IPOs

SPACs: Will They Rise Again?

In January, the Securities and Exchange Commission (“SEC”) approved final rules regarding special purpose acquisition companies (“SPACs”). The rules were first proposed back in March 2022. After nearly two years, and two separate comment periods, the final rules come at a time when SPAC market activity has dropped significantly since the gold rush days of 2021-22. Even so, there is a case to be made this new SPAC 2.0 template will not just survive, but actually improve the quality of companies coming to public markets via the SPAC process. Thanks to these new regulations, the days of sketchy SPAC sponsors, rubber stamp IPOs and even sketchier mergers may be a thing of the past.

Enhanced Disclosures

The final rules address a number of topics, including enhanced disclosure requirements for both the SPAC initial public offerings (IPO) and business combinations between the SPAC IPO and a target company known as a de-SPAC merger (de-SPAC). CFA Institute offered extensive recommendations on what issues need more detail and prominence in SPAC IPO documentation. In fact, CFA Institute’s working group report entitled THE NEW AGE OF SPECIAL PURPOSE ACQUISITION COMPANIES: What Investors Should Know was referenced numerous times in the SEC’s final rule including repeated references to CFA recommendations for a separate Key Risks and Conflicts Form so that disclosures are featured to improve investor attention and focus. 

Key IPO Disclosure Improvements

The new rules require additional disclosure in the SPAC’s IPO registration, and support the views of CFA Institute, including;

  • Lock Ups and Conflicts. Increased disclosures of any lock-up agreements applicable to the SPAC sponsor or identified anchor investors; material conflicts of interest; and more clarity on the sources and amounts of dilution that may affect a SPAC public investor.
  • SPAC Sponsor Capacity. Concerns arose over whether SPAC public investors were receiving appropriate detail about how many other SPACs the sponsor was involved in. The gold-rush SPAC culture in 2021-22 lead to many “serial” sponsors, where they would be involved in several SPAC IPOs and merger transactions at the same time. This created conditions where the sponsor’s time, attention and allegiances to individual SPACs in their portfolio could be compromised. The SEC agreed with CFA Institute’s recommendation to require full disclosure of a sponsor’s pending SPAC obligations at the time of any new SPAC IPOs.
  • Identity and Experience of Sponsors and Key Investors. A primary concern for investor protection has been the lack of detail about the key personal of the sponsor and key investors behind the SPAC IPO. We argued that SPAC disclosures must include more thorough information about the experience and track record of these players, not unlike the information provided by general partners in private equity funds.

Key Disclosure Improvements for de-SPAC Mergers

The key moment for any SPAC IPO and its investors is when the SPAC identifies and merges with an operating company. This de-SPAC transaction was another area where additional disclosures were identified in the CFA Institute recommendations to upgrade the detail and quality of information about the proposed merger, including:

  • Compensation for Closing a de-SPAC. The nature and amount of any and all compensation that will go to the SPAC sponsor, advisors or other promoters of the de-SPAC should be fully detailed.
  • New Lock Ups or Redemption Waivers. Any agreements between the SPAC sponsor and unaffiliated security holders such as new anchor and PIPE investors as to lock ups or waiver of redemption rights in SPAC shares must be disclosed.
  • Business Reasons for the de-SPAC. Expanded information and details as to the business reasons why the SPAC and target company are proceeding with the de-SPAC merger is now required.
  • Fairness Opinion Optional. The SEC now requires details as to whether a SPAC board opined on the fairness of the de-SPAC and whether it is in the best interests of the SPAC shareholders. However, the final rule backed away from requiring a formal “fairness opinion” from the SPAC sponsor in response to concerns raised by CFA Institute and others, that such a move would disadvantage SPACs, not level the playing field with typical

Use of Forward-Looking Projections

A very contentious issue was whether projections and forward-looking forecasts about the de-SPAC merger should have protection from liability under the Private Securities Litigation Reform Act (PSLRA safe harbor). Regular IPOs do not have this safe harbor and the SEC decided to remove it for de-SPAC registration documents to level the playing field.

The SEC specifically referenced the CFA Institute comment that “too many of these de-SPAC forward-looking statements are an exercise in creative writing, baseless hype and embellishment.” And the SEC also acknowledged our concern that the new higher liabilities on forward-looking information may chill essential disclosures and leave investors without key information. In the new rules, the SEC recognized our call to “monitor the effects of the safe harbor removal for de-SPACs on the availability and quality of forward-looking information critical for SPAC investor decisions on merger approval votes and exercising redemption rights.”

Conclusion

The new SPAC 2.0 template constitutes a significant upgrade to investor protection and greater transparency around the entire SPAC process. Even though many observers wonder if the new rules even matter at this point given the precipitous decline in SPACs, we welcome these improvements that upgrade the structure and preserve the SPAC vehicle as a useful tool for capital formation. While these new protections are not without cost, the SEC backed away from several of the most aggressive regulations as first proposed. The new rules will encourage sponsors who are more experienced, better resourced and who are more skilled at finding potential de-SPAC partners that are truly ready for public markets. Higher quality SPACs don’t just improve markets, they improve opportunities for investors.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Paul Andrews

Paul Andrews is Managing Director for Research, Advocacy, & Standards for CFA Institute. Paul is also a current member of the CFA Institute Systemic Risk Council. Previously he was Secretary General of the International Organization of Securities Commissions (IOSCO) where he served two terms.

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