US Securities and Exchange Commission: Open Meeting
US Securities and Exchange Commission
Open Meeting
Wednesday, January 24, 2024
Topline
- The rulemaking was approved by a vote of 3-2, with Chair Gensler, Commissioner Crenshaw, and Commissioner Lizarraga voting yes and Commissioners Peirce and Uyeda in opposition.
ITEM 1: Special Purpose Acquisition Companies, Shell Companies, and Projections
The Commission considered whether to adopt new rules and amendments to enhance disclosures and provide additional investor protections in initial public offerings by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and target companies (de-SPAC transactions), and to address investor protection concerns more broadly with respect to shell companies.
Staff Discussion
Erik Gerding, Director, Division of Corporation Finance, SEC
Gerding recommended that the Commission adopt rules governing shell company business combinations more broadly, citing that when successfully merged, SPACs conduct a business combination with a private company target in what is essentially an IPO for that target company. He said that consideration of these rules will strengthen the investor protections around SPACs and explained that staff recommendations are designed to strengthen investor confidence in a stock market. Gerding closed by recommending the Commission adopt rules to address shell company business combination in transactions more generally and adopt rules to enhance disclosures and investor protections and connection with the use of projections.
Mark Saltzburg, Senior Counsel, Division of Corporation Finance, SEC
Saltzburg explained how an important goal of several of the final rules is to align the rules that apply to de-SPAC transactions with disclosures and investor protections in traditional IPOs. He recommended that the Commission adopt new Subpart 1600 of Regulation S-K that would require additional disclosures regarding SPAC sponsors, SPAC Sponsor compensation, conflicts of interest and dilution. Saltzburg also recommended that there be revised definitions of smaller reporting companies’ status following the completion of a de-SPAC transaction and an amendment to Regulation S-X that would align more closely the financial statement reporting requirement in business combination transactions involving shell companies with those in traditional IPOs to enhance disclosures and investor protections in connection with the use of projections. He closed by asking the Commission to not adopt the proposed Securities Act Rule 140a and proposed Investment Company Act Rule 3a-10 and urged the Commission to provide guidance in two areas: guidance to assist SPACs in assessing their status under the Investment Company Act of 1940 and guidance regarding statutory underwriter status under the Securities Act of 1933 in connection with de-SPAC transactions.
Jessica Wachter, Director, Division of Economic and Risk Analysis (DERA), SEC
Wachter explained how SPACs emerged in the 2010s as an alternative to the traditional means of accessing public markets. She went on to say that 10 years after the emergence of SPACs, their use exploded in 2021. She said the rules being considered will protect investors by requiring additional disclosures in certain key areas regarding SPACs, and that the specific rules regarding co-registration will also align liability to the target in a de-SPAC transaction with liability that may apply in a traditional IPO. Wachter acknowledged that there will be costs to these rules, such as potential reductions in forward-looking statements appearing in de-SPAC transactions and noted that the rules may cause companies to turn to traditional IPOs and may lead some companies that may have gone public to avoid public markets. She closed by reassuring the Commission that staffers expect that these rules will promote greater trust in public markets.
Commissioner Questions and Comments
Commissioner Hester Peirce
Peirce explained that the Commission could have undertaken a more meaningful project to assess and address the causes of the troubling dearth of public companies and failed to identify a problem in need of a regulatory solution with this rule. She said the final rules will increase costs and could harm investor protection by potentially rushing the completion of SPAC transactions. Peirce also noted that the rules would risk altering voting behavior by requiring disclosure for director votes on the approval of de-SPAC transactions. She criticized the Commission for failing to appreciate or accommodate the unique characteristics of vibrant small companies and said that the rules being considered flatten the landscape between small and large companies with an indiscriminate and inflexible set of regulations for SPACs. Peirce also suggested that the SEC seek to better understand the causes of the decline in IPOs. She closed by warning her fellow Commissioners that if they don’t turn the tide, the costs of going public are likely to continue to rise.
Peirce asked Gerding if there any benefits of going public through a SPAC instead of a traditional IPO worth preserving. Gerding said that there are merits, but this rule does not make any distinction in the merits of the route to go public. He went on to say that strong investor protections should be present in every form, whether the choice made is to go public for a SPAC or through a traditional IPO.
She also pressed Gerding on how these rules would impact small businesses and asked why the SEC isn’t more open to helping small companies. Gerding said the disclosure rules will apply to small and large companies, and that there is a smaller reporting company redetermination provision that has changed since the proposing rule.
Peirce asked if there are concerns that the Private Securities Litigation Reform Act (PSLRA) revisions and new projection disclosures could cause issuers to release overly pessimistic projections to avoid releasing projections that they otherwise would have released. Gerding said there are no concerns.
Peirce then asked if the rule is an appropriate use of the SECs authority under the PSLRA. Gerding said that this was an appropriate use of authority.
Commissioner Caroline Crenshaw
Crenshaw discussed how these rules are still needed, and responded to Peirce’s concerns by saying the SEC is not seeking to regulate on the merits based on the rise in SPAC offerings and noted that the proposed rule reiterates an existing test for determining whether an entity meets the definition of an investment company. She also stated that the purpose of Section 11 liability is to protect investors and that all participants in SPAC transactions should be aware that the analysis under the existing law is dependent upon the facts and circumstances. Crenshaw closed by stating that the US public markets remain the envy of the world because of thoroughness and reliability of the processes the US has in place which allows for companies to access the public’s hard-earned dollars.
Commissioner Mark Uyeda
Uyeda disagreed with Crenshaw and described the rules as burdensome disclosure regulations on SPACs as a form of merit regulation. Uyeda said that he thinks that the SEC simply does not like SPACs and is trying to regulate them to death. He brought up Regulation AB and how no registered mortgage-backed securities have been offered since the SEC implemented Regulation AB in 2014. He said that the current SPAC market is a shell of its former self and that the final rules would only continue to shrink the market by imposing rigorous and expansive requirements from nearly every corner of federal securities laws on SPACs and any related de-SPAC transaction. Uyeda said that the rules will result in fewer opportunities for companies to access our public markets and fewer opportunities for people to make investments. He also mentioned that under this guidance, any SPAC that allocates any portion of its assets to investment securities triggers investment companies status concerns, even if it complies with the timeframe of completion. Uyeda closed by describing the rules as an inappropriate tactic from the SEC, and that the effects of the investment company guidance could raise serious legal and compliance issues across a wide array of issuers.
Uyeda asked Gerding if the rule would be considered successful if there are no SPAC offerings after its implementation. Gerding reiterated that they are not looking to get rid of SPACs, but to create the same or similar investor protections through disclosures regarding SPACs.
He then asked Gerding whether a SPAC at the IPO stage should disclose all the targets they are thinking about, observing that the SPAC to de-SPAC timeframe will be much compressed under the rules. Gerding said that usually the SPAC does not know what targets it is considering at the IPO stage. Gerding said that the de-SPAC stage is when there is information about the target company. He said that SPACs should disclose material information and that if they know their targeted companies at the IPO time, that would appear to be material information that should be disclosed.
Uyeda then discussed that he thinks tightened timeframes and lack of clarity will be concerning for current and future SPACs. Uyeda then brought up concerns regarding the investment company guidance and what the Division of Enforcement relies on for enforcement actions. Thoreau Bartmann (Co-Chief Counsel of the Division of Investment Management, SEC) responded that he would not speak for the Division of Enforcement but that any enforcement actions would be based on the Investment Company Act.
Uyeda then asked how the Division of Investment Management would respond if, after the enactment of the rule, the Division of Enforcement decided to a “total sweep” of existing SPACs. Bartmann responded that they would apply the analysis from the rule to the SPACs.
Commissioner Jaime Lizarraga
Lizarraga agreed with Crenshaw and noted that under current practice, investors face informational disadvantages when evaluating whether to invest in companies that raise capital through a SPAC structure instead of a traditional IPO. He said the rule will better protect retail investors who choose to invest in such vehicles and that it will provide investors with better information to evaluate the merits of de-SPAC transactions. Lizarraga also recognized that a key protection in the final rule is aligning SPACs treatment of financial projections with traditional IPOs and said that it will level the playing field for retail investors since SPACs will be more likely to exercise the appropriate care to avoid unreasonable forward-looking projections. He concluded that the reforms would increase transparency and market efficiency and empower investors to make more informed investment in voting decisions.
Chair Gary Gensler
Gensler began his remarks by expressing his support for the rules. He recognized that just because a company uses a different method to go public does not mean that its investors are any less deserving of time-tested investor protections. Gensler also noted that things could change in the future, and that this adoption would help ensure that the treatment of SPACs substantially align with those of traditional IPOs, which will overall enhance investor protections. Gensler said that what has developed with SPACs is regulatory arbitrage. He also said that the rules remove what’s called a “safe harbor” about future projections in de-SPACs. Gensler said that the Commission is merit neutral, noting that he thinks that regardless of what it is, investors benefit from disclosure. He rebutted Uyeda and Peirce’s doubts about the future of SPACs by noting that SPACs will still exist, but that this rule protects investors by requiring additional disclosures. He closed by saying these rules will help protect investors by addressing information asymmetries through disclosure.
Peirce added that she hopes that the commission can do a three- or five-year retrospective on whether there are still SPACs.
Gensler noted agreement with Peirce, saying that it is important to constantly reassess as models start to change. He noted that this is part of the reason for the rule.
Vote
Chairman Gensler called the role. The item was approved 3-2. Peirce and Uyeda voted no.
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