On January 24, 2024, the U.S. Securities and Exchange Commission (SEC) announced the adoption of new rules and amendments (the Final Rules) intended to enhance disclosures and provide additional investor protection in initial public offerings (IPOs) by special purpose acquisition companies (SPACs) and in subsequent business combination transactions between SPACs and target companies (de-SPAC Transactions). The Final Rules are substantially similar to those originally proposed on March 30, 2022, and in many ways seek to align the disclosure regime and legal liability of SPAC IPOs and de-SPAC transactions, with those of traditional IPOs.

Background

Since their height in 2021, SPAC IPOs and private companies seeking to enter the public markets through a de-SPAC transaction have markedly decreased, respectively. Many commentators and market participants attribute such decrease to unfavorable market conditions, as well as increased regulatory oversight, among other factors. Nevertheless, the number of SPAC IPOs and de-SPAC transactions remains significant relative to non-SPAC IPOs, and as a result, the Final Rules are reflective of the SEC’s intent to treat SPACs as an alternative method to an IPO, as opposed to operating on the margins of the SEC’s regulatory framework.

Enhanced Disclosure Requirements

As part of the Final Rules, the SEC adopted new Subpart 1600 of Regulation S-K that sets forth specialized disclosure requirements for SPAC IPOs and de-SPAC Transactions, which contains provisions that, among other things:

• Require additional disclosures about the SPAC sponsor (e.g., experience, responsibilities, interests, rights, compensation), potential conflicts of interest, and potential sources of dilution that investors may experience (e.g., redemptions, SPAC sponsor compensation, PIPE financings, warrants, convertible securities); 
• 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, including the manner with which the SPAC will identify and evaluate potential business combination candidates, the proposed timeline of the SPAC to consummate a de-SPAC transaction, redemption terms, compensation of the SPAC sponsor team, and potential conflicts of interest; 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 interest 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.

Expansion of Liability

Another feature of the Final Rules is the expansion of Section 11 liability ¹ under the Securities Act of 1933 (the Securities Act) for target companies in a de-SPAC transaction. Historically, the 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. The Final Rules will now require that the target company and its related signatories sign the registration statement on Form S-4 (or Form F-4), thus deeming the target company a “co-registrant”. As a result, target companies will now be exposed to Section 11 liability. The SEC’s rationale for subjecting a target company to Section 11 liability is to more closely align de-SPAC transactions with traditional IPOs, and to further incentivize the target company to disclose higher quality information about its financial condition and future prospects.

In addition, the Final Rules adopt a new definition of “blank check company” under the Private Securities Litigation Reform Act of 1995 (the PSLRA). The result of this new definition will be that 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 definition of “blank check company.”

Notably, the SEC declined to adopt proposed Rule 140a, which would have considered 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 as an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act. Instead, the SEC provided guidance to reinforce the SEC’s historical practice of applying the statutory terms “distribution” and “underwriter” broadly and flexibly, as the facts and circumstances of any transaction may warrant.

Enhanced Projections Disclosure

The Final Rules amend Item 10(b) of Regulation S-K to expand and update the factors to be considered in formulating and disclosing management’s projections of future economic performance applicable to filings made with the SEC. While such projections included in filings must continue to have a reasonable basis, registrants will now be required to clearly distinguish projected measures that are not based on historical financial results or operational history from such projections that are. The SEC further states that it 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. Specifically with respect to de-SPAC transactions, registrants will now be required to provide disclosure in SEC filings that includes the purpose for including projections, the party that prepared the projections, the material bases to such projections, and whether the disclosed projections reflect the view of the board or management of the SPAC or target company, as applicable.

Re-Determination of Smaller Reporting Company (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 on 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. The effect of this rule is that it more closely aligns a post-combination company’s disclosure to that which is applicable in a traditional IPO setting, and substantially shortens the time period with which a post-combination company needs to make such a determination, which under the previous rules, could extend up to 18 months in certain scenarios.

Compliance Date

The Final Rules will become effective 125 days after publication in the Federal Register. Compliance with the structured data requirements (which require tagging of information disclosed pursuant to new Subpart 1600 of Regulation S-K in Inline XBRL) will be required 490 days after publication of the Final Rules in the Federal Register.

What’s Next?

It is unclear as to what effect the Final Rules will have on SPAC activity in the coming months and beyond. The Final Rules have largely been expected by market participants, and as such, many SPACs had preemptively begun to include many of the features of the Final Rules into their SEC filings. Ice Miller will continue to monitor the developments of SEC rulemaking in this area.

For more information relating to this topic, please reach out to Stephen Hackman, Pierce Haesung Han, Connor Skelly or any other Ice Miller attorney.

^{[1] Section 11 liability refers to Section 11 of the Securities Act, which allows purchasers of a security in a public offering to bring a civil action against the issuer, underwriter, or anyone who signed or helped prepare the registration statement for any misrepresentations in the registration statement.} 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.