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New Rules On SPACS, Shell Companies And The Use of Projections – Enhanced Projections Disclosure; SAPCs And The Investment Company Act

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 SEC specifically requires enhanced disclosures with respect to compensation paid to sponsors, conflicts of interest, dilution, and the determination, if any, of the board of directors (or similar governing body) of a SPAC regarding whether a de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders. The SEC has also adopted rules that 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 has amended several financial statement requirements applicable to transactions involving shell companies.

In addition, the new rules require that a private operating company be a co-registrant when an SPAC files an S-4 or F-4 registration statement associated with a business combination; minimum dissemination periods for the distribution of shareholder de-SPAC communications; require a re-determination of smaller reporting company status within four days following the consummation of a de-SPAC transaction; and amend 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. Although the SEC did not adopt a proposed rule that would deem underwriters in a SPAC IPO to be underwriters in a de-SPAC transaction, they have provided guidance under the current rules, which could result in the same conclusion. Moreover, the rules provide guidance on investment company determinations, which impact all public companies.

Enhanced Projections Disclosure

Item 10(b) of Regulation S-K addresses the use of projections and requires that a Company have a reasonable basis for any future performance assessment. Item 10(b) also sets the SEC’s views on the need for disclosure of the assumptions underlying the projections, the limitations of such projections, and the format of the projections.

The SEC has amended Item 10(b) to (i) modify the presentation of projections by companies with no history of operations and (ii) expand the scope of the guidance in the Item to include projections of the future economic performance of entities other than the registrant such as the target in a business combination. The SEC has also adopted a new Item 1609 of Regulation S-K that will be particularly applicable to the use of projections in de-SPAC transactions, including expanding the disclosure requirements.

Item 10(b) has been amended to provide that:

  • Any projected measures that are not based on historical financial results or operational history should be clearly distinguished from projected measures that are based on historical results or operational history;
  • It generally would be misleading to present projections that are based on historical financial results or operational history without presenting such historical results or operational history with equal or greater prominence;
  • The presentation of projections that include a non-GAAP financial measure should include a clear definition or explanation of the measure, a description of the GAAP financial measure to which it is most directly comparable, and an explanation of why the non-GAAP financial measure is being used instead of a GAAP measure (for more on the use of non-GAAP measures, see; and
  • The guidance in Item 10(b) applies to any projections of future economic performance of persons other than the registrant, such as the target company in a business combination transaction, included in the registrant’s SEC filings.

New Item 1609 of Regulation S-K applies only to de-SPAC transactions and requires a registrant to provide the following disclosures:

  • With respect to any projections disclosed in the filing, the purpose for which the projections were prepared and the party that prepared the projections;
  • All material bases of the disclosed projections, all material assumptions underlying the projections, and any factors that may impact such assumptions (including a discussion of any material growth or reduction rates or discount rates used in preparing the projections and the reasons for selecting such growth rates or discount multiples); and
  • Whether the disclosed projections reflect the view of the board of directors (or similar governing body) or management of the SPAC or target company, as applicable, as of the most recent practicable date prior to the date of the disclosure document required to be disseminated to security holders; if not, then a statement regarding the purpose of disclosing the projections and the reasons for any continued reliance by management or the board on the projections.

The SEC has also amended General Instruction B to Form 8-K to require the information set forth in paragraphs (a) and (b) of Item 1609 in any Form 8-K report or exhibit to such report that relates to a de-SPAC transaction and includes projections that relate to the performance of the SPAC or the target company.

The Status Of SPACs Under The Investment Company Act

An issue that has plagued SPACs is allegations that a SPAC is a veiled unregistered Investment Company in contravention of the Investment Company Act of 1940 (’40 Act) and that its sponsors are acting in violation of the Investment Advisers Act of 1940. The allegations stem from a practice of investing the funds held in escrow in short-term government securities and money market funds. These investments can stem over a year, beginning at the close of the IPO and ending at the close of the de-SPAC transaction. A slew of lawsuits have been filed alleging investment company violations, including one against Bill Ackman’s $4 billion Pershing Square Tontine Holdings, Ltd., the largest SPAC in history to date.

Section 3(a)(1)(A) of the ’40 Act defines an “investment company” as any issuer that is or holds itself out as being engaged primarily or proposes to engage primarily in the business of investing, reinvesting, or trading in securities. Depending on the facts and circumstances, SPACs could meet the definition of “investment company.” To assess a SPAC’s status as an investment company, the SEC generally looks to the SPAC’s assets, the sources of its income, its historical development, its public representations of policy, and the activities of its officers and directors (known as the “Tonopah factors”).

To address these concerns, the SEC had originally proposed a limited safe harbor from the ’40 Act for SPACs that satisfy certain conditions, including the nature and management of SPAC assets, SPAC activities related to the de-SPAC transaction, and duration limitations. However, the SEC decided not to adopt the proposed amendment and instead issued guidance on facts and circumstances that are relevant to determine whether an SPAC meets the definition of an investment company under the ’40 Act, including applying the Tonopah factors.

The SEC breaks down its guidance by factors as follows:

The Nature Of SPAC Assets And Income

A SPAC may hold, or propose to hold, assets that would weigh heavily in favor of it being an investment company. For example, if a SPAC were to invest in corporate bonds or not engage in a de-SPAC transaction but instead acquire a minority interest in a company with the intention of being a passive investor, it could be deemed an investment company. Likewise, a SPAC whose income was primarily derived from investment assets would support a finding that the SPAC is an investment company.

On the other hand, a SPAC that holds only the sort of securities typically held by SPACs today, such as U.S. Government securities, money market funds and cash items prior to the completion of the de-SPAC transaction, and that does not propose to acquire investment securities, would be more likely not to be considered an investment company under the ’40 Act.

Management Activities

The actions of SPAC officers, directors and employees can support a finding that an SPAC is an investment company. For example, if management did not actively seek a de-SPAC transaction or spent a considerable amount of time actively managing the SPACs investment portfolio. Further, depending on the facts and circumstances, the management of an SPAC could also cause SPAC sponsors to come within the definition of “investment adviser” in the Investment Advisers Act.

An” investment adviser” is generally any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or any person who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.


While the duration of a SPAC is not the sole determinant of its status under the Investment Company Act, a SPAC’s activities may become more difficult to distinguish from those of an investment company the longer the SPAC takes to achieve its stated business purpose. For example, when a SPAC operates without completing a de-SPAC transaction with a target company, particularly where its assets are substantially composed of and its income derived from securities, its duration may indicate that its historical development is that of an investment company, even if its representations say otherwise. Similarly, the longer that a SPAC takes to achieve its stated business purpose, the more questions arise as to whether its officers, directors, and employees are more engaged in achieving investment returns from the securities the SPAC holds rather than in achieving the SPAC’s stated business purpose.

Generally, a SPAC that takes over 12-18 months to enter into a contract with a target company could be considered an investment company.

Holding Out

A SPAC that holds itself out in a manner that suggests that investors should invest in its securities primarily to gain exposure to its portfolio of securities prior to the de-SPAC transaction would likely be an investment company under the definition in section 3(a)(1)(A).

Merging With An Investment Company

If a SPAC were to engage or propose to engage in a de-SPAC transaction with a target company that meets the definition of an investment company, such as a closed-end fund or a business development company, the SPAC is likely to be an investment company under section 3(a)(1)(A).

Learn More About The Impact On Your Merger

Owners of an SPAC need the most up-to-date information about applicable laws and regulations. Contact ANTHONY, LINDER & CACOMANOLIS, PLLC, at 877-541-3263 or online to schedule a consultation.