On January 24, 2024, the U.S. Securities and Exchange Commission (the "SEC") adopted new rules and amendments to existing rules and forms (the "Final Rules") addressing (i) the treatment under the securities laws of special purpose acquisition companies ("SPACs") in connection with their initial public offerings ("IPOs") and their subsequent business combination transactions ("de-SPAC transactions") with target operating companies; (ii) business combinations with shell companies; and (iii) presentation of projections in SEC filings. The SEC had issued proposed rules ("Proposed Rules") on March 30, 2022.1

This Legal Update (i) discusses changes from the Proposed Rules; (ii) summarizes the Final Rules; and (iii) offers key takeaways and practical considerations.

Changes from the Proposed Rules

With limited exceptions, the Final Rules were adopted substantially as proposed. The Final Rules:

  • require increased public disclosures in connection with SPAC IPOs and de-SPAC transactions, such as mandating additional disclosures regarding SPAC sponsors, dilution, SPAC sponsor compensation, factors considered by the SPAC's board in evaluating a proposed business combination, disclosures of any opinion received from a third party regarding the de-SPAC transaction (e.g., a fairness opinion) and additional disclosures about the target company;
  • require new disclosures related to projections in de-SPAC transactions, including requiring disclosure of the purpose for which projections were prepared and who prepared them, all material bases and assumptions underlying the projections and whether the projections continue to reflect the views of the preparer;
  • adopt a new definition of "blank check company" for purposes of the Private Securities Litigation Reform Act of 1995 (the "PSLRA") that renders the PSLRA's the safe harbor for forward-looking statements unavailable for SPACs;
  • require the target company in a de-SPAC transaction to be a co-registrant, which has the significant consequence of imposing potential liability under the Securities Act of 1933, as amended (the "Securities Act") on the target company's directors and executive officers required to sign the registration statement in connection with the registration statement on a Form S-4 or Form F-4 filed in connection with a de-SPAC transaction (the "de-SPAC Registration Statement");
  • require redetermination of smaller reporting company ("SRC") status following completion of a de-SPAC transaction;
  • require the dissemination and public filing of prospectuses and proxy statements at least 20 calendar days prior to a stockholder meeting; and
  • adopt amendments to Regulation S-X intended to align financial statement requirements between IPOs and business combinations.

While the SEC did not formally adopt its proposed Rule 140a relating to statutory underwriter status for investment banks participating in the SPAC IPO, which was arguably the most controversial aspect of the Proposed Rules, the SEC instead sought to substitute the formal rule with guidance on the matter, as we discuss in more detail below. The SEC also did not adopt the proposed safe harbor Rule 3a-10 under the Investment Company Act of 1940, as amended (the "Investment Company Act"), and instead provided guidance in assessing when a SPAC meets the definition of an "investment company" under the Investment Company Act.

Background on SPACs

A SPAC is a shell company that completes an IPO with no business operations of its own. Instead, a SPAC's sole purpose is to identify and consummate a business combination, often called a "de-SPAC" transaction, with a target operating company, a process that the SPAC has a limited time to complete. Upon completion of the business combination, the target operating company effectively becomes a publicly traded company. Because a SPAC has no operations, the disclosure in a SPAC IPO typically focuses on the prior experience of the SPAC's organizers/founders (referred to as "sponsors"), which are expected to find a target company and complete the de-SPAC transaction. Although terms vary from offering to offering, a SPAC IPO typically consists of the sale of units, comprised of one share of Class A common stock and a fraction of a redeemable warrant to purchase one share of Class A common stock. The gross proceeds from a SPAC IPO are placed in a trust account and are generally unavailable to the SPAC prior to consummation of a de-SPAC transaction. Funds in the trust account may be removed only in limited circumstances, primarily if either: (i) the SPAC completes a de-SPAC transaction; (ii) the SPAC seeks permission from its stockholders to amend its charter to extend the time it has to complete a business combination and offers its Class A stockholders the opportunity to redeem their shares; or (iii) the SPAC fails to complete a de-SPAC transaction in the allotted time and dissolves, in which case the funds in the trust account are returned to the public stockholders. Investment banks that underwrite a SPAC IPO typically receive a portion, typically one-third, of their underwriting compensation upon the closing of the SPAC IPO, with the remaining portion payable when, and only if, the SPAC completes the de-SPAC transaction.

The terms of a SPAC's charter typically include a requirement that the SPAC must offer to redeem its Class A shares (though not its warrants) in connection with the consummation of the de-SPAC transaction. The redemption price equals the investor's original investment plus the investor's pro rata share of any interest earned on the funds held in the trust account.

SPAC sponsors typically receive a "sponsor promote" consisting of shares of a separate class of common stock (sometimes referred to as "founder shares") issued prior to the SPAC IPO for a nominal amount and warrants purchased in a private placement consummated simultaneously with the SPAC IPO. The founder shares typically represent 20% of the SPAC's total outstanding common stock after the closing of the SPAC IPO. The number of private placement warrants varies based on the size of the SPAC IPO and the price per warrant paid. The proceeds from the sale of the private placement warrants fund the SPAC IPO expenses and working capital while the SPAC searches for a target company. Once a SPAC identifies a target company with which to combine, the SPAC will often seek to raise additional capital through a private investment in public equity ("PIPE") transaction in order to provide additional cash for the post-business combination company and to mitigate the risk that a significant number of SPAC stockholders will tender their Class A shares for redemption.

Prior to consummating a de-SPAC transaction, a SPAC will seek approval for the transaction from its stockholders using a proxy statement to solicit proxies to be voted at a special stockholder meeting. The proxy statement will describe, among other things, the terms of the business combination as well as how the target company was selected, including the target company's business, results of operations, financial condition, prospects and risks. In many cases, SPACs combine the proxy statement with a prospectus registering securities to be issued in the de-SPAC transaction on a de-SPAC Registration Statement.

If the de-SPAC transaction is approved by the stockholders and the other conditions precedent to the business combination agreement have been satisfied, the SPAC will consummate its de-SPAC transaction shortly after the stockholder meeting and the target company becomes a publicly listed company. Funds from the trust account are released to the target company (net of any amounts returned to investors who tender their Class A shares for redemption and payment of any deferred IPO underwriting fee to the underwriters of the SPAC IPO) and any financing transactions are simultaneously consummated.

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Footnote

1. See Proposed Rules, available at https://www.sec.gov/files/rules/proposed/2022/33-11048.pdf. For a summary of the Proposed Rules, see Mayer Brown Legal Update, SEC Proposes a "Sea Change" Set of New Rules Applicable to SPACs and Other Market Participants (Apr. 4, 2022), available at https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2022/04/sec-proposes-a-sea-change-set-of-new-rules-applicable-to-spacs-and-other-market-participants.pdf?rev=4182e91616e3480381f39d2326623c8b.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.