SEC Proposes Rules on Special Purpose Acquisition Companies, Shell Companies and Projections

SEC Proposes Rules on Special Purpose Acquisition Companies, Shell Companies and Projections

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On March 30, 2022, the U.S. Securities and Exchange Commission (“SEC”) proposed rules under the Securities Act of 1933 and Securities Exchange Act of 1934 to codify enhancements of disclosure and procedural requirements applicable to special purpose acquisition companies (“SPACs”) in initial public offerings (“IPOs”) and business combination transactions involving shell companies.

The term SPAC refers to a company formed by a sponsor to raise capital through an IPO for the purpose of transacting a business combination involving one or more target private operating companies. The term business combination transaction could refer to a merger, consolidation, exchange of securities, acquisition of assets or similar transaction. Under the proposed rules, “de-SPAC” refers to a business combination involving a SPAC and one or more target companies – and a “target company” would be defined as an operating company, business or assets. Additionally, the proposal addresses the status of SPACs under the Investment Company Act of 1940.

To address the significant financial risks posed to shareholders of SPACs and to reduce information asymmetry surrounding shell company business combinations, including de-SPAC transactions, the rules would require:

  • Sponsor Disclosures. Proposed rule amendments would require additional disclosures regarding a sponsor, its affiliates and any promoters of a SPAC.
  • Dilution Disclosures. Potential sources of dilution in a SPAC’s structure include shareholder redemptions, sponsor compensation, underwriting fees, outstanding warrants and convertible securities, and private investment in public equity (“PIPE”) transactions, all of which would require certain disclosures.
  • Minimum Dissemination Period. Amended rules would require certain information statements filed in connection with de-SPAC transactions to be distributed to shareholders at least 20 calendar days in advance of a shareholder meeting or the earliest date permitted.
  • Modification of Definitions and Statuses. The SEC proposed to revise the definition of:
    • “Blank check company” would refer to 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.
    • The amended definition of blank check company was modified to remove the current “penny stock” condition for meeting the definition and, therefore, would encompass blank check entities (i.e., SPACs) which raise more than $5 million in a firm commitment underwritten IPO.
    • Anyone who has acted as an underwriter in a SPAC IPO and “participates in the distribution by taking steps to facilitate the de-SPAC transaction, or any related financing transaction,” or otherwise participates in the de-SPAC transaction “to be engaged in the distribution of the securities of the surviving public entity.”
  • Projections Guidance and Target Companies as Co-Registrants. To allow investors to better assess the reliability of projections and whether they have a reasonable basis, registration statements filed in connection with a business combination transaction of a reporting shell company involving a non-shell company entity would, among other things, be required to include certain performance disclosures and target companies as co-registrants.

The proposed rules would deem any business combination of a “reporting shell company” involving an entity that is not a shell company (i.e., the target company) to involve a sale of securities to the reporting shell company’s shareholders. These transactions, absent a valid exemption of federal securities laws, would be required to be registered, which could trigger additional pre-sale disclosures and affect when SPACs may be required to file a Form S-4 or F-4 in connection with de-SPAC transactions.

Finally, the trust accounts established by blank check companies that comply with Rule 419 are known as “Rule 419 Accounts.” The proposed rules address the status of Rule 419 Accounts and the fact that a Rule 419 Account may be an investment company under the Investment Company Act. The SEC generally looks at the SPAC’s source of income, its historical development, its public representations of policy, and the activities of its officers and directors before determining whether the SPAC meets the definition of “investment company.” If adopted, the proposed rules would provide that a SPAC meeting certain conditions would not need to register as an investment company.

These proposed rules present a complex framework and intentionally broad definitions that encompass more typical transactions, such as the acquisition of one or more private operating companies by a shell company, as well as less common transactions that may or may not be permitted under exchange listing rules, but for which the proposed enhanced disclosure and procedural requirements described may be regarded as appropriate because they raise the same investor protection concerns.

If you have any questions about how these proposed rules would affect your firm or any strategy your firm implements, please contact your Greyline representative.

Read the SEC press release here.

Read the proposed rules here

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Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
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