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SPAC IPOs
The final rules provide SPAC IPO investors with additional information about the SPAC structure, financing arrangements, planned de-SPAC timeline, risks, and governance, including disclosures about:
- The SPAC sponsor – relevant experience, expected role, compensation arrangements, conflicts of interest, and other items
- Possible future shareholder dilution in connection with SPAC life cycle activities
Crowe observation: As a SPAC does not conduct ongoing business activities, the SEC final rules suggest the new disclosure requirements are important for assessing a SPAC’s prospects of success and might be relevant in assessing the risk and market value of a SPAC’s securities.
De-SPAC transactions
Similar to SPAC IPO disclosures, the final rules require filings for de-SPAC transactions to include information about the SPAC sponsor (for example, compensation arrangements and conflicts of interest) and shareholder dilution associated with the de-SPAC transaction. The final rules also:
- Codify existing staff practice for de-SPAC target company financial statements, including audit requirements, age of financial statements, and predecessor financial statements
- Require disclosure (when mandatory in the jurisdiction where the SPAC is organized) of the board of directors’ (or similar governing body’s) conclusion of whether the specific de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, including the material factors considered (for example, valuation of the target, projections used, financing terms, and any third-party appraisal or similar report) in the determination
- Specify additional nonfinancial disclosures of the target company, including description of business, description of property, legal proceedings, security ownership, recent sales of unregistered securities, changes in accountants, and disagreements with accountants on accounting and financial disclosure
Crowe observation: The SEC final rules are intended to provide SPAC investors the same disclosures and other protections for a de-SPAC transaction afforded by the Securities Act of 1933. The new disclosures also help investors evaluate the reasons for a de-SPAC transaction and for choosing a particular structure and financing for the transaction.
Use of projections and other forward-looking statements
The final rules update and modernize the SEC’s current view on the use of projections in any SEC filing and include new requirements for projections presented in de-SPAC transactions. Updates affecting the use of projections in all SEC filings include the following:
- Projections not based on historical results must be clearly distinguished from those that are.
- Projections based on historical results should be presented with prominence equal to or greater than those that are not.
- Projections that include a non-GAAP financial measure must clearly define the measure, explain why it was used instead of a GAAP measure, and describe the most directly comparable GAAP measure.
Specific to SPAC transactions, the final rules:
- Require additional disclosures about projections such as their purpose, a description of the material bases and assumptions, who prepared them, and whether the projections reflect the view of the SPAC and private operating company management about future performance
- Remove the ability of SPACs to use the safe harbor from liability for forward-looking statements, including for any projections of the de-SPAC target company
Crowe observation: The SEC final rules note that the removal of safe harbor for forward-looking statements might incentivize the same level of care in preparing projections and other forward-looking statements for de-SPAC transactions as in traditional IPOs.
Other matters
Disclosures are not the only aspects of SPAC and de-SPAC transactions the final rules affect. The final rules:
- Deem the target company a co-registrant in a de-SPAC transaction registered under the Securities Act of 1933, which subjects the target company executives to legal liability for material misstatements or omissions in the registration statement
- View any business combination involving a shell company (whether or not it is a SPAC) to be a sale of securities to the shell company’s shareholders
- Provide guidance on:
- When a party to a de-SPAC transaction would be considered an underwriter
- Analyzing whether a SPAC is an investment company under the Investment Company Act of 1940
Crowe observation: The SEC final rules result in possible legal liability for numerous parties involved in the SPAC life cycle that did not exist under prior rules.
- Require redetermination of smaller reporting company (SRC) status following consummation of a de-SPAC transaction, which is effective for filings 45 days after completion of the de-SPAC transaction
Crowe observation: In situations where a de-SPAC entity determines it is no longer an SRC, any new registration statement filed prior to the entity’s first annual report on Form 10-K will result in incremental disclosure requirements and financial statement periods compared to the information included in the de-SPAC transaction filings.
- Require a minimum 20-day dissemination period for security holder communication materials in connection with de-SPAC transactions including prospectuses, proxy, or information statements
- Mandate certain structured data extensible business reporting language (XBRL) requirements
Compliance dates
The final rules will become effective 125 days after the publication in the Federal Register, with structured data requirements effective 490 days after publication.
Takeaways
- As outlined in the SEC final rules, SPAC activity has decreased substantially from the heights of 2020 and 2021, with only 31 SPAC IPOs completed during 2023 versus 613 in 2021. The decrease in SPAC activity likely resulted from enhanced regulatory scrutiny, uncertain market conditions, and elevated shareholder redemptions.
- While SPACs will remain a potential avenue for a company to access public capital markets, the additional requirements and costs associated with the new rules, which are acknowledged in the final rule’s economic analysis, might make SPACs a less attractive path. Some private companies might consider the traditional IPO route a more desirable alternative.
Crowe observation: A company planning to go public should consider its public company readiness and can learn from others that have previously gone down that path.
