SEC Toughens Transparency Rules for SPACs

We don’t hear much anymore in the compliance world about special purpose acquisition companies, more commonly known as SPACs. It tends to be bad when we do, such as last week’s news that the Securities and Exchange Commission slapped Northern Star Investment Corp. II with a $1.5 million fine for making misleading statements in public filings tied to its 2021 IPO. According to the agency’s announcement, the SPAC failed to disclose discussions with a company it had identified as a potential merger target.

In addition to innuendo regarding shady business dealings, regulators’ thinly disguised skepticism of SPACs has likely played a role in the decline of the market for the blank-check investment vehicles. SEC Chair Gary Gensler betrayed his true feelings last week in a statement of support for the SEC’s final rules on SPACs. He painted an unflattering picture of SPACs as a gimmick to avoid investor protections afforded by the traditional process of taking a company public. Thus, in a nod to Aristotle, Gensler said the newly adopted final rules seek to “treat like cases alike” by forcing SPACs to abide by standards similar to traditional IPOs.

The newly adopted guidelines focus on three areas. First, they add more disclosures for SPACs when they begin selling their shares on public exchanges and when initiate their so-called de-SPAC mergers with private companies. In addition to addressing issues like compensation, the new disclosures will include more information about merger targets.

Second, the new rules will increase exposure for SPACs in terms of their accountability for forward-looking statements. That means nixing safe harbors and layering on more disclosures for projections related to de-SPAC transactions.

Lastly, SPAC targets must sign-off on registration statements for de-SPAC deals under the final rules. As a result, the target companies will also become liable for any false or misleading disclosures.

The SEC’s Republican-appointed commissioners, Hester Peirce and Mark Uyeda, both voted against the new SPAC rules. Peirce dismissed the project for lack of “a problem in need of a regulatory solution.” Instead, the adopted rules will hasten the decline in the number of public companies by cutting off a lane to the public markets for some private companies, according to Peirce: “The popularity of SPACs with certain types of companies was an indicator that the traditional IPO process was not working for these kinds of companies.”

Frankly, the crippled state of the SPAC market would suggest arguing for or against the new rules is pointless. Data from research firm Solactive show the IPO values of SPACs are down 98% since 2021, while SPAC-launched stock prices have lost all but roughly 10% of their value.

For at least one SPAC still on the market, the adoption of the new rules seems to be causing concern about the potential for a de-SPAC deal. In a recent filing, Ault Disruptive Technologies Corp. noted the business risks it now faces going forward: “Certain of the procedures that we, a potential initial business combination target, or others may determine to undertake in connection with such rules may increase our costs and the time needed to complete an initial business combination and may constrain the circumstances under which we could complete an initial business combination.”

Nevertheless, it will be interesting to see how implementation of the SEC’s newly adopted SPAC rules will begin to take shape in the coming weeks and months.