In the last several days, the SEC has engaged in a skirmish, and possibly an opening battle, against SPACs. A recap follows.
The first shot was fired on March 31, when the Staff of the SEC’s Division of Corporation Finance and the Office of Chief Accountant issued separate public statements about a number of risks and challenges associated with taking private companies public via “deSPAC” transactions.
The CorpFin statement covered a lot of territory, pointing out the following pitfalls, among others, facing companies that go public via a deSPAC. These pitfalls reflect that such companies are subject to rules governing shell companies that do not apply to companies going public through conventional IPOs.
- Financial statements for the target must be filed with an 8-K report within four business days of the completion of the business combination. The usual 71-day extension for such financial statements is not available.
- The combined company will not be eligible to incorporate Exchange Act reports or proxy or information statements until three years after the completion of the business combination.
- The combined company will not be eligible to use Form S-8 for the registration of securities issuable under compensation and benefit plans until at least 60 calendar days after the combined company has filed current Form 10 information. (This information is customarily included in a “Super 8-K” filed within four business days after closing of the deSPAC transaction.)
- For three years following the completion of the deSPAC transaction, the company will be unable to use some streamlined procedures for offerings and other filings, such as using a free-writing prospectus.
The statement also reminds companies that public issuers are required to maintain accurate books and records as well as internal control on financial reporting – both areas that have been the basis for enforcement actions by the SEC.
The statement issued by the Office of Chief Accountant has a somewhat more benign tone, but the substance is just as cautionary. Specifically, it notes that “once a target company is identified, the [deSPAC] merger can occur within just a few months, triggering a number of… reporting and listing requirements” and that it is “essential that target companies have a comprehensive plan in place to address the…demands of becoming a public company on an accelerated timeline.” It also cautions that the newly public company needs to “have personnel and processes in place to produce…financial reporting that is in compliance with all SEC rules and regulations”. And it notes the importance of sound corporate governance, including a board comprised of members with appropriate skills who are familiar with their responsibilities and fiduciary duties, as well as a vital audit committee.
Finally (so far), on April 8, John Coates, Acting Director of the SEC’s Division of Corporation Finance (and presumably the permanent head of CorpFin once new Chairman Gensler is seated), issued his own public statement on deSPAC transactions. Coates notes, and generally blows a hole through, the theory that deSPAC transactions entail a lesser degree of liability – specifically, for projections – than a “conventional” IPO. He states that the presumed reduction in exposure results from the Private Securities Litigation Reform Act safe harbor for forward-looking information, but that
“[a]ny…claim about reduced liability exposure for SPAC participants is overstated at best and potentially seriously misleading at worst. Indeed, in some ways, liability risks for those involved are higher, not lower, than in conventional IPOS due…to the potential conflicts of interest in the SPAC structure.”
The presumption of reduced liability for deSPACs is based on the view that (a) the PSLRA excludes initial public offerings but that (b) a deSPAC is not an IPO. However, Coates makes it clear that the term “initial public offering” is not defined in the PSLRA and that any differences between a deSPAC and an IPO are not meaningful.
It seems possible and perhaps likely that we will continue to see broadsides urging caution to SPAC sponsors and investors alike. And it’s not too soon (or too much) to think about possible formal rulemaking, enforcement actions, or both. Watch this space!