Always Evolving And Adapting

  1. Home
  2.  » New Rules On SPACs: Subpart 1600 Of Regulation S-K

New Rules On SPACs, Shell Companies And The Use Of Projections: New Subpart 1600 Of Regulation S-K

On January 24, 2024, the Securities and Exchange Commission (SEC) adopted final rules enhancing disclosure obligations for special purpose acquisition company (SPAC) initial public offerings (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 is specifically requiring 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 a SPAC files an S-4 or F-4 registration statement associated with a business combination; that there be minimum dissemination periods for the distribution of shareholder de-SPAC communications; that there be a redetermination of smaller reporting company status within four days following the consummation of a de-SPAC transaction; and that there be an amendment to the definition of a “blank-check company” to make the liability safe harbor in the Private Securities Litigation Reform Act of 1995 (PSLRA) for forward-looking statements, 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 that impact all public companies.

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) add 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 those to Forms S-1, F-1, S-4 and F-4; Schedules 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, a consolidation, an exchange of securities, an acquisition of assets, a reorganization or a 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, a consolidation, an exchange of securities, an acquisition of assets, a reorganization or a 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, a 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 lockup 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 increases in shares issued or to be issued.
  • 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.

Conflicts of Interest – Items 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 that investors have on the SPAC if no de-SPAC transaction takes place and claims that 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 also the SPAC officers, SPAC directors, target company officers and target company directors, 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 and are 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, which can require conflicts in time management and target company acquisition opportunities.

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% and 75% of the maximum redemption possible as well as 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, then 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; and (iii) 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.

De-SPAC Transactions: Background, Reasons, Terms And Effects – Item 1605

Item 1605 requires disclosure of the background, material terms and effects of the de-SPAC transaction, including:

  • A summary of the background of the de-SPAC transaction, including, but not limited to, a description of any contacts, negotiations or transactions that have occurred concerning the de-SPAC transaction
  • A brief description of any related financing transaction, including any payments from the SPAC sponsor to investors in connection with the financing transaction
  • A reasonably detailed discussion of the reasons of the SPAC and the target company for engaging in the de-SPAC transaction and reasons of the SPAC for the structure and timing of the de-SPAC transaction and any related financing transaction
  • An explanation of any material differences in the rights of SPAC and target company security holders as compared with security holders of the combined company as a result of the de-SPAC transaction
  • The federal income tax consequences of the de-SPAC transaction to the SPAC, the target company and its respective security holders
  • 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 or held by the target company’s officers or directors that consist of any interest in, or affiliation with, the SPAC sponsor or SPAC, including fiduciary or contractual obligations to other entities
  • A statement regarding whether security holders are entitled to any redemption or appraisal rights, a summary of such redemption of appraisal rights and, if there are no redemption or appraisal rights available for security holders who object to the de-SPAC transaction, a brief outline of any other rights that may be available to security holders

Board Determination About The De-SPAC Transaction – Reports, Opinions, Appraisals And Negotiations – Items 1606 And 1607

Final Rule 1606(a) requires disclosure as to whether the law of the SPAC organizational jurisdiction requires the board of directors (or a similar governing body) to determine whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, and if so, what that determination is. As noted by the SEC, the Delaware General Corporation Law requires a board of directors to adopt a resolution on – and declare the advisability of – any merger or consolidation, including a de-SPAC transaction.

Final Rule 1606(b) requires a discussion of a non-exclusive list of factors that the board considered in making a fairness determination, to the extent that such factors may have been considered. Factors would include, but not be limited to, the valuation of the target company; financial projections; the terms of financing materially related to the de-SPAC transaction; any report, opinion or appraisal; and dilution.

Item 1606(c) through (e) require additional information about the de-SPAC transaction and related financings, including shareholder approval requirements and adviser involvement. Final items 1606(c) through (e) require the following disclosures:

  • The identity of any director that voted for or against or abstained on approval of the de-SPAC transactions
  • Whether a vote of unaffiliated SPAC shareholders is required to approve the transactions
  • The use of unaffiliated advisers or representatives

Item 1607 requires disclosure about whether the SPAC or SPAC sponsor received any report, opinion or appraisal from an outside party relating to the consideration or the fairness of the consideration to be offered to security holders. The rule also requires disclosure of certain information about such report, opinion or appraisal, if any, and any individuals involved in its preparation, including qualifications and affiliations. Part of this disclosure includes whether an adviser, the SPAC or a SPAC sponsor determined the consideration to be paid to or the valuation of the target company. All such reports must be filed as exhibits to Forms S-4 and F-4, Schedule TO, or Schedules 14A or 14C as used in the transactions.

Tender Offer Filing Obligations – Item 1608

Item 1608 requires that a Schedule TO filed in connection with a de-SPAC transaction contain substantially the same information about a target private operating company that is required under the proxy rules. Item 1608 also requires specific disclosures about redemptions and extensions of time when a Schedule TO is used in a de-SPAC transaction.

It should be noted that, although redemption rights and the solicitation of redemptions are in effect the same as a tender offer – where a SPAC is subject to and complies with Regulations 14A or 14C and files Schedules 14A or 14C – the SEC does not and will not require compliance with the separate tender offer rules. Since a foreign portfolio investment (FPI) is not subject to the proxy rules, it would need to file a Schedule TO complying with new Item 1608 if an F-4 is not used.

Structured Data Requirements – Item 1610

New Item 1610 requires SPACs to tag all information disclosed pursuant to Subpart 1600 using inline XBRL.

Further Guidance From A Robust Team Of Corporate Securities Lawyers

Given the complexity of these new regulations – and the high stakes involved – it’s critical to seek legal guidance on how they apply to your organization. Our attorneys at ANTHONY, LINDER & CACOMANOLIS, PLLC, provide diligent guidance on all the nuances of the latest regulations. They draw on more than a century of combined legal experience to successfully steer clients through the maze of corporate securities law.

Learn more by submitting a quick contact form or calling 877-541-3263 to reach our office.