The U.S. Securities and Exchange Commission (SEC) recently issued proposed rules governing SPACs (special purpose acquisition companies) that would, among other things, increase SPAC disclosure requirements in an effort to protect investors.
Since their boom in 2020, SPACs have had a tumultuous history riddled with low-performance post-merger and an array of shareholder litigation. The SEC intends for the proposed rules to provide additional investor protections during SPAC IPOs and during the merger with a private target company (de-SPAC transaction) and more fully parallel the de-SPAC transaction regulations with those of a traditional IPO.
The proposed rules would (i) increase disclosure requirements; (ii) subject target companies and underwriters to potential liability; (iii) eliminate the safe harbor for future projections; and (iv) provide clarification on steps SPACs can take so as to not be considered an investment company, as discussed below:
While the increase in disclosure requirements was expected based on prior guidance from the SEC, the additional rules regarding liability to target companies and underwriters, as well as, the elimination of the safe harbor for projections, may deter private companies and investment banks from participating in SPACs going forward. Additionally, the clarification on whether a SPAC constitutes an investment company may prove to have an effect on current shareholder litigation in which shareholders allege SPACs acted as an investment company and should be subject to more regulation. While not yet final, the proposed rules provide insight into current SEC thinking on SPACs and how they should be regulated going forward.
Public comments will be accepted for 60 days following publication of the proposing release on the SEC’s website or 30 days upon publication of the proposing release in the Federal Register, whichever is longer.
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