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Regulation

SEC votes to ramp up SPAC regulation

An SEC vote to increase SPAC-related disclosures spurs debate over the future of blank-check companies.

In a Wednesday vote, the Securities and Exchange Commission approved a set of sweeping rules and amendments related to special purpose acquisition companies.

The new regulations will increase disclosure requirements for SPAC sponsors in an effort to protect investors, but industry players also believe the ruling will have a stifling effect on the already-shrunken pipeline of blank-check companies taking private firms to the public markets.

The decision came nearly two years after the SEC initially proposed the reform to the SPAC market following a boom in the use of blank-check structures to publicly list companies in 2020 and 2021.

According to the SEC, the surge in public offerings via SPACs raised concerns about the stability of the vehicle’s structure, particularly around transparency for existing investors in the target company and the merit of future projections about the newly listed company’s economic performance.

Since the Commission’s initial proposals two years ago, the use of blank-check companies in public listings of PE-backed companies in the US has fallen from 34 in 2021 to five in 2023. In VC, IPOs via SPACs fell from 102 in 2021 to only 23 last year, according to PitchBook data.

Among a number of items, the fresh rules require additional disclosures about SPAC sponsors, conflicts of interest and sources of dilution—when the emergence of new shares decreases the value of the stock for existing shareholders.

Parties filing for a SPAC or any business combination transactions between SPACs and private operating companies—known as deSPACs—will now be required to provide the SEC with information about their valuation forecasts.

SPAC sponsors now have to report information about their compensation and conflicts of interest. They will also be required to disseminate certain disclosure documents to existing investors at least 20 days before any SPAC-related transaction.

Both SPAC sponsors and the private company involved in the transaction will be considered co-registrants when filing for an IPO. Historically, only the SPAC has been responsible for providing accurate projections and information about the transaction to governing bodies.

Now, the private company will also be liable.

“This will put a chill on target companies wanting to deSPAC,” said Kevin Shuler, partner at law firm Foley & Lardner, where he focuses on general corporate and securities law.

In addition to the added impetus of disclosure, the requirement will hike up the costs of liabilities to the target company and impact its insurance costs, Shuler said.

‘A few defiant chickens’

In 2022, many industry players interpreted the changes as an effort to temper the use of blank-check companies during the COVID-19 pandemic. In Wednesday’s vote, Republican commissioners Hester Peirce and Mark Uyeda reiterated these concerns in their vote against the proposal.

Peirce said the dramatic drop in SPAC and deSPAC numbers last year fell “under the shadow of [the SEC’s] rule proposal.”

“A few defiant chickens might survive the final rule, but today’s action will render SPACs a much less useful pathway for companies to enter the public markets,” she said.

The vote was split along party lines with the two Republican commissioners voting against the proposals and the three Democratic seats pushing it into fruition.

Erik Gerding, director of the Division of Corporation Finance, the unit making these recommendations to the SEC, said the rule changes are not intended to bring an end to SPAC transactions.

Instead, he said the proposed rules and amendments enhance the levels of disclosure requirements, investor protections in SPAC-related transactions, and information about valuation projections in SPAC and deSPAC transactions.

SEC Chair Gary Gensler, who voted to adopt the rules and amendments, agreed with Gerding on the basis that the commission is merit-neutral.

“We will still have SPACs,” Gensler said. “I think that if sponsors aren’t able to do this, it will be because there’s some regulatory arbitrage and they’re not giving the appropriate disclosures.”

Joel Rubinstein, partner at White & Case, said right now, industry players see an onslaught of new regulation and wonder how necessary it is. Since the rules were proposed in 2022, Rubenstein said his clients have already included many of the proposed disclosures and liability considerations in their processes.

“I’ve done hundreds of these deals. People take their disclosures seriously,” he said.

Commissioners recognized some of the redundancies with existing rules. On Wednesday, the SEC retreated from a couple of proposed rules, including one that would have imposed liability for misrepresentation of material information on underwriters of a SPAC’s IPO who work on the same SPAC’s subsequent deSPAC transaction.

The Commission also pulled back on a proposed safe harbor rule that could have deemed SPACs outside the scope of the rule, designating them as unregistered investment companies and thus exposing them to greater scrutiny.

“In both cases, [the SEC] said we have existing rules and laws in the book to address them,” Rubinstein said.

Featured image of SEC Chair Gary Gensler by Drew Angerer/Getty Images

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