New SEC Rules On SPACs And Shell Companies: Key Updates

On January 24, 2024, the SEC adopted final rules to enhance disclosure requirements for special purpose acquisition companies (SPAC) initial public offerings (IPOs) and de-SPAC business combination transactions. These rules align disclosures and legal liabilities in de-SPAC transactions with those in traditional IPOs. They extend beyond SPACs to include shell companies and blank check companies broadly.

The SEC now requires more detailed disclosures on:

• Compensation paid to sponsors
• Conflicts of interest
• Dilution
• Any board determination about whether a de-SPAC transaction benefits the SPAC and its shareholders

Additionally, the SEC considers any business combination involving a reporting shell company, including a SPAC, as a sale of securities to its shareholders. The rules also update financial statement requirements for shell company transactions.

Other key changes include:

• Requiring the private operating company to co-register when a SPAC files an S-4 or F-4 for a business combination
• Setting minimum dissemination periods for shareholder de-SPAC communications
• Mandating a redetermination of smaller reporting company status within four days after a de-SPAC transaction
• Amending the “blank check company” definition to exclude SPACs and similar entities from the Private Securities Litigation Reform Act (PSLRA) safe harbor for forward-looking statements, like projections

Although the SEC did not adopt a rule labeling SPAC IPO underwriters as underwriters in de-SPAC transactions, their guidance suggests this could apply. The rules also offer guidance on investment company determinations affecting all public companies.

What Is A SPAC?

A SPAC is a blank check shell company created to merge, exchange shares, acquire assets or combine with an unidentified target within a set period. Sponsors drive this process, a “de-SPAC” transaction, and use their expertise and reputation to form a successful public company.

SPACs follow a consistent structure. Sponsors buy founder shares for $25,000, typically representing 20% of the SPAC’s stock after the IPO (called the “promote” or “founder’s shares”). They also invest additional capital – about 5% of the IPO amount – to cover IPO costs, legal and accounting fees, and de-SPAC expenses such as due diligence and transaction costs. This investment often comes through a private placement, known as the sponsor PIPE, with terms more favorable than the IPO’s. The sponsor PIPE might include different stock classes, warrants or both, often leading to sponsors owning 25% or more of the post-IPO SPAC.

The SPAC IPO mirrors a traditional IPO. The SPAC files a Form S-1 or F-1, undergoes SEC review and lists on a national exchange. After the IPO, nearly all proceeds go into an escrow account, typically invested in treasury securities, raising questions about whether SPACs function as investment companies.

SPACs usually have 24 months to complete a business combination, which is extendable by one year with shareholder approval. If unsuccessful, escrow funds return to shareholders and sponsors lose their investment. This risk incentivizes sponsors to complete a deal, sometimes on less favorable terms, creating a conflict of interest with shareholders.

When a business combination is agreed upon, the SPAC files an 8-K or 6-K and seeks shareholder approval. Before the de-SPAC closes, shareholders can:

• Redeem their shares for a pro-rata share of the escrow funds
• Stay invested in the surviving company

Shareholders can vote “yes” on the deal and still redeem shares, retaining warrants for potential gains. To offset redemptions, SPACs often raise additional funds via a PIPE. Though structured as a merger or acquisition, the SEC views a de-SPAC as an IPO equivalent, as it takes the target company public.

Summary Of New Rules

The new rules add Subpart 1600 to Regulation S-K, requiring:

• More disclosures about the SPAC sponsor, conflicts of interest and dilution
• Specific de-SPAC transaction details, such as: 
  • Whether the SPAC’s jurisdiction requires the board to assess if the deal benefits shareholders and the board’s conclusion
  • Any external reports, opinions or appraisals received by the SPAC or sponsor, with related disclosures
  • Key information on prospectus cover pages and summaries for SPAC IPOs and de-SPAC transactions

The SEC also aligns de-SPAC rules with traditional IPOs by:

• Updating registration forms to include more target company disclosures
• Making the target company a co-registrant on de-SPAC registration statements, exposing it to Securities Act liability
• Requiring smaller reporting company status redetermination post-de-SPAC
• Redefining “blank check company” to exclude SPACs from PSLRA forward-looking statement protections

These rules apply to all shell companies in reverse acquisitions. The new Securities Act Rule 145a treats any reporting shell company business combination as a securities sale to its shareholders. A “reporting shell company” has minimal operations, nominal assets (or just cash) and Exchange Act reporting duties. Learn more about reporting obligations.

This shift has significant implications. Shell companies must now file an S-4 or F-4 registration statement – or find an exemption – before closing a deal. Our attorneys believe exemptions are rare, meaning most transactions will require registration. New Article 15 of Regulation S-X aligns shell company financial reporting with IPO standards.

Audited financials and Form 10 data are due in a Form 8-K within four days of closing for shell acquisitions. With prior S-4 or F-4 filings, the post-closing “Super 8-K” can incorporate this data, keeping it concise. The SEC also provides guidance on underwriter status in de-SPACs and SPAC classification under the Investment Company Act of 1940 based on specific circumstances.

How These New Rules Impact Your Organization

The SEC’s new rules affect SPACs and shell companies significantly. SPAC sponsors face stricter disclosures on compensation, conflicts and dilution, raising costs and scrutiny, with boards possibly needing to assess de-SPAC benefits formally. Target companies in de-SPACs or reverse mergers must co-register on S-4 or F-4, facing Securities Act liability and earlier financial reporting. Shell companies now require registration statements for all combinations, as rare exemptions increase time and expense. Investors lose PSLRA safe harbor for projections, and a post-de-SPAC status redetermination within four days may alter obligations. These changes align de-SPACs with IPO standards, affecting timelines, costs, and confidence.

Get Experienced Guidance On SEC Compliance Today

Navigating the complexities of the new SEC rules on SPACs and shell companies can be challenging. At ANTHONY, LINDER & CACOMANOLIS, PLLC, our attorneys are committed to keeping you informed and compliant. Our team of corporate securities lawyers offers comprehensive guidance, applying meticulous attention to detail and a thorough understanding of securities law to address these updates. Whether you’re a sponsor, target company or investor, we can help you adapt to increased disclosures, registration demands and liability risks. Contact us at 877-541-3263 to schedule a consultation with our experienced attorneys. Stay ahead of the curve – reach out today.