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. The second 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. The third blog in the series continued the summary of Subpart 1600 and in particular the new dilution disclosure requirements – see HERE. Part 4 continued a review of new Subpart 1600 to Regulation S-K including the new prospectus cover page and summary requirements and the de-SPAC background discussion – see HERE. Part 5 completed the Subpart 1600 discussion – see HERE.
This Part 6 covers further rule amendments impacting de-SPAC transactions including non-financial disclosures, minimum dissemination periods, requiring a target to be a co-registrant, re-determining smaller reporting company status, and the PSLRA safe harbor.
Disclosures and Liability in De-SPAC Transactions
Non-Financial Disclosures in De-SPAC Disclosure Documents
The new rules will require the following disclosures in any registration statement or schedule (14C, 14A or TO) filed in connection with a de-SPAC transaction: (i) Item 101 (description of business) (see HERE); (ii) Item 102 (description of property); (iii) Item 103 (legal proceedings)(see HERE); (iv) Item 304 (changes in and disagreements with accountants on accounting and financial disclosure); (v) Item 403 (security ownership of certain beneficial owners and management, assuming the completion of the de-SPAC transaction and any related financing transaction); and (6) Item 701 (recent sales of unregistered securities). Where the target company is an FPI, analogous disclosures from Form 20-F are required.
Although this information has generally always been included in de-SPAC registration statements and schedules, the new rules codify the requirements. Moreover, if this disclosure is included in a Form S-4 or Form F-4, any material misstatements or omissions contained therein would subject the issuers and other parties to liability under Sections 11 and 12 of the Securities Act. Further, where an S-1 or F-1 is used (as opposed to an S-4 or F-4), Form S-4/F-4 disclosures must be included.
Minimum Dissemination Period
Historically, in business combination transactions, there has been no requirement under SEC rules to provide security holders with a minimum amount of time to consider proxy statement or other disclosures. The new rules amend Exchange Act Rules 14a-6 and 14c-2 and add instructions to Forms S-4 and F-4 to require that prospectuses and proxy and information statements filed in connection with de-SPAC transactions be distributed to security holders at least 20 calendar days in advance of a security holder meeting is to be held or action to be taken, or the maximum period for disseminating such disclosure documents permitted under the applicable laws of the SPAC’s jurisdiction if such period is less than 20 days.
Private Operating Company as Co-Registrant
Prior to the rule changes when a SPAC offered and sold its securities in a registered de-SPAC transaction, only the SPAC, its principal executive officer or officers, its principal financial officer, its controller or principal accounting officer, and at least a majority of its board of directors (or persons performing similar functions) were required to sign the registration statement for the transaction. The new rules have amended Forms S-4/F-4 and S-1/F-1 to require that the SPAC and the target company be treated as co-registrants when these registration statements are filed in connection with a de-SPAC transaction (including a de-SPAC transaction involving a holding company restructure).
Under the new rules, the target company must appear on the cover-page of the registration statement as a co-registrant. Where the target company involves a distinct business or assets as opposed to an entire operating entity, the co-registrant is the seller of that business or assets. Moreover, the additional signatories to the form, including the principal executive officer, principal financial officer, controller/principal accounting officer, and a majority of the board of directors or persons performing similar functions of the target company, liable for any material misstatements or omissions in the registration statement.
Under the new rules, the target company would become subject to the Exchange Act reporting requirements upon effectiveness of a registration statement pending consummation of the de-SPAC transaction. However, the rule release points out that in the event the de-SPAC transaction does not close, the target company could seek to terminate its reporting obligations under Exchange Act Rule 12h-3 and Staff Legal Bulletin 18 in the same manner in which it would in an abandoned IPO. For more on termination of reporting obligations, see HERE.
Re-Determination of Smaller Reporting Company Status
A smaller reporting company is a company that is not an investment company, an asset-backed issuer or a majority-owned subsidiary of a parent that is not a smaller reporting company, and had (i) a public float of less than $250 million, or (ii) had annual revenues of less than $100 million during the most recently completed fiscal year for which audited financial statements are available and either had no public float or a public float of less than $700 million. Smaller reporting companies are a category of registrants that are eligible for scaled disclosure requirements in Regulation S-K and Regulation S-X and in various forms under the Securities Act and the Exchange Act. For a detailed discussion of smaller reporting companies, see HERE and HERE.
Smaller reporting company status is determined at the time of filing an initial registration statement under the Securities Act or Exchange Act for shares of common equity and is re-determined on an annual basis. Currently, most SPACs qualify as smaller reporting companies, and, when a SPAC is the legal acquirer of the private operating company in a de-SPAC transaction, a post-business combination company has been permitted to retain this status until the next annual determination date.
Addressing a concern that these companies have been able to avail themselves of scaled disclosures that they would not qualify for in an IPO, under the new rules, the company must re-determine smaller reporting company status following the consummation of a de-SPAC transaction and prior to such companies next Exchange Act periodic report, other than the closing 8-K. For purposes of the redetermination, the public float threshold must be measured as of a date within four business days after the consummation of the de-SPAC transaction and the revenue threshold determined by using the annual revenues of the private operating company as of the most recently completed fiscal year for which audited financial statements are available.
To allow for a period of adjustment in the event that smaller reporting company status is lost, the company will not need to reflect or account for such new status in any filing that is due within 45 days of consummation of the de-SPAC transaction. However, the new status would need to be reflected (and accompanying rules followed) in any filing made after the 45 day period, including amendments to prior filings such as the closing Super 8-K.
The new rules do not require the redetermination of any filer status, such as EGC status or FPI status, however the SEC rule release does provide some guidance on the FPI subject. A new registrant, such as a SPAC in an IPO, makes the determination of its FPI status as of a date within 30 days prior to filing its initial registration statement and redetermines such status once a year on the last business day of its second fiscal quarter (see HERE). The SEC notes that when a domestic SPAC re-incorporates in a foreign jurisdiction in order to achieve FPI status in a de-SPAC transaction, the Form F-1 or F-4 used in the de-SPAC transaction is the first registration statement filed by this new entity, so the current rules suffice.
Moreover, although not codified in a rule, the rule release indicates that the SEC would not object if a company did not comply with SOX 404(b) in the Form 10-K covering the fiscal year in which the de-SPAC transaction was consummated. For more on SOX 404(b), see HERE.
PSLRA Safe Harbor
Section 27A of the Securities Act and 21E of the Exchange Act, both created by the Private Securities Litigation Reform Act of 1995 (PSLRA), provide certain statutory protections for qualifying companies in qualifying materials, for forward-looking statements. The protections afforded by the PSLRA are not available to a company that: (i) has been convicted of a felony or misdemeanor related to securities fraud within the last three years; (ii) has been, within the past three years, subject to a judicial or administrative decree or order prohibiting future violations of the antifraud provisions of the securities laws; (iii) has been, within the past three years, subject to a judicial or administrative decree or order requiring the company to cease and desist from violating the antifraud provisions of the securities laws; (iv) has been, within the past three years, subject to a judicial or administrative decree or order determining the company has violated the antifraud provisions of the securities laws; (v) makes the forward-looking statement in connection with an offering of securities of a blank check company; (vi) is a penny stock company; or (vii) is an investment company.
In addition, the forward-looking statements protections of the PSLRA are not available for forward-looking statements that are: (i) included in financial statements that are prepared in accordance with GAAP; (ii) made in connection with a roll-up transaction; (iii) made in connection with a going private transaction; (iv) made in connection with a tender offer; (v) made in connection with an IPO; (vi) made in connection with an offering by, or relating to the operations of a partnership, limited liability company, or a direct participation program; or (vii) made in a disclosure of beneficial ownership under Section 13 of the Exchange Act (Schedule 13D and 13G).
For purposes of the PSLRA, the SEC previously defined a “blank check company” as a development stage company that is issuing “penny stock,” as defined in Exchange Act Rule 3a51-1, and that has no specific business plan or purpose, or has indicated that its business plan is to merge with or acquire an unidentified company or companies, or other entity or person and accordingly SPACs were excluded from the definition as a SPAC does not offer penny stocks.
The SEC has amended the definition of “blank check company” for purposes of the PSLRA as “a company that has no specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person.” As such, the PSLRA is no longer available for forward-looking statements, such as projections, made in connection with de-SPAC transactions involving an offering of securities by a SPAC (which under the new rules includes all de-SPAC transactions). The final rule makes it clear that the new definition is solely for purposes of the PSLRA and does not impact any other rules defining or using the term “blank check company.”
Underwriter Status and Liability in Securities Transactions
The term “underwriter” is broadly defined in Section 2(a)(11) of the Securities Act to mean “any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking.” The determination of whether a particular person is an “underwriter” does not depend on the person’s business but rather on that person’s relationship to a particular securities offering. Any person whose activities with respect to any given offering fall within one of the prongs of the Section 2(a)(11) definition is deemed to meet the statutory definition of underwriter—commonly known as a “statutory underwriter.” The definition of an underwriter is meant to be, and has been, interpreted very broadly.
An underwriter’s participation in a company’s offering also exposes the underwriter to potential liability under Sections 11 and 12 of the Securities Act. Section 11 of the Securities Act imposes civil liability for any part of the registration statement, at effectiveness, which contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, to any person acquiring such security. Similarly, Section 12 imposes liability upon anyone, including underwriters, who offers or sells a security, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. Both Sections 11 and 12 have due diligence defenses available to an underwriter.
The SEC views the entire lifecycle of a SPAC as a public offering – first with the initial public offering and later with the de-SPAC transaction resulting in a once private target company entering the capital markets. One of the main purposes of the new SPAC rules is to align a de-SPAC transaction with the rules, regulations, disclosures, and liabilities associated with a traditional IPO. Consistent with this view, the original proposed rules would have created new Rule 140A to clarify that the SPAC IPO underwriter is an underwriter with respect to the distribution that occurs in the de-SPAC transaction, when it takes steps to facilitate the de-SPAC transaction, or any related financing transaction, or otherwise participates (directly or indirectly) in the de-SPAC transaction. Further, the receipt of deferred underwriter compensation in a de-SPAC transaction, as is typically the case, would constitute direct or indirect participation in the de-SPAC transaction.
The SEC, however, did not adopt Rule 140A in its final rules. Rather the SEC published guidance on underwriter status in de-SPAC transactions. From a broad perspective, a statutory underwriter encompasses any person who sells for the issuer or participates in a distribution associated with a de-SPAC transaction. Although the word “distribution” has no definition in the Securities Act, the term “distribution” refers to the entire process in a public offering through which a block of securities is dispersed and ultimately comes to rest in the hands of the investing public. In a de-SPAC transaction, the SPAC shareholders become shareholders in the private target company through the business combination. In essence, the “distribution” in a de-SPAC transaction is the process by which the SPAC’s investors, and therefore the public, received interest in the combined operating company.
In a de-SPAC distribution, a statutory underwriter would be someone who is selling for the issuer or participating in the distribution of securities in the combined company to the SPAC’s investors and the broader public. Such an underwriter could be any person involved in these functions, regardless of whether they are named as an underwriter in any given offering or engaged in typical capital raising activities. Section 11 would apply as it would to anyone acting as underwriter with respect to a registered de-SPAC transaction, and such person will have liability for any material misstatement or omission in the registration statement.
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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