SEC commissioners on a 3-2 vote today imposed sweeping changes on the regulatory landscape governing SPACs.
The biggest change would be removing “safe harbor” protections that currently allow companies being acquired by SPACs to provide more forward-looking projections than are allowed for traditional IPO issuers.
Chairman Gary Gensler said the goal is to level the playing field so SPAC rules more closely follow rules for other companies pursuing an IPO. He was among the three commissioners who voted in favor of the new regulations.
The new rules and amendments require, among other things, enhanced disclosures about conflicts of interest, SPAC sponsor compensation, dilution, and other information that is important to investors in SPAC IPOs and de-SPAC transactions. The rules also require registrants to provide additional information about the target company to investors that will help investors make more informed voting and investment decisions in connection with a de-SPAC transaction.
SPACs represented 43% of all IPOs in 2023 and more than half of all IPOs in each of the preceding three years. While the SPAC market has cooled substantially, Commissioner Hester Peirce raised concerns that the SEC’s actions could kill it off entirely.
Among the key provisions:
- The rules also require additional disclosures regarding SPAC sponsors, their financial interest and compensation as well as dilution. Disclosures of analysis by third-parties regarding deSPAC transactions will likewise be required.
- A target company would be a co-registrant with the SPAC and assume equal responsibility for disclosures.
- Certain safe harbor protections would no long apply to SPACs.
- Greater clarity for initial investors on how the addition of PIPE financing may impact dilution.
- Forward-looking statements would not be included under safe harbor protections. The commissioners openly acknowledged that this may reduce the appeal of going public via a SPAC.
Commissioner Peirce said the new SPAC rules would have a mostly negative effect on blank-check firms while doing nothing to address the rising costs to companies seeking to go public.
“Today’s action will render SPACs much less useful as a tool for accessing the public markets,” she said.
Overall, the rules fail to address the real needs of smaller companies seeking to access the public markets, she added.
Commissioner Caroline Crenshaw said SPACs should be considered investment companies subject to the rules of the Investment Company Act of 1940.
Commissioner Mark Uyeda, who along with Peirce voted against the new regulations, noted the proposals cover some 600 pages.
“The commission seeks to impose crushing regulations,” he said. And the SEC had an opportunity to address concerns more than two years ago during the SPAC boom, he added.
Disclosures for deSPAC transactions would be broader than for traditional M&A deals, he noted.
Citing one example, a SPAC’s board members voting against a transaction must now be identified – which Uyeda said is not required for any other public company.
Financial disclosures would now be required from “essentially everyone with a title,” Uyeda said.
The new regulations impose a one-year time frame for a SPAC to register as an investment company.
SEC staff insisted that the goal is to provide the same protections to investors as traditional IPOs.
Gensler at one point paraphrased Aristotle, saying, “I think we should treat alike alike.” In other words, SPACs should have to follow the same rules as companies pursuing a traditional IPO, he said.
“We shouldn’t have a pecking order that one approach to going public has less disclosure than another approach,” Gensler said.
The full regulatory package will be published in the Federal Register.
