On March 30, 2022, the SEC proposed rules enhancing disclosure requirements associated with SPAC initial public offerings (IPOs) and de-SPAC merger transactions; requiring that a private operating company be a co-registrant when a SPAC files an S-4 or F-4 registration statement associated with a business combination; requiring a re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction; amending the definition of a “blank check company” to make the liability safe harbor in the Private Securities Litigation Reform Act of 1995 for forward-looking statement such as projections, unavailable in filings by SPACs and other blank check companies; and deeming underwriters in a SPAC IPO to be underwriters in a de-SPAC transaction when certain conditions are met.
The proposed rules would require specialized disclosure with respect to compensation paid to sponsors, conflicts of interest, dilution and the fairness of business combination transactions. Further disclosures will also be required in connection with the use of projections. The SEC is also proposing a rule that would deem any business combination transaction involving a reporting shell company, including a SPAC, to involve a sale of securities to the reporting shell company’s shareholders and is proposing to amend a number of financial statement requirements applicable to transactions involving shell companies.
In the wake of the chilled market and proposed rule changes, dozens of SEC laws have pulled their offerings since January of this year. The SEC has also found other ways to chill the market, including refusing to declare de-SPAC transaction registration statements effective resulting in the time for completion of a transaction to run out. The SEC’s current distaste for SPACs is so extreme that SEC Commissioner Hester M. Peirce issued a statement on April 15, 2022, chastising the Commission for its actions. In one case, the SEC issued round after round of comments on an S-4, resulting in eight amendments to the registration statement following which the SEC still refused to accelerate effectiveness. The SPAC ran out of time to complete its transactions and will be liquidated.
In her statement, Ms. Peirce is clearly frustrated, noting, “[W]ith the end of the road finally in sight, when the SPAC sought to have its registration statement go effective, it did not get the response that virtually everyone gets at this stage of the process. That appears to be the death knell of the SPAC, which robs the investors of the opportunity to decide whether they approve the merger agreement.” She then concludes with a plea for fair treatment, stating “[W]e must always engage registrants in the same good faith that we expect of them. A failure to do so would undermine the credibility of this agency.”
In the first blog in this series, I provided background on and a summary of the proposed new rules (see HERE). The second blog began a granular discussion of the 372-page rule release and its vast implications to not only the SPAC market, but shell company reverse mergers in general (see HERE). This week’s blog will dissect the new de-SPAC transaction disclosures.
New Subpart 1600 to Regulation S-K
The proposed new rules would add a new Subpart 1600 to Regulation S-K delineating specialized disclosure requirements in connection with SPAC IPOs and de-SPAC transaction. New Subpart 1600 would: (i) require additional disclosures about the sponsor of the SPAC, potential conflicts of interest, and dilution; (ii) require additional disclosures on de-SPAC transactions, including that the SPAC disclose (a) whether it reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to investors (indirectly requiring a fairness opinion), and (b) whether it has received any outside report, opinion, or appraisal relating to the fairness of the transaction; and (c) require certain disclosures on the prospectus cover page and in the prospectus summary of registration statements filed in connection with SPAC initial public offerings and de-SPAC transactions.
Subpart 1600 would also require changes to several forms including S-1, F-1, S-4, F-4, and Schedules 14A, 14C and TO. To the extent that the disclosure requirements in proposed Subpart 1600 address the same subject matter as the existing disclosure requirements of the forms or schedules, the requirements of proposed Subpart 1600 would be controlling.
Several parts of new Subpart 1600 address de-SPAC transactions. New Item 1604 would require certain information on the prospectus cover page and in the prospectus summary of registration statements for de-SPAC transactions and enhanced dilution disclosures. New Item 1605 would require disclosure on the background, material terms and effects of a proposed de-SPAC transaction. Item 1606 would require disclosure on whether a SPAC reasonably believes that a de-SPAC transaction and any related financing transactions are fair or unfair to investors, as well as a discussion of the bases for this reasonable belief. Similarly, new Item 1607 would require disclosure as to whether the SPAC or its sponsor received a report, opinion or appraisal from an outside party as to such fairness. New Item 1608 would require similar disclosures as Items 1604-1607 in a Schedule TO filed in connection with a de-SPAC transaction. New Item 1609 would require additional disclosures regarding financial projections disclosed in a disclosure document for a de-SPAC transaction.
Item 1604-1609 would require disclosures in registration statements on Forms S-4 and F-4 and in proxy and tender offer Schedules 14A, 14C and TO. Finally, Item 1610 would require the various information disclosed pursuant to Subpart 1600 to be XBRL tagged.
I included a discussion in last week’s blog under Registered Offerings by SPACs on new proposed Item 1604 (see HERE). Proposed Item 1605 would require disclosure of the background, material terms, and effects of the de-SPAC transaction, including:
- A summary of the background of the de-SPAC transaction, including, but not limited to, a description of any contacts, negotiations, or transactions that have occurred concerning the de-SPAC transaction. For example, this disclosure could encompass whether any portion of the underwriting fees in connection with a SPAC’s initial public offering is contingent upon the SPAC’s completion of a de-SPAC transaction and whether the underwriter in the SPAC’s initial public offering has provided additional services to the SPAC following the initial public offering, such as locating potential target companies, providing financial advisory services, acting as a placement agent for PIPE transactions, and/or arranging debt financing;
- A brief description of any related financing transaction, including any payments from the sponsor to investors in connection with the financing transaction;
- The reasons for engaging in the particular de-SPAC transaction and for the structure and timing of the de-SPAC transaction and any related financing transaction;
- An explanation of any material differences in the rights of security holders of the post-business-combination company as a result of the de-SPAC transaction such as where there is a new holding company structure or an Up-C structure; and
- Disclosure regarding the accounting treatment and the federal income tax consequences of the de-SPAC transaction, if material.
Item 1605 would also require a reasonably detailed discussion of the reasons for, and the structure and timing of, a proposed de-SPAC transaction, which could include a discussion of the key events and activities in identifying the target private operating company and in negotiating the terms of the merger or acquisition, as well as the material factors considered by a SPAC’s board of directors in approving the terms of the proposed de-SPAC transaction and in recommending shareholder approval of the transaction. In addition, Item 1605 would require disclosure of the effects of the de-SPAC transaction and any related financing transaction on the SPAC and its affiliates, the sponsor and its affiliates, the private operating company and its affiliates, and unaffiliated security holders of the SPAC.
The disclosure must provide a reasonably detailed discussion of both the benefits and detriments to non-redeeming shareholders of the de-SPAC transaction and any related financing transaction, with such benefits and detriments quantified to the extent practicable. For example, if the sponsor’s interests and returns may differ from those of public investors in regard to a prospective de-SPAC transaction, the disclosure should describe and quantify, to the extent practicable, dollar amounts or prospective returns the sponsor and its affiliates stand to gain or lose that are dependent on the completion of the transaction.
Similarly, the disclosure would need to include the SPAC’s sponsors’, officers’ and directors’ material interests in the de-SPAC transaction or any related financing transaction, including any fiduciary or contractual obligations to other entities and any interest in, or affiliation with, the private operating company that is the target of the de-SPAC transaction. Like the rest of Subpart 1600, these disclosures are in addition to and do not replace any existing required disclosures under Regulation S-K.
Related to redemptions, Item 1605 requires detailed disclosure on the entitlement to such redemptions as well as any appraisal rights. The disclosure would need to include whether shareholders may redeem their shares regardless of whether they vote in favor of or against a proposed de-SPAC transaction, or abstain from voting, and whether shareholders have the right to redeem their securities at the time of any extension of the time period to complete a de-SPAC transaction. If there are no redemption or appraisal rights available for security holders who object to the de-SPAC transaction, the proposed rules would require disclosure of any other rights that may be available to security holders under the law of the jurisdiction of organization (most states allow for appraisal rights to shareholders who vote against a merger transaction).
Item 1606 will require a statement from a SPAC as to whether it reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to the SPAC’s unaffiliated security holders, as well as a discussion of the bases for this statement. In reality, this will require that all SPACs obtain an independent fairness opinion on de-SPAC transactions. The statement must be detailed as to the material factors considered upon which a belief is based. These factors would include but not be limited to: (i) the valuation of the private operating company; (ii) the consideration of any financial projections; (iii) any report, opinion, or appraisal obtained from a third party; (iv) and the dilutive effects of the de-SPAC transaction and any related financing transaction on non-redeeming shareholders.
The statement/opinion must encompass both the de-SPAC transaction and any related financing transaction so that the fairness determination would require consideration of the combined effects of both transactions, which are often dependent on each other, on unaffiliated security holders. As proposed, a SPAC would be required to include this statement in any Forms S-4 and F-4 or Schedules 14A, 14C, and TO filed in connection with a de-SPAC transaction.
In addition, Item 1606 will require disclosure on whether any director voted against, or abstained from voting on, approval of the de-SPAC transaction or any related financing transaction. The director must be identified as well as, if known after making a reasonable inquiry, the reasons for the vote against the transaction or abstention. I find this provision incredibly intrusive to a board of directors and could have the unintended consequences of chilling open discussion among a board when considering a transaction. I am hopeful that the SEC will not pass this provision as written.
Item 1606 also requires disclosure on:
- Whether the de-SPAC transaction or any related financing transaction is structured so that approval of at least a majority of unaffiliated security holders is required;
- Whether a majority of directors who are not employees of the SPAC have retained an unaffiliated representative to act solely on behalf of unaffiliated security holders for purposes of negotiating the terms of the de-SPAC transaction or any related financing transaction and/or preparing a report concerning the fairness of the de-SPAC transaction or any related financing transaction; and
- Whether the de-SPAC transaction or any related financing transaction was approved by a majority of the directors of the SPAC who are not employees of the SPAC.
Whereas Item 1606 requires disclosure about the SPAC directors’ fairness opinion, Item 1607 requires specified disclosures about reports, opinions, or appraisals from outside parties. In particular, Item 1607 would require disclosure about whether or not the SPAC or its sponsor has received any report, opinion, or appraisal obtained from an outside party relating to the consideration or the fairness of the consideration to be offered to security holders or the fairness of the de-SPAC transaction or any related financing transaction to the SPAC, the sponsor or security holders who are not affiliates.
The disclosure must include:
- The identity, qualifications, and method of selection of the outside party and/or unaffiliated representative;
- Any material relationship between (i) the outside party, its affiliates, and/or unaffiliated representative, and (ii) the SPAC, its sponsor and/or their affiliates, that existed during the past two years or is mutually understood to be contemplated and any compensation received or to be received as a result of the relationship;
- Whether the SPAC or the sponsor determined the amount of consideration to be paid to the private operating company or its security holders, or the valuation of the private operating company, or whether the outside party recommended the amount of consideration to be paid or the valuation of the private operating company; and
- A summary concerning the negotiation, report, opinion or appraisal, including a description of the procedures followed; the findings and recommendations; the bases for and methods of arriving at such findings and recommendations; instructions received from the SPAC or its sponsor; and any limitation imposed by the SPAC or its sponsor on the scope of the investigation.
As noted, at times SPAC shareholder approval is not required in a de-SPAC transaction and registered securities are not issued, obviating the need for an S-4 or F-4 registration statement or a Schedule 14A proxy statement. In that case, the SPAC uses a Schedule TO to offer redemption to the public shareholders in connection with the de-SPAC transaction.
Item 1608 codifies the SEC’s position that t a Schedule TO filed in connection with a de-SPAC transaction should contain substantially the same information about a target private operating company that is required under the proxy rules and that a SPAC must comply with the procedural requirements of the tender offer rules when using a Schedule TO in connection with a redemption as part of a de-SPAC transaction. That is, Item 1608 would require inclusion of specified disclosures in Forms S-4 and F-4 and Schedule 14A in a Schedule TO.
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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