SEC enhances SPAC and shell company disclosures

On Jan. 24, the SEC issued a Final Rule, Special Purpose Acquisition Companies, Shell Companies, and Projections, which enhances disclosures in both a special purpose acquisition company’s (SPAC’s) initial public offering (IPO) and in a subsequent business combination between a SPAC and a private operating target (de-SPAC transaction). The Final Rule aims to enhance the comparability and completeness of disclosures provided by SPACs in their IPOs and by SPACs and their target companies in de-SPAC transactions, while also affording investors similar protections that are available under a traditional IPO.

The Final Rule will become effective 125 days following publication in the Federal Register, except for the XBRL tagging requirements, which will be effective 490 days from the date of publication.

Regulation S-K, Subpart 1600

The Final Rule adds Items 1600 to 1610 to Regulation S-K, which, among other things, require disclosures related to the SPAC sponsor, potential conflicts of interest, and dilution, including certain disclosures on the prospectus cover page and in the prospectus summary. The Final Rule also amends registration statement forms and schedules filed in connection with de-SPAC transactions to require information set forth in the new Subpart 1600 of Regulation S-K. Several of the disclosures in new Subpart 1600 codify existing practices and are noted in the table below.

Target company as a co-registrant

The Final Rule adopts Securities Act of 1933 (Securities Act) Rule 145a, which recognizes that a de-SPAC transaction involves a sale of securities of the combined company to the SPAC’s shareholders. Further, Forms S-4 and F-4 were amended to require the target company in a de-SPAC transaction to be identified as a co-registrant. As a result, the target company and its required officers and directors must now sign the Securities Act registration statement filed by a SPAC or another shell company for a de-SPAC transaction and is subject to the liability provisions under Section 11 of the Securities Act. Similar amendments were made to Forms S-1 and F-1 and now apply when these forms are used for a de-SPAC transaction. If a target company is not a legal entity and consists of a business or assets, the seller will be deemed the registrant under the new rules.

As a registrant, the target company is subject to reporting requirements under the Securities Exchange Act of 1934 (Exchange Act) upon the effectiveness of the Securities Act registration statement, until the target company terminates or suspends the Exchange Act reporting obligations.

Financial statement requirements

The Final Rule adds new Article 15 to Regulation S-X along with related amendments to codify certain existing SEC staff interpretive guidance and to more closely align the related financial statement reporting and audit requirements for de-SPAC transactions with those for a traditional IPO. These new rules are summarized below.

Post-merger reporting

Redetermination of SRC status

The Final Rule amends existing rules to require the post-merger registrant to redetermine its SRC status using (1) its public float as of a date within four business days after the consummation of the de-SPAC transaction and (2) the annual revenues of the target company as of the most recently completed fiscal year reported in Form 8-K filed with Form 10 information (Super 8-K). If the post-merger registrant loses SRC status upon the redetermination, it must reflect the non-SRC status in filings beginning 45 days after the consummation of the de-SPAC transaction, and it would no longer be able to avail itself of the scaled-disclosure requirements applicable to an SRC in that filing, including any amendment to the Super 8-K.

Financial statements of target company in Super 8-K

The Final Rule also amends Form 8-K to note that if the predecessor meets the conditions of an EGC at the time of filing that form, the registrant is not required to include their financial statements for any period earlier than the financial statement periods included in the registration statement or proxy statement for the de-SPAC transaction.

Other nonfinancial disclosures

The Final Rule also amends registration statement forms and schedules filed in connection with de-SPAC transactions to require disclosures for the target company pursuant to certain existing items of Regulation S-K, in order to codify current practice and align such disclosures more closely with those for a traditional IPO. These required disclosures include

• Item 101 (description of business);
• Item 102 (description of property);
• Item 103 (legal proceedings);
• Item 304 (changes in and disagreements with accountants and accounting and financial disclosures);
• Item 403 (security ownership of certain beneficial owners and management, assuming the completion of the de-SPAC transaction and any related financing transaction); and
• Item 701 (recent sales of unregistered securities).

Minimum dissemination period

The Final Rule amends Exchange Act rules and related forms to allow security holders a minimum time to consider proxy statements and other disclosures surrounding de-SPAC transactions. The amendments require prospectuses as well as proxy and information statements to be distributed to security holders at least 20 calendar days in advance of the date when the security holder meeting will be held or action will be taken in connection with the de-SPAC transaction.

Additional guidance

The Final Rule does not amend any provisions related to the definition of “underwriter” in Section 2(a)(11) of the Securities Act as it relates to de-SPAC transactions. However, in the adopting release, the SEC provides general guidance regarding statutory underwriter status, stating that the SEC intends to follow the existing practice of applying the statutory terms “distribution” and “underwriter” broadly and flexibly, as the facts and circumstances of any transaction may warrant.

Further, the SEC did not adopt the proposal to provide a safe harbor for SPACs from the definition of an “investment company” under Section 3(a)(1)(A) of the Investment Company Act. However, in the adopting release, the SEC provides views on facts and circumstances that are relevant to determining whether a SPAC meets the definition of an investment company.