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.
In last week’s blog, I provided background on and a summary of the new rules – see HERE. This week’s blog begins a granular discussion of the 581-page rule release and its vast implications to not only the SPAC market, but shell company reverse mergers in general. This week in particular, I will begin coverage of new Subpart 1600 to Regulation S-K related to disclosures in SPAC IPO’s and de-SPAC transactions.
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.
Definitions – Item 1601
New Item 1601 adds definitions applicable to SPACs and de-SPAC transactions, as follows:
- De-SPAC Transaction – a business combination, such as a merger, consolidation, exchange of securities, acquisition of assets, reorganization, or similar transaction, involving a special purpose acquisition company and one or more target companies (contemporaneously, in the case of more than one target company).
- SPAC – a company that has: (1) indicated that its business plan is to: (a) conduct a primary offering of securities that is not subject to the requirements of Rule 419 under the Securities Act; (b) complete a business combination, such as a merger, consolidation, exchange of securities, acquisition of assets, reorganization, or similar transaction, with one or more target companies within a specified time frame; and (c) return proceeds from the offering and any concurrent offering (if such offering or concurrent offering intends to raise proceeds) to its security holders if the company does not complete a business combination, such as a merger, consolidation, exchange of securities, acquisition of assets, reorganization, or similar transaction, with one or more target companies within the specified time frame; or (2) represented that it pursues or will pursue a special purpose acquisition company strategy.
- SPAC Sponsor – any entity and/or person primarily responsible for organizing, directing, or managing the business and affairs of a special purpose acquisition company, excluding, if an entity is a SPAC sponsor, officers and directors of the special purpose acquisition company who are not affiliates of any such entity that is a SPAC sponsor.
- Target Company – an operating company, business, or assets.
Disclosure About the SPAC Sponsor, Affiliates and Promoters – Item 1603(a)
New Item 1603 requires particular disclosures about the SPAC Sponsor and its affiliates and promoters in SPAC IPOs and de-SPAC transactions, including the following:
- The background, experience, material roles, and responsibilities of each, as well as any agreement, arrangement, or understanding, including payments, (i) between the SPAC sponsor and the SPAC, its executive officers, directors, or affiliates, with respect to determining whether to proceed with a de-SPAC transaction and (ii) between the SPAC sponsor and unaffiliated security holders of the SPAC regarding the redemption of outstanding securities;
- The controlling persons of the SPAC sponsor and any persons who have direct and indirect material interests in the SPAC sponsor and the nature and amount of their interests;
- Tabular disclosure of the material terms of any lock-up agreements with the SPAC sponsor and its affiliates, including the expiration dates, the natural persons and entities subject to the agreements, any exceptions under the agreements, and any terms that would result in an earlier expiration ;
- The nature and amounts of all compensation that has or will be awarded to, earned by, or paid to the SPAC sponsor, its affiliates, and any promoters for all services rendered in all capacities to the SPAC and its affiliates, as well as the nature and amounts of any reimbursements to be paid to the SPAC sponsor, its affiliates, and any promoters upon the completion of a de-SPAC transaction;
- As part of the compensation disclosure – 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. This item includes any anti-dilution provisions, potential cancellations of shares or increase in shares issued or to be issued; and
- Any circumstances or arrangements under which the SPAC sponsor, its affiliates, and promoters, directly or indirectly, have transferred or could transfer ownership of securities of the SPAC, or that have resulted or could result in the surrender or cancellation of such securities. This disclosure includes the transfer of ownership interests in the SPAC sponsor or ownership interests in a holding company that owns interests in the SPAC sponsor.
New Item 1603 will follow the current Securities Act Rule 405 and Exchange Act Rule 12b-2 definition of a promoter. In particular, a promoter includes: (i) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; or (ii) Any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, 10% or more of any class of securities of the issuer or 10% or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise. Generally, a SPAC sponsor will also be a promoter.
In my experience a SPAC already discloses the vast majority of this information and as such the new rules codify existing practices.
Conflicts of Interest – Item 1602, 1603, 1604 and 1605
The final new rules contain many provisions related to conflict of interest disclosures in different transactions, offerings and circumstances. This particular discussion relates to disclosures in SPAC IPOs, de-SPAC transactions and other registered offerings and as such apply to registration statements, proxy statements, information statements and tender offer statements but not to periodic Exchange Act reports such as Forms 10-Q, 10-K or 8-K.
The new rules require disclosure of any actual or potential material conflict of interest between (i) the SPAC sponsor or its affiliates or the SPAC’s officers, directors, or promoters, and (ii) unaffiliated security holders. Such disclosure includes any conflict of interest with respect to determining whether to proceed with a de-SPAC transaction and any conflict of interest arising from the manner in which a SPAC compensates the SPAC sponsor or the SPAC’s executive officers and directors or the manner in which the SPAC sponsor compensates its own executive officers and directors. Furthermore, disclosure is required regarding the fiduciary duties each officer and director of a SPAC owes to other companies.
Conflict disclosure includes the names of all sponsors and their financial arrangements with SPACs, claims investors have on the SPAC if no de-SPAC transaction takes place, and claims investors have on the SPAC if investors exit before the de-SPAC transaction.
Related to a de-SPAC transaction, additional disclosures include any material interests in the de-SPAC transaction, or any related financing transaction held by the SPAC sponsor and the SPAC’s officers and directors, including fiduciary or contractual obligations to other entities as well as any interest in, or affiliation with, the target company. The SEC is clear that all the conflict disclosure obligations apply not only to the SPAC sponsor but cover the SPAC officers, SPAC directors, target company officers, and target company directors as well with the conflicts measured against the interests of the unaffiliated SPAC security holders.
The new rules also require certain conflict disclosures on a prospectus over page and summary.
The new rules are broad, meant to encompass disclosure of any material scenarios. As the SEC notes, there are numerous situations that could give rise to these potential conflicts, including of course the nature of the SPAC sponsor’s compensation (the promote) inherently creating an incentive to complete a de-SPAC transaction. Moreover, SPAC sponsors often sponsor multiple SPACs requiring conflicts in time management and target company acquisition opportunities.
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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