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SEC Open Meeting

Securities and Exchange Commission

Open Meeting

Wednesday, March 30, 2022

Topline

  • The Commission voted 3-1 to propose amendments for SPACs, shell companies, the use of projections in SEC filings and a rule addressing the status of SPACs under the Investment Company Act.
  • The comment period is 30 days after publication in the Federal Register or May 31 (which is 60 days after issuance), whichever is later.
  • Commissioner Peirce suggested that the Commission could improve the IPO process, and Commissioner Lee expressed concern over the proposed safe harbor under the Investment Company Act.

ITEM 1: Special Purpose Acquisition Companies, Shell Companies, and Projections

The Commission voted 3-1 to propose amendments regarding special purpose acquisition companies (SPAC), shell companies, the use of projections in Commission filings and a rule addressing the status of SPACs under the Investment Company Act of 1940.

Staff Discussion

Renee Jones introduced the proposal recommending enhancements for SPAC transactions, including initial public offerings (IPO) and subsequent business combinations, in addition to rules governing shell companies more broadly. She then defined SPACs and explained the surge in SPAC IPOs in recent years, causing investor protection concerns over conflicts of interest, compensation, dilution of shares, and disclosure adequacy. She also discussed concern over the Investment Company Act’s application to SPACs and the proposal’s shell company business transaction rules.

Charles Kwon summarized five categories under the proposal: (1) proposals set forth for specialized disclosure requirements and IPOs and subsequent business transactions between SPACs and private operating companies; (2) proposals to align more closely disclosures and legal obligations with those of traditional IPOs; (3) proposals to address business combinations involving shell companies more generally and specifically de-SPACs; (4) proposals to address the use of projections in Commission filings generally; and (5) proposals to create a new safe harbor for SPACs under the Investment Company Act of 1940. He explained each category, including how: under the first category, the Commission would add new subpart 1600 to Regulation S-K to set forth specialized disclosure requirements for SPAC IPOs; under the second category, the Commission would amend the registration forms and schedules filed in connection with de-SPAC transactions to require additional disclosure about the private operating company and amend the definition of smaller reporting companies to require a re-determination of smaller reporting company status following the completion of a de-SPAC transaction; under the third category, the Commission would deem any business combination of a reporting shell company involving a non-shell company entity to include a sale of securities to the reporting shell company shareholders; under the fourth category, the Commission would enhance the reliability of projection disclosure in Commission filings by amending Item 10(b) of Regulation S-K; under the fifth category, the Commission would provide a safe harbor from the definition of investment company under the Investment Company Act.

Jessica Wachter discussed SPACs’ new prevalence in capital markets, and concerns of information asymmetry, moral hazard, potential harm to investors, and decreased willingness to invest. She then explained that the complex SPAC structure causes confusion for investors and that additional disclosures would benefit unaffiliated investors. She added that the proposed rules would clarify application of the Private Securities Litigation Reform Act (PSLRA) safe harbor, leading to more care taken in forward looking statements and filings and highlighted that the line between a SPAC and an investment company is blurry.

Commissioner Discussion

Commissioner Hester Peirce stated that the proposal seems designed to stop SPACs and makes sweeping interpretations of the law. She then expressed her opposition to the proposal and further stated that the typical SPAC could not meet the proposal’s standards without significant changes to its operations, economics, and timeline. She next outlined a series of other substantive changes under the proposal including: (1) requiring a SPAC to state whether it reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to unaffiliated security holders of the SPAC; (2) deeming target companies to be co-registrants at the de-SPAC stage; (3) eliminating the availability of the PSLRA safe harbor for forward-looking statements in de-SPAC transactions; (4) imposing underwriter liability on SPAC IPO underwriters by deeming many of them to be underwriters at the de-SPAC stage; and (5) establishing a non-exclusive safe harbor for SPACs under the Investment Company Act. Peirce then discussed proposed changes to shell company business transactions, encouraged market participants other than SPACs that may be affected by the proposal to provide comments, and declared that the Commission needs to do a better job of drawing attention to releases that have broader market effect than their headlines may suggest to ensure robust public participation in the comment process. She concluded by stating that it is not the Commission’s place to decide that SPACs are good or bad, that the Commission needs to do the disclosure work and let the markets sort out whether and if substantive changes are needed in the SPAC and de-SPAC process, and that the proposal does not adequately account for the potential cost of damming up the SPAC river. Peirce closed by suggesting that the current IPO process could be improved.

Commissioner Allison Herren Lee discussed the rise of SPACs and said SPAC transactions are governed for regulations designed for more traditional IPO structures. She highlighted questions around compensation, incentives, conflict of interest, absence of traditional investor protections, liability, and shareholder vulnerability. She then discussed enhanced transparency and accountability under the proposal. Despite her support for the larger proposal, Lee expressed concern about the proposed safe harbor under the Investment Company Act, adding that it was not clear whether SPACs that meet the conditions of the proposed safe harbor should nevertheless be exempted from the investor protections of the Investment Company Act.

Commissioner Caroline Crenshaw stated the proposed rules would enhance disclosures and reporting so that investors are better informed about the complexities of using the SPAC method to accessing public markets and the factors that impact their SPAC investment. She added that the proposals amend existing rules, offer guidance, and contemplate new rules to bring protections afforded to investors in the traditional IPOs to de-SPACs. She also asked William Birdthistle what the proposed rules would mean for SPACs when they assess whether or not they are investment companies. Birdthistle responded that SPACs able to satisfy the conditions of the safe harbor with respect to their activities, the holdings of their portfolio, and the duration of their project would enjoy certainty with respect to their situation and added that SPACs that do not satisfy those conditions should consult with their advisors and carefully consider their compliance obligations.

Commission Chair Gary Gensler said the proposal would strengthen disclosure, marketing standards, and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional IPOs. He outlined the proposal, including: (1) the addition of specialized disclosure requirements regarding, among other things, SPAC sponsors, conflicts of interest, SPAC target IPOs, and dilution; (2) the requiring of additional non-financial disclosures about the target private operating company during the SPAC target IPO; (3) the requirement that disclosure documents in SPAC target IPOs generally be disseminated to investors at least 20 calendar days before shareholders would have to vote to approve the transaction; and (4) the alignment of financial statement requirements with those of traditional IPOs for business combinations between a public shell company and a private operating company, including for SPAC target IPOs. He then summarized the marketing practice requirements, which would: (1) amend the definition of “blank check company” to encompass SPACs, such that the Private Securities Litigation Reform Act (PSLRA) safe harbor would not be available to SPACs regarding projections of target companies; (2) update the Commission’s views on disclosure of projected financial information; and (3) require additional disclosures regarding the use of projections in SPAC target IPO transactions. Gensler next summarized the gatekeeper and issuer piece of the proposal, including: (1) subjecting a target company and its signing persons to liability for a SPAC target IPO registration statement filed by a SPAC; (2) deeming any SPAC blank-check IPO underwriter that takes steps to facilitate a SPAC target IPO or any related financing transaction to be an underwriter in the SPAC target IPO; and (3) requiring that any business combination of a public shell company with a non-shell company entity be deemed a sale to the shell company’s shareholders subject to the Securities Act. Lastly, he discussed the safe harbor for SPACs that meet certain investor protection conditions. Gensler concluded by stating that the SPAC target IPO is being used as an alternative means to conduct an IPO and that, as a result, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.

 

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.

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