SEC Issues New SPAC/De-SPAC Rules: A Definitive Guide

On January 24, 2024, the Securities and Exchange Commission (“SEC”) adopted final rules relating to special purpose acquisition companies (“SPACs”). This email just touches on the material aspects of the final rules which consist of 581 pages. You can see the final rule here: https://www.sec.gov/files/rules/final/2024/33-11265.pdf

Definitions:

• “De-SPAC transaction” means 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).
• “Special purpose acquisition company means a company that has: (1) indicated that its business plan is to: (i) conduct a primary offering of securities that is not subject to the requirements of Rule 419 under the Securities Act of 1933 (“Securities Act”); (ii) 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 (iii) 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” means 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” means an operating company, business or assets.

Registered Offerings by SPACs: The new rules cover: (i) the forepart of the registration statement and the prospectus cover page; (ii) a new summary section; and (iii) a new dilution table.

SPAC sponsor; conflicts of interest: The focus is on identifying the SPAC sponsors and their compensation, including: (i) identifying the controlling persons; (ii) the extent to which the SPAC sponsor, its affiliates, and the promoters are involved in other special purpose acquisition companies; (iii) any agreement between the SPAC sponsor and the SPAC, its officers, directors, or affiliates with respect to determining whether to proceed with a de-SPAC transaction; (iv) the nature (e.g., cash, shares of stock, warrants and rights) and amounts of all compensation to be paid and whether any shares have been transferred, surrendered or cancelled; (v) any actual or potential conflicts of interest; and (vi) any fiduciary duties of each officer and director of the SPAC to other companies.

De-SPAC Transactions: The new rules cover: (i) the forepart of the registration statement and the prospectus cover page: (A) whether the SPAC has received an appraisal; (B) whether any material financing transactions that have occurred since the SPAC IPO or will occur in connection with the consummation of the de-SPAC transaction; (C) the compensation to be received in the de-SPAC transaction; and (D) any material conflicts of interest that have or may occur; (ii) a new summary section; and (iii) a new dilution table.

Background of and reasons for the de-SPAC transaction; terms of the de-SPAC transaction; effects: The registration statement must cover, among other things: (i) how the de-SPAC transaction came about; (ii) the material terms of the transaction; (iii) the financing of the transaction; (iv) differences in the rights of the stockholders of the two companies; (iv) the accounting treatment of the transaction; (v) the tax consequences of the transaction; and (vi) any material interests in the de-SPAC transaction or any related financing transaction held by the SPAC sponsor or the SPAC’s officers or directors.

Board determination about the de-SPAC transaction: Requires disclosure of: (i) whether the SPAC Board found the deal advisable and in the stockholders’ best interests; (ii) the factors used by the Board to reach their decision; (iii) whether the de-SPAC transaction is structured so that approval of at least a majority of unaffiliated security holders of the SPAC is required; (iii)  whether the Board has retained an unaffiliated representative to act solely on behalf of unaffiliated security holders for purposes of negotiating the terms of the de-SPAC transaction; and (iv) whether the de-SPAC transaction was approved by a majority of the SPAC board who are not employees.

Reports, opinions, appraisals, and negotiations: Requires disclosure if the SPAC or SPAC sponsor has received any report, opinion (other than an opinion of counsel) or appraisal from an outside party or an unaffiliated representative relating to the fairness and other matters of the de-SPAC transaction, and if so, summarize it.

Tender offer filing obligations: If the SPAC files a Schedule TO  for any redemption of securities offered to security holders, such Schedule TO must provide additional information from the Proxy Rules and the tender offer must be done in compliance with the Issuer Tender Offer Rules.

Projections: If projections are used in the registration statement, the SPAC must disclose their purpose, assumptions used, and whether the target company has approved them, among other things.

Forward Looking Statements: The rules adopt a definition of “blank check company” under the Private Securities Litigation Reform Act (“PSLRA”) that make the safe harbor for forward-looking statements under the PSLRA unavailable for such blank check companies, including SPACs.

Interactive Data File: The disclosure must comply with Rule 405 of Regulation S-T and the EDGAR Filer Manual. This requirement will become effective on or about May 28, 2025 (490 days after publication in the Federal Register).

Shell Company Mergers. The Final Rule also deals with shell company mergers. Under Rule 145a in certain business combination transactions where reporting shell companies, including SPACs, are parties, the combined company will be required to register the deemed sale of its securities to the pre-transaction reporting shell company shareholders at the time of the business combination, unless there is an available exemption. Thus, the target company will be a co-issuer/co-registrant and its directors and officers will have to sign the registration statement and will be subject to liability under the securities laws.

Amendments to Regulation S-X: The final Rules amend financial statement requirements and the forms and schedules filed in connection with business combination transactions involving shell companies (other than business combination related shell companies), including de-SPAC transactions, to align more closely required disclosures about the target company with those required in a Form S-1 or F-1 for an IPO, including: (i) expanding the circumstances in which target companies may report two years, instead of three years, of audited financial statements; and (ii) further aligning the requirements for audited financial statements in these transactions with those required in a registered IPO.

Effective Date: Except as for the IDF rule, the rules become effective on or about May 28, 2024 (125 days after publication in the Federal Register).

See the Fact Sheet here: https://www.sec.gov/files/33-11265-fact-sheet.pdf

See the Press Release here: https://www.sec.gov/news/press-release/2024-8

This memorandum is provided by Sichenzia Ross Ference Carmel LLP for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.