eur. Fin. Mgmt. 399, 399-420 (2023).
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A potential cost of the re-determination is that, under certain
circumstances, a SPAC that qualifies as an SRC could file two years of
audited financial statements in conjunction with the de-SPAC
transaction, but then upon re-determination lose its SRC qualification,
and potentially be required to include an additional year of audited
financial statements in subsequent registration statements. This
scenario would result in additional costs, such as engaging audit
services for the additional historical year, that would not be incurred
without the re-determination.\1361\ These costs, however, are partially
mitigated by the provision in the final rules of the 45-day window
before SRC status is required to be reflected following a de-SPAC
transaction. For combined companies that, based on public float
calculations as within four business days following the de-SPAC
transaction, no longer qualify for SRC status under the final re-
determination rules, this window allows them to continue to reflect SRC
status on registration statements filed within this 45-day window after
the de-SPAC transaction, thereby avoiding those extra costs associated
with the loss of SRC status.
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\1361\ Because SPACs would have an existing history of audits,
including for the filings required as part of the de-SPAC
transaction, we expect the cost of auditing the additional
historical year would be mitigated. We note that the opposite
scenario, namely a non-SRC SPAC resulting in a post-combination firm
that is re-determined to be an SRC would file fewer years of
financials in subsequent registration statements. However, this
scenario does not represent a concomitant reduction of cost, because
those auditing or other costs would already be incurred.
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Some of the companies that lose SRC status but meet the EGC
definition could avail themselves of the accommodations associated with
EGC reporting requirements, which could mitigate some of the disclosure
costs required by the adopted amendment.
k. Minimum Dissemination Period
We are adopting final rules that require a minimum dissemination
period for registration statements, proxy statements, and information
statements filed in connection with de-SPAC transactions.\1362\ We
expect these rules will benefit SPAC shareholders by providing a
minimum amount of time to review the information disclosed in these
documents before making voting, redemption, and investment
decisions.\1363\ To the extent that this results in investors having
more time to review the information than they would otherwise have, the
minimum distribution period will allow them to more thoroughly consider
their choices. This amendment will likely provide its greatest
potential benefits to SPAC shareholders in de-SPAC transactions where
there are no required advance dissemination periods, such as in the
cases of SPACs that are not organized in a jurisdiction with equivalent
delivery requirements for notices of stockholder meetings,\1364\ do not
file a Schedule
[[Page 14286]]
TO,\1365\ or do not incorporate information by reference in their Form
S-4/F-4 filings.\1366\
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\1362\ Specifically, the final rules require dissemination no
later than the lesser of 20 calendar days prior to the date on which
the meeting of security holders is to be held or action is to be
taken in connection with the de-SPAC transaction or the maximum
number of days permitted for disseminating the prospectus under the
applicable laws of the jurisdiction of incorporation or
organization.
\1363\ The final minimum dissemination rules do not apply with
respect to Schedule TO. The combined effect of certain tender offer
rules currently effectively provides for a comparable, slightly
longer minimum 20-business-day period for investors to make
decisions. See 17 CFR 240.14e-1 under the Exchange Act (prohibiting
tender offers that are held open for less than 20 business days from
the date the tender offer is first published or sent to security
holders).
\1364\ For example, while Delaware General Corporation Law only
requires that due notice of an upcoming meeting be provided 20 days
prior to the event (in connection with certain transactions such as
mergers) and does not mandate a minimum period for dissemination of
proxy statements or joint prospectus/proxy statements required by
the Federal securities laws. As noted in the Proposing Release
(supra, note 7, at 29531), Commission staff, in reviewing filings,
has observed that the notices of the meeting mandated by Delaware
General Corporation 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 General Corporation Law notice
requirement. See also letter from Vinson & Elkins (``Under the
existing regulatory framework, which is dictated by the laws of the
SPAC's jurisdiction of formation and the proxy rules, SPACs are
typically required to deliver notice of the special meeting not less
than 10 days before the meeting and, if the SPAC is a Delaware
entity and will be directly merging with another entity, such notice
is typically required at least 20 days before the meeting. This
notice is included at the beginning of the SPAC's proxy statement
and effectively requires that final versions of all proxy materials
be delivered to the SPAC's shareholders at least 10 days (or 20
days, as applicable) before the SPAC's special meeting.'' (Footnotes
omitted)). See also Table 4 in section VIII.A.2.iv.
\1365\ 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 20-calendar-day minimum
dissemination period will not have an incremental effect.
\1366\ There will be no incremental effect on the dissemination
of Form S-4 or F-4 in connection with a de-SPAC transaction if the
form incorporates information by reference because a 20-business-day
minimum dissemination requirement already applies, a period
lengthier than 20 calendar days. See supra note 501.
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The costs of this amendment, including printing and mailing costs,
management time, and or consulting fees, may be limited by the fact
that, under the baseline, SPACs may have incentives to provide the
required disclosure materials in advance of a minimum deadline. 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. In these cases, we do not expect the final rules will
cause a change in behavior for firms already submitting these
statements 20 calendar days or greater in advance.
The additional time required by the amendment could, in effect,
shorten a SPAC's time to otherwise complete a business combination
within its limited lifespan, and this amendment will remove the option
value inherent in the existing flexibility in dissemination timing.
Costs associated with adopting this proposal could also increase in
proximity to the SPAC's dissolution date, because, under such
conditions, logistical costs like expedited reviewing and printing
would accrue.\1367\ It is also possible that the minimum dissemination
period 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, or, in the extreme, a de-SPAC transaction would not be able to
proceed due to these new timing requirements. However, as discussed
above, we believe such costs would rarely be incurred given the
significance of a de-SPAC transaction to SPACs and targets and the
amount of time that SPACs have to find a target and engage in a de-SPAC
transaction relative to the length of the dissemination period. Rather,
we believe it is more likely that SPACs and targets will account for
the amended dissemination period in establishing a timeline for their
business combination in the event that it would not have already been
met or otherwise required.
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\1367\ We note discussion in section III.B clarifying that the
deadline is met when the materials are mailed; thus, the delivery
timing is not a consideration. See supra note 512.
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Furthermore, because we are also adopting Rule 145a, which will
require the filing of a registration statement or reliance on an
exemption for a de-SPAC transaction, and because de-SPAC transactions
can incorporate information by reference, we expect there may be few
future de-SPAC transactions to which the minimum dissemination period
requirement would impose an otherwise additional binding time
constraint.
l. Aligning Non-Financial Disclosures in De-SPAC Disclosure Documents
We are adopting amendments such that target companies in a de-SPAC
transaction not subject to the reporting requirements of section 13(a)
or 15(d) of the Exchange Act must include in their registration
statement or schedule filed in connection with the de-SPAC, disclosures
relating to the target company that would be provided in a Form S-1 or
F-1 for an IPO. These final amendments would require disclosure with
respect to the target comprising: (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; and (6) Item 701 (recent sales of unregistered
securities).\1368\ The final amendments also require, where a Form S-1
or Form F-1 is used to register securities in connection with a de-SPAC
transaction, that these registration statements include the information
required in Form S-4 and Form F-4, respectively, and that any Schedule
TO or Schedule 14A filed for a de-SPAC transaction incorporate the
disclosure provisions of Items 1603 through 1609 and the structured
data provision of Item 1610.
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\1368\ Where the target is an FPI, the amendment includes the
option for accordant disclosures. See supra section III.A.1.
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The costs and benefits of these final amendments 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.\1369\ 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.\1370\ 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.\1371\
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\1369\ The Form 8-K with Form 10 information (often referred to
as the ``Super 8-K'') is due four business days after consummation
of the de-SPAC transaction. See Item 2.01(f), Form 8-K.
\1370\ 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.
\1371\ Because some filers incorporate disclosure by reference
from more than one source, the total percentage of usage across
sources exceeds 100%.
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[[Page 14287]]
[GRAPHIC] [TIFF OMITTED] TR26FE24.002
Figure 3 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 Item 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.\1372\ 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 the final amendments may be
mitigated.
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\1372\ 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 or
disagreements with accountants on accounting and financial
disclosures 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%.
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These final amendments will ensure information about the target
company is provided before shareholders potentially make voting,
redemption, or investment decisions in connection with the de-SPAC
transaction (whereas under the baseline 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).
This timing change 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,
relative to the baseline. 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.
As a result of the final amendments, 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. The final amendments therefore
should provide increased investor protections and generally improve the
information environment for investors making a voting, redemption, or
investment decision in connection with the de-SPAC transaction.
The final amendments require disclosure of information that must
already be included in the ``Super 8-K'' filed after closing of the de-
SPAC transaction. Thus, we expect the compliance costs of these
amendments to be low to the extent they will primarily stem from the
accelerated filing timeline for these disclosures (with the exception
of cases involving failed de-SPAC transaction votes), although we
recognize that some items may be more costly to disclose earlier than
others. Further, these additional compliance costs should be limited to
the extent they are consistent with
[[Page 14288]]
existing practice, as suggested by commenters.\1373\
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\1373\ Letters from ABA, PwC.
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2. Liability-Related Rules
In addition to the rules discussed above pertaining to disclosures,
we are adopting rules and amendments to clarify and amend the existing
liability framework to resolve certain ambiguities and protect
investors. In this section, we discuss the potential costs and benefits
of requiring that the target company be treated as a co-registrant on a
Form S-4, Form F-4, Form S-1, or Form S-4 filed in connection with a
de-SPAC transaction. In addition, we discuss the amendment to the
definitions of ``blank check company'' for purposes of the PSLRA to
remove the ``penny stock'' condition.
i. Target Company as Co-Registrant
Currently, a SPAC, the target company, or a holding company may
file the registration statement for a de-SPAC transaction depending on
the structure of the transaction. When the SPAC or holding company
files the registration statement for a de-SPAC transaction, section 11
liability may not apply to the target company. Given that the target
company effectively is an ``issuer'' of securities in a de-SPAC
transaction regardless of transaction structure, the final rules will
require that the target company and its related section 6(a)
signatories sign these registration statements when filed by a SPAC or
another shell company.\1374\ In addition, in a de-SPAC transaction
where the target company consists of a business or assets, the seller
of the business or asset is deemed to be a registrant instead of the
business or assets.
---------------------------------------------------------------------------
\1374\ See supra section III.C.
---------------------------------------------------------------------------
The primary benefit of this rule will be to align potential section
11 liability applicable to the target company in a de-SPAC transaction
with such liability that may apply in a traditional IPO because, given
that the transaction is essentially its IPO, it is the target company
that, in substance, issues or proposes to issue its securities or,
pursuant to new Rule 145a, the securities of the combined
company.\1375\ Under current rules, when the target company does not
file this registration statement, it would not have section 11
liability for any information about its business and operations in the
registration statement even though, like a traditional IPO, investors
look to the business and prospects of the target company in evaluating
an investment in the combined company. Significant information
asymmetries also arise because the filer likely must rely on the target
company providing this information for inclusion in the registration
statement.\1376\ While exposing the target company to section 11
liability may increase costs (such as compliance costs or the target
company obtaining directors and officers insurance where it does not
already have coverage and perceives a need to have coverage), ensuring
that the target company is subject to such liability for a de-SPAC
registration statement should give the target company stronger
incentives to provide higher quality information about its financial
condition and future prospects. Thus, we expect that the final rule
will lead to better informed voting and investment decisions and reduce
adverse selection with regard to de-SPAC transactions.\1377\
---------------------------------------------------------------------------
\1375\ See supra section III.C.
\1376\ See supra note 22 and accompanying text.
\1377\ Adverse selection describes a situation in which
investors have incomplete information about potential de-SPAC
targets and thus have difficulty distinguishing good investments
from bad investments. As a result, investors may be less willing to
participate in the SPAC market out of fear of choosing a bad
investment. Higher quality information about targets mitigates this
problem and encourages investor participation and the health of the
SPAC market overall.
---------------------------------------------------------------------------
A few commenters compared de-SPAC transactions and M&A transactions
generally, in which targets typically do not sign a registration
statement filed by the acquiror and do not share liability as a signing
party. They argued that, if market forces ensure sufficient information
about the target reaches investors in traditional M&A transactions,
market forces should serve the same function in de-SPAC
transactions.\1378\ However, as noted elsewhere in this release, while
the de-SPAC transaction is a type of M&A transaction, we believe de-
SPAC transactions can be distinguished from other M&A transactions due
to their hybrid nature. Specifically, the de-SPAC transaction
simultaneously: (i) functions as a form of public capital raising for
the target company, (ii) transforms a shell company, that is not a
business combination related shell company, into an operating company,
and (iii) commonly represents the introduction of a formerly private
company to the public markets for the first time. Moreover, SPACs
sponsors--who often have significant influence over the de-SPAC--may
have weaker incentives than acquiring firm managers in traditional M&A
transactions to perform detailed due diligence on information supplied
by the target company, because SPAC sponsors benefit from a completed
de-SPAC transaction at nearly any price.\1379\ In addition, this
information may be more important to investors because unlike a
traditional M&A transaction, the SPAC has no business operations of its
own, and the business and operations of the target company will
typically be the sole business and operations of the combined company
after the business combination. The final rules would address these
misaligned market incentives by assigning strict liability under
section 11 to the target company, which is in the best position to
ensure the accuracy of the disclosures.
---------------------------------------------------------------------------
\1378\ See letters from ABA, Skadden.
\1379\ See supra section VIII.A for discussion of SPAC sponsors'
interests in completing the de-SPAC transaction.
---------------------------------------------------------------------------
Another reason we expect the final rules will produce a more
optimal solution than reliance on existing market incentives is that we
do not expect ``inherited liability'' of target company officials to
effectively address the information asymmetry and incentive
misalignment issues, as suggested by a few commenters.\1380\ To the
extent the target company survives and/or the officers and directors of
the target company are officers and directors of the surviving company,
they would potentially have liability for statements in the de-SPAC
registration statement. However, that future assumption of liability
does not change the fact that, under current regulations, depending on
the transaction structure, the target company and its officers and
directors may not have liability at the time of sale for the statements
made in any registration statement filed in connection with the de-SPAC
transaction. The final rules ensure that target company directors and
signing officers have liability for statements made in the de-SPAC
registration statement, regardless of whether they remain with the
surviving company following the de-SPAC transaction.
---------------------------------------------------------------------------
\1380\ See letters from ABA, NYC Bar. See discussion of these
comments in section III.C (regarding whether current requirements
provide sufficient incentives in connection with discussion of the
final rules).
---------------------------------------------------------------------------
The final rules regarding ``co-registration'' may be associated
with additional administrative or other costs. First, in connection
with the filing of the registration statement, the co-registrant
requirements could increase compliance costs of target companies and
introduce the prospect of new potential costs if the target company
incurs section 11 liability. Compliance costs compared to the baseline
may increase in cases where the target would not otherwise have been a
registrant of
[[Page 14289]]
a registration statement for the de-SPAC transaction. For example, the
target company may elect to employ service providers (such as legal,
accounting, or financial advisers) to a greater degree or may elect to
have its management spend more time preparing and reviewing the
registration statement disclosure, since under the final rules, the
target company, its directors, and its section 6(a) signatories will
potentially be liable for material misstatements in or material
omissions from any effective de-SPAC transaction registration statement
pursuant to section 11. Potential target companies may also be deterred
from engaging in a de-SPAC transaction due to this potential liability,
which could result in fewer public companies.
Second, target companies may elect to spend more money than under
the baseline for directors and officers insurance coverage, although
this would not be a direct compliance cost of the final rules. A number
of commenters raised such concerns.\1381\ Based on staff experience
reviewing filings involving SPACs, most target companies already have
directors and officers insurance.\1382\ Where a target company expects
to enter a de-SPAC transaction, following the adoption of the final
rules, we expect that some of these target companies may seek to expand
their existing coverage due to the potential added liability from the
above filings, resulting in a higher premium. We note costs for
additional insurance may help offset or substitute for the potential
increase in liability-related costs discussed earlier.
---------------------------------------------------------------------------
\1381\ Letters from ABA (``Targets will be forced to
substantially enhance their D&O liability insurance coverage to
cover potential federal securities law liability substantially
earlier in the De-SPAC Transaction process than is currently the
case. Moreover, if the De-SPAC Transaction is never completed for
some reason, Targets would likely not be able to `ratchet down'
their coverage to more typical private company levels until the next
policy renewal date.''); Anonymous (Apr. 7, 2022); Skadden (``Given
the potential for increased risk of liability to boards, we also
expect D&O liability insurance premiums to increase significantly,
further diluting the value of the transaction to stockholders.'').
See also letters from ABA, Goodwin, White & Case (each discussing
directors and officers insurance premium costs in connection
proposed Item 1606(a)) and Job Creators Network (noting that costs
generally will increase, as ``SPACs and target companies should
expect extensive diligence requests from financial institutions,
advisors, and their counsel in connection with a de-SPAC
transaction'' (citations omitted)).
\1382\ These target companies may have directors and officers
coverage for several reasons: (a) to cover the target company in
connection with any liability to investors in connection with
material misstatements or omissions in the registration statement,
(b) to cover the target company in connection with government
enforcement actions and investigations, (c) to cover the expense of
the company in indemnifying directors and officers for their
liability, and (d) to cover the liability of directors and officers
where they are not indemnified by the target company.
---------------------------------------------------------------------------
Third, depending on when the business combination closes, the
target company may incur compliance costs in connection with periodic
and current reporting, because, as a registrant of a de-SPAC
transaction registration statement, once this registration statement is
effective, the target company will become an Exchange Act reporting
company.\1383\ This would, among other things, require the filing of
Exchange Act periodic reports on Forms 10-K, 10-Q, and 20-F where
applicable, and current reports on Forms 8-K and 6-K after the
effectiveness of any registration statement for the de-SPAC transaction
and until the target company is able to terminate/suspend its Exchange
Act reporting obligations.\1384\ This additional cost to target
companies may be mitigated to some degree by the fact that much of the
information they will have to disclose under the final rules is
information that, under the baseline, either was already compiled and
disclosed as part of the de-SPAC transaction or would be required in
disclosures of the combined company after the de-SPAC transaction.
However, in cases of de-SPAC transactions for which a registration
statement becomes effective but the business combination does not
close, which based on staff experience is very rare, the final rules
will impose a cost upon those target companies that would not be
incurred under the baseline, which could affect the cost and benefit
calculations of target companies when choosing whether to go public
through a de-SPAC transaction.
---------------------------------------------------------------------------
\1383\ See supra note 558 and accompanying text.
\1384\ See supra section III.C.3 for discussion of reporting
obligations. We also note that although these filings will create
costs, investors should also benefit from these ongoing disclosures.
---------------------------------------------------------------------------
Finally, we expect audit costs may increase for a minority of
target companies as a result of the co-registration requirement. Under
the current regulatory regime, filings of U.S. public companies must be
audited by PCAOB-registered auditors, including financials of
predecessor target companies.\1385\ As co-registrants to a de-SPAC
transaction, non-predecessor target companies will also need to obtain
audits from PCAOB-registered auditors. We expect relatively few targets
would need to change auditors as a result of the co-registration
requirement for several reasons. First, many target companies may have
already decided to work with PCAOB auditors in advance of seeking an
acquisition with a public company. Second, we expect there to be
relatively few de-SPAC transactions involving non-predecessor target
companies. For example, approximately 97% of de-SPAC transactions from
1990-2022 involved a single predecessor target.\1386\ Finally, any cost
related to this requirement would be limited because audits of the
target company's operations and financials for filings subsequent to
the de-SPAC transaction closing would need be conducted by PCAOB-
registered auditors under the current regulatory regime. With respect
to cost of conducting the audits in accordance with PCAOB standards,
for predecessor target companies, and PCAOB or GAAS standards for non-
predecessor target companies, we do not anticipate meaningful
additional costs.
---------------------------------------------------------------------------
\1385\ See supra note 624 and accompanying text.
\1386\ Target counts are from Dealogic's SPAC M&A data.
---------------------------------------------------------------------------
These costs may be factors that a target company that seeks to
become public considers when evaluating the route of a traditional IPO
versus a de-SPAC transaction. As such, under the final rules, the
additional costs for target companies, balanced against reduced adverse
selection faced by investors, potentially drawing more investors to the
SPAC market, may tilt the relative attractiveness of seeking a public
listing away from a de-SPAC transaction towards a traditional IPO or
away from public listing entirely. The extent to which these factors
influence such a decision would depend on a variety of factors, such as
target company preferences toward the de-SPAC transaction method of
going public--based on views of the process such as its level of
transaction costs, its timing, and its certainty of closing.
ii. PSLRA Safe Harbor
As discussed in section III.E, we are adopting new Securities Act
and Exchange Act rule definitions of ``blank check company'' under the
PSLRA. The effect of the final rules will be that the PSLRA statutory
safe harbors will be unavailable for forward-looking statements made in
connection with a de-SPAC transaction involving an offering of
securities by a SPAC or other issuer meeting the final definitions of
``blank check company.'' \1387\
---------------------------------------------------------------------------
\1387\ See supra section VIII.A.3. See also supra section III.E
for more information about the regulatory baseline.
---------------------------------------------------------------------------
These provisions of the final rules have two related benefits: (1)
an increase in the likelihood that such issuers will take more care in
avoiding the use of unreasonable forward-looking statements, and (2) an
increase in the likelihood that investors will have
[[Page 14290]]
confidence in the forward-looking statements made by such issuers.
First, the final rules will benefit investors by incentivizing
SPACs and other blank check companies \1388\ to take greater care to
avoid making forward-looking statements that are unreasonable. There is
broad acknowledgement that forward-looking statements can be important
for investors to aid their valuation of securities.\1389\ As noted
above, however, several commenters have raised concerns that forward-
looking statements used in de-SPAC transactions are overly optimistic
and thus less useful for investors.\1390\ Some academic research has
found SPAC forward-looking statements to be overly optimistic \1391\
and suggests, with caveats, that less sophisticated investors are more
likely to be swayed by such projections.\1392\ One study finds,
however, little evidence of ``hype'' in SPAC forecasts.\1393\ As a
result of the final definitions of ``blank check company'' for purposes
of the PSLRA, we expect SPACs and other affected blank check companies
will take greater care to avoid unreasonable forward-looking statements
because these issuers will be concerned there may be a higher risk of
incurring potential costs or liability in such cases as compared to the
baseline.\1394\ The reduced likelihood of unreasonable statements
should allow investors to make better investment and voting decisions.
The potential for improvement in decision-making may be particularly
pronounced in de-SPAC transactions as there is typically no prior
public history of filings or financial information for investors to
draw upon to help determine the reasonableness of projections.
---------------------------------------------------------------------------
\1388\ In this subsection VIII.B.2.ii, where we refer to ``blank
check companies'' in connection with our discussion of the final
rules, unless otherwise indicated, we are referring to blank check
companies that are not limited by any qualification that the company
is an issuer of penny stock.
\1389\ See, e.g., letter from CFA Institute (``FLS are regularly
used in connection with de-SPAC merger transactions and are
considered key information for assessing prospects for the newly
merged entity.''); Anne Beyer, Daniel A. Cohen, Thomas Z. Lys &
Beverly R. Walther, The Financial Reporting Environment: Review of
the Recent Literature, 50 J. Acct. & Econ. 296-343 (2010) (Using a
sample from 1994 to 2007, this article shows management earnings
forecasts contributed over half (55%) of the accounting-based
information to the market that explained quarterly stock return
variance.); Moonchool Kim & Jay R. Ritter, Valuing IPOs, 53 J. Fin.
Econ. (1999) (finding that valuing IPOs with comparable firm
multiples using analyst forecasts of future accounting performance
rather than historical numbers improves accuracy substantially).
\1390\ Letters from Americans for Financial Reform Education
Fund (``Post-merger investors in SPACs, who are predominantly retail
investors, are often lured by ambitious projections of growth--made
with the protection of the safe harbor--and unfortunately have
already lost significant amounts of money as a result. . . . In some
cases, SPACs have lost up to 75% of their value since 2021. Retail
investors are estimated to have lost about $4.8 billion, or 23% of
the $21.3 billion of their total $21.3 billion in SPACs.''), Better
Markets, CFA Institute, CII, Senator Elizabeth Warren (``In 2021,
nearly half of all companies with less than $10 million of annual
revenue that went public through a SPAC `have failed or are expected
to fail to meet the 2021 revenue or earnings targets they provided
to investors.' These companies fell short on revenue projections by
an average of 53%.'' (Referencing a WSJ analysis)).
\1391\ Blankespoor, Hendricks, Miller & Stockbridge, supra note
1240, finds that combined companies meet or beat 35% of revenue
projections. This percentage declined as the forecast period
increased; SPACs meet or beat 42% of 1-year forecasts but 0% of
four-year forecasts. Note that unbiased forecasts should
approximately overshoot as often as undershoot the eventual true
value, and thus forecasts should be expected to meet or beat true
values approximately 50% of the time.
\1392\ See supra notes 1240 and 1341.
\1393\ See letter from Cato Institute, which cites Kimball
Chapman, Richard Frankel, & Xiumin Martin, SPACs and Forward-Looking
Disclosure: Hype or Information (Research Paper No. 3920714, last
revised Oct. 21, 2021), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3920714 (retrieved from SSRN Elsevier
database). Using a sample of 420 SPACs with IPOs between 2015 and
2020, the authors find ``a negative association between the
redemption rate and Forecast Intensity [the number of performance
metrics forecasted times the number of years forecasted] and the
forecasted revenue growth rate, which is the opposite of what the
opportunistic disclosure hypothesis would predict. In other words,
we fail to find evidence of `hyping' when analyzing the association
between the redemption rate and SPAC disclosures.'' The authors
caveat that this inference ``is based on the assumption that the
perceived deal quality as measured by redemption rate is an unbiased
estimate of deal quality.'' Put another way, the authors argue that
since other studies have observed a positive correlation between
lower investor redemption levels and higher de-SPAC-period stock
performance, the fact that they find an association between lower
investor redemption levels and forecast intensity and growth rates
suggests high forecasts are associated with better de-SPAC
performance in the year following the de-SPAC. Thus, they assert
SPAC forecasts do not display ``hype.'' We find this conclusion
problematic. Finding that more intense or higher raw forecasts are
associated with better SPAC performance does not mean there is no
hype, because both low and high growth rates can be exaggerated. The
study also finds ``no evidence of a subsequent return reversal in
the de-SPAC period'' that is more prevalent for the SPACs with the
highest raw forecast growth rates, which the authors argue would
have been evidence of overly optimistic ``hype.'' However, the
paper's regressions include four sets of returns as dependent
variables in a single specification: the returns before merger
announcement, right around announcement, after announcement to the
day before closing, and trading day 0 to 1 year after closing. This
approach hinders statistical inference since standard errors are not
appropriately corrected for heteroskedasticity and the design
decision to include multiple return windows simultaneously in a
single regression results in biased estimations of the control
variables included as regressors, making it difficult to draw firm
conclusions from the results.
\1394\ While the Commission has brought enforcement actions
alleging the use of baseless or unsupported projections about future
revenues and the use of materially misleading underlying financial
projections involving both SPACs and other reporting companies (see
supra note 848), removal of the PSLRA safe harbors for SPACs will
add liability for forward-looking statements in any private right of
action under the Securities Act or Exchange Act.
---------------------------------------------------------------------------
It is possible the market already discounts to some extent overly
optimistic claims in forward-looking statements by SPACs who were
operating under the assumption that their disclosures were subject to
PSLRA safe harbor protections, reducing the potential harm from such
forward-looking statements that this rule is intended to
ameliorate.\1395\ In this regard, we note that sophisticated investors
are more likely to discount overly optimistic forward-looking
statements, and thus the final rules may benefit less sophisticated
investors more.
---------------------------------------------------------------------------
\1395\ Several commenters expressed this view. See, e.g.,
letters from Cato Institute, Kirkland & Ellis, Paul Swegle.
---------------------------------------------------------------------------
By incentivizing SPACs and other blank check companies to avoid
unreasonable forward-looking statements, the final rules will also
benefit investors and issuers by increasing the likelihood that those
investors will have confidence that the forward-looking statements are
reliable. If investors are aware that SPACs are taking greater care to
avoid unreasonable forward-looking statements, investors may be able to
analyze SPAC opportunities with greater precision, resulting in less
adverse selection and encouraging investment and capital formation.
Similar benefits will accrue to investors in registered securities
offerings of non-SPAC registrants that meet the final definitions of
``blank check company,'' although this is less likely to have a
significant impact on the overall market due to the limited number of
business combinations involving these issuers, as observed in recent
years.\1396\
---------------------------------------------------------------------------
\1396\ See supra section VIII.A.
---------------------------------------------------------------------------
Considering the final rules holistically, we note that Item 1609 of
Regulation S-K, amended Item 10(b) of Regulation S-K, and other
provisions of the final rules intended to increase investor awareness
of potential conflicts of interest \1397\ may prompt SPACs to improve
their projections because of the reasons discussed above \1398\ and/or
allow investors to better understand and evaluate projections,\1399\
which could
[[Page 14291]]
reduce the incremental benefit of the removal of the PSLRA safe harbor
in isolation.
---------------------------------------------------------------------------
\1397\ See supra section II.C (discussing rules requiring
disclosure of conflicts of interest between public investors and
SPAC sponsors).
\1398\ See supra note 1394.
\1399\ For example, Item 1609(b) of Regulation S-K requires
disclosure of material assumptions that underlie projections. This
additional detail may allow investors to better assess the validity
of projections and detect over-optimism.
---------------------------------------------------------------------------
This provision of the final rules may entail additional costs.
First, SPACs and other blank check companies may experience greater
legal and related costs in connection with defending actions brought
against them under the Federal securities laws, particularly if the
combined company that results from a business combination transaction
underperforms relative to any forward-looking statements.\1400\ The
clarity the rule provides about the absence of the PSLRA safe harbor
may increase the risk of such legal action. This cost would be
mitigated by the extent that directors and officers of the SPAC and the
target company have relevant directors and officers liability
insurance, though the cost of that insurance to cover potentially
increased legal risk may also likely be higher relative to the
baseline.\1401\
---------------------------------------------------------------------------
\1400\ Increased legal costs could also concern other
transaction participants such as third-parties hired to prepare
projections if they determine the disclosure of the projections
would subject them to liability. They may seek compensation for
bearing this additional liability. See letter from ABA.
\1401\ See letter from Amanda Rose.
---------------------------------------------------------------------------
Second, SPACs and other blank check companies may incur additional
costs related to efforts by these companies to ensure projections they
provide investors are not unreasonable.\1402\ For example, SPACs and
other blank check companies may employ service professionals (such as
lawyers, accountants, and financial advisers) to a greater extent, by
having them spend more time reviewing projections. Also, SPACs and
other blank check companies may decide to devote more management time
to prepare and validate projections.
---------------------------------------------------------------------------
\1402\ See, e.g., letter from Winston & Strawn.
---------------------------------------------------------------------------
Third, given the potential legal and preparation costs, a SPAC or
other blank check company may decide not to provide forward-looking
statements it otherwise would have provided in connection with a
business combination absent the final rules. In this case, investors
may have less information, potentially negatively impacting their
ability to accurately value these companies and allocate their
investments accordingly to the extent such forward-looking statements
would have been informative.\1403\ A number of commenters expressed
this concern.\1404\ This could result in information only being
revealed to market participants in de-SPAC transactions to the extent
SPACs are able, like IPOs, to provide investors forward-looking
information indirectly through securities analysts.\1405\ Potential
loss of information in SPACs may be mitigated in situations where a
SPAC or other blank check company may be required to provide forward-
looking statements under State law or think investors need such
information to fully assess the proposed business combination
transaction.\1406\
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\1403\ We note that the absence of forward-looking statements
regarding a de-SPAC transaction will not preclude investors from
valuing the business combination, as financial projections supplied
by an entity to be valued are not a requirement for deriving its
valuation.
\1404\ See, e.g., letters from Cato Institute, CFA Institute,
Managed Funds Association, NYC Bar, SPAC Association, Winston &
Strawn.
\1405\ See, e.g., letters from Bullet Point Network,
SPACInsider, Ropes & Gray, SPAC Association, Vinson & Elkins, White
& Case.
\1406\ See, e.g., letters from ABA, Andrew Tuch, Cato Institute,
CFA Institute, Goodwin Procter, NYC Bar, Paul Swegle, Vinson &
Elkins, Winston & Strawn. See also supra note 829.
---------------------------------------------------------------------------
Fourth, if potential SPACs (or other blank check companies) or
target companies determine forward-looking statement disclosures are
necessary but are not willing to provide such statements without PSLRA
protections, fewer SPACs could form and/or impacted blank check
companies such as SPACs may decide not to enter into a business
combination transaction, such as a de-SPAC transaction. In addition,
potential target companies may decide not to go public by way of a de-
SPAC transaction. In particular, as stated by a commenter, the
combination of the increased liability associated with forward-looking
statements and any State law fiduciary requirements to provide such
disclosure could result in de-SPAC transactions, on net, facing more
liability than IPOs, which have the ability to avoid such liability by
not providing forward-looking projections.\1407\ This could lead to
fewer public investment opportunities for investors to the extent
potential SPAC target companies do not go public another way, i.e., via
the IPO market. One commenter provided data showing that the firms
SPACs have taken public are smaller in average market capitalization
and are not distributed in precisely the same industries as firms taken
public through IPOs. This might suggest SPAC and IPO markets do not
fully overlap.\1408\ Relatedly, a target company's ability to raise
capital may also be reduced, although these companies may be able to
ameliorate any reduction in capital formation if they receive funding
from other capital sources, such as unregistered equity investments.
---------------------------------------------------------------------------
\1407\ See letter from Cato Institute.
\1408\ See letter from Committee on Capital Markets Regulation.
We note that no tests for statistical significance of these
differences in size and industry distribution were conducted and
thus we cannot confirm that SPAC and IPO markets are different. See
also letter from Yuchi Yao (Dec. 15, 2023), which provides a
theoretical analysis suggesting SPACs and IPOs could serve different
types of firms that wish to go public.
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3. Shell Company-Related Rules
In addition to the rules discussed above, we are also adopting
rules and amendments to address further areas of incongruity in
requirements that guide the disclosures and liabilities in the context
of shell-companies more broadly, excluding those that are business
combination related shell companies.
i. Rule 145a
Rule 145a deems 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. To the extent that an exemption is unavailable for a de-
SPAC transaction, the transaction must be registered. Rule 145a is
intended to address concerns regarding the use of reporting shell
companies generally as a means by which private 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 final rule,
these deemed sales will need to be registered under the Securities Act
unless there is an applicable exemption.\1409\
---------------------------------------------------------------------------
\1409\ See supra section IV.A.2 for more information about the
regulatory baseline.
---------------------------------------------------------------------------
Currently, if a reporting shell company buys a target company by
issuing its shares as consideration for the interests of the target
shareholders, reporting shell company investors are unlikely to receive
a Securities Act 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.
Rule 145a should provide shareholders in a reporting shell company
that is not a business combination related shell company,
[[Page 14292]]
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. Because of this consistency, we
expect the rule will bolster investor protection for reporting shell
company shareholders and reduce the information asymmetry between such
investors in the reporting shell company and the target company.
Specifically, we expect this rule to be of particular benefit to
shareholders in reporting shell companies that may not otherwise
receive timely information about the intended target company, or
potentially even notification that the reporting shell company is
entering into a business combination until after the transaction has
occurred. Additionally, receipt of registration materials may highlight
salient information (e.g., as required by subpart 1600 of Regulation S-
K for transactions involving SPACs) for reporting shell company
shareholders who might otherwise not receive or overlook it (or those
who are vulnerable to inertia \1410\) and call attention to the nature
in which their investment will be transformed should they continue to
hold their securities. For these reasons, we expect Rule 145a will
result in more consistent information (i.e., timing, disclosure, and
format) for investors and thereby improve price discovery and capital
formation. Even if an exemption were available for the transaction
(and, as a result, shareholders do not receive a registration statement
in connection with the deemed sale), Rule 145a would still confer
informational benefits to affected reporting shell company shareholders
as such shareholders would receive whatever information the shell
company concludes must be provided to satisfy section 10(b).\1411\
Because it is unclear the extent to which reporting shell company
shareholders may be able to anticipate whether such an exemption would
be available, the full extent to which Rule 145a will result in these
expected price or capital formation benefits is unclear.\1412\
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\1410\ 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'').
\1411\ In registered public offerings, the extent to which
disclosure is required is set forth in detail in Commission
registration statement forms, Regulation S-K and Regulation S-X. The
disclosure that may be required in an exempt offering, on the other
hand, is primarily driven by section 10(b) of, and Rule 10b-5 under,
the Exchange Act, which enable a buyer to recover against a seller
that, among other things, makes an untrue statement of a material
fact or omits to state a material fact necessary in order to make
the statements made, in the light of the circumstances under which
they were made, not misleading in connection with a sale of a
security.
\1412\ Id.
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Under Rule 145a in certain business combination transactions where
reporting shell companies, including SPACs, are parties, the combined
company will be required to register the deemed sale of its securities
to the pre-transaction reporting shell company shareholders at the time
of the business combination, unless there is an available exemption. We
expect this will increase costs in those cases where the business
combination is not structured in a manner that otherwise would need to
be registered. These costs could include, in the extreme case, all
costs associated with conducting a registered offering of securities,
such as preparing a Securities Act registration statement, if no
exemption is available. The 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 entirely, if, for
example, any securities issued to the target company's shareholders in
exchange for their interests in the target can be issued under an
exemption. Because Rule 145a deems such a transaction to involve a sale
to reporting shell company shareholders that will need to be registered
(unless there is an applicable exemption), affected parties may opt not
to pursue such a transaction to avoid the new transaction costs
involved.
To the extent that the final rule requires the filing of a
Securities Act registration statement, we expect extra costs associated
with greater care in preparation and review of the disclosures therein
due to the applicability of section 11.\1413\ Also, there could be some
costs associated with timing issues generated by any Commission staff
review of any registration statement. Some of these costs may be
mitigated to the extent that the reporting shell company or target
company is already preparing disclosure documents, particularly
Securities Act registration statements, in connection with a business
combination that would be covered by 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, F-4, S-1, or F-1.
Reporting shell companies and SPACs also typically prepare Forms 8-K
containing Form 10 disclosures that are filed shortly after the
business combination.
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\1413\ See generally supra section VIII.B.2 for a discussion of
the costs of increased liability.
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ii. Financial Statement Requirements in Business Combination
Transactions Involving Shell Companies
Article 15 of Regulation S-X and related amendments aim 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 IPOs. These amendments should ensure
the appropriate level of investor protections by reducing the potential
for regulatory arbitrage by private companies that go public through a
business combination with a shell company rather than a traditional
IPO. Furthermore, the disclosure and audit requirements (e.g., Rule 15-
01(a)) should reduce information asymmetry between financial statement
disclosures in business combination transactions involving shell
companies, including de-SPAC transactions, and traditional IPOs, which
may in turn benefit private operating companies going public by
reducing the cost of capital.\1414\ The rules and amendments that
clarify applicable definitions and requirements (e.g., Rule 15-01(b),
(c), (d), and (e)), are expected to reduce potential ambiguity faced by
registrants by codifying certain existing interpretive positions, as
discussed above in section IV.B and improve comparability.
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\1414\ 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: A Journal of
Practice & Theory 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.
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The final rules and amendments should allow investors to more
readily locate and process relevant information and reduce processing
costs, and should increase investor confidence in the reporting
provided by entities involved in these business combinations.\1415\ In
turn, these improvements should lead to more efficient voting,
redemption, and investment decisions. Many of the final rules and
amendments codify existing staff guidance or financial reporting
practices. Thus, to the extent that registrants are already preparing
statements and reports in a manner
[[Page 14293]]
consistent with the rules and amendments, the incremental benefits and
costs will be limited. Below, we discuss the benefits and costs of each
individual item under Rule 15-01 of Regulation S-X and the other
amendments.\1416\
---------------------------------------------------------------------------
\1415\ See supra note 1351.
\1416\ See supra section IV.B for additional regulatory baseline
information.
---------------------------------------------------------------------------
a. Rule 15-01(a) Audit Requirements of a Predecessor
Rule 15-01(a), in connection with the amendments to Rule 1-02(d)
and related new instructions to Forms S-4 and F-4 aligns the level of
audit assurance required in business combination transactions involving
a shell company with that for an IPO. The rule requires the financial
statements of a business that is or will be a predecessor to a shell
company to be audited in accordance with the standards of the PCAOB,
which are the same auditing standards required in an IPO registration
statement. This amendment will codify existing staff guidance. Rule 15-
01(a) permits non-predecessor businesses to be audited under PCAOB
standards or U.S. GAAS, aligning with the audit standards that would be
applied in an IPO registration statement.
Rule 15-01(a) should benefit investors by clarifying that the
financial statements of a business that is or will be a predecessor to
a shell company are to be audited in accordance with PCAOB standards
consistent with a traditional IPO.\1417\ To the extent that investors
use the audited financial statements to project future cash flows, the
new rule also may benefit shell companies and target companies by
lowering their cost of capital.\1418\ The final rules may, however,
increase the compliance costs (e.g., audit costs) of the business
combination. To the extent that registrants are, in practice, already
including financial statements of target companies audited under PCAOB
standards, the above incremental benefits and costs likely would be
limited.
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\1417\ 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) (documenting
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).
\1418\ 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).
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b. Rule 15-01(b) Number of Years of Financial Statements
Under Rule 15-01(b), a shell company registrant will be permitted
to include in its Form S-4/F-4/proxy or information statement balance
sheets as of the end of the two most recent fiscal years and two years
of statements of comprehensive income, changes in stockholders' equity,
and cash flows for the target company where both the shell company and
a target company 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. Rule 15-01(b) will align the number
of years required to be disclosed in the financial statement between
de-SPAC transactions and traditional IPOs.
For those transactions affected by the rule, registrants that
qualify for EGC status and are not SRCs should benefit from reduced
cost of producing audited financial statements because this rule will
reduce the number of years of financial statements required from three
years to two years. In those cases, this rule could cause some
information loss for investors. However, investors would still have
access to two years of financial statements for the target company, the
same amount that would be required had the target company gone public
via a traditional IPO. In addition, the omitted ``third year'' of
financial statements would be the oldest information and thus may
provide less incremental value to investors than the two most recent
fiscal years.
c. Rule 15-01(c) Age of Financial Statements of the Predecessor
Rule 15-01(c) provides that the age of financial statements for a
business that will be acquired by a shell company in a registration
statement or proxy statement will be based on the age requirements in
Rule 3-12 or 8-08 of Regulation S-X, rather than the target company
provisions in Item 17 of Form S-4. Because this amendment is generally
consistent with existing market practice, we do not expect it to have
significant economic effects for registrants or investors. This rule
will align disclosure requirements across the different routes of going
public, which may reduce compliance uncertainty for registrants and
their predecessors and increase investor confidence.
d. Rule 15-01(d) Acquisition of a Business or Real Estate Operation by
a Predecessor
Rule 15-01(d) requires application of Rule 3-05 or 8-04 (or Rule 3-
14 or 8-06, respectively, as relates to a real estate operation), the
Regulation S-X provisions related to financial statements of an
acquired business or real estate operation, to an acquisition by a
predecessor of a shell company registrant. This amendment is consistent
with the current market practice of applying Rule 3-05 (or Rule 8-04)
to acquisitions by the business that will be the predecessor, therefore
we believe that the incremental benefits and costs should be limited.
Rule 15-01(d)(1) pertains to the calculation of significance tests
and refers to Rule 1-02(w) of Regulation S-X, which we are amending as
well, to require that the significance of the acquired business be
calculated using the predecessor's financial information as the
denominator instead of that of the shell company registrant. The use of
the shell company registrant, which has nominal activity, for the
denominator in materiality tests under current rules results in limited
to no sliding scale for business acquisitions, including those made by
the target company that will be the predecessor to the shell company
because every acquisition would be significant and thus require
financial statements. The adopted amendment may alleviate compliance
burdens to the extent that it would no longer require inclusion of
financial statements of acquired businesses or real estate operations
that formerly would have been in excess of a significance test in Rule
1-02(w).
Rule 15-01(d)(2) requires a shell company that omits from a
registration statement or proxy statement the financial statements of a
recently acquired business or real estate operation that is not or will
not be its predecessor pursuant to Rule 3-05(b)(4)(i) or 17 CFR 210.3-
14(b)(3)(i) of Regulation S-X to file those financial statements in a
Form 8-K by the later of the filing of the Item 2.01(f) Form 8-K or 75
days after consummation of the acquisition.\1419\ This amendment will
both harmonize the timing with that in the IPO setting and alleviate
ambiguity regarding the timing in which these financial statements are
required to be filed, which we expect will facilitate compliance for
the registrant. Additionally, this amendment should help ensure that
investors receive predictable and timely disclosure about the acquired
business, facilitating better informed capital market decision-making.
---------------------------------------------------------------------------
\1419\ This is a modification from the Proposing Release
(Proposing Release, supra note 7, at 29492) in response to comments,
allowing for the same 75-day grace period as in the IPO setting. See
supra section IV.B.12.
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[[Page 14294]]
As a result of these final amendments, we expect registrants'
compliance burden will likely be reduced. Although, the final
amendments to the significance test may reduce the information
available to investors about business acquisitions by the target
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
those of all acquired businesses. 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.\1420\ Therefore, we believe that investors will still
be presented with all the salient information required to make informed
investment decisions.
---------------------------------------------------------------------------
\1420\ See Securities Act Rule 408(a); Exchange Act Rule 12b-20.
---------------------------------------------------------------------------
e. Rule 15-01(e) Financial Statements of a Shell Company Registrant
After the Combination With Predecessor
Rule 15-01(e) allows a registrant post combination to exclude the
pre-acquisition financial statements of a shell company (including a
SPAC) for periods prior to the business combination that results in the
combined entity no longer being a shell company once the following
conditions have been met: (1) the financial statements of the
predecessor, as that term is used in financial reporting, have been
filed for all required periods through the acquisition date, and (2)
the financial statements of the combined entity registrant include the
period in which the acquisition was consummated, which would also
include the accounting for the business combination. In the vast
majority of cases, the target is a predecessor business, and therefore,
in effect, this rule requires historical financial information for the
shell and target companies up to and including the acquisition, after
which the financial statements of the shell can be omitted, because at
that point they are not expected to continue providing investor
relevant information (at least not beyond the extent to which they are
reflected in the registrant's financials). Rule 15-01(e) has been
revised from the proposal to clarify that similar requirements apply in
cases where the target acquires the shell company. This will, in
effect, apply the same requirement for reporting SPAC financials post-
combination regardless of the structure of the de-SPAC transaction.
It is possible that Exchange Act Rule 12b-20 or Securities Act Rule
408(a), which both require disclosure of additional information
``necessary to make the required statements, in the light of the
circumstances under which they are made, not misleading,'' could prompt
firms to include these financials notwithstanding the newly final Rule
15-01(e), as mentioned by several commenters.\1421\ However, under the
baseline, the decision to disclose these financials comes from the SPAC
management and could result in fewer disclosures than desired by
investors. Thus, requiring the disclosure of SPAC financials as adopted
will provide a consistent set of information for investors to use in
their decision-making. Further, it will harmonize such disclosures
across SPACs, allowing for more meaningful comparison. To the extent
that SPAC financials are already known, and relatively less complex
than those for the target operating company, we expect the additional
cost of providing such financials to be limited (compared to relying on
existing materiality discretion on behalf of the SPAC).
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\1421\ Letters from Freshfields, Vinson & Elkins.
---------------------------------------------------------------------------
Rule 15-01(e) should reduce disclosure requirements for, and
associated costs of disclosing, information 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. To the
extent that this rule is consistent with existing practice, whereby
after a reverse recapitalization a registrant may omit historical SPAC
financial statements once the financial statements of the combined
company were reflected in a periodic filing, we do not expect this rule
to result in a significant change in disclosure behavior. In addition,
to the extent that the final rule extends the practice to forward
acquisitions, we expect the final rule will reduce compliance costs
related to continued filing of previous year financial statements of a
shell company. Investors may also benefit from the increased efficiency
in processing post-business combination filings that exclude
uninformative historical SPAC financials.
f. Other Amendments
We are adopting an amendment to Item 2.01(f) of Form 8-K, which
will apply to all shell companies, that clarifies that the information
required by Item 2.01(f) of Form 8-K should relate to the ``acquired
business that is its predecessor'' and not the ``registrant,'' as
currently stated in the Form 8-K. This 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 an ``acquired business that is the
predecessor'' due to registrants' more consistent application of Item
2.01(f). We are also adopting revisions to Item 2.01(f) to Form 8-K
stipulating that when the predecessor meets the conditions of an EGC,
the registrant does not need to present audited financial statements of
the predecessor for periods prior to the earliest of those presented in
the de-SPAC registration, proxy, or information statement of the
registrant. This amendment will harmonize the required disclosures of
Form 10 information with the requirements of Rule 15-01(b) and should
reduce registrants' compliance costs to the extent they were required
to produce a greater number of years of audited financial statements
under the baseline.
We are also adopting amendments to Rules 3-01, 8-02, and 10-
01(a)(1) of Regulation S-X to clarify that the requirement of ``balance
sheets'' would apply to both the registrant and its predecessors.
Because these amendments codify existing financial reporting practices
necessary for a complete set of financial statements, they should not
impact registrants' compliance costs, and should reduce uncertainty
regarding regulatory requirements.
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 filings with the Commission. The final amendments update
this guidance, broadening the scope of covered projections and adding
detail on the formatting of disclosed projections. More specifically,
the final amendments state that the guidelines also apply to
projections of future economic
[[Page 14295]]
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 amendments to Item 10(b) also state that
projections that are not based on historical financial results or
operational history should be clearly distinguished from those that
are. In addition, the final amendments 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 results or operational history with equal or
greater prominence. Finally, for projections that include non-GAAP
financial measures, the amendments to Item 10(b) state that the
presentation should include a clear definition or explanation of the
non-GAAP financial measures, a description of the most closely related
GAAP financial measure, and an explanation why the non-GAAP measure was
selected instead of a GAAP measure.
Due to these final amendments, investors should gain additional
information and context to help them evaluate the reasonableness of the
projections and make more informed investment decisions. For example,
the final amendments related to historical financial results or
operational history could inform investors about potential biases in
the financial projections and help them more efficiently process the
underlying assumptions, thereby potentially improving their investment
decisions.\1422\ Also, the greater consistency in the contextual and
supporting historical information for projections should aid
comparability across registrants, further benefiting investors. These
benefits could be mitigated, however, to the extent that registrants
are already providing this information or including projections of
future economic performance that do not follow some or all of the
revised guidance. A study of management earnings forecasts by public
companies from 2000 to 2018 found that management provided earnings
forecasts in approximately 31% of the firm-year observations comprising
the sample.\1423\
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\1422\ 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)
(employing a sample from 1994 to 2007 to show how management
forecasts provide over half of accounting-based information to the
market).
\1423\ See Claude Francoeur, Yuntian Li, Zvi Singer, & Jing
Zhang. Earnings Forecasts of Female CEOs: Quality and Consequences,
Rev. Acct. Stud. (2022). The authors of the study obtained the
management earnings forecast data from IBES. 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 also Zahn Bozanic, Darren T.
Roulstone & 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).
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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 final amendments, investors may benefit from improved
presentation with respect to any third-party projections in a
registrant's filing.
To the extent that registrants follow the guidance in the
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.
C. Effects on Efficiency, Competition, and Capital Formation
1. Efficiency
The final rules and amendments should enhance and standardize
disclosure about specific aspects inherent to the SPAC structure at
both the SPAC IPO stage and the de-SPAC transaction stage. Requiring
the SPAC and the target company to provide such disclosure will provide
market participants more information that is likely relevant to voting,
redemption, and investment decisions. The final rules will also improve
the standardization and comparability of disclosures through changes to
the disclosure formatting and presentation, which should make it easier
for investors to efficiently process information about SPACs and for
market prices to reflect such information. Together we expect these
changes to result in more efficient prices and deployment of invested
capital.
The final rules, by adopting new definitions of ``blank check
company'' under the PSLRA, should incentivize blank check companies
that are not penny stock issuers and underwriters to exercise greater
care to ensure any forward-looking disclosures are reasonable,
increasing efficiency. The final rules regarding shell company business
combination transactions (e.g., Rule 145a) would increase the
likelihood that the protections of the Securities Act consistent with
those applicable to traditional IPOs are made available to investors,
such as liability under the Securities Act and receipt of a Securities
Act registration statement. Overall, we expect that the effects of the
new definitions of ``blank check company'' and the requirements
regarding shell company business transactions will provide investors
with more consistent access to more reliable information when making
their investing decisions, which should lead to an increase in price
discovery and market efficiency. It is possible a SPAC or other blank
check company that is not a penny stock issuer may be dissuaded from
providing forward-looking disclosures due to increased costs and
heightened liability concerns, leaving investors with less information,
offsetting some efficiency gains.\1424\
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\1424\ While, in the extreme case, the interaction between the
adopted definitions of ``blank check company'' under the PSLRA and
jurisdictional requirements for certain forward-looking disclosures
may disincentivize companies from engaging in de-SPAC transactions
which, as discussed below, could affect capital formation, it is not
expected to affect the efficiency of those transactions that do
occur.
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2. Competition
By improving the informational environment at the SPAC IPO and the
de-SPAC transaction stages through changes in disclosure requirements,
we expect the final rules will allow investors to make better informed
investment decisions which should encourage greater competition among
SPAC sponsors, which would further benefit SPAC investors. For example,
by increasing comparability through standardization of the disclosures
provided regarding SPAC IPOs and de-SPAC transactions, the final rules
should lead to improved investor awareness, greater transparency, and
lower search costs. These improvements to the information available to
investors should allow them to better differentiate between SPACs based
on factors the investors deem important (such as costs or fees), and in
response SPAC sponsors may be forced to compete for those better
informed investors by offering better terms such as lower costs.\1425\
[[Page 14296]]
These improvements to the informational environment could also improve
competition between SPACs and other investment avenues generally,
further improving overall capital formation. For example, to the extent
that the final rules lead to shell company mergers (including de-SPAC
transactions) being more attractive to investors, other capital raising
avenues that target companies may consider (e.g., traditional IPOs) may
experience greater competitive pressure.
---------------------------------------------------------------------------
\1425\ For example, SPAC sponsors could set up structures that
are more or less dilutive to investors or adjust any forfeiture of
their promote used to induce investors not to redeem.
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A reduction in shell company business combinations or activity in
the SPAC market could reduce competition between SPAC sponsors or for
investment opportunities in target companies.\1426\ Such a reduction
could result in higher costs for SPAC investors, depending on the
elasticity of those costs. For example, SPAC promoters may offer less
attractive terms to SPAC investors. Fewer SPACs might also lower
competitiveness in the traditional IPO market, as companies that wish
to go public may see diminished alternatives to IPOs.
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\1426\ Reductions in SPAC formation and de-SPAC mergers could
result from increased costs to de-SPAC transactions due to
differential liability and disclosure requirements compared to non-
SPAC acquirers or other methods of accessing public markets. For
example, the new definitions of ``blank check company'' under the
PSLRA may interact with existing jurisdictional requirements (such
as any requirements to provide projections) which could impose
significant additional liability costs on de-SPAC transactions.
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3. Capital Formation
Enhanced disclosure at both the SPAC IPO and the de-SPAC stages,
combined with a stronger incentive to perform better due diligence at
the de-SPAC transaction stage, should improve investor protection at
both stages, as should the rules and amendments for shell company
mergers. For example, Rule 145a will help shareholders of reporting
shell companies more consistently receive the protections of the
Securities Act in business combinations involving reporting shell
companies, regardless of the transaction structure, which should reduce
adverse selection and improve the availability and reliability of
information for investors, incentivizing more investors to invest in
reporting shell companies, including SPACs, thus enhancing capital
formation.
If the final rules and amendments create significant costs for
shell companies, including SPACs, this may reduce the number of private
companies that go public through shell companies, including through de-
SPAC transactions, and may reduce the overall number of companies that
choose to go public. For example, one commenter asserted that the
proposed rules would ``overregulate SPACs to such a degree that they
will no longer be viable vehicles for companies to access the public
markets.'' \1427\ Other commenters, expressing similar concerns, noted
that SPACs have been an important way for younger and more
``innovative'' companies to access public capital markets.\1428\
Further, the new definitions of ``blank check company'' under the PSLRA
may interact with existing jurisdictional requirements (such as any
requirements to provide projections) which could impose significant
additional costs on de-SPAC transactions. As a result, SPACs may adopt
practices they believe will minimize their liability or other costs,
which could result in them providing less information to investors, or,
in the extreme, forgoing de-SPAC transactions they otherwise believe
would be beneficial, which could harm capital formation.
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\1427\ See letter from Virtu.
\1428\ See, e.g., letters from National Venture Capital
Association (June 13, 2022); Managed Funds Association; I-Bankers
Securities, Inc. (June 24, 2022).
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In response to these comments and concerns, and as previously
discussed, the final rules include provisions that reduce expected
compliance costs relative to the proposal. However, 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 using the
traditional IPO channel or a merger with a non-shell company as a more
cost-effective alternative. We are not able to estimate how many
companies would consider these alternatives 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 public offering activity and capital
formation.\1429\ Any reduction in public offering activity, however,
could be offset by an increase in investor trust in capital markets.
---------------------------------------------------------------------------
\1429\ To provide a sense of magnitude, see letter from
Committee on Capital Markets Regulation which presents data
suggesting that from 2017 to 2021, there were roughly 3 de-SPAC
transactions for every 10 traditional IPOs. See also letter from
Committee on Capital Markets Regulation, suggesting differences
between SPACs and traditional IPOs on dimensions of size and
industry of firms taken public. To the extent that the SPAC and IPO
markets appeal to different firms, it is possible some firms
deterred from going public via de-SPAC transaction will not
substitute to an alternative form of accessing the public market.
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D. Reasonable Alternatives
1. Disclosure-Related Rules
i. Require Disclosure of Policies and Procedures That Address Conflicts
of Interest
As an alternative to Item 1603, we considered whether to adopt a
complementary requirement to describe or to file as an exhibit any
policies and procedures used or to be used by a SPAC or by a target
company to minimize potential or actual conflicts of interest related
to disclosures provided in response to Items 1603(b) or to describe any
SPAC policies and procedures related to duties of SPAC officers or
directors owed to other companies in connection with disclosure
required under Item 1603(c). We considered that 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. We also considered, on the other hand,
that requiring this information would increase compliance costs for
SPACs and target companies and could cause some of these companies to
adopt policies and procedures that would not be efficient or cost-
effective given their particular organizational structure and
determined not to require this information in part for those reasons.
Further, our determination not to adopt such a requirement was also
based on our view that there are incentives to provide such disclosure
voluntarily, as these disclosures would indicate to investors the
degree to which conflicts of interest may be ameliorated.
ii. Certain Reports, Opinions, or Appraisals
We are requiring, in connection with de-SPAC transactions, the
filing of certain reports, opinions (other than an opinion of counsel),
or appraisals provided to the SPAC or a SPAC sponsor materially
relating to any determination described in Item 1606(a), the approval
of the de-SPAC transaction, the consideration or the fairness of the
consideration to be offered to security holders of the target company
in the de-SPAC transaction, or the fairness of the de-SPAC transaction
to the SPAC, its security holders or SPAC sponsor (Item 1607) as
exhibits to registration statements and schedules (or as part of the
schedule if the
[[Page 14297]]
schedule does not have exhibit filing requirements) filed in connection
with a de-SPAC transaction. We are also requiring disclosures
summarizing such report, opinion, or appraisal or any negotiation or
report by an unaffiliated representative on behalf of unaffiliated
security holders. We are also requiring 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 considered requiring disclosure of only a
summary of the reports, opinions, appraisals, and negotiations (without
the requirement that the reports, opinions, and appraisals be filed).
We considered that this could avoid costs of additional compensation
third parties may require for providing reports that are suitable for
public disclosure. 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.
iii. Re-Determine Smaller Reporting Company (SRC) Status of a Post-
Business Combination Company Without a Public Float Test
As another alternative, we considered whether the re-determination
for SRC status of the combined company following a de-SPAC transaction
should require only a re-measurement of the revenue component of the
SRC test and not its public float component. Generally, SRC status is
re-determined on an annual basis at the end of the second fiscal
quarter based on the issuer's public float on the last day of the
second fiscal quarter, and, if there is no public float or there is a
public float of between $250 million or more and $700 million, based as
well on a determination of whether the annual revenues as of the most
recently completed fiscal year for which audited financial statements
are available are less than $100 million (where greater annual revenues
than $100 million causes loss of SRC status). Revenues of the combined
company may be more relevant to SRC status than public float because,
generally, the target company has generated revenue while the SPAC has
not done so.\1430\
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\1430\ See supra note 665 (income statement items such as
``Interest earned on marketable securities held in trust account''
and ``Unrealized gain on marketable securities held in trust
account'' are generally not revenue for SPACs).
---------------------------------------------------------------------------
Accordingly, the revenue test may be the more determinative factor
than the public float test in determining whether the combined company
following a de-SPAC transaction remains an SRC because, based on staff
experience, the public float of most SPACs and subsequent combined
companies typically is between $250 and $700 million, which exceeds the
public float threshold for SRC status, unless the company's revenue is
under $100 million. 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, under the
final rule 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 as compared to an alternative of
using only revenue as the basis for determining SRC status following
the de-SPAC, in which case public float would only need to be measured
once during the annual re-determination period.
We considered, however, that compared to joint determination with
the public float, revenue, if used as a sole basis of the significance
test, may be subject to a greater degree of managerial discretion or
manipulation.\1431\ Further, it could result in, for example, firms
with revenue below the threshold but public float above the maximum
threshold qualifying for SRC status and the resultant lower disclosure
requirements. Because companies with greater public float have greater
potential impacts on markets, such an allowance for large public float
companies to qualify for SRC status due solely to their revenues being
below the threshold value could have commensurately large economic
costs. Thus, we determined it is appropriate that these companies
should take both the public float and total revenue into account in re-
determining SRC status following the consummation of a de-SPAC
transaction and determined not to adopt this alternative.
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\1431\ See Jenny Zha Giedt, Modelling Receivables and Deferred
Revenues to Detect Revenue Management, 54 Abacus 181 (2018)
(focusing on the SEC Accounting and Auditing Enforcement Releases,
i.e., AAER, from 1982 to 2016, and documenting that 47% of all
financial misstatements are related to revenue).
---------------------------------------------------------------------------
iv. Structured Data Requirement
As another alternative, we considered whether to change the scope
of the Inline XBRL tagging requirements for the SPAC disclosures, such
as by excluding certain subsets of registrants or disclosures. For
example, the tagging requirements could have excluded the SPAC IPO
disclosures. Under such an alternative, SPACs would have submitted IPO
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.\1432\ This would have made it incrementally easier for
SPACs to consummate an IPO. However, narrowing the scope of the tagging
requirements, whether based on filing, offering size, or other
criteria, would have diminished the extent of any informational
benefits that would accrue as a result of the adopted disclosure
requirements by making the excluded disclosures comparatively costlier
to process and analyze. Thus, we believe it is appropriate to require
Inline XBRL for all SPAC disclosures, rather than exclude particular
subsets of registrants or disclosures.
---------------------------------------------------------------------------
\1432\ 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 67 (Sept. 2023), 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).
---------------------------------------------------------------------------
We also considered requiring only the quantitative SPAC-related
disclosures to be tagged in Inline XBRL. Excluding qualitative
disclosures from the tagging requirements could have provided some
incremental cost savings for registrants compared to the rule as
adopted, because incrementally less time would have been required to
select and review the particular tags to apply to quantitative
disclosures. However, we expect these incremental cost savings would
have been low because SPACs are subject to similar Inline XBRL
requirements, including requirements to tag quantitative and
qualitative disclosures, in other Commission filings.\1433\ The
alternative would not impact the fixed startup costs associated with
Inline XBRL tagging and would instead only remove the modest variable
cost associated with applying additional tags to text blocks within an
already tagged filing.
---------------------------------------------------------------------------
\1433\ See supra section VIII.B.1.ii.d.
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Moreover, narrowing the scope of tagging requirements to exclude
qualitative information would have diminished 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
[[Page 14298]]
projections), thus creating the need to manually review search results
drawn from entire documents to find these disclosures.\1434\ Such an
alternative would have also inhibited the automatic comparison of
narrative disclosures against prior periods. It also may have been
harder for investors to perform a targeted assessment of a filing for
particular types of narrative SPAC-related disclosures because they
would have needed to assess the entire filing for relevant information.
Thus, we believe it is appropriate to include qualitative disclosures
within the scope of the tagging requirement.
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\1434\ 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 required by Item
1606(b) of Regulation S-K, such as disclosures in the risk factors
section or in the description of stock incentive plans. However,
when Inline XBRL is used, it enables a user to search for the term
``dilution'' exclusively within the fairness determination
disclosure, thereby likely reducing the number of irrelevant
results.
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With respect to the compliance date for tagging requirements, we
could have added a separate phase-in period for SRCs and FPIs, as one
commenter suggested.\1435\ However, both SRCs and FPIs are subject to
Inline XBRL tagging requirements for other disclosures, so we believe
any burden reduction for SRCs and FPIs arising from a separate phased-
in compliance date would therefore likely be minimal. Thus, we do not
believe it is necessary to provide a separate phased-in compliance date
for SRCs and FPIs to comply with the tagging requirements. We note,
however, that both SRCs and FPIs (along with other filers) will be
subject to a one year phased-in compliance date under the final rules.
---------------------------------------------------------------------------
\1435\ See letter from XBRL US.
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v. Dilution Disclosure Measurement Alternatives
As an alternative to disclosure of net tangible book value, as
adjusted, to capture dilution incurred by non-redeeming shareholders,
various commenters suggested a measure based on the net cash per share
held by the SPAC prior to the de-SPAC transaction.\1436\ These comments
generally reflect the desire for dilution disclosures to capture a
measure of how much liquidity financing (in the form of cash) is
transferred to the target at the de-SPAC transaction.\1437\ To this
end, the net cash measure suggested by commenters would be calculated
as: \1438\ total cash (from SPAC public shareholders, forward purchase
agreements (FPA), and PIPE investments) less cash expenses, less the
fair value of outstanding warrants and other equity derivatives. This
measure would be scaled to be a per share value by dividing the former
quantity by the sum of public shares, founder shares, PIPE and FPA
shares, shares issuable under rights according to terms and agreements,
and any other shares issued up to the point of the merger. Notably,
this measure does not include shares issued to target shareholders as
part of the merger agreement.
---------------------------------------------------------------------------
\1436\ See letters from NASAA; Vinson & Elkins; CII; Michael
Klasuner, Michael Ohlrogge, and Harald Halbhuber.
\1437\ See Klausner, Ohlrogge & Ruan, supra note 18.
\1438\ See Michael Klausner, Michael Ohlrogge & Harald
Halbhuber, Net Cash Per Share: The Key to Disclosing SPAC Dilution,
40 Yale J. on Reg. 18, 28 (2022).
---------------------------------------------------------------------------
We believe that the net tangible book value as adjusted measure
that we are adopting and the net cash per share alternative both
generally capture expectations of the remaining amount of financing to
be provided by the SPAC in the merger transaction, or, according to one
commenter, ``of the $10 that I am paying per share, how much will
actually be invested in the post-merger company?'' \1439\ The material
difference between the two measures is in their treatment of equity-
classified awards and shares issuable by rights. While some comment
letters highlighted that prior dilution disclosures (e.g., those
required by Item 506) omitted certain components (such as warrants and
other derivative securities), we note that the dilution measure as
adopted accounts for them when classified as liabilities, and generally
to the same extent as the suggested alternative measure, although we
acknowledge that excluding from net tangible book value the value of
warrants classified as equity may result in net tangible book value
showing less cash dilution than a net cash per share measure. Further,
the net tangible book value as adjusted measure that we are adopting
relies on the specified adjustments in Item 1602(c) or 1604(c) to
derive the value of the firm as if the redemptions had occurred, which
avoids the issue of temporary equity being excluded.\1440\ Therefore,
we believe that the approach we are adopting using the net tangible
book value as adjusted measure instead of the alternative net cash
measure sufficiently captures the desired idea of cash dilution
intended by the comments.
---------------------------------------------------------------------------
\1439\ Letter from Michael Klausner, Michael Ohlrogge, and
Harald Halbhuber.
\1440\ See letter from White & Case (``the calculation of pro
forma net tangible book value per share in accordance with U.S. GAAP
inevitably produces a deficit and remains the same constant figure
across any assumed redemption thresholds because the metric solely
takes into account the non-redeemable [``founder shares''], which
are classified as permanent equity, and none of the public shares,
which are classified as temporary equity.'').
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Another alternative to the dilution table columns would be to
require a fixed range of redemption levels, rather than the fixed range
of feasible redemption levels as adopted. Some commenters supported
such an alternative, suggesting the maximum redemption column be
100%.\1441\ The advantage of a fixed range, as those commenters argued,
would be to remove the effects of differences in SPAC governing
documents and agreements, because those are liable to change. For
example, many SPACs put in place a maximum redemption limit to maintain
a minimum net tangible asset reserve, but shareholders could vote to
waive those limits which would change the maximum redemption threshold
in the table as adopted. However, because a fixed range would not take
into account the governing documents and agreements specific to that
particular SPAC, it may omit information that could be informative to
prospective investors from those documents or agreements, such as the
waiver in this example. Further, a fixed range requires additional
assumptions about future outcomes, for example a successful proxy vote
or breaking non-redemption contracts. The threshold in the final rule
of maximum redemptions rather than 100% redemptions does not require
these additional assumptions and does include the SPAC specific
redemption details; thus, it is likely more descriptive of possible and
expected outcomes. To the extent SPAC specific features are important
to compare across SPACs, we expect the tables as adopted will provide
information that will benefit investors more than the alternative.
---------------------------------------------------------------------------
\1441\ Letters from Vinson & Elkins, White & Case.
---------------------------------------------------------------------------
2. PSLRA Safe Harbor Guidance
As an alternative to addressing the use of forward-looking
statements in de-SPAC transactions and other business combinations
involving blank check companies that are not penny stock issuers by
adopting a ``blank check company'' definitions under the PSLRA, 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
[[Page 14299]]
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 rule as adopted.
3. Expanding Disclosure in Reporting Shell Company Business
Combinations
Rule 145a specifies that a sale occurs between the shareholders of
a reporting shell company and the post-transaction company in
situations where a reporting shell company that is not a business
combination related shell company enters into a business combination
transaction involving another entity that is not a shell company. As an
alternative, instead of deeming all such transactions to be a sale that
would need 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 comparable to that which 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 comparable to that which they would receive had a registration
statement been filed for the transaction. This would ensure that the
reporting shell company's shareholders receive largely 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 than the costs of liability associated with the purchase and sale
of securities and potential Securities Act registration of shell
company business combinations under final 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, if any, that is required. Only by specifying
that a sale occurs would investors necessarily receive all of the
protections that apply in connection with all purchases and sales 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 Disclosure
The amendments to Item 10(b) of Regulation S-K present the
Commission's 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 have adopted 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.
IX. Paperwork Reduction Act
A. Summary of the Collections of Information
Certain provisions of our rules and forms that will be affected by
the final rules contain ``collection of information'' requirements
within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\1442\ The Commission published a notice requesting comment
on changes to these collections of information in the Proposing Release
and submitted these requirements to the Office of Management and Budget
(``OMB'') for review in accordance with the PRA.\1443\
---------------------------------------------------------------------------
\1442\ See 44 U.S.C. 3501 et seq.
\1443\ See 44 U.S.C. 3507(d), 5 CFR 1320.11.
---------------------------------------------------------------------------
The hours and costs associated with preparing, filing, and sending
the forms constitute reporting and cost burdens imposed by each
collection of information.\1444\ An agency may not conduct or sponsor,
and a person is not required to comply with, a collection of
information unless it displays a currently valid OMB control number.
Responses to the information collections are not kept confidential and
there is no mandatory retention period for the information disclosed.
The titles for the affected collections of information are:
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\1444\ The paperwork burdens for Regulation S-X, Regulation S-K,
17 CFR 230.400 through 230.494 (Regulation C), 17 CFR 240.12b-1
through 240.12b-37 (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 8-K (OMB Control No. 3235-0060);
Form 10-K (OMB Control No. 3235-0063); and
Form 10-Q (OMB Control No. 3235-0070).
The forms, schedules, and regulations listed above were adopted
under the Securities Act or the Exchange Act. These regulations,
schedules, and forms set forth the disclosure requirements for
registration statements, annual and quarterly reports, proxy and
information statements, and tender offer statements filed by
registrants to provide investors with information to make informed
investment and voting decisions. Compliance with these information
collections is mandatory to the extent applicable to each registrant. A
description of the final rules, including the need for the information
and its use, as well as a description of the likely respondents, may be
found in sections II through V above, and a discussion of the economic
effects of the final rules may be found in section VIII above.
B. Estimates of the Effects of the Final Rules on the Collections of
Information
The following PRA Table 1 summarizes the estimated effects of the
final rules on the paperwork burdens associated with the affected forms
and schedules.
BILLING CODE 8011-01-P
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[[Page 14301]]
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[[Page 14302]]
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BILLING CODE 8011-01-C
In addition, we are adopting requirements that a post-business
combination company re-determine whether it is an SRC following a de-
SPAC transaction. Under the final rules, a post-business combination
company is required to reflect this re-determination in its filings
beginning 45 days after consummation of the de-SPAC transaction. We
estimate that the re-determination of SRC status will 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 will lose SRC status, which takes into account the
increased incremental burden in providing disclosures pursuant to non-
SRC disclosure requirements. The following PRA Table 2 sets forth our
estimates regarding the increase in compliance burden per filing when a
post-business combination company loses SRC status:
[[Page 14305]]
[GRAPHIC] [TIFF OMITTED] TR26FE24.012
C. Incremental and Aggregate Burden and Cost Estimates
---------------------------------------------------------------------------
\1445\ See discussion preceding PRA Table 4 below for a brief
discussion on the allocation of compliance burdens between internal
burden hours and outside professional costs.
---------------------------------------------------------------------------
1. Current Inventory Update To Reflect $600 per Hour Rather Than $400
per Hour Outside Professional Costs Rate
At the outset, we note that the current OMB inventory for the
above-referenced collections of information reflects an average rate of
$400 per burden hour borne by outside professionals. Similarly, in the
Proposing Release, the Commission used an estimated cost of $400 per
hour, recognizing that the costs of retaining outside professionals may
vary depending on the nature of the professional services.\1446\ The
Commission recently determined to increase the estimated hourly rate to
$600 per hour \1447\ to adjust the estimate for inflation from August
2006.\1448\ In order to more accurately present the burden changes as a
result of the final amendments in the context of the current burden
inventory, in this section IX.C.1 we present updated numbers for the
current inventory for professional cost burden for each of the affected
collections of information to reflect the updated $600 per hour rate
where it has not yet been reflected in the current burden inventory.
This update is solely derived from the change in the hourly rate; it is
not a new burden imposed by the final amendments. The updated cost
estimates using the $600 per hour rate are set out in PRA Table 3
below.
---------------------------------------------------------------------------
\1446\ See Proposing Release, section X.C.
\1447\ 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 $600 per hour. This is the rate we
typically estimate for outside legal services used in connection
with public company reporting.
\1448\ See Listing Standards for Recovery of Erroneously Awarded
Compensation, Rel. No. 33-11126 (Oct. 26, 2022) [87 FR 73076 (Nov.
28, 2022)].
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[[Page 14306]]
[GRAPHIC] [TIFF OMITTED] TR26FE24.013
2. PRA Burden and Cost Estimates Resulting From the Final Rules
Next, we estimate the incremental and aggregate increase in
paperwork burden as a result of the final 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 and
filing documents. We believe that some registrants will experience
costs in excess of this average and some registrants will experience
lower 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.\1449\ Additionally, our estimates take
into account an expected increase in the number of Securities Act
registration statements as a result of final Rule 145a. Based on a
review of Commission filings during the period 2012-2022 and an
analysis of the effects of the final new rules and amendments,\1450\
the staff estimates that:
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\1449\ 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.''
\1450\ 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.
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SPACs will file an average of 90 registration statements
each year for registered offerings on Form S-1 and eight registration
statements on Form F-1, other than for de-SPAC transactions;
Regarding filings made per year in connection with de-SPAC
transactions, we estimate there will be an average of: 50 registration
statements on Form S-4 and eight registration statements on Form F-4;
\1451\ four definitive proxy statements on Schedule 14A; two definitive
information statements on Schedule 14C; \1452\ two tender offer
statements on Schedule TO; and 58 Current Reports on Form 8-K; \1453\
and
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\1451\ Of the estimated 50 Form S-4 filings, we expect 30
filings would have been made irrespective of Rule 145a and an
additional 20 filings will be made as a result of Rule 145a (whereas
in the absence of Rule 145a, these latter 20 filings potentially may
have been made on other forms, such as Schedule 14A, Schedule 14C,
or Schedule TO). Similarly, our estimate of eight Form F-4 filings
is based on four Form F-4 filings that we expect would have been
made irrespective of Rule 145a and four additional filings as a
result of Rule 145a.
\1452\ Our estimates of proxy statements (4) and information
statements (2) do not include any combined registration/proxy
statements or combined registration/information statements, which
are included in the estimates of registration statements on Forms S-
4 (50) and F-4 (8). Additionally, we have changed our estimate of
the number of proxy statement filings on Schedule 14A from the 30
estimated in the Proposing Release to four because we expect fewer
proxy statements as a result of Rule 145a. We have also changed our
estimate of the number of information statement filings on Schedule
14C from four to two because we expect fewer information statements
as a result of Rule 145a. Our estimates of proxy statements and
information statements are greater than zero because, as we discuss
in section IV.A, notwithstanding Rule 145a, depending on the facts
and circumstances, an exemption from registration could potentially
apply, and, because, even where a registration statement has been
filed, we expect some SPACs may still file a stand-alone proxy or
information statement that is not combined with the registration
statement.
\1453\ While the final rules apply Item 1609 to projections in a
Form 8-K filed pursuant to Item 1.01, we are unable to estimate the
number of such filings that may include projections. We are
estimating as an upward bound that every domestic registrant that
engages in a de-SPAC transaction may include such disclosure.
Accordingly, our estimate of 58 Forms 8-K is the sum of the number
of estimated Form S-4, Schedule 14A, Schedule 14C, and Schedule TO
filings in connection with a de-SPAC. We note that, to the extent
that a registrant prepares responsive disclosure that is included in
a Form 8-K and is later included in one of these filings, the total
burden assumed by the registrant would be mitigated, which our
estimates do not reflect.
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[[Page 14307]]
An average of 20 registration statements on Form S-4 and
two registration statements on Form F-4 will be filed each year for
business combination transactions involving a reporting shell company
that is not a business combination related shell company and a non-
shell company, other than de-SPAC transactions.\1454\
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\1454\ This estimate represents the upper bound of the estimated
number of Forms S-4 and F-4 filed for these transactions as a result
of Rule 145a. See supra note 78 (discussing data on non-SPAC reverse
mergers, including limitations on data for more recent years).
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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 PRA Table 4 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
$600 per hour.
[GRAPHIC] [TIFF OMITTED] TR26FE24.014
The following PRA Table 5 summarizes the estimated effects of the
final new rules and amendments on the paperwork burdens associated with
the affected forms, schedules, and records, including those effects
related to Rule 145a, which have been broken out to demonstrate the
impact of that rule on certain forms:
[[Page 14308]]
[GRAPHIC] [TIFF OMITTED] TR26FE24.015
In addition, we estimate that an average of 50 fewer post-business
combination companies following a de-SPAC transaction will qualify as
SRCs than under the current rules until the next annual re-
determination date.\1455\ 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.\1456\ We estimate that these registrants would file, on average,
one Form 10-K, 1.5 Forms 10-Q, one Schedule 14A, 0.1 Schedule 14C, and
one registration statement on Form S-1 prior to the next re-
determination of SRC status.
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\1455\ This estimate is based, in part, on our estimate of the
number of de-SPAC transactions in which the SPAC is the legal
acquirer.
\1456\ 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.
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The following PRA Table 6 summarizes the estimated effects of the
re-determination of SRC status on the paperwork burdens associated with
the affected forms and schedules:
[[Page 14309]]
[GRAPHIC] [TIFF OMITTED] TR26FE24.016
The following PRA Table 7 summarizes the requested paperwork burden
changes to existing information collections, including the estimated
total reporting burdens and costs, under the final rules.
BILLING CODE 8011-01-P
[[Page 14310]]
[GRAPHIC] [TIFF OMITTED] TR26FE24.017
BILLING CODE 8011-01-C
[[Page 14311]]
X. Final Regulatory Flexibility Analysis
The Regulatory Flexibility Act (``RFA'') \1457\ requires the
Commission, in promulgating rules under section 553 of the
Administrative Procedure Act of 1946, to consider the impact of those
rules on small entities. We have prepared this Final Regulatory
Flexibility Analysis (``FRFA'') in accordance with section 604 of the
RFA. An Initial Regulatory Flexibility Analysis (``IRFA'') was prepared
in accordance with the RFA and was included in the Proposing
Release.\1458\
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\1457\ 5 U.S.C. 601 et seq.
\1458\ Proposing Release, supra note 7, at 29558-29560.
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A. Need for, and Objectives of, the Final Rules
We are adopting new subpart 1600 of Regulation S-K and amendments
to existing forms and schedules to require certain disclosures in
registered offerings by SPACs, including IPOs, and in disclosure
documents for de-SPAC transactions with respect to, among other things,
compensation paid to SPAC sponsors, conflicts of interest, and
dilution. For de-SPAC transactions, we are also adopting final rules
that require disclosure of a determination of the board of directors
(or similar governing body) of the SPAC whether the de-SPAC transaction
is advisable and in the best interests of the SPAC and its security
holders if such a determination is required by the law of the
jurisdiction in which the SPAC is organized or disclosure of any
comparable determination that is required under such law, additional
disclosures about the target company, a re-determination of SRC status
following the completion of a de-SPAC transaction, and a minimum
dissemination period for certain disclosure documents in these
transactions. The final rules apply 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.
In addition, the first filing in which re-determination of SRC status
following a de-SPAC transaction is reflected may be in a Form 10-K or
Form 10-Q filing under the Exchange Act. The final rules also provide
that if securities to be registered on Form S-4 or F-4 will be issued
by a SPAC or another shell company in connection with a de-SPAC
transaction, the registrants must also include the target company,
except that in a de-SPAC transaction where the target company consists
of a business or assets, the seller of the business or assets is deemed
to be a registrant instead of the business or assets. Further, we are
adopting: new definitions of ``blank check company'' under 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; updated and expanded guidance in Item 10(b) of
Regulation S-K regarding the use of projections in Commission filings;
\1459\ and requirements to provide additional disclosure when
projections are disclosed in connection with de-SPAC transactions.
---------------------------------------------------------------------------
\1459\ 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,\1460\ we are adopting Securities Act Rule 145a
that provides, with respect to a reporting shell company's
shareholders, any direct or indirect business combination of a
reporting shell company involving another entity that is not a shell
company, is deemed to involve an offer, offer to sell, offer for sale,
or sale within the meaning of Securities Act section 2(a)(3). In
addition, we are adopting amendments to the financial statement
reporting requirements in Regulation S-X for transactions involving
shell companies.
---------------------------------------------------------------------------
\1460\ 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 final rules are discussed in
more detail in sections II through V above. We discuss the economic
impact, including the estimated costs and burdens, of the final rules
on all registrants, including small entities, in sections VIII and IX
above.
B. Significant Issues Raised by Public Comments
In the Proposing Release, we requested comment on all aspects of
the IRFA, including the number of small entities that would be affected
by the proposed rules, the existence or nature of the potential impact
of the proposals on small entities discussed in the analysis, how the
proposed rules could further lower the burden on small entities, and
how to quantify the impact of the proposed rules. While we did not
receive any comments specifically addressing the IRFA, as discussed
above, one commenter suggested that the Commission consider a phased-in
compliance period for smaller reporting companies for the tagging
requirements.\1461\ We also received a number of comments on the
proposed rules generally \1462\ and have considered these comments in
developing the FRFA.
---------------------------------------------------------------------------
\1461\ See supra section II.I.
\1462\ See supra sections II through VI.
---------------------------------------------------------------------------
C. Small Entities Subject to the Final Rules
The final rules will affect registrants that are small entities.
The RFA defines ``small entity'' to mean ``small business,'' ``small
organization,'' or ``small governmental jurisdiction.'' \1463\ The
regulation at 17 CFR 230.157 defines an issuer, other than an
investment company, to be a ``small business'' or ``small
organization'' for purposes of the RFA 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. The regulation at 17 CFR 240.0-10(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.
---------------------------------------------------------------------------
\1463\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------
The final disclosure and other requirements applicable to SPACs
would not apply to issuers that raise less than $5 million at the time
of their IPOs.\1464\ However, we acknowledge that there may be
instances where a small entity may be affected by the final rules,
including at the time of a subsequent registered offering or at the
time of a de-SPAC transaction.\1465\ While the Commission solicited
comment on the number of SPACs that were small entities in such
instances, we did not receive any feedback on this point. We remain
unaware of any such instances to date. The Commission also solicited
comment on the number of target private operating companies in de-SPAC
transactions that may be small entities, and likewise did not receive
feedback on this point. As noted in the Proposing Release, 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,
[[Page 14312]]
however, we expect this number to be relatively low.\1466\
---------------------------------------------------------------------------
\1464\ See discussion of the definition of ``special purpose
acquisition company'' in section II.A.
\1465\ According to data from Dealogic, the vast majority of
IPOs by SPACs in 2020 and 2021 raised more than $50 million and in
2022 all SPAC IPOs raised $50 million or more. In 2020, the smallest
amount raised in a SPAC IPO was $40 million. In 2021, the smallest
amount raised in a SPAC IPO was $44 million. In 2022, the smallest
amount raised in a SPAC IPO was $50 million.
\1466\ 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 note 1203 (regarding exchange
requirements that the SPAC complete a business combination(s) having
an aggregate fair market value of at least 80% of the value of the
net assets in the trust account excluding certain costs).
---------------------------------------------------------------------------
In regard to final Rule 145a and the final amendments to Regulation
S-X, we estimate that there are 136 non-SPAC reporting shell companies
that are small entities.\1467\ The Commission requested comment in the
Proposing Release regarding the number of private operating companies
and private shell companies that are small entities and may engage in a
business combination transaction but did not receive any information on
this point. Due to data limitations, we remain unable to estimate this
number.
---------------------------------------------------------------------------
\1467\ This estimate does not include business combination
related shell companies.
---------------------------------------------------------------------------
D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
We expect that the final disclosure and other requirements
applicable to registrants, including target companies, will have an
incremental effect on reporting, recordkeeping, and other compliance
burdens for registrants (including target companies), including small
entities. These requirements will increase compliance costs for
registrants (including target companies), and compliance with these
requirements will 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 final rules 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. The final rules are discussed in detail
in sections II through V above. We discuss the economic effects,
including the estimated costs and burdens, of the final rules on all
registrants (including target companies), including small entities, in
sections VIII and IX above.
Final Rule 145a may impose reporting or compliance requirements and
related costs on a small entity to the extent it would require such a
small entity to register the transaction under the Securities Act or
comply with an exemption from registration.
E. Duplicative, Overlapping or Conflicting Federal Rules
The final disclosure requirements in subpart 1600 of Regulation S-K
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.\1468\ To the extent
that the disclosure requirements in final subpart 1600 overlap with
these existing disclosure requirements, a registrant would not be
required to duplicate the resulting disclosure, and as such there
should not be a duplicative or increased burden. As discussed in
section II.C, if there are facts and circumstances that may result in
required disclosure under a current rule being the same as under any of
the rules we are adopting, then registrants could cross-reference
rather than repeat disclosures.
---------------------------------------------------------------------------
\1468\ See supra sections II through V.
---------------------------------------------------------------------------
Other than these disclosure requirements, we believe that the final
rules and amendments would not duplicate, overlap, or conflict with
other Federal rules.
F. Agency Action To Minimize Effect on Small Entities
The RFA 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 final rules will enhance and clarify information provided to
investors, including by enabling investors to make better informed
decisions as to whether to purchase securities in SPAC registered
offerings or to purchase or sell SPAC securities in secondary trading
markets and as to voting, investment, redemption, and tender decisions
in connection with de-SPAC transactions. Further, with respect to Rule
145a and co-registration requirements, as discussed above in sections
III.C and IV.A, the final rules will help ensure that a private
operating company's method of becoming a public company does not
negatively impact the protection of investors. Due to the nature of
SPAC transactions and the investor protection concerns discussed above,
we believe that the final rules are equally appropriate for SPACs of
all sizes that are engaged in a registered offering and for SPACs and
target companies of all sizes that are engaged in a de-SPAC transaction
because we believe investors should receive the enhanced protections of
the final rules regardless of the size of the entity engaged in the
SPAC transaction. For the same reason, we believe that the final rules
that apply to shell companies and/or blank check companies, including
SPACs, are equally appropriate for such shell companies and/or blank
check companies of all sizes.\1469\ As a result, we do not believe that
it is appropriate: to adopt different compliance or reporting
requirements for small entities; to clarify, consolidate or simplify
small entity compliance and reporting requirements; \1470\ or to
provide for small entity exemptions. As noted above, in our view, a
private operating company's method of becoming a public company should
not negatively impact investor protection. We believe that exempting
certain entities based on size from the requirements of the final rules
would mean the benefits discussed above would be inappropriately
unavailable to investors in those registrants. With respect to using
performance rather than design standards, the final rules use primarily
design standards in order to promote uniform compliance requirements
for all registrants. Further, we believe that the 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.
---------------------------------------------------------------------------
\1469\ The final definitions, for purposes of the PSLRA, of
``blank check company,'' final Rule 145a, and the final amendments
to Regulation S-X are not limited to SPACs. See discussion in
sections III.E, IV.A, and IV.B.
\1470\ Certain rules we are adopting may provide benefits of
clarity and simplicity for entities of all sizes, as we discuss in
sections II through V.
---------------------------------------------------------------------------
As discussed in section IV.A above, Rule 145a is designed to ensure
that shareholders more consistently receive the full protections of
Securities Act disclosure and liability provisions, as applicable, and
that such investor protections will apply more consistently regardless
of transaction structure. As a result, with respect to Rule 145a, we do
not believe that it is appropriate to adopt different compliance or
reporting requirements for small entities, to
[[Page 14313]]
clarify, consolidate, or simplify small entity compliance and reporting
requirements, or to provide for small entity exemptions.
The amendments to Regulation S-X that we are adopting 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, including small entities,
already report consistently with this staff guidance. The amendments
are not expected to have any significant adverse effect on small
entities (and are expected to reduce compliance burdens as discussed in
sections VIII and IX). Accordingly, we do not believe that it is
necessary: to exempt small entities from all or part of the amendments
to Regulation S-X; to establish different compliance or reporting
requirements for such entities; or to clarify, consolidate, or simplify
compliance and reporting requirements for small entities. Furthermore,
the final amendments to Regulation S-X regarding financial statement
requirements use design standards to a greater degree than performance
standards in order to promote consistency in financial reporting which
benefits investors who use financial data in making investment
decisions, including by comparing financial data across companies.
Statutory Authority
We are adopting 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; and sections 3, 12, 13, 14, 15, 23(a), and 36
of the Exchange Act.
List of Subjects
17 CFR Part 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.
Text of Rule and Form Amendments
For the reasons set out in the preamble, to the Commission is
adopting amendments to 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 paragraphs (d) and (w)(1) 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 an entity that will combine with an entity
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, other than in transactions where Sec. 210.15-01(a)
applies, 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 this part 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 an acquisition by a predecessor to a shell company, use the
predecessor's consolidated financial statements instead of those of the
shell company registrant in applying the significance tests in
paragraphs (w)(1)(i), (ii), and (iii) of this section. A registrant
that files its financial statements in accordance with or provides a
reconciliation to U.S. Generally Accepted Accounting Principles (U.S.
GAAP) must use amounts determined under U.S. GAAP. A foreign private
issuer that files its financial statements in accordance with
International Financial Reporting Standards as issued by the
International Accounting Standards Board (IFRS-IASB) must use amounts
determined under IFRS-IASB.
* * * * *
0
3. Amend Sec. 210.3-01 by revising paragraph (a) to read as follows:
Sec. 210.3-01 Consolidated balance sheets.
(a) There must 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 must 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. When a
predecessor to a shell company (other than a business combination
related
[[Page 14314]]
shell company) acquires a business and the financial statements of that
recently consummated business are omitted from a registration statement
or proxy statement pursuant to paragraph (b)(4)(i) of this section,
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. When a predecessor to a shell company (other than a
business combination related shell company) acquires a real estate
operation and the financial statements of that recently consummated
acquisition of a real estate operation are omitted from a registration
statement or proxy statement pursuant to paragraph (b)(3)(i) of this
section, refer to Sec. 210.15-01(d)(2).
* * * * *
0
6. Revise Sec. 210.8-02 to read as follows:
Sec. 210.8-02 Annual financial statements.
Smaller reporting companies must file an audited balance sheet for
the registrant and its subsidiaries consolidated 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 section 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 part may be omitted.
* * * * *
0
8. 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. The term audit (or examination), when used
in regard to financial statements of an entity 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 Public Company Accounting Oversight Board (``PCAOB'')
for the purpose of expressing an opinion thereon. When used in regard
to financial statements of an entity that is not a predecessor that are
included in a registration statement or proxy statement filed for a
combination with an issuer that is a shell company (other than a
business combination related shell company), 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 this part and forms applicable to those entities for the purpose of
expressing an opinion thereon. In transactions involving a shell
company that is not a SPAC (as defined in Sec. 229.1601(b) of this
chapter), the predecessor must be audited by an independent accountant
registered with the PCAOB.
(b) Financial statements. When a registrant is a shell company
(other than a business combination related shell company) and the
financial statements of a business that will be combining with such
registrant are required in a registration statement or proxy statement,
such 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 for which audited financial statements are available, if it
were filing a registration statement alone.
(c) Age of financial statements. The financial statements of a
business that will be acquired by a shell company (other than a
business combination related shell company) must 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 for which audited
financial statements are available, if it were filing a registration
statement alone) as if the financial statements were included in an
initial registration statement in determining the age of financial
statements of the business in the registration statement or proxy
statement of the registrant.
(d) Acquisition of a business or real estate operation by a
predecessor. Registrants must apply Sec. 210.3-05 (Sec. 210.8-04 when
the predecessor would qualify to be a smaller reporting company based
on its annual revenues as of the most recently completed fiscal year
for which audited financial statements are available if it were filing
a registration statement alone) or Sec. 210.3-14 (Sec. 210.8-06 when
the predecessor would qualify to be a smaller reporting company based
on its annual revenues as of the most recently completed fiscal year
for which audited financial statements are available if it were filing
a registration statement alone) to acquisitions of a business or real
estate operation, respectively, by a predecessor.
(1) See Sec. 210.1-02(w)(1) for rules on applying the significance
tests to acquisitions of a business or real estate operation that is
not or will not be the predecessor.
(2) When the financial statements of a recently acquired business
or real estate operation that is not or will not be the predecessor are
omitted from a registration statement or proxy statement pursuant to
Sec. 210.3-05(b)(4)(i) (Rule 3-05(b)(4)(i) of Regulation S-X) or Sec.
210.3-14(b)(3)(i) (Rule 3-14(b)(3)(i) of Regulation S-X), those
financial statements must be filed in a Form 8-K by the later of the
filing of the Form 8-K filed pursuant to Item 2.01(f) of Form 8-K or 75
days after consummation of the acquisition.
(e) Financial statements of shell company. After a shell company
[[Page 14315]]
registrant (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 any 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. If a registrant is to acquire or has
acquired a shell company (other than a business combination related
shell company), the financial statements of the shell company are
required to be included in any filing that requires the registrant's
financial statements, as if the shell company were the registrant for
the filing, unless the financial statements of the registrant include
the period in which the acquisition of the shell company 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
9. 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
10. Amend Sec. 229.10 by:
0
a. Revising paragraph (b); and
0
b. Adding paragraph (f)(2)(iv).
The revision and addition read as follows:
Sec. 229.10 (Item 10) General.
* * * * *
(b) Commission policy on projections. The Commission encourages the
use in documents specified in Sec. Sec. 230.175 (Rule 175 under the
Securities Act) and 240.3b-6 (Rule 3b-6 under the Exchange Act) 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 in this paragraph (b) 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 (loss). 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 results or operational
history with equal or greater prominence.
(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
directly comparable, 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
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 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
[[Page 14316]]
filings, beginning 45 days after consummation of the de-SPAC
transaction.
(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
11. Amend Sec. 229.601 by:
0
a. In the exhibit table in paragraph (a), adding entry 98 and footnote
8;
0
b. Adding paragraph (b)(98);
0
c. Removing the word ``and'' at the end of paragraph (b)(101)(i)(B);
0
d. Removing the period at the end of paragraph (b)(101)(i)(C)(2) and
adding ``; and'' in its place; and
0
e. Adding paragraph (b)(101)(i)(D).
The additions read as follows:
Sec. 229.601 (Item 601) Exhibits.
(a) * * *
Exhibit Table
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Securities act forms Exchange act forms
-------------------------------------------------------------------------------------------------------------------------------------------
S-1 S-3 SF-1 SF-3 S-4 \1\ S-8 S-11 F-1 F-3 F-4 \1\ 10 8-K \2\ 10-D 10-Q 10-K ABS- EE
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* * * * * * *
(98) Reports, opinions, or appraisals in de-SPAC X ...... ....... ....... X ...... ....... X ...... X ...... ....... ....... ....... ....... ........
transactions \8\...................................
* * * * * * *
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ An exhibit need not be provided about a company if: (1) With respect to such company an election has been made under Form S-4 or F-4 to provide information about such company at a level
prescribed by Form S-3 or F-3; and (2) the form, the level of which has been elected under Form S-4 or F-4, would not require such company to provide such exhibit if it were registering a
primary offering.
\2\ A Form 8-K exhibit is required only if relevant to the subject matter reported on the Form 8-K report. For example, if the Form 8-K pertains to the departure of a director, only the
exhibit described in paragraph (b)(17) of this section need be filed. A required exhibit may be incorporated by reference from a previous filing.
* * * * * * *
\8\ If required pursuant to Sec. 229.1607(c) (Item 1607(c) of Regulation S-K).
(b) * * *
(98) Reports, opinions, or appraisals in de-SPAC transactions. If
the securities to be registered on the form will be issued in a de-SPAC
transaction, as defined in Sec. 229.1601(a) (Item 1601(a) of
Regulation S-K), all reports, opinions, or appraisals required to be
filed or included by Sec. 229.1607(c) (Item 1607(c) of Regulation S-
K).
* * * * *
(101) * * *
(i) * * *
(D) Is required in any filing that is excluded by paragraphs
(b)(101)(i)(A), (B), or (C) of this section, that contains any
disclosure required by subpart 229.1600 of this part but only as to
such disclosure.
* * * * *
0
12. Add 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) Board determination about the de-SPAC
transaction.
229.1607 (Item 1607) Reports, opinions, appraisals, and
negotiations.
229.1608 (Item 1608) Tender offer filing obligations.
229.1609 (Item 1609) 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:
(a) De-SPAC transaction. The term de-SPAC transaction means a
business combination, such as a merger, consolidation, exchange of
securities, acquisition of assets, reorganization, 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 (SPAC) means a company that has:
(1) Indicated that its business plan is to:
(i) Conduct a primary offering of securities that is not subject to
the requirements of Sec. 230.419 of this chapter (Rule 419 under the
Securities Act);
(ii) Complete a business combination, such as a merger,
consolidation, exchange of securities, acquisition of assets,
reorganization, or similar transaction, with one or more target
companies within a specified time frame; and
(iii) Return proceeds from the offering and any concurrent offering
(if such offering or concurrent offering intends to raise proceeds) to
its security holders if the company does not complete a business
combination, such as a merger, consolidation, exchange of securities,
acquisition of assets, reorganization, or similar transaction, with one
or more target companies within the specified time frame; or
(2) Represented that it pursues or will pursue a special purpose
acquisition company strategy.
(c) SPAC sponsor. The term SPAC sponsor means any entity and/or
person primarily responsible for organizing, directing, or managing the
business and affairs of a special purpose acquisition company,
excluding, if an entity is a SPAC sponsor, officers and directors of
the special purpose acquisition company who are not affiliates of any
such entity that is a SPAC sponsor.
(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
[[Page 14317]]
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, its affiliates, and promoters, the amount of
securities issued or to be issued by the SPAC to the SPAC sponsor, its
affiliates, and promoters and the price paid or to be paid for such
securities, and whether this compensation and securities issuance 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 at quartile
intervals based on percentages of the maximum redemption threshold: the
offering price; as of the most recent balance sheet date filed, the net
tangible book value per share, as adjusted, as if the offering and
assumed redemption levels have occurred and to give effect to material
probable or consummated transactions (other than the completion of a
de-SPAC transaction); and the difference between the offering price and
such net tangible book value per share, as adjusted. Provide a cross-
reference, highlighted by prominent type or in another manner, to the
locations of related disclosures in the prospectus:
Table 1 to Paragraph (a)(4)
Net Tangible Book Value Per Share, as Adjusted
----------------------------------------------------------------------------------------------------------------
25% of Maximum 50% of Maximum 75% of Maximum
Offering Price of __ redemption redemption redemption Maximum redemption
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Instruction 1 to paragraph (a)(4). If the offering includes an
over-allotment option, include separate rows in the tabular disclosure
showing the information required by this paragraph (a)(4) with and
without the exercise of the over-allotment option.
(5) State whether there may be actual or potential material
conflicts of interest between the SPAC sponsor, 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) must include 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, the amount of securities issued or to be issued by the SPAC
to the SPAC sponsor, its affiliates, and promoters and the price paid
or to be paid for such securities, and, outside of the table, the
extent to which this compensation and securities issuance may result in
a material dilution of the purchasers' equity interests; and
(7) Any actual or potential material conflict of interest between
the SPAC sponsor, 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. Disclose in a tabular format for the same quartile
intervals as in paragraph (a)(4) of this section: the offering price;
net tangible book value per share, as adjusted, determined in the same
manner as in paragraph (a)(4); and the difference between the offering
price and such net tangible book value per share, as adjusted. The
tabular disclosure must show: the nature and amounts of each source of
dilution used to determine net tangible book value per share, as
adjusted; the number of shares used to determine net tangible book
value per share, as adjusted; and any adjustments to the number of
shares used to determine the per share component of net tangible book
value per share, as adjusted. Outside of the table, describe each
material potential source of future dilution following the registered
offering by the special purpose acquisition company, including sources
not included in the table with respect to the determination of net
tangible book value per share, as adjusted. Provide a description of
the model, methods, assumptions, estimates, and parameters necessary to
understand the tabular disclosure.
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,
[[Page 14318]]
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
officers, directors, or affiliates with respect to 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 been or will be
awarded to, earned by, or paid to the SPAC sponsor, its affiliates, and
any promoters for all services rendered or to be rendered in all
capacities to the special purpose acquisition company and its
affiliates and the amount of securities issued or to be issued by the
SPAC to the SPAC sponsor, its affiliates, and any promoters and the
price paid or to be paid for such securities. Disclose any
circumstances or arrangements under which the SPAC sponsor, its
affiliates, and promoters, directly or indirectly, have transferred or
could transfer ownership of securities of the SPAC, or that have
resulted or could result in the surrender or cancellation of such
securities. 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.
(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.
(b) Conflicts of interest. Describe any actual or potential
material conflict of interest, including any material conflict of
interest that may arise 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 a
SPAC sponsor, officers, or directors or the manner in which a SPAC
sponsor compensates its officers and directors, between:
(1) The SPAC sponsor or its affiliates; the special purpose
acquisition company's officers, directors, or promoters; or the target
company's officers or directors; and
(2) Unaffiliated security holders of the SPAC.
(c) SPAC officer and director fiduciary duties. 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 the determination, if any, of the board of directors (or
similar governing body) of the special purpose acquisition company
disclosed in response to Sec. 229.1606(a) (Item 1606(a) of Regulation
S-K) and, if applicable, that the special purpose acquisition company
or the SPAC sponsor has received a report, opinion, or appraisal
referred to in Sec. 229.1607(a) (Item 1607(a) of Regulation S-K).
(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; the
amount of securities issued or to be issued by the SPAC to the SPAC
sponsor, its affiliates, and promoters and the price paid or to be paid
for such securities in connection with the de-SPAC transaction or any
related financing transaction; and whether this compensation and
securities issuance 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, in connection with the de-SPAC transaction,
there may be any actual or potential material conflict of interest,
including any material conflict of interest that may arise 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 a SPAC sponsor,
officers, and directors or the manner in which a SPAC sponsor
compensates its officers and directors, between: on one hand, the SPAC
sponsors, their affiliates, SPAC officers, SPAC directors, or
promoters, target company officers or target company directors; and, on
the other hand, unaffiliated security holders of the SPAC. 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) must include 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) The determination, if any, of the board of directors (or
similar governing body) of the special purpose acquisition company
disclosed in response to Sec. 229.1606(a) (Item 1606(a) of Regulation
S-K), the material factors that the board of directors (or similar
governing body) of the special purpose acquisition company considered
in making such determination, and any report, opinion, or appraisal
referred to in Sec. 229.1607(a) (Item 1607(a) of Regulation S-K);
(3) In connection with the de-SPAC transaction, any actual or
potential material conflict of interest between:
(i) The SPAC sponsor, SPAC officers, SPAC directors, SPAC
affiliates or promoters, target company officers, or target company
directors; and
(ii) Unaffiliated security holders of the SPAC;
(4) In a tabular format, the terms and amount of the compensation
received or
[[Page 14319]]
to be received by the SPAC sponsor, its affiliates, and promoters in
connection with the de-SPAC transaction or any related financing
transaction, the amount of securities issued or to be issued by the
SPAC to the SPAC sponsor, its affiliates, and promoters and the price
paid or to be paid for such securities in connection with the de-SPAC
transaction or any related financing transaction; and, outside of the
table, the extent to which that compensation and securities issuance
has resulted or may result in a material dilution of the equity
interests of non-redeeming shareholders of the special purpose
acquisition company;
(5) The material terms of any material 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 non-redeeming shareholders; and
(6) The rights of security holders to redeem the outstanding
securities of the special purpose acquisition company and the potential
dilutive impact of redemptions on non-redeeming shareholders.
(c) Dilution. Disclose in a tabular format that includes intervals
representing selected potential redemption levels that may occur across
a reasonably likely range of outcomes: the offering price disclosed
pursuant to Sec. 229.1602(a)(4) (Item 1602(a)(4)) in the initial
registered offering by the SPAC; as of the most recent balance sheet
date filed, the net tangible book value per share, as adjusted, as if
the selected redemption levels have occurred, and to give effect to,
while excluding the de-SPAC transaction itself, material probable or
consummated transactions and other material effects on the SPAC's net
tangible book value per share from the de-SPAC transaction; and the
difference between such offering price and such net tangible book value
per share, as adjusted. The tabular disclosure must show: the nature
and amounts of each source of dilution used to determine net tangible
book value per share, as adjusted; the number of shares used to
determine net tangible book value per share, as adjusted; and any
adjustments to the number of shares used to determine the per share
component of net tangible book value per share, as adjusted. Outside of
the table, 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,
including sources not included in the table with respect to the
determination of net tangible book value per share, as adjusted.
(1) With respect to each redemption level, 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 tabular
disclosure.
Sec. 229.1605 (Item 1605) Background of and reasons for the de-SPAC
transaction; terms of the de-SPAC transaction; effects.
(a) Provide a summary of the background of the de-SPAC transaction.
Such summary must include 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 of the SPAC and
the target company for engaging in the de-SPAC transaction and reasons
of the SPAC 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
SPAC and target company security holders as compared with security
holders of the combined company as a result of the de-SPAC transaction;
(5) A brief statement as to the accounting treatment of the de-SPAC
transaction; and
(6) The Federal income tax consequences of the de-SPAC transaction
to the SPAC, the target company, and their respective security holders.
(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 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 of the special purpose acquisition company. 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 or the
special purpose acquisition company's officers or directors, including
fiduciary or contractual obligations to other entities as well as any
interest in, or affiliation with, the target company; or held by the
target company's officers or directors that consist of any interest in,
or affiliation with, the SPAC sponsor or the special purpose
acquisition 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) Board determination about the de-SPAC
transaction.
(a) Board determination. If the law of the jurisdiction in which
the special purpose acquisition company is organized requires its board
of directors (or similar governing body) to determine whether the de-
SPAC transaction is advisable and in the best interests of the special
purpose acquisition company and its security holders, or otherwise make
any comparable determination, disclose that determination.
(b) Factors considered in board determination. Discuss the material
factors the board of directors (or similar governing body) of the
special purpose acquisition company considered in making any
determination disclosed in response to paragraph (a) of this section.
To the extent considered, such factors must include, but need not be
limited to, the valuation of the target company, financial projections
relied upon by the board of directors (or similar governing body), the
terms of financing materially related to the de-SPAC transaction, any
report, opinion, or appraisal referred to in Sec. 229.1607(a) (Item
1607(a) of Regulation S-K), and the dilution 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
[[Page 14320]]
is structured so that approval of at least a majority of unaffiliated
security holders of the special purpose acquisition company is
required.
(d) Unaffiliated representative. State whether or not a majority of
the directors (or members of similar governing body) 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 and/or preparing a report concerning the approval of the
de-SPAC transaction.
(e) Approval of directors. State whether or not the de-SPAC
transaction was approved by a majority of the directors (or members of
similar governing body) of the special purpose acquisition company who
are not employees of the special purpose acquisition company. If any
director (or member of a similar governing body) of the special purpose
acquisition company voted against, or abstained from voting on,
approval of the de-SPAC transaction, identify such persons, and
indicate, if known after making reasonable inquiry, the reasons for the
vote against the transaction or abstention.
Sec. 229.1607 (Item 1607) Reports, opinions, appraisals, and
negotiations.
(a) Report, opinion, or appraisal. Disclose the information
required by paragraph (b) of this section if the special purpose
acquisition company or SPAC sponsor has received any report, opinion
(other than an opinion of counsel) or appraisal from an outside party
or an unaffiliated representative referred to in Sec. 229.1606(d)
(Item 1606(d) of Regulation S-K) materially relating to:
(1) Any determination disclosed in response to Sec. 229.1606(a)
(Item 1606(a) of Regulation S-K);
(2) The approval of the de-SPAC transaction;
(3) The consideration or the fairness of the consideration to be
offered to security holders of the target company in the de-SPAC
transaction; or
(4) The fairness of the de-SPAC transaction to the special purpose
acquisition company, its security holders, or SPAC sponsor.
(b) Preparer and summary of the report, opinion, appraisal, or
negotiation. For each report, opinion, or appraisal referred to in
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) If the report, opinion, or appraisal relates to the fairness of
the consideration to be offered to security holders of the target
company in the de-SPAC transaction, 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
and/or unaffiliated representative 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 paragraph (b): The information called for by
paragraphs (b)(1) through (3) of this section must be given with
respect to the firm that provides the report, opinion, or appraisal or
participates in the negotiation rather than the employees of the firm
that prepared the report, opinion, or appraisal or participated in the
negotiation.
(c) Exhibits. All reports, opinions, or appraisals referred to in
paragraphs (a) and (b) of this section must 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.
If the special purpose acquisition company files a Schedule TO
(Sec. 240.14d-100 of this chapter) pursuant to Sec. 240.13e-4(c)(2)
of this chapter (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)(2) of Schedule 14A (Sec.
240.14a-101 of this chapter), as applicable, in addition to the
information otherwise required by Schedule TO. Such redemption must be
conducted in compliance with all other provisions of Sec. Sec.
240.13e-4 (Rule 13e-4) and 240.14e-1 through 240.14e-8 (Regulation 14E)
of this chapter.
Sec. 229.1609 (Item 1609) Projections in de-SPAC transactions.
(a) With respect to any projections disclosed in the filing (or any
exhibit thereto), disclose the purpose for which the projections were
prepared and the party that prepared the projections.
(b) Disclose all material bases of the disclosed projections and
all material assumptions underlying the projections, and any material
factors that may affect such assumptions. The disclosure referred to in
this section should include a discussion of any material growth or
reduction rates or discount rates used in preparing the projections,
and the reasons for selecting such growth or reduction rates or
discount rates.
(c) If the projections relate to the performance of the special
purpose acquisition company, state whether or not the projections
reflect the view of the special purpose acquisition company's
management or board of directors (or similar governing body) about its
future performance as of the most recent practicable date prior to the
date of the disclosure document required to be disseminated to security
holders. If the projections relate to the target company, disclose
whether or not 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 of directors (or similar governing body)
about its future performance as of the most recent practicable date
prior to the date of the disclosure document required to be
disseminated to security holders. If the projections no longer reflect
the views of the special purpose acquisition company's or the target
company's management or board of directors (or similar governing body)
regarding the future performance of
[[Page 14321]]
their respective companies as of the most recent practicable date prior
to the date of the disclosure document required to be disseminated to
security holders, state the purpose of disclosing the projections and
the reasons for any continued reliance by the management or board of
directors (or similar governing body) on the projections.
Sec. 229.1610 (Item 1610) Structured data requirement.
Provide the disclosure required by this subpart in an Interactive
Data File in accordance with Sec. Sec. 232.405 (Rule 405 of Regulation
S-T) and 232.301 (the EDGAR Filer Manual) of this chapter.
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
0
13. 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 Pub. L. 112-106, sec. 201(a), sec. 401, 126
Stat. 313 (2012), unless otherwise noted.
* * * * *
0
14. 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 section, a reporting shell company is a company other
than an asset-backed issuer as defined in Sec. 229.1101(b) of this
chapter (Item 1101(b) of Regulation AB), that has:
(a) No or nominal operations;
(b) Either:
(1) No or nominal assets;
(2) Assets consisting solely of cash and cash equivalents; or
(3) Assets consisting of any amount of cash and cash equivalents
and nominal other assets; and
(c) 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
15. Amend Sec. 230.405 by:
0
a. Adding in alphabetical order the definition for ``Blank check
company''; and
0
b. Adding paragraph (3)(iv) to the definition for ``Smaller reporting
company''.
The additions read as follows:
Sec. 230.405 Definitions of terms.
* * * * *
Blank check company. For purposes of section 27A of the Securities
Act of 1933 (15 U.S.C. 77z-2), 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.
* * * * *
Smaller reporting company. * * *
(3) * * *
(iv) Upon the consummation of a de-SPAC transaction, as defined in
Sec. 229.1601(a) of this chapter (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 filings beginning
45 days after consummation of the de-SPAC transaction.
(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) of this chapter (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.
* * * * *
PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR
ELECTRONIC FILINGS
0
16. The general authority citation for part 232 continues to read 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, 80b-4, 80b-6a, 80b-10, 80b-11, 7201
et seq.; and 18 U.S.C. 1350, unless otherwise noted.
* * * * *
0
17. 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)(4)(i) and
adding a period in its place;
0
c. Adding paragraph (b)(4)(vi); and
0
d. Revising note 1 to the section.
The revisions and addition 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), General Instruction F of Sec. 249.311 of this
chapter (Form 11-K), 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), Sec. 240.13a-21 of this chapter (Rule 13a-21
under the Exchange Act), paragraph 101 of the Instructions as to
Exhibits of Sec. 249.220f of this chapter (Form 20-F), paragraph
B.(15) of the General Instructions to Sec. 249.240f of this chapter
(Form 40-F), paragraph C.(6) of the General Instructions to Sec.
249.306 of this chapter (Form 6-K), Sec. 240.17Ad-27(d) of this
chapter (Rule 17Ad-27(d) under the Exchange Act), Note D.5 of Sec.
240.14a-101 of this chapter (Rule 14a-101 under the Exchange Act), Item
1 of Sec. 240.14c-101 of this chapter (Rule 14c-101 under the Exchange
Act), General Instruction L of Sec. 240.14d-100 of this chapter (Rule
14d-100 under the Exchange Act), General Instruction I of Sec. 249.333
of this chapter (Form F-SR), General Instruction C.3.(g) of Sec. Sec.
239.15A and 274.11A of this chapter (Form N-1A), General Instruction I
of Sec. Sec. 239.14 and 274.11a-1 of this chapter (Form N-2), General
Instruction C.3.(h) of Sec. Sec. 239.17a and 274.11b of this chapter
(Form N-3), General Instruction C.3.(h) of Sec. Sec. 239.17b and
274.11c of this chapter (Form N-4), General Instruction C.3.(h) of
Sec. Sec. 239.17c and 274.11d of this chapter (Form N-6), General
Instruction 2.(l) of Sec. 274.12 of this chapter (Form N-8B-2),
General Instruction 5 of Sec. 239.16 of this chapter (Form S-6), and
General Instruction C.4 of Sec. Sec. 249.331 and 274.128 of this
chapter (Form N-CSR) 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
[[Page 14322]]
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),
General Instruction F of Sec. 249.311 (Form 11-K), 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), Sec. 240.13a-
21 of this chapter (Rule 13a-21 under the Exchange Act), paragraph 101
of the Instructions as to Exhibits of Sec. 249.220f of this chapter
(Form 20-F), paragraph B.(15) of the General Instructions to Sec.
249.240f of this chapter (Form 40-F), paragraph C.(6) of the General
Instructions to Sec. 249.306 of this chapter (Form 6-K), Rule 17Ad-
27(d) under the Exchange Act, Note D.5 of Rule 14a-101 under the
Exchange Act, Item 1 of Rule 14c-101 under the Exchange Act, General
Instruction L of Sec. 240.14d-100 of this chapter (Rule 14d-100 under
the Exchange Act), General Instruction I to Sec. 249.333 of this
chapter (Form F-SR), General Instruction C.3.(g) of Sec. Sec. 239.15A
and 274.11A of this chapter (Form N-1A), General Instruction I of
Sec. Sec. 239.14 and 274.11a-1 of this chapter (Form N-2), General
Instruction C.3.(h) of Sec. Sec. 239.17a and 274.11b of this chapter
(Form N-3), General Instruction C.3.(h) of Sec. Sec. 239.17b and
274.11c of this chapter (Form N-4), General Instruction C.3.(h) of
Sec. Sec. 239.17c and 274.11d of this chapter (Form N-6), General
Instruction 2.(l) of Sec. 274.12 of this chapter (Form N-8B-2),
General Instruction 5 of Sec. 239.16 of this chapter (Form S-6), or
General Instruction C.4 of Sec. Sec. 249.331 and 274.128 of this
chapter (Form N-CSR), as applicable;
* * * * *
(4) Be submitted in accordance with the EDGAR Filer Manual and, as
applicable, 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 Sec. 239.40 of this
chapter (Form F-10), Sec. 240.13a-21 of this chapter (Rule 13a-21
under the Exchange Act), paragraph 101 of the Instructions as to
Exhibits of Sec. 249.220f of this chapter (Form 20-F), paragraph
B.(15) of the General Instructions to Sec. 249.240f of this chapter
(Form 40-F), paragraph C.(6) of the General Instructions to Sec.
249.306 of this chapter (Form 6-K), Sec. 240.17Ad-27(d) of this
chapter (Rule 17Ad-27(d) under the Exchange Act), Note D.5 of Sec.
240.14a-101 of this chapter (Rule 14a-101 under the Exchange Act), Item
1 of Sec. 240.14c-101 of this chapter (Rule 14c-101 under the Exchange
Act), General Instruction L of Sec. 240.14d-100 of this chapter (Rule
14d-100 under the Exchange Act), General Instruction I to Sec. 249.333
of this chapter (Form F-SR), General Instruction C.3.(g) of Sec. Sec.
239.15A and 274.11A of this chapter (Form N-1A), General Instruction I
of Sec. Sec. 239.14 and 274.11a-1 of this chapter (Form N-2), General
Instruction C.3.(h) of Sec. Sec. 239.17a and 274.11b of this chapter
(Form N-3), General Instruction C.3.(h) of Sec. Sec. 239.17b and
274.11c of this chapter (Form N-4), General Instruction C.3.(h) of
Sec. Sec. 239.17c and 274.11d of this chapter (Form N-6); General
Instruction 2.(l) of Sec. 274.12 of this chapter (Form N-8B-2);
General Instruction 5 of Sec. 239.16 of this chapter (Form S-6); or
General Instruction C.4 of Sec. Sec. 249.331 and 274.128 of this
chapter (Form N-CSR).
* * * * *
(b) * * *
(4) * * *
(vi) The information required by Sec. Sec. 229.1601 through
229.1610 of this chapter (subpart 1600 of Regulation S-K).
* * * * *
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. Sec. 239.11 (Form S-1), 239.13 (Form S-3),
239.25 (Form S-4), 239.18 (Form S-11), 239.31 (Form F-1), 239.33
(Form F-3), 239.34 (Form F-4), 249.310 (Form 10-K), 249.308a (Form
10-Q), and 249.308 (Form 8-K) of this chapter. General Instruction F
of Sec. 249.311 of this chapter (Form 11-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 Form 11-K. 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. Sec.
249.240f (Form 40-F) and 249.306 (Form 6-K) of this chapter. Section
240.17Ad-27(d) of this chapter (Rule 17Ad-27(d) under the Exchange
Act) specifies the circumstances under which an Interactive Data
File must be submitted with respect the reports required under Rule
17Ad-27. Note D.5 of Sec. 240.14a-101 of this chapter (Schedule
14A) and Item 1 of Sec. 240.14c-101 of this chapter (Schedule 14C)
specify the circumstances under which an Interactive Data File must
be submitted with respect to Schedules 14A and 14C. General
Instruction L of Sec. 240.14d-100 of this chapter (Schedule TO)
specifies the circumstances under which an Interactive Data File
must be submitted with respect to Schedule TO. Section 240.13a-21 of
this chapter (Rule 13a-21 under the Exchange Act) and General
Instruction I to Sec. 249.333 of this chapter (Form F-SR) specify
the circumstances under which an Interactive Data File must be
submitted, with respect to Form F-SR. Sec. Sec. 242.829 and 242.831
of this chapter (Rules 829 and 831 of Regulation SE) and the
Registration Instructions to Sec. 249.1701 of this chapter (Form
SBSEF), as applicable, specify the circumstances under which an
Interactive Data File must be submitted with respect to filings made
under Regulation SE. 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 Sec. Sec. 210.6-01 through 210.6-10
of this chapter (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), General Instruction 2.(l) of
Sec. 274.12 of this chapter (Form N-8B-2), General Instruction 5 of
Sec. 239.16 of this chapter (Form S-6), and General Instruction C.4
of Sec. Sec. &thnsp;249.331 and 274.128 of this chapter (Form N-CSR)
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 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
18. The authority citation for part 239 continues to read, in part, as
follows:
[[Page 14323]]
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, 80a-37, and sec. 71003 and sec. 84001, Pub. L. 114-
94, 129 Stat. 1321, unless otherwise noted.
Sections 239.31, 239.32 and 239.33 are also issued under 15
U.S.C. 78l, 78m, 78o, 78w, 80a-8, 80a-29, 80a-30, 80a-37 and 12
U.S.C. 241.
* * * * *
0
19. Amend Form S-1 (referenced in Sec. 239.11) by:
0
a. Adding General Instruction VIII; and
0
b. Revising Item 6. Dilution.
Note: Form S-1 is attached as appendix A to this document. Form
S-1 will not appear in the Code of Federal Regulations.
0
20. 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.
Note: Form S-4 is attached as appendix B to this document. Form
S-4 will not appear in the Code of Federal Regulations.
0
21. Amend Form F-1 (referenced in Sec. 239.31) by adding General
Instruction VII.
Note: Form F-1 is attached as appendix C to this document. Form
F-1 will not appear in the Code of Federal Regulations.
0
22. 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;
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.
Note: Form F-4 is attached as appendix D to this document. Form
F-4 will not appear in the Code of Federal Regulations.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
23. The authority citation for part 240 continues to read, in part, 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, 78j-4, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o,
78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 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; and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L.
112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise
noted.
* * * * *
Sections 240.12b-1 to 240.12b-36 also issued under secs. 3, 12,
13, 15, 48 Stat. 892, as amended, 894, 895, as amended; 15 U.S.C.
78c, 78l, 78m, 78o;
* * * * *
Sections 240.14c-1 to 240.14c-101 also issued under sec. 14, 48
Stat. 895; 15 U.S.C. 78n;
* * * * *
0
24. Amend Sec. 240.12b-2 by:
0
a. Adding in alphabetical order the definition for ``Blank check
company''; and
0
b. Adding paragraph (3)(iv) to the definition of ``Smaller reporting
company''.
The additions read as follows:
Sec. 240.12b-2 Definitions.
* * * * *
Blank check company. For purposes of section 21E of the Securities
and Exchange Act of 1934 (15 U.S.C. 78u-5), 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.
* * * * *
Smaller reporting company. * * *
(3) * * *
(iv) Upon the consummation of a de-SPAC transaction, as defined in
Sec. 229.1601(a) of this chapter (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 filings, beginning
45 days after consummation of the de-SPAC transaction.
(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) of this chapter (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
25. 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 to be held or action is to
be taken in connection with the de-SPAC transaction or the maximum
number of days permitted for disseminating the proxy statement under
the applicable laws of the jurisdiction of incorporation or
organization.
0
26. Amend Sec. 240.14a-101 by:
0
a. Adding paragraph (f) to Item 14; and
0
b. In Item 25:
0
i. Removing ``and'' from the end of paragraph (a);
0
ii. Redesignating paragraph (b) as paragraph (c); and
0
iii. Adding new paragraph (b).
The additions read as follows:
Sec. 240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
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,
229.1604(b)(1) through (6) and (c), 229.1605 through 229.1607, and
229.1609 (Items 1603, 1604(b)(1) through (6) and (c), 1605 through
1607, and 1609 of Regulation S-K) apply in addition to the provisions
of this schedule and disclosure thereunder must be provided in the
proxy statement, and the structured data provisions of Sec. 229.1610
(Item 1610 of Regulation S-K) apply to those disclosures. The
information required by Sec. 229.1604(b)(1) through (6) must be
briefly described in the front of the disclosure document. To the
extent that the applicable disclosure requirements of subpart 229.1600
of Regulation S-K
[[Page 14324]]
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 (Item 101 of Regulation
S-K, description of business);
(ii) Information required by Sec. 229.102 (Item 102 of Regulation
S-K, description of property);
(iii) Information required by Sec. 229.103 (Item 103 of Regulation
S-K, legal proceedings);
(iv) Information required by Sec. 229.304 (Item 304 of Regulation
S-K, changes in and disagreements with accountants on accounting and
financial disclosure);
(v) Information required by Sec. 229.403 (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; and
(vi) Information required by Sec. 229.701 (Item 701 of Regulation
S-K, recent sales of unregistered securities).
* * * * *
Item 25. * * *
* * * * *
(b) If the transaction is a de-SPAC transaction, as defined in
Sec. 229.1601(a) (Item 1601(a) of Regulation S-K), all reports,
opinions, or appraisals required to be filed or included by Sec.
229.1607(c) (Item 1607(c) of Regulation S-K); and
* * * * *
0
27. 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 to
be held or action is to be taken in connection with the de-SPAC
transaction or the maximum number of days permitted for disseminating
the information statement under the applicable laws of the jurisdiction
of incorporation or organization.
0
28. Amend Sec. 240.14d-100 by:
0
a. Redesignating General Instruction K as General Instruction M;
0
b. Adding new General Instructions K and L; and
0
c. In Item 12:
0
i. Removing ``and'' from the end of paragraph (a);
0
ii. Redesignating paragraph (b) as paragraph (c); and
0
iii. Adding new paragraph (b).
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. If the filing relates to a de-SPAC transaction, as defined in
Sec. 229.1601(a) (Item 1601(a) of Regulation S-K), then the provisions
of Sec. Sec. 229.1603, 229.1604(b)(1) through (6) and (c) and 229.1605
through 229.1609 (Items 1603, 1604(b)(1) through (6) and (c) and 1605
through 1609 of Regulation S-K) apply in addition to the provisions of
this schedule and disclosure thereunder must be provided in this
schedule, and the structured data provisions of Sec. 229.1610 (Item
1610 of Regulation S-K) apply to those disclosures. The information
required by Sec. 229.1604(b)(1) through (6) must be briefly described
in the front of the disclosure document. If the filing by a special
purpose acquisition company, as defined in Sec. 229.1601(b) (Item
1601(b) of Regulation S-K), relates to any other redemption of
securities offered to security holders, then the provisions of Sec.
229.1608 (Item 1608 of Regulation S-K) apply in addition to the
provisions of this schedule and disclosure thereunder, if applicable,
must be provided in this schedule and the structured data provisions of
Sec. 229.1610 (Item 1610 of Regulation S-K) apply to those
disclosures. To the extent that the applicable disclosure requirements
of subpart 229.1600 of Regulation S-K are inconsistent with the
disclosure requirements of this filing, the requirements of subpart
229.1600 of this chapter are controlling.
L. An Interactive Data File must be included in accordance with
Sec. 232.405 (Rule 405 of Regulation S-T) and the EDGAR Filer Manual
where applicable pursuant to General Instruction K and Sec.
232.405(b).
* * * * *
Item 12. * * *
* * * * *
(b) If the filing relates to a de-SPAC transaction, as defined in
Sec. 229.1601(a) (Item 1601(a) of Regulation S-K), all reports,
opinions, or appraisals required to be filed or included by Sec.
229.1607(c) (Item 1607(c) of Regulation S-K); and
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
29. 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), Sec. 72001 Pub. L. 114-94,
129 Stat. 1312 (2015), and secs. 2 and 3 Pub. L. 116-222, 134 Stat.
1063 (2020), 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
30. Amend Form 20-F (referenced in Sec. 249.220f) by adding
Instruction 4 to Item 8.
Note: Form 20-F is attached as appendix E to this document. Form
20-F will not appear in the Code of Federal Regulations.
0
31. Amend Form 8-K (referenced in Sec. 249.308) by:
0
a. Adding General Instruction B.7; and
0
b. Revising paragraph (f) of Item 2.01.
Note: Form 8-K is attached as appendix F to this document. Form
8-K will not appear in the Code of Federal Regulations.
By the Commission.
Dated: January 24, 2024.
J. Matthew DeLesDernier,
Deputy Secretary.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendix A--Form S-1
Form S-1
* * * * *
General Instructions
* * * * *
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
[[Page 14325]]
de-SPAC transaction, the requirements of Form S-4 applicable to de-
SPAC transactions apply to this Form, including, but not limited to,
Item 17 and General Instruction L.
* * * * *
Item 6. Dilution
Provide the information required by Item 506 of Regulation S-K
(Sec. 229.506 of this chapter), unless the registrant is a special
purpose acquisition company (as defined in Item 1601 of Regulation
S-K).
* * * * *
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 a special purpose
acquisition company, as such term is defined in Item 1601 of
Regulation S-K, or another shell company in connection with a de-
SPAC transaction, as such term is defined in Item 1601 of Regulation
S-K, the term ``registrant'' for purposes of this instruction and
the Signatures section of this form also includes the target
company, as such term is defined in Item 1601 of Regulation S-K,
except that in connection with any de-SPAC transaction involving the
purchase of assets or a business, with respect to the purchase of
assets or a business, the term ``registrant'' also includes the
seller of the business or assets.
* * * * *
Appendix B--Form S-4
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) apply in addition to the provisions of this
Form and disclosure thereunder must be provided in the prospectus,
and the structured data provisions of Item 1610 of Regulation S-K
(17 CFR 229.1610) apply to those disclosures. 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 such term is defined in Item 1601 of
Regulation S-K) or another shell company in connection with a de-
SPAC transaction, the registrants also include the target company
(as such term is defined in Item 1601 of Regulation S-K), and it
must be so designated on the cover page of this Form. In such a de-
SPAC transaction, where the target company consists of a business or
assets, the seller of the business or assets is deemed to be a
registrant instead of the business or assets and must be so
designated on the cover page of this Form. Further, in such a de-
SPAC transaction, the term ``registrant'' for purposes of the
disclosure requirements of this Form means the special purpose
acquisition company, and the term ``company being acquired'' for the
purposes of the disclosure requirements of this Form means the
target 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, as
defined in Item 1601 of Regulation S-K (17 CFR 229.1601), 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 4,
6.E, 7.A, 8.A.7, and 16F 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 the meeting of security holders is to be held or
action is to be taken in connection with the de-SPAC transaction 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, see 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 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.
For a company combining with a registrant that is a shell company,
see Sec. 210.15-01(a).
* * * * *
Signatures
* * * * *
Instructions
1. The registration statement must 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 must also be signed by its authorized
representative in the United States. Where the registrant is a
limited partnership, the registration statement must 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 a special purpose
acquisition company, as such term is defined in Item 1601 of
Regulation S-K, or another shell company in connection with a de-
SPAC transaction, as such term is defined in Item 1601 of Regulation
S-K, the term ``registrant'' for purposes of this instruction and
the Signatures section of this form also includes the target
company, as such term is defined in Item 1601 of Regulation S-K,
except that in connection with any de-SPAC transaction involving the
purchase of assets or a business, with respect to the purchase of
assets or a business, the term ``registrant'' also includes the
seller of the business or assets.
* * * * *
Appendix C--Form F-1
Form F-1
* * * * *
General Instructions
* * * * *
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
[[Page 14326]]
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 the requirements of Form F-4
applicable to de-SPAC transactions apply to this Form, including,
but not limited to, Item 17 and General Instruction I.
* * * * *
Item 9. The Offer and Listing
* * * * *
E. Dilution. The following information shall be provided:
* * * * *
4. Where the registrant is a special purpose acquisition company
(as defined in Item 1601 of Regulation S-K), in lieu of providing
the information required under Item 9.E.1 and Item 9.E.2, provide
the disclosure required pursuant to Items 1602(a)(4) and 1602(c) of
Regulation S-K in an offering other than a de-SPAC transaction (as
defined in Item 1601 of Regulation S-K) and provide the disclosure
required under Item 1604(c) of Regulation S-K in connection with a
de-SPAC transaction.
* * * * *
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 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 a
special purpose acquisition company, as such term is defined in Item
1601 of Regulation S-K, or another shell company in connection with
a de-SPAC transaction, as such term is defined in Item 1601 of
Regulation S-K, the term ``registrant'' for purposes of this
instruction and the Signatures section of this form also includes
the target company, as such term is defined in Item 1601 of
Regulation S-K, except that in connection with any de-SPAC
transaction involving the purchase of assets or a business, with
respect to the purchase of assets or a business, the term
``registrant'' also includes the seller of the business or assets.
* * * * *
Appendix D--Form F-4
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) apply in addition to the provisions of this Form
and disclosure thereunder must be provided in the prospectus, and
the structured data provisions of Item 1610 of Regulation S-K (17
CFR 229.1610) apply to those disclosures. 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 such term is defined in Item 1601 of
Regulation S-K), or another shell company in connection with a de-
SPAC transaction, the registrants also include the target company
(as such term is defined in Item 1601 of Regulation S-K), and it
must be so designated on the cover page of this Form. In such a de-
SPAC transaction, where the target company consists of a business or
assets, the seller of the business or assets is deemed to be a
registrant instead of the business or assets and must be so
designated on the cover page of this Form. Further, in such a de-
SPAC transaction, the term ``registrant'' for purposes of the
disclosure requirements of this Form means the special purpose
acquisition company, and the term ``company being acquired'' for the
purposes of the disclosure requirements of this Form means the
target 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, as
such term is defined in Item 1601 of Regulation S-K, 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 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 4,
6.E, 7.A, 8.A.7, and 16F 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 the meeting of security holders is to be held or
action is to be taken in connection with the de-SPAC transaction 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.
For a company combining with 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 must 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 the registrant is a limited partnership, the
[[Page 14327]]
registration statement must 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 a special purpose acquisition company (as such term is
defined in Item 1601 of Regulation S-K) or another shell company in
connection with a de-SPAC transaction, as such term is defined in
Items 1601 of Regulation S-K, the term ``registrant'' for purposes
of this instruction and the Signatures section of this form also
includes the target company (as such term is defined in Item 1601 of
Regulation S-K), except that in connection with any de-SPAC
transaction involving the purchase of assets or a business, with
respect to the purchase of assets or a business, the term
``registrant'' also includes the seller of the business or assets.
* * * * *
Appendix E--Form 20-F
Form 20-F
* * * * *
Item 8. Financial Information
* * * * *
Instructions to Item 8
* * * * *
4. For filings on Form 20-F filed pursuant to General
Instruction A.(d) of this form and for registration statements, when
the issuer is a shell company that is combining with a business, see
Sec. 240.15-01 (Rule 15-01 of Regulation S-X).
* * * * *
Appendix F--Form 8-K
Form 8-K
* * * * *
B. Events To Be Reported and Time for Filing of Reports
* * * * *
7. If a registrant's report or exhibit to such report relates to
a de-SPAC transaction (as defined in Item 1601(a) of Regulation S-K
(17 CFR 229.1601(a)) and includes projections that relate to the
performance of the special purpose acquisition company or the target
company, the report or exhibit, as applicable, must include the
information required by paragraphs (a) and (b) of Item 1609 of
Regulation S-K (17 CFR 229.1609(a), (b)).
* * * * *
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
that is its predecessor, disclose the information that would be
required if the acquired business or real estate operation that is
its predecessor 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. However, when, at the
time of filing, the predecessor meets the conditions of an emerging
growth company, as defined in Sec. 230.405 of this chapter (Rule
405 of the Securities Act) or Sec. 240.12b-2 of this chapter (Rule
12b-2 of the Exchange Act), the registrant need not present audited
financial statements for the predecessor for any period prior to the
earliest audited period presented in its financial statements
included in a previously filed registration or proxy statement for
the transaction resulting in the loss of shell company status.
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.
* * * * *
[FR Doc. 2024-01853 Filed 2-23-24; 8:45 am]
BILLING CODE 8011-01-P