On January 24, 2024, the SEC adopted final rules enhancing disclosure obligations for SPAC IPOs and subsequent de-SPAC business combination transactions. The rules are designed to more closely align the required disclosures and legal liabilities that may be incurred in de-SPAC transactions with those in traditional IPOs. The new rules spread beyond SPACs to shell companies and blank check companies in general. The compliance date for the new rules is July 1, 2025.
In the first blog in this series, I provided background on and a summary of the new rules – see HERE. Last week’s blog began a granular discussion of the 581-page rule release starting with partial coverage of new Subpart 1600 to Regulation S-K related to disclosures in SPAC IPO’s and de-SPAC transactions – see HERE. This week’s blog will continue a review of new Subpart 1600 to Regulation S-K.
New Subpart 1600 of Regulation S-K
The SEC has adopted new Subpart 1600 to Regulation S-K to: (i) set forth disclosure obligations for SPACs regarding the sponsor, potential conflicts of interest, and dilution; (ii) adding certain disclosures to the prospectus cover page and summary; (iii) require disclosures of whether law of the SPAC organizational jurisdiction requires the board of directors to determine whether the de-SPAC is advisable and in the best interests of the SPAC shareholders or make a comparable determination, and to disclose that determination; and (iv) whether the SPAC or SPAC sponsor has received any outside report, opinion, or appraisal relating to the de-SPAC transaction and certain disclosures pertaining to such report, opinion or appraisal. The SEC has adopted numerous form changes, including to Forms S-1, F-1, S-4, F-4, Schedule 14A and 14C, and Schedule TO, to implement these new rules.
Dilution – Items 1602 and 1604
The new rules require enhanced dilution disclosures in SPAC IPO’s and other non-de-SPAC registered offerings (Item 1602), and de-SPAC transactions (Item 1604). There are numerous potential sources of dilution in common SPAC structures, including: (i) shareholder redemptions, (ii) SPAC sponsor compensation, (iii) underwriting fees, (iv) warrants, (v) convertible securities, and (vi) PIPE financings.
The SEC recognizes that the important aspects of a dilution disclosure are different in a SPAC than an operating business. Investors use dilution to determine value vs. assets and liabilities, among other similar value metrics, when analyzing an investment in an operating company. In a SPAC, the important aspects of dilution are to understand the impact of the disparity in price paid by insiders and the price paid by investors for shares, to be able to compare to other SPACs and to evaluate the economics of a de-SPAC transaction.
Item 1602 – Dilution Disclosure in SPAC IPOs and Non-De-SPAC Registered Offerings
New Item 1602(a) requires a disclosure on the outside front cover page of a prospectus detailing: (i) the amount of compensation received or to be received by the SPAC sponsor, its affiliates, and promoters; (ii) the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters; and(iii) the price paid or to be paid for such securities, and whether this compensation and securities issuance may result in a material dilution of the purchasers’ equity interests. The outside front cover disclosure must include a prominent type cross reference to the related disclosure inside the prospectus.
In addition, Item 1602(a) requires a tabular disclosure, also on the outside front cover of the prospectus, of the net tangible book value per share, as adjusted, based on gradual amounts of redemption of 25%, 50%, 75% of the maximum redemption possible, and the maximum redemption possible. The table must show the difference between the offering price and the various net tangible book values. If an offering includes an over-allotment option, separate tabular figures must be included showing the figures with and without exercise of the option. In response to comments the new rules provide a detailed explanation as to how to calculate the required dilution information.
New Item 1602(b) requires the prospectus summary to include a table disclosing: (i) the nature and amount of the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters, (ii) the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters and the price paid or to be paid for such securities, and (iii) outside of the table, the extent to which this compensation and securities issuance may result in a material dilution of the purchasers’ equity interests.
New Item 1602(c) requires the same tabular disclosure of net tangible book value as is required on the cover page. The table must include: (i) the offering price; (ii) net tangible book value, as adjusted assuming maximum redemptions and 25%, 50% and 75% of maximum redemptions; and (iii) the difference between the offering price and such net tangible book value per share, as adjusted. Moreover, the table must show: (i) the nature and amounts of each source of dilution used to determine net tangible book value per share, as adjusted; (ii) the number of shares used to determine net tangible book value per share, as adjusted; and (iii) any adjustments to such number of shares. As part of this disclosure, outside the table, the SPAC must provide a description of each material potential source of future dilution following the registered offering. Finally, the SPAC must include a description of the model, methods, assumptions, estimates, and parameters necessary to understand the tabular disclosure.
Item 1604 – Dilution Disclosure in De-SPAC Transactions
New Item 1604(a) requires a disclosure on the outside front cover page of a prospectus detailing: (i) the amount of the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters in connection with the de-SPAC transaction or any related financing transaction; (ii) the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters and the price paid or to be paid for such securities in connection with the de-SPAC transaction or any related financing transaction; and (iii) whether this compensation and securities issuance may result in a material dilution of the equity interests of non-redeeming shareholders who hold the securities until the consummation of the de-SPAC transaction. The outside front cover disclosure must include a prominent type cross reference to the related disclosure inside the prospectus.
New Item 1604(b) requires the prospectus summary to include a table disclosing the following information related to the de-SPAC or any related financing transaction: (i) the terms and amount of the compensation received or to be received by the SPAC sponsor, its affiliates, and promoters, (ii) the amount of securities issued or to be issued by the SPAC to the SPAC sponsor, its affiliates, and promoters and the price paid or to be paid for such securities, and (iii) outside of the table, the extent to which this compensation and securities issuance may result in a material dilution of the equity interests of the non-redeeming shareholders.
Item 1604(b) also requires the prospectus summary to include a brief description of the material terms of any material financing transactions that have occurred or will occur in connection with the consummation of the de-SPAC transaction, the anticipated use of proceeds from these financing transactions and the dilutive impact, if any, of these financing transactions on non-redeeming shareholders. In addition, the prospectus summary must include disclosure of the rights of security holders to redeem the outstanding securities of the SPAC and the potential dilutive impact of redemptions on non-redeeming shareholders.
New Item 1604(c) requires tabular disclosure that includes intervals representing selected potential redemption levels that may occur across a reasonably likely range of outcomes of: (i) the offering price disclosed pursuant to Item 1602(a) in the initial registered offering by the SPAC; (ii) as of the most recent balance sheet date filed, the net tangible book value per share, as adjusted, as if the selected redemption levels have occurred and to give effect to, while excluding the de-SPAC transaction itself, material probable or consummated transactions, and other material effects on the SPAC’s net tangible book value per share from the de-SPAC transaction;(iii) and the difference between such offering price and such net tangible book value per share, as adjusted. Final Item 1604(c) also requires that the tabular disclosure show: (i) the nature and amounts of each source of dilution used to determine net tangible book value per share, as adjusted; (ii) the number of shares used to determine net tangible book value per share, as adjusted; and (iii) any adjustments to the number of shares.
As part of this disclosure, outside the table, the SPAC must provide a description of each material potential source of future dilution that non-redeeming shareholders may experience by electing not to tender their shares in connection with the de-SPAC transaction. Final Rule 1604(c)(1) requires, with respect to each redemption level, a statement of the company valuation at or above which the potential dilution results in the amount of the non-redeeming shareholders’ interest per share being at least the IPO price per share of common stock. Final Item 1604(c)(2) requires a description of the model, methods, assumptions, estimates, and parameters necessary to understand the tabular disclosure.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony, Linder & Cacomanolis
A Corporate and Securities Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, 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, Linder & Cacomanolis, 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 ALC 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.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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