# Conformed to Federal Register version > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/agency%3Asec%3A4469d48d980bea52 ## Record - **Collection:** Agency decision - **Document type:** Agency decision ## Text Conformed to Federal Register version SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 210, 229, 230, 232, 239, 240, and 249 [Release Nos. 33-11265; 34-99418; IC-35096; File No. S7-13-22] RIN 3235-AM90 Special Purpose Acquisition Companies, Shell Companies, and Projections AGENCY: Securities and Exchange Commission. ACTION: Final rules; guidance. SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting rules intended to enhance investor protections in initial public offerings by special purpose acquisition companies (commonly known as SPACs) and in subsequent business combination transactions between SPACs and private operating companies (commonly known as de-SPAC transactions). Specifically, we are adopting disclosure requirements with respect to, among other things, 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 security holders. We are adopting rules that require a minimum dissemination period for the distribution of security holder communication materials in connection with de-SPAC transactions. We are adopting rules that require the re-determination of smaller reporting company (“SRC”) status in connection with de-SPAC transactions. We are also adopting rules that address the scope of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act of 1995. Further, we are adopting a rule that would deem any business combination transaction involving a reporting shell company, including a SPAC, to be a sale of securities to the reporting shell company’s shareholders and are adopting amendments to a number of financial statement requirements applicable to transactions involving shell companies. In addition, we are providing guidance on the status of potential underwriters in de-SPAC transactions and adopting updates to our guidance regarding the use of projections in Commission filings as well as requiring additional disclosure regarding projections when used in connection with business combination transactions involving SPACs. Finally, we are providing guidance for SPACs to consider when analyzing their status under the Investment Company Act of 1940. DATES: Effective date: The final rules are effective on July 1, 2024. Compliance date: The compliance date for the final rules, other than 17 CFR 229.1610, is July 1, 2024. The compliance date for 17 CFR 229.1610 is June 30, 2025. FOR FURTHER INFORMATION CONTACT: Mark Saltzburg, Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430; with respect to 17 CFR 230.145a (Rule 145a under the Securities Act of 1933), the Office of Chief Counsel, Division of Corporation Finance, at (202) 551-3500; with respect to 17 CFR 210.15-01 (Rule 15-01 of Regulation S-X), Ryan Milne, Office of Chief Accountant, Division of Corporation Finance, at (202) 551-3400; with respect to amendments relating to projections disclosure and tender offer rules, Daniel Duchovny, Office of Mergers & Acquisitions, Division of Corporation Finance, at (202) 5513440; and with respect to guidance under the Investment Company Act of 1940, Rochelle Kauffman Plesset, Seth Davis, or Taylor Evenson, Senior Counsels; or Lisa Reid Ragen, Branch Chief, Chief Counsel’s Office, Division of Investment Management, at (202) 551-6825; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. 2 SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR 210.15-01, new 17 CFR 229.1601 through 229.1610 (Item 1600 series of Regulation S-K), and new 17 CFR 230.145a. We are also adopting amendments to: CFR Citation (17 CFR) Commission Reference Securities Act of 1933 Rule 405 § 230.405 Form S-1 § 239.11 Form F-1 § 239.31 Form S-4 § 239.25 Form F-4 § 239.34 Rule 12b-2 § 240.12b-2 Rule 14a-6 § 240.14a-6 Rule 14c-2 § 240.14c-2 Schedule 14A § 240.14a-101 Schedule TO § 240.14d-100 Form 20-F § 249.220f Form 8-K § 249.308 Securities Exchange Act of 1934 Regulation S-K §§ 229.10 through 229.1406 Item 10 § 229.10 Item 601 § 229.601 Regulation S-T §§ 232.10 through 232.903 Rule 405 § 232.405 §§ 210.1-01 through 210.1302 Regulation S-X 3 Rule 1-02 § 210.1-02 Rule 3-01 § 210.3-01 Rule 3-05 § 210.3-05 Rule 3-14 § 210.3-14 Rule 8-02 § 210.8-02 Rule 10-01 § 210.10-01 TABLE OF CONTENTS I. INTRODUCTION ................................................................................................................... 8 II. NEW SUBPART 1600 OF REGULATION S-K .................................................................. 23 A. Definitions......................................................................................................................... 24 1. Proposed Definition: “De-SPAC Transaction” .............................................................. 24 2. Comments: Definition of “De-SPAC Transaction” ....................................................... 24 3. Final Definition: “De-SPAC Transaction” ..................................................................... 25 4. Proposed Definition: “Special Purpose Acquisition Company (SPAC)” ...................... 26 5. Comments: Definition of “Special Purpose Acquisition Company (SPAC)”................ 27 6. Final Definition: “Special Purpose Acquisition Company (SPAC)” ............................. 28 7. Proposed Definition: “SPAC Sponsor” .......................................................................... 35 8. Comments: Definition of “SPAC Sponsor” ................................................................... 35 9. Final Definition: “SPAC Sponsor” ................................................................................ 36 10. Proposed Definition: “Target Company” ....................................................................... 39 11. Comments: Definition of “Target Company” ................................................................ 39 12. Final Definition: “Target Company”.............................................................................. 40 B. Sponsors ............................................................................................................................ 40 1. Proposed Rules ............................................................................................................... 40 2. Comments....................................................................................................................... 42 3. Final Rules...................................................................................................................... 47 C. Conflicts of Interest........................................................................................................... 59 1. Proposed Rules ............................................................................................................... 59 2. Comments....................................................................................................................... 61 3. Final Rules...................................................................................................................... 64 D. Dilution ............................................................................................................................. 72 1. Proposed Rules ............................................................................................................... 72 2. Comments....................................................................................................................... 76 3. Final Rules...................................................................................................................... 85 E. Prospectus Cover Page and Prospectus Summary Disclosure ........................................ 117 1. Proposed Rules ............................................................................................................. 117 2. Comments..................................................................................................................... 120 3. Final Rules.................................................................................................................... 121 F. De-SPAC Transactions: Background, Reasons, Terms, and Effects .............................. 126 1. Proposed Item 1605 ...................................................................................................... 126 2. Comments: Item 1605 .................................................................................................. 127 3. Final Item 1605 ............................................................................................................ 128 G. Board Determination about the De-SPAC Transaction; Reports, Opinions, Appraisals, and Negotiations .................................................................................................................. 132 1. Proposed Item 1606(a) ................................................................................................. 132 2. Comments: Item 1606(a) .............................................................................................. 132 3. Final Item 1606(a) ........................................................................................................ 135 4. Proposed Item 1606(b) ................................................................................................. 140 5. Comments: Item 1606(b) ............................................................................................. 141 6. Final Item 1606(b) ........................................................................................................ 142 7. Proposed Item 1606(c) through (e) .............................................................................. 145 8. Comments: Item 1606(c) through (e) ........................................................................... 145 4 9. Final Item 1606(c) through (e) ..................................................................................... 147 10. Proposed Item 1607 ...................................................................................................... 149 11. Comments: Item 1607 .................................................................................................. 150 12. Final Item 1607 ............................................................................................................ 152 H. Tender Offer Filing Obligations ..................................................................................... 156 1. Proposed Item 1608 ...................................................................................................... 156 2. Comments: Item 1608 .................................................................................................. 157 3. Final Item 1608 ............................................................................................................ 158 I. Structured Data Requirement .......................................................................................... 161 1. Proposed Item 1610 ...................................................................................................... 161 2. Comments..................................................................................................................... 161 3. Final Item 1610 and Tagging Compliance Date .......................................................... 163 III. DISCLOSURES AND LIABILITY IN DE-SPAC TRANSACTIONS.............................. 166 A. Non-Financial Disclosures in De-SPAC Disclosure Documents ................................... 167 1. Proposed Rules ............................................................................................................. 167 2. Comments..................................................................................................................... 168 3. Final Rules.................................................................................................................... 169 B. Minimum Dissemination Period ..................................................................................... 172 1. Proposed Rules ............................................................................................................. 172 2. Comments..................................................................................................................... 173 3. Final Rules.................................................................................................................... 175 C. Private Operating Company as Co-Registrant ................................................................ 179 1. Proposed Rules ............................................................................................................. 179 2. Comments..................................................................................................................... 180 3. Final Rules.................................................................................................................... 190 D. Re-Determination of Smaller Reporting Company (SRC) Status .................................. 211 1. Proposed Rules ............................................................................................................. 211 2. Comments..................................................................................................................... 212 3. Final Rules and Guidance ............................................................................................ 219 E. PSLRA Safe Harbor ........................................................................................................ 231 1. Proposed Rules ............................................................................................................. 231 2. Comments..................................................................................................................... 234 3. Final Rules.................................................................................................................... 255 F. Underwriter Status and Liability in Securities Transactions .......................................... 278 1. Proposed Rule .............................................................................................................. 278 2. Comments..................................................................................................................... 279 3. Declining to Adopt Proposed Rule 140a; Commission Guidance on Underwriter Status in De-SPAC Transactions ............................................................................................ 282 IV. BUSINESS COMBINATIONS INVOLVING SHELL COMPANIES .............................. 289 A. Shell Company Business Combinations and the Securities Act of 1933 ........................ 290 1. Proposed Rule .............................................................................................................. 290 2. Comments..................................................................................................................... 290 3. Final Rule ..................................................................................................................... 293 B. Financial Statement Requirements in Business Combination Transactions Involving Shell Companies ........................................................................................................................... 308 1. Proposed Rule 15-01(a), Rule 1-02(d), and Form Instructions: Audit Requirements . 309 5 2. Comments: Rule 15-01(a), Rule 1-02(d), and Form Instructions: Audit Requirements ...................................................................................................................................... 310 3. Final Rule 15-01(a), Rule 1-02(d), and Form Instructions: Audit Requirements ........ 311 4. Proposed Rule 15-01(b): Number of Years of Financial Statements ........................... 314 5. Comments: Rule 15-01(b): Number of Years of Financial Statements ....................... 315 6. Final Rule 15-01(b): Number of Years of Financial Statements ................................. 315 7. Proposed Rule 15-01(c): Age of Financial Statements ................................................ 316 8. Comments: Rule 15-01(c): Age of Financial Statements............................................. 317 9. Final Rule 15-01(c): Age of Financial Statements ....................................................... 317 10. Proposed Rules: 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a Predecessor ................................................... 319 11. Comments: Rules 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a Predecessor ................................................... 323 12. Final Rules 15-01(d), 1-02(w)(1), 3-05(b)(4)(ii), 3-14(b)(3)(ii): Acquisition of a Business or Real Estate Operation by a Predecessor ................................................... 324 13. Proposed Rule 15-01(e): Financial Statements of a Shell Company Registrant after the Combination with Predecessor..................................................................................... 328 14. Comments: Rule 15-01(e): Financial Statements of a Shell Company Registrant after the Combination with Predecessor ............................................................................... 329 15. Final Rule 15-01(e): Financial Statements of a Shell Company Registrant after the Combination with Predecessor..................................................................................... 330 16. Proposed Rule 11-01(d) ............................................................................................... 332 17. Comments: Rule 11-01(d) ............................................................................................ 334 18. Decline to Adopt Rule 11-01(d) ................................................................................... 336 19. Proposed Item 2.01(f) of Form 8-K ............................................................................. 338 20. Comments: Item 2.01(f) of Form 8-K .......................................................................... 338 21. Final Item 2.01(f) of Form 8-K .................................................................................... 339 22. Proposed Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of Predecessors .................. 340 23. Comments: Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of Predecessors ............... 340 24. Final Rules 3-01, 8-02, 10-01(a)(1): Balance Sheets of Predecessors ......................... 340 25. Other Shell Company Matters ...................................................................................... 341 V. ENHANCED PROJECTIONS DISCLOSURE .................................................................. 343 A. Proposed Items 10(b) and 1609 of Regulation S-K ........................................................ 343 1. Proposed Rules ............................................................................................................. 343 2. Comments..................................................................................................................... 345 3. Final Rules.................................................................................................................... 350 VI. THE STATUS OF SPACS UNDER THE INVESTMENT COMPANY ACT .................. 359 A. Background ..................................................................................................................... 359 B. SPAC Activities .............................................................................................................. 364 1. The Nature of SPAC Assets and Income ..................................................................... 364 2. Management Activities ................................................................................................ 365 3. Duration ........................................................................................................................ 367 4. Holding Out .................................................................................................................. 369 5. Merging with an Investment Company ........................................................................ 369 C. Conclusion ...................................................................................................................... 370 VII. OTHER MATTERS ............................................................................................................ 370 6 VIII. ECONOMIC ANALYSIS............................................................................................ 370 A. Baseline and Affected Parties ......................................................................................... 376 1. SPAC Initial Public Offerings ...................................................................................... 376 2. De-SPAC Transactions ................................................................................................ 384 3. Blank Check Companies .............................................................................................. 393 4. Shell Company Business Combinations ...................................................................... 394 B. Benefits and Costs of the Adopted Rules ....................................................................... 395 1. Disclosure-Related Rules ............................................................................................. 395 2. Liability-Related Rules ................................................................................................ 453 3. Shell Company-Related Rules ..................................................................................... 466 4. Enhanced Projections Disclosure (Amendments to Item 10(b) of Regulation S-K).... 478 C. Effects on Efficiency, Competition, and Capital Formation........................................... 480 1. Efficiency ..................................................................................................................... 480 2. Competition .................................................................................................................. 481 3. Capital Formation ......................................................................................................... 482 D. Reasonable Alternatives.................................................................................................. 484 1. Disclosure-Related Rules ............................................................................................. 484 2. PSLRA Safe Harbor Guidance ..................................................................................... 492 3. Expanding Disclosure in Reporting Shell Company Business Combinations ............. 492 4. Enhanced Projections Disclosure ................................................................................. 494 IX. PAPERWORK REDUCTION ACT ................................................................................... 494 A. Summary of the Collections of Information ................................................................... 494 B. Estimates of the Effects of the Final Rules on the Collections of Information .............. 496 C. Incremental and Aggregate Burden and Cost Estimates................................................. 501 1. Current Inventory Update to Reflect $600 Per Hour Rather than $400 Per Hour Outside Professional Costs Rate ................................................................................................ 501 2. PRA Burden and Cost Estimates Resulting from the Final Rules ............................... 503 X. FINAL REGULATORY FLEXIBILITY ANALYSIS ....................................................... 511 A. Need for, and Objectives of, the Final Rules .................................................................. 511 B. Significant Issues Raised by Public Comments .............................................................. 513 C. Small Entities Subject to the Final Rules ........................................................................ 513 D. Projected Reporting, Recordkeeping, and Other Compliance Requirements ................. 515 E. Duplicative, Overlapping or Conflicting Federal Rules ................................................. 515 F. Agency Action to Minimize Effect on Small Entities .................................................... 516 STATUTORY AUTHORITY .................................................................................................... 519 7 I. INTRODUCTION Special purpose acquisition companies, or SPACs, first began to emerge in the 1990s as an alternative to blank check companies after blank check companies began to be regulated more strictly pursuant to 17 CFR 230.419 (“Rule 419”1 under the Securities Act of 1933 (“Securities Act”)),2 a rule the Commission adopted following the enactment of the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (“Penny Stock Reform Act”).3 SPACs are shell companies4 organized and managed by a sponsor for the purpose of merging with or acquiring one or more unidentified private operating companies, commonly known as a de-SPAC transaction, within a certain time frame.5 The de-SPAC transaction is a hybrid transaction that contains elements of both an initial public offering (“IPO”) and a merger and acquisition (“M&A”) transaction.6 While structured as an M&A transaction, the de-SPAC transaction also 1 The regulation at 17 CFR 230.419(a)(2) defines the term “blank check company” as a development stage company that has no specific business plan or purpose or that has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies and that is issuing “penny stock,” as defined in 17 CFR 240.3a51-1 (“Rule 3a51-1” under the Securities Exchange Act of 1934). 2 15 U.S.C. 77a et seq. 3 Pub. L. 101-429, 104 Stat. 931 (Oct. 15, 1990). See Blank Check Offerings, Release No. 33-6932 (Apr. 13, 1992) [57 FR 18037 (Apr. 28, 1992)]. A SPAC is not a “blank check company” because, given that it raises more than $5 million in a firm commitment underwritten initial public offering, it is not selling “penny stock.” See Penny Stock Definition for Purposes of Blank Check Rule, Release No. 33-7024 (Oct. 25, 1993) [58 FR 58099 (Oct. 29, 1993)]. To that end, SPACs often have provisions in their governing instruments that prohibit them from being “penny stock” issuers. 4 The term “shell company” is defined in Securities Act Rule 405 and Exchange Act Rule 12b-2 as a registrant, other than an asset-backed issuer, that has: (1) no or nominal operations; and (2) either: (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. 5 The descriptions included in this release of common features and fees currently seen in SPACs and SPAC transaction structures are based, in part, on reviews by the Commission staff of SPAC filings with the Commission. Based on review by the Commission staff of SPAC filings, in the majority of transactions, SPACs typically combine with private operating companies. In some cases, however, SPACs may combine with other public companies. See, e.g., Bailey Lipschultz, Re-SPACs Gain Steam as Arrival Finds New Sponsor, Bloomberg News (Apr. 10, 2023), available at https://news.bloomberglaw.com/mergers-andacquisitions/re-spacs-gain-steam-as-arrival-shares-sink-new-sponsor-steps-up. 6 We use the terms “initial public offering” or “IPO” to refer to a securities offering registered under the Securities Act by an issuer that was not subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934 immediately prior to the registration. 8 is the functional equivalent of the private target company’s IPO, because it results in the target company becoming part of a combined company that is a reporting company and provides the private target company with access to cash proceeds that the SPAC had previously raised from the public. As part of this process, the shareholders of the SPAC go from owning shares in a shell company to owning shares in a combined company that conducts the business of the private target. As a result, the de-SPAC transaction implicates disclosure and liability concerns associated with both IPOs and M&A transactions. Additionally, parties involved in the SPAC process, such as the SPAC sponsor, may have incentives to consummate a de-SPAC transaction that are not present in a traditional IPO or M&A transaction. Further, as discussed in the Proposing Release,7 the shareholders and management of a private operating company may believe there to be certain advantages of combining with a SPAC compared with conducting an underwritten IPO. To have the necessary context for the concerns unique to SPACs and de-SPAC transactions, it is critical to understand the structure and lifecycle of a SPAC. Once formed, a SPAC will conduct its IPO in the form of a firm commitment underwritten IPO of $5 million or more in units consisting of redeemable shares and of warrants. The underwriting fees for a SPAC IPO typically approximate 5% to 5.5% of the offering proceeds, and a significant portion of those fees (around 3% of the IPO proceeds) are conditioned on the completion of a de-SPAC transaction.8 The SPAC sponsor is usually compensated through a “promote” or “founder’s 7 Special Purpose Acquisition Companies, Shell Companies, and Projections, Release No. 33-11048 (Mar. 30, 2022) [87 FR 29458 (May 13, 2022)] (“Proposing Release”), at 29461, nn.22–25 and accompanying text. See infra section VIII.A.1.ii. 8 See infra section VIII.A.1.iii. 9 shares”—i.e., discounted SPAC shares received prior to the SPAC’s IPO that generally only have value if a de-SPAC transaction occurs.9 Following its IPO, a SPAC places all or substantially all of the IPO proceeds into a trust or escrow account. The SPAC typically registers its shares and warrants under section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”)10 and lists the units (typically consisting of a common share and a fraction of a warrant) for trading on a national securities exchange.11 Next, the SPAC seeks to identify a target company for a de-SPAC transaction within the time frame specified in its governing documents.12 If the SPAC does not complete a de-SPAC transaction within that time frame, it may seek an extension (often requiring approval from its shareholders) or dissolve and liquidate.13 If the SPAC enters into a business combination agreement with a target company, the SPAC files a Form 8-K (or Form 6-K if the SPAC is a foreign private issuer (“FPI”) that reports on Form 20-F)14 announcing the transaction that 9 The sponsor’s compensation usually amounts to around 20% of the total shares of a SPAC after its IPO. 10 15 U.S.C. 78a et seq. 11 The shares and warrants usually begin trading as a unit, with a unit frequently consisting of a common share and a fraction of a warrant, and are traded separately after a certain period. The warrants often become exercisable at a price that is higher (often $11.50) than the IPO price for common shares (which is often $10) upon the later of the passage of a certain time period following the SPAC’s IPO (often one year) or a certain time period following the completion of a de-SPAC transaction (often 30 days). Many warrants have limitations on their potential upside as a result of the right of the issuer to call the warrant under certain conditions, which commonly include a condition that the underlying common stock have traded at or above a certain price (often $18) for a specified period of time. The redemption price in those call situations can vary based on the specific warrant agreement provisions, so investors commonly pay close attention to those pricing provisions. 12 The governing documents often provide for a time frame of 24 months, but it can be as long as 36 months. Exchange listing rules generally require a SPAC to complete a business combination within three years (or such shorter period specified in its registration statement or applicable governing documents). See, e.g., NYSE Listed Company Manual Section 102.06 and Nasdaq Listing Rule IM-5101-2. 13 SPAC shareholders typically also have a redemption right in connection with any votes to extend the duration of the SPAC. 14 See definition of “foreign private issuer,” infra note 442. 10 includes certain information on the material terms of the business combination agreement.15 The parties structure the de-SPAC transaction in different forms that may have tax or other regulatory advantages.16 Prior to the closing of the de-SPAC transaction, the shareholders of the SPAC typically have the opportunity to either: (1) require the SPAC to redeem their shares prior to the de-SPAC transaction17 and receive a pro rata share of the amount in the IPO proceeds and related assets subject to the trust or escrow arrangements (including interest thereon and commonly less amounts released to pay income and franchise taxes), or (2) remain a shareholder of the surviving company after the business combination.18 To offset shareholder redemptions or to fund larger de-SPAC transactions, SPACs often conduct additional private capital-raising transactions, typically in the form of private investment in public equity (PIPE) transactions.19 Regardless of its form, a de-SPAC transaction often is accompanied by the need to attain shareholder approval for certain items (e.g., amendments to the governing documents of the SPAC, or authorization of additional securities for issuance), and, in such cases, a SPAC 15 A SPAC is required to file a Form 8-K that provides certain disclosures regarding the business combination agreement if the agreement is a material definitive agreement not made in the ordinary course of business. See Item 1.01 of Form 8-K. 16 Three examples of common de-SPAC transaction structures are: (i) the SPAC is the surviving company in a merger and the target company merges into the SPAC, (ii) the target company is the surviving company in a merger and the SPAC merges into the target company, and (iii) a new holding company is created and the SPAC and target company merge into that new holding company. The holding company structure referred to in (iii) above includes “double-dummy” structure transactions. 17 Until they become exercisable, warrants issued by the SPAC do not typically provide a right to require the redemption of the warrant by any party. 18 De-SPAC transactions often result in the former SPAC shareholders owning a minority interest in the combined company. According to one study of the 47 de-SPAC transactions that occurred between Jan. 2019 and June 2020, SPAC shareholders, including the SPAC sponsor, held a median of 35% of the combined company after a de-SPAC transaction and the sponsor alone held a median of 12% of the combined company. Michael Klausner, Michael Ohlrogge & Emily Ruan, A Sober Look at SPACs, 39 Yale J. Reg., 228, 239–240 (2022). 19 The parties to a de-SPAC transaction often negotiate a minimum cash condition pursuant to which a SPAC must have a specified minimum amount of cash at the closing of the de-SPAC transaction, which could include funds in the trust or escrow account, the proceeds from PIPE transactions, and other sources. When a SPAC conducts a PIPE transaction in connection with a de-SPAC transaction, the post-business combination company generally files a Securities Act registration statement following the de-SPAC transaction to register the resale of the securities purchased in the PIPE transaction. 11 provides its shareholders with a proxy statement on Schedule 14A or an information statement on Schedule 14C.20 If the SPAC, the target company, or a holding company21 must register the offer and sale of its securities to be issued in the de-SPAC transaction, the entity typically files a registration statement on Form S-4 or F-4 to do so.22 If no registration statement or proxy or information statement is required, the SPAC may disseminate a tender offer statement (i.e., a Schedule TO) for the redemption offer to its security holders with information about the target company.23 20 17 CFR 240.14a-2; Exchange Act Rule 14c-2. The regulation at 17 CFR 240.3a12-3(b) provides an exemption from the proxy and information statement rules for FPIs, providing that “[s]ecurities registered by a foreign private issuer, as defined in Rule 3b-4…, shall be exempt from sections 14(a), 14(b), 14(c), 14(f) and 16 of the Act.” 21 In certain de-SPAC structures, a holding company is formed to acquire both the private operating company and the SPAC. 22 As noted above, SPACs currently use a variety of legal structures to effect de-SPAC transactions, and the particular transaction structure and the consideration used can affect (1) the Commission filings required for the transaction, (2) the entity that will have a continuing Exchange Act reporting obligation following the transaction, and (3) the disclosures provided in connection with the transaction. 23 The Commission has promulgated rules under the Exchange Act setting forth filing, disclosure, and dissemination requirements in connection with tender offers. See, e.g., 17 CFR 240.14d-1 through 240.14d103, 17 CFR 240.14e-1 through 240.14e-8 (“Regulation 14E” under the Exchange Act), and 17 CFR 240.13e-4 (“Rule 13e-4” under the Exchange Act). When an issuer conducts a tender offer, the issuer may be required to file and disseminate a Schedule TO pursuant to Rule 13e-4. Because the redemption rights in a SPAC context generally have indicia of a tender offer, such as a limited period of time for the SPAC security holders to request redemption of their securities, SPACs will generally file a Schedule TO in circumstances where, in connection with a de-SPAC transaction, the parties are neither soliciting votes or consents nor registering the offer or sale of securities. The Commission staff has not objected if a SPAC does not comply with the tender offer rules when the SPAC files a required Schedule 14A or 14C in connection with the approval of a de-SPAC transaction or an extension of the timeframe to complete a de-SPAC transaction and conducts the solicitation in accordance with 17 CFR 240.14a-1 through 240.14b-2 (“Regulation 14A” under the Exchange Act) or 240.14c1 through 240.14c-101 (“Regulation 14C” under the Exchange Act), as the Federal proxy rules mandate substantially similar disclosures and applicable procedural protections as required by the tender offer rules. However, this staff position does not apply to a SPAC that does not file a required Schedule 14A or 14C in connection with the de-SPAC transaction or an extension. In these circumstances, SPACs have generally filed and disseminated Schedules TO, and the staff has taken the position that the Schedule TO should include the same financial and other information as is required in Schedule 14A or 14C for a de-SPAC transaction. See infra section II.H for a discussion of 17 CFR 229.1608 (“Item 1608” of Regulation S-K) that we are adopting in this release and section IV.A for a discussion of Rule 145a under the Securities Act that we are adopting in this release, which will affect when a SPAC may be required to file a registration statement in connection with a deSPAC transaction. For exchange-listed SPACs, exchange rules may require a SPAC to file tender offer documents with the Commission in some circumstances. See, e.g., Nasdaq Listing Rule IM-5101-2; NYSE Listed Company Manual Section 102.06. The staff position discussed in this footnote and any other staff guidance or statements referenced in this release, including staff legal bulletins, staff compliance and disclosure 12 Finally, after the completion of the de-SPAC transaction, the combined company must file a Form 8-K within four business days that includes information about the target company equivalent to the information that a new reporting company would be required to provide when filing a Form 10 under the Exchange Act.24 In recent years, the U.S. securities market experienced a significant increase in the number of SPAC IPOs, as shown in Table 125 below. interpretations, and the Division of Corporation Finance’s Financial Reporting Manual (“FRM”), represent the views of Commission staff and are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the views reflected in these staff positions or the content of these staff statements and, like all staff positions or statements, they have no legal force or effect, do not alter or amend applicable law, and create no new or additional obligations for any person. 24 Form 10 is the long-form registration statement to register a class of securities under section 12(b) or 12(g) of the Exchange Act. See Items 2.01(f), 5.01(a)(8), and 9.01(c) of Form 8-K. If the shell company is an FPI then a Form 20-F should be filed no later than four business days after the consummation of the acquisition that includes all of the information for the target company that Form 20-F requires for registration of securities. By the time the Form 8-K with Form 10 information is filed, the securities of the combined company have often already begun trading on a national securities exchange with a new ticker symbol because the securities of the SPAC generally trade on an exchange until the consummation of the de-SPAC transaction and the securities of the combined company generally commence trading on the following business day. 25 Estimates of SPAC IPO and IPO data in Table 1 are based on SPAC Analytics, SPAC and US IPO Activity, available at https://www.spacanalytics.com. Estimates of de-SPAC transactions in Table 1 are based on data from Dealogic for SPACs registered with the Commission and where year is based on M&A Completion Date. 13 Table 1. Number of SPAC IPOs in the U.S. Securities Market from 2012–2023 Number of Offerings SPAC IPOs IPOs (including SPAC IPOs) Percentage from SPACs Total Proceeds (in billions of dollars) SPAC IPOs IPOs (including SPAC IPOs) Percentage from SPACs Number of Completed De-SPAC Transactions 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 9 10 12 20 13 34 46 59 248 613 86 31 147 220 258 173 111 189 225 213 450 968 118 72 6% 5% 5% 12% 12% 18% 20% 28% 55% 63% 73% 43% 0.5 1.4 1.8 3.9 3.5 10.0 10.8 13.6 83.4 162.5 13.4 3.8 50.1 70.8 93.0 39.2 25.8 50.3 63.9 72.2 179.4 334.7 22.9 25.1 1% 2% 2% 10% 14% 20% 17% 19% 46% 49% 59% 15% 6 11 5 10 9 13 23 28 64 199 101 89 As shown above in Table 1, SPAC IPOs represent a significant share of the U.S. IPO market in recent years. While we recognize that, like overall IPO activity, the SPAC IPO market has declined recently, SPAC IPOs nonetheless constituted over half of all U.S. IPOs respectively in 2020, 2021, and 2022, and constituted 43% of all U.S. IPOs in 2023.26 The number of deSPAC transactions has also been significant relative to the number of non-SPAC U.S. IPOs. A similar trend has occurred when considering total proceeds for SPAC IPOs as a percentage of total proceeds raised in all U.S. IPOs over this period. SPAC IPO proceeds represented 46%, 49%, and 59% of total proceeds raised in all U.S. IPOs respectively in 2020, 2021, and 2022. This percentage declined to 15% in 2023.27 26 Id. 27 Id. 14 During the years of increase in SPAC IPOs, many market observers raised concerns about various aspects of the SPAC structure and the hybrid nature of the de-SPAC transaction.28 Among other things, commentators expressed concerns about SPAC sponsor compensation and other costs that can have a dilutive effect on a SPAC’s shareholders,29 potential conflicts of interest in the SPAC structure and de-SPAC transactions (e.g., the SPAC sponsors’ compensation being contingent on the completion of the de-SPAC transaction could lead sponsors to enter into de-SPAC transactions that are unfavorable to unaffiliated shareholders),30 and SPAC governing documents and stock exchange listing rules under which SPAC shareholders can vote in favor of a proposed de-SPAC transaction yet redeem their shares prior to the closing of the transaction.31 28 For example, in May 2021, the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets of the House Financial Services Committee held a hearing on “Going Public: SPACs, Direct Listings, Public Offerings, and the Need for Investor Protections,” which included testimony on, among other things, misaligned incentives in the SPAC structure, disclosure issues with respect to SPACs, and the use of projections in deSPAC transactions. A webcast of the hearing is available at https://financialservices.house.gov/events/eventsingle.aspx?EventID=407753. In addition, as discussed in the Proposing Release, the Commission’s Investor Advisory Committee issued recommendations and expressed certain concerns regarding SPACs. See Proposing Release, supra note 7, at 29462, nn.36–38 and accompanying text. 29 See Testimony of Stephen Deane, CFA Institute, before the Investor Protection, Entrepreneurship, and Capital Markets Subcommittee of the U.S. House Committee on Financial Services, May 24, 2021 (“Deane Testimony”), https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-deanes-20210524.pdf; see also Amrith Ramkumar, SPAC Insiders Can Make Millions Even When the Company They Take Public Struggles, Wall St. J. (Apr. 25, 2021). 30 See, e.g., Klausner, Ohlrogge & Ruan, supra note 18; Usha Rodrigues & Michael A. Stegemoller, Redeeming SPACs (2021), U. of Ga. Sch. of L. Legal Stud. Res. Paper No. 2021-09, available at https://ssrn.com/abstract=3906196 or http://dx.doi.org/10.2139/ssrn.3906196 (in the Proposing Release, a working paper of this article was cited as Usha R. Rodrigues and Michael Stegemoller, SPACs: Insider IPOs (SSRN Working Paper, 2021), with the short form citation “Rodrigues and Stegemoller”); Minmo Gahng, Jay R. Ritter & Donghang Zhang, SPACs, 36 The Rev. of Financial Stu. 3463 (2023), available at https://doi.org/10.1093/rfs/hhad019; letter dated Feb. 16, 2021, from Americans for Financial Reform and Consumer Federation of America to the House Financial Services Committee (“AFR Letter”); Deane Testimony; Testimony of Andrew Park, Americans for Financial Reform, before the Investor Protection, Entrepreneurship, and Capital Markets Subcommittee of the U.S. House Committee on Financial Services, May 24, 2021 (“Park Testimony”), https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-parka20210524.pdf. 31 See Mira Ganor, The Case for Non-Binary, Contingent, Shareholder Action, 23 U. Pa. J. Bus. L. 390 (2021); Rodrigues & Stegemoller, supra note 30. We note that exchange listing rules only explicitly require that, when 15 Some commentators have expressed concerns regarding the adequacy of the disclosures provided to investors in SPAC IPOs and de-SPAC transactions32 in terms of explaining the potential risks and effects for investors related to these transactions and the potential benefits for the SPAC sponsor and other affiliates of the SPAC.33 For example, even though the de-SPAC transaction essentially serves as the IPO of the target company in the form of an M&A transaction, investors may not receive the same information about the target company as they would in a registration statement for a traditional IPO, because a filing for an M&A transaction has different disclosure requirements.34 a shareholder vote on a business combination is held, the public shareholders voting against a business combination have a right to redeem shares. See, e.g., Nasdaq Listing Rule IM-5101-2 (stating, in part, that “public Shareholders voting against a business combination must have the right to convert their shares of common stock into a pro rata share of the aggregate amount then in the deposit account (net of taxes payable and amounts distributed to management for working capital purposes) if the business combination is approved and consummated”). In April 2022, the Commission’s Investor Advocate issued a recommendation to the NYSE and Nasdaq that their respective listing standards should prohibit consummation of a business combination when public SPAC shareholders exercise their conversion rights for a majority of the shares. See Memorandum, dated April 21, 2022, from Rick A. Fleming, Investor Advocate, U.S. Securities and Exchange Commission, to Adena T. Friedman, President & Chief Executive Officer, and John Zecca, EVP & Global Chief Legal and Regulatory Officer, Nasdaq, Inc., available at https://www.sec.gov/about/offices/investorad/recommendation-of-the-investor-advocate-nasdaq-spac-listingstandards-042122.pdf; and Memorandum, dated April 21, 2022, from Rick A. Fleming, Investor Advocate, U.S. Securities and Exchange Commission, to Lynn Martin, President, and Jaime L. Klima, Chief Regulatory Officer, The NYSE Group, Inc., available at https://www.sec.gov/about/offices/investorad/recommendation-ofthe-investor-advocate-nyse-spac-listing-standards-042122.pdf. 32 Throughout this release, when we discuss “SPAC transactions,” we are referencing both SPAC IPOs and deSPAC transactions. 33 See, e.g., AFR Letter; Testimony of Professor Usha R. Rodrigues, University of Georgia School of Law, before the Investor Protection, Entrepreneurship, and Capital Markets Subcommittee of the U.S. House Committee on Financial Services, May 24, 2021 (“Rodrigues Testimony”), https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-rodriguesu-20210524.pdf. A number of recent Commission actions have highlighted disclosures about the private operating company that are allegedly materially misleading, among other things. See, e.g., In the Matter of Momentus, Inc., Stable Road Acquisition Corp., SRC-NI Holdings, LLC, and Brian Kabot, Release No. 33-10955, 34-92391 (July 13, 2021) (settled order); In the Matter of Nikola Corp., Release No. 33-11018, 34-93838 (Dec. 21, 2021) (settled order); SEC v. Akazoo S.A., Case No. 1:20-cv-08101 (S.D.N.Y. filed Sept. 30, 2020); SEC v. Hurgin, et al., Case No. 1:19-cv05705 (S.D.N.Y. filed June 18, 2019). 34 For example, a traditional IPO requires a more comprehensive description of the business of a prospective registrant than is required of a private target operating company in an M&A transaction. Compare Item 11(a) of Form S-1, with Item 17(b)(1) of Form S-4, and Item 14(b)(3) of Schedule 14A. Additionally, a description of property and material legal proceedings is required for a prospective registrant in a traditional IPO, but these 16 There are also additional disclosure and liability concerns that stem from the hybrid nature of the de-SPAC transaction. For example, some commentators have criticized the use of projections in de-SPAC transactions that, in their view, have appeared to be unreasonable, unfounded, or potentially misleading, particularly where the target company is an early stage company with no or limited sales, products, and/or operations and have expressed concern that some SPACs have taken the position that the Private Securities Litigation Reform Act of 1995 (“PSLRA”)35 safe harbor applies to forward-looking statements made by SPACs in connection with de-SPAC transactions.36 The target company also is often not required to sign a registration statement filed for a de-SPAC transaction (except in transaction structures where the target company survives the de-SPAC transaction) and, by extension, would not take on section 11 liability even though, similar to a traditional IPO, reliable information about the business of the target company is critical to investors when deciding whether to approve the transaction and to invest in the combined company through their redemption decision. Finally, commentators have noted that, unlike a traditional IPO, a registered de-SPAC transaction lacks a named underwriter that would typically perform traditional gatekeeping functions, such as due diligence on the target company, and would be subject to liability under section 11 of the Securities Act for the registration statement.37 disclosure requirements do not apply to a private target operating company in an M&A transaction. See Item 11(b)-(c) of Form S-1. 35 Pub. L. 104-67, 109 Stat. 737 (1995). 36 See, e.g., Michael Dambra, Omri Even-Tov & Kimberlyn George, Should SPAC Forecasts Be Sacked? (SSRN Working Paper, 2022), available at https://www.utah-wac.org/2022/Papers/even-tov_UWAC.pdf; AFR Letter; Park Testimony; Rodrigues & Stegemoller, supra note 30; see also Heather Somerville & Eliot Brown, SPAC Startups Made Lofty Promises. They Aren’t Working Out., Wall St. J., Feb. 25, 2022. 37 See AFR Letter; Deane Testimony; Rodrigues Testimony. For a general discussion of the role of gatekeepers in securities markets, see also John C. Coffee Jr., Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms, 84 B. U. L. Rev. 301 (2004); John C. Coffee, Jr., Gatekeepers: The Professions and Corporate Governance (2006). 17 In response to a number of these and other concerns, the Commission staff provided guidance relating to SPACs on five occasions between December 2020 and April 2021.38 Then, in March 2022, the Commission proposed new rules and rule amendments to enhance existing disclosure requirements and investor protections in SPAC IPOs and in de-SPAC transactions.39 On July 13, 2022, the U.S. Securities and Exchange Commission Small Business Capital Formation Advisory Committee (“Small Business Capital Formation Advisory Committee”) issued recommendations related to this proposal.40 38 See CF Disclosure Guidance: Topic No. 11—Special Purpose Acquisition Companies (Division of Corporation Finance, Dec. 22, 2020); Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies (Division of Corporation Finance, Mar. 31, 2021); Public Statement on Financial Reporting and Auditing Considerations of Companies Merging with SPACs (Office of Chief Accountant, Mar. 31, 2021); Public Statement on SPACs, IPOs and Liability Risk under the Securities Laws (Division of Corporation Finance, Apr. 8, 2021); Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”) (Division of Corporation Finance and Office of Chief Accountant, Apr. 12, 2021). 39 In this release, unless otherwise indicated, comment letters cited refer to comment letters received in response to the Proposing Release, and are available at https://www.sec.gov/comments/s7-13-22/s71322.htm. On March 30, 2022, the Commission published the Proposing Release on its website. The comment period for the Proposing Release was open for 30 days from publication in the Federal Register and ended on June 13, 2022. Four commenters stated that the comment period was inadequate and/or recommended extending the comment period. See letters from Christopher Iacovella, Chief Executive Officer, American Securities Association (June 7, 2022) (“American Securities Association”); Jennifer Schulp, Director of Financial Regulation Studies, Center for Monetary and Financial Alternatives, Cato Institute (June 13, 2022) (“Cato Institute”); Bobby Franklin, President & CEO, National Venture Capital Association (June 13, 2022); Rod Miller, Chair, Securities Regulation Committee, New York City Bar Association (June 13, 2022) (“NYC Bar”). In Oct. 2022, the Commission reopened the comment period for the Proposing Release and other rulemakings because certain comments on the Proposing Release and other rulemakings were potentially affected by a technological error in the Commission’s internet comment form. See Resubmission of Comments and Reopening of Comment Periods for Several Rulemaking Releases Due to a Technological Error in Receiving Certain Comments, Release No. 33-11117 (Oct. 7, 2022) [87 FR 63016 (Oct. 18, 2022)] (“Reopening Release”). The Reopening Release was published on the Commission’s website on Oct. 7, 2022, and in the Federal Register on Oct. 18, 2022, and the reopened comment period ended on Nov. 1, 2022. We have considered all comments received since Mar. 30, 2022, and do not believe an additional extension of the comment period is necessary. 40 The Small Business Capital Formation Advisory Committee recommendations on the Proposing Release are available at https://www.sec.gov/spotlight/sbcfac/sbcfac-spac-recommendation-050622.pdf. The Small Business Capital Formation Advisory Committee made the following five recommendations, in summary: (1) SPACs should remain a viable path for companies to pursue as a means of getting access to public market capital and the committee is concerned the proposed rules, as written, might render SPACs unusable as an alternative to IPOs, (2) the committee is generally supportive of improving disclosures for SPACs, particularly in the period of time between the announcement of the merger and the closing of the de-SPAC transaction, (3) the Commission should clearly identify which participants would have underwriter liability and participants should be held accountable to the same extent they would be in traditional IPOs, (4) projections in de-SPAC transactions should be covered by the liability safe harbor provisions of the PSLRA, because management 18 While we recognize that the number of SPAC IPOs has declined since 2021, the investor protection concerns regarding SPACs and the hybrid nature of the de-SPAC transaction identified in the Proposing Release do not depend on market fluctuations. In addition, as noted above, notwithstanding the recent decline, SPAC transactions have become a much larger part of the U.S. securities markets over the last decade and could continue to grow as macroeconomic and other factors change. Accordingly, after considering comments received on the proposal, we are adopting final rules that will provide for greater transparency and more robust investor protections in SPAC IPOs and de-SPAC transactions. The final rules will enhance the completeness, usefulness, and comparability of the disclosures provided by SPACs and target companies at the SPAC IPO and de-SPAC transaction stages and will provide other important protections for investors in this market, all of which may promote market efficiency. Further, given that the de-SPAC transaction essentially is an IPO of the target company in the form of an M&A transaction, the final rules also will ensure that investors receive similar information about the target company and similar protections as in a traditional IPO in connection with the deSPAC transaction. The final rules also will provide investors with information about, and projections are an important part of the rationale for companies in determining whether to engage in a merger with a SPAC and they are necessary when financial intermediaries provide fairness opinions related to deSPAC transactions, and (5) the Commission should expand or eliminate the 18-month and 24-month timelines provided in the Investment Company Act safe harbor for SPACs, because the requirement to engage in a deSPAC transaction within 18 months after a SPAC IPO and complete a de-SPAC transaction within 24 months could incentivize SPAC sponsors to engage in riskier acquisitions to complete the merger process within artificially short periods. With respect to the Small Business Capital Formation Advisory Committee’s first recommendation—that SPACs remain a viable path to access public market capital—we do not believe the final rules will vitiate this access or render SPACs unusable as an alternative to IPOs. On the contrary, we believe the final rules will support the SPAC market by enhancing SPAC disclosures and enhancing investor protection in ways that help investor decision-making and increase investor confidence that they have the necessary information to invest in the SPAC market. With respect to the Small Business Capital Formation Advisory Committee’s second recommendation—supporting improved disclosures for SPACs, particularly in the period of time between the announcement of the merger and the closing of the de-SPAC transaction—we believe the final rules collectively will enhance such disclosure. We address the other specific recommendations of the Small Business Capital Formation Advisory Committee in the specific sections of this release related to those recommendations. 19 protections with respect to, the M&A elements of de-SPAC transactions, particularly regarding the transaction approval process and conflicts of interest. To these ends, we are adopting new subpart 229.1600 of 17 CFR part 229 (“subpart 1600” of Regulation S-K) that sets forth specialized disclosure requirements for SPAC IPOs and de-SPAC transactions. New subpart 1600 contains provisions that, among other things: • Require additional disclosures about the SPAC sponsor, potential conflicts of interest, and dilution; • Require certain disclosures on the prospectus outside front cover page and in the prospectus summary of registration statements filed in connection with SPAC IPOs and de-SPAC transactions; and • Require additional disclosures regarding de-SPAC transactions, including (1) if the law of the jurisdiction in which the SPAC is organized requires its board of directors (or similar governing body) to determine whether the de-SPAC transaction is advisable and in the best interests of the SPAC and its shareholders, or otherwise make any comparable determination, disclosure of that determination, and (2) if the SPAC or SPAC sponsor has received any outside report, opinion, or appraisal materially relating to the de-SPAC transaction, certain disclosures concerning the report, opinion, or appraisal. In addition, we are adopting amendments to provide procedural protections and to align the disclosures provided to investors, as well as the legal obligations of companies, in de-SPAC transactions more closely with those in traditional IPOs. Specifically, we are adopting final rules that: 20 • Amend the registration statement forms and schedules filed in connection with deSPAC transactions to require additional disclosures about the target company; • Provide that a target company in a registered de-SPAC transaction is a co-registrant on the registration statement used for the de-SPAC transaction such that the target company will be subject to liability under section 11 of the Securities Act; • Make the PSLRA safe harbor unavailable to SPACs (including with respect to projections of target companies seeking to access the public markets through a deSPAC transaction), by defining “blank check company” to encompass SPACs (and other companies that would be blank check companies but for the fact that they do not sell penny stock); and • Require re-determination of SRC status following a de-SPAC transaction. We also are providing guidance regarding potential underwriter status under section 2(a)(11) of the Securities Act in de-SPAC transactions. In addition, to provide reporting shell company shareholders, including SPAC shareholders, with more consistent Securities Act liability protections regardless of transaction structure, we are adopting new Rule 145a that specifies that any business combination of a reporting shell company, other than a business combination related shell company, involving another entity that is not a shell company involves a sale of securities to the reporting shell company’s shareholders.41 We are also adopting new 17 CFR 210.15-01 (“Article 15” of Regulation S-X), as well as related amendments, to more closely align the financial statement 41 Throughout this release, for readability, we use “shell company” in lieu of the phrase “shell company, other than a business combination related shell company.” The term “business combination related shell company” is defined in Securities Act Rule 405 and Exchange Act Rule 12b-2. We similarly use “reporting shell company” in lieu of the phrase “reporting shell company, other than a business combination related shell company” throughout this release. 21 reporting requirements in business combinations involving a shell company and a target company with those in traditional IPOs. With respect to effectiveness and compliance with the final rules, in response to commenters,42 we have set an extended effective date for the new rules (i.e., July 1, 2024, which is 125 days after the date of publication of this release in the Federal Register). This extended period before the final rules are effective will provide sufficient time for an initial public filing to be made under the existing rules for any transactions that are currently pending or planned. Any filings made on or after the effective date must comply with the final rules. We are also issuing guidance regarding the status of SPACs under the Investment Company Act of 1940 (“Investment Company Act”).43 We have decided not to adopt proposed 17 CFR 270.3a-10 (“Rule 3a-10” under the Investment Company Act) which would have provided a safe harbor from the definition of investment company under section 3(a)(1)(A) to SPACs that complied with the rule’s conditions. Whether a SPAC is an investment company as defined in the Investment Company Act is a question of facts and circumstances. Given the individualized nature of this analysis, and because, depending on the facts and circumstances, a SPAC could be an investment company at any stage of its operations such that a specific duration limitation may not be appropriate, we have decided not to adopt proposed Rule 3a-10. We are, however, providing guidance as to the type of activities that would likely raise serious questions about a SPAC’s status as an investment company under the Investment Company Act. 42 Some commenters indicated that some or all of the new rules should not apply to existing SPACs and/or should apply only prospectively. See, e.g., letters from American Securities Association; Cato Institute; Freshfields Bruckhaus Deringer US LLP (June 13, 2022) (“Freshfields”); Don Nguyen (Apr. 20, 2022); Nicholas Wilson (June 9, 2022). 43 15 U.S.C. 80a-1 et seq. 22 II. NEW SUBPART 1600 OF REGULATION S-K The Commission is adopting final rules to add new subpart 1600 to Regulation S-K. The new subpart sets forth disclosure requirements applicable to SPACs regarding, among other things, the sponsor, potential conflicts of interest, and dilution and requires certain disclosures on the prospectus cover page and in the prospectus summary.44 The Commission is also adopting final rules to amend a number of forms and schedules used by SPACs for IPOs and de-SPAC transactions to require the information set forth in subpart 1600.45 To the extent that the disclosure requirements in subpart 1600 address the same subject matter as the existing disclosure requirements of the forms or schedules, the requirements of subpart 1600 are controlling.46 44 The requirements in new subpart 1600 will codify and standardize some of the disclosures already commonly provided by SPACs. 45 See the amendments to Forms S-1, F-1, S-4, F-4 and 8-K and Schedules 14A and TO. While the Commission did not propose amendments to Schedule 14C, the disclosure required by subpart 1600 will be required in Schedule 14C pursuant to Item 1 of Schedule 14C, which states that a Schedule 14C must include the information called for by all of the items of Schedule 14A, with limited exceptions, to the extent each item would be applicable to any matter to be acted upon at a shareholder meeting if proxies were to be solicited in connection with the meeting. If the securities to be issued in a de-SPAC transaction are registered on a form other than Form S-4 or F-4, such as Form S-1 or F-1 the requirements of Form S-4 or F-4 that the Commission is adopting, as applicable, in regard to de-SPAC transactions would apply in that context. Also, in both Form S4 and Form F-4, we made technical changes from the proposal to clarify that the new Regulation S-K Item 1600 series of disclosures should be located in the prospectus part of these forms. As a result Form S-4 provides: “If securities to be registered on this Form will be issued in a de-SPAC transaction, as defined in Item 1601(a) of Regulation S-K (17 CFR 229.1601(a)), then the disclosure provisions of Items 1603 through 1607 and 1609 of Regulation S-K (17 CFR 229.1603 through 229.1607 and 229.1609) apply in addition to the provisions of this Form and disclosure thereunder must be provided in the prospectus, and the structured data provisions of Item 1610 of Regulation S-K (17 CFR 229.1610) apply to those disclosures.” We made similar changes to Form F4. For purposes of consistency across forms and schedules, we made similar changes as well to Schedule 14A and Schedule TO, although there is no requirement in these forms to locate the disclosure in the prospectus portion of these schedules. In both Schedule 14A and Schedule TO, we made technical changes from the proposal to clarify that Item 1604(a) does not apply since these disclosure documents do not include an outside front cover page similar to a prospectus and Item 1604(b) disclosure should be included in the front part of the disclosure document instead of the prospectus summary referred to in Item 1604(b). 46 General Instruction L.1. to Form S-4; General Instruction I.1. to Form F-4; Item 14(f)(1) to Schedule 14A; General Instruction L to Schedule TO. 23 A. Definitions 1. Proposed Definition: “De-SPAC Transaction” The Commission proposed to define the term “de-SPAC transaction” as a business combination such as a merger, consolidation, exchange of securities, acquisition of assets, or similar transaction involving a SPAC and one or more target companies (contemporaneously, in the case of more than one target company).47 2. Comments: Definition of “De-SPAC Transaction” One commenter recommended we add the term “reorganization” to the non-exhaustive list of transactions set out in the proposed definition of de-SPAC transaction.48 One commenter recommended the definition of de-SPAC transaction refer to “initial business combination” not “business combination.”49 Another commenter recommended the definition be named “initial business combination” instead of “de-SPAC transaction.”50 In response to a request for comment,51 one commenter said there was no need to tie the definition of de-SPAC transaction to transactions that are permitted under exchange listing standards, particularly if the definition of SPAC includes non-listed shell companies.52 47 Proposed Item 1601(a). 48 Letter from Jay Knight, Chair of the Committee on Federal Regulation of Securities of the Section of Business Law of the American Bar Association (June 17, 2022) (“ABA”). 49 Letter from ABA. 50 Letter from Kirkland & Ellis LLP (June 15, 2022) (“Kirkland & Ellis”). 51 Proposing Release, supra note 7, at 29466 (request for comment number 2) (“Should we define ‘de-SPAC transaction’ as proposed? Should the scope of the proposed definition instead be tied to de-SPAC transactions that are permitted under exchange listing standards?”). 52 Letter from Vinson & Elkins (June 13, 2022) (“Vinson & Elkins”). 24 3. Final Definition: “De-SPAC Transaction” After considering the comments received, we are adopting the definition of de-SPAC transaction as proposed with a modification discussed below.53 Under the final rules, the term 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). We agree with one commenter’s recommendation54 to add the term “reorganization” to the non-exhaustive list of transactions set out in the definition of de-SPAC transaction. It is our understanding some transactions commonly considered to be de-SPAC transactions may be considered reorganizations. Hence, we have added the suggested term to the final definition. A few commenters suggested the definition of de-SPAC transaction should use the phrase “initial business combination.”55 We recognize the phrase “initial business combination” may be used interchangeably with “business combination” or “de-SPAC transaction” in the marketplace today, but we believe the simpler proposed term “business combination” used in the body of the de-SPAC transaction definition will be clearer to market participants. One of these commenters suggested the term “initial business combination” should be used because “[s]ubsequent acquisitions by the former SPAC after Closing should not be considered a De-SPAC 53 Item 1601(a) of Regulation S-K. 54 Letter from ABA. 55 Letters from ABA, Kirkland & Ellis. 25 Transaction.”56 We note that a company that is no longer a SPAC would not be subject to the disclosure items in subpart 1600 of Regulation S-K.57 We agree with the commenter who said there was no need to tie the definition of deSPAC transaction to transactions that are permitted under exchange listing standards, particularly if the definition of SPAC includes non-listed shell companies.58 A narrower definition may inappropriately exclude transactions that should be included, such as those involving over-thecounter-traded SPACs. We continue to believe, as indicated in the Proposing Release,59 that the definition of de-SPAC transaction should include less common transactions that may or may not be permitted under exchange listing rules but for which the enhanced disclosure and procedural requirements in the final rules may be appropriate because they raise the same investor protection concerns.60 4. Proposed Definition: “Special Purpose Acquisition Company (SPAC)” The Commission proposed Item 1601 to define the term “special purpose acquisition company (SPAC)” to mean a company that has indicated that its business plan is to (1) register a primary offering of securities that is not subject to the requirements of Rule 419;61 (2) complete a de-SPAC transaction within a specified time frame; and (3) return all remaining proceeds from 56 Letter from ABA. 57 See also infra note 94 and accompanying text concerning SPAC status after a de-SPAC transaction. 58 Letter from Vinson & Elkins. 59 Proposing Release, supra note 7, at 29466. 60 In adopting this definition of de-SPAC transaction, we do not intend to indicate that such transactions are or should be permitted under the exchanges’ SPAC listing rules or that exchange listing requirements should not apply to SPACs seeking an exchange listing. 61 Blank check companies subject to Rule 419 must comply with a comprehensive set of disclosure and investor protection requirements under the rule and were not proposed to be subject to the requirements applicable to SPACs under the proposed rules. 26 the registered offering and any concurrent offerings to its shareholders if the company does not complete a de-SPAC transaction within the specified time frame.62 5. Comments: Definition of “Special Purpose Acquisition Company (SPAC)” One commenter indicated they saw no need for a definition of the term “SPAC,” as the commenter saw “no reason why the Proposed Rules should not apply to all shell companies, other than business combination shell companies, inclusive of blank check companies” and also indicated the proposed definitions of “SPAC” and “de-SPAC transaction” were circular, stating, “The proposed definition of ‘de-SPAC transaction’ should be revised to eliminate the reference to ‘a special purpose acquisition company’ in order to eliminate circularity.”63 A few commenters did not support including the requirement that a SPAC “return all remaining proceeds from the registered offering and any concurrent offerings to its shareholders” in the proposed SPAC definition.64 One of these commenters said this aspect of the definition is “unnecessary and should be eliminated or revised to only refer to the plan to return proceeds from the registered offering” because “SPACs often hold a modest amount of working capital outside of their trust accounts that they use to fund operating expenses.”65 According to the commenter, “[i]f a shell company had such cash remaining at the point when the public shareholders exercise their redemption rights, it would be inappropriate to exclude such shell company from the [p]roposed [r]ules based solely on retaining such cash.”66 Another commenter 62 Proposed Item 1601(b). 63 Letter from Vinson & Elkins (noting that “as proposed, a special purpose acquisition company has a business plan to complete a de-SPAC transaction, and a de-SPAC transaction involves a special purpose acquisition company.”). 64 Letters from ABA, Vinson & Elkins. 65 Letter from Vinson & Elkins. 66 Id. 27 recommended that we change this aspect of the definition to use the phrase “redeem the equity securities issued in the registered offering if the company does not complete a de-SPAC transaction within the specified time frame.”67 One commenter recommended we narrow the definition of SPAC to only “a blank check company as defined in § 230.419(a)(2).”68 Another commenter, who opposed defining “SPAC,” noted that the proposed definition “is not limited to companies listed on a national securities exchange” and “would include shell companies traded in over-the-counter markets, which are not what would generally be considered to be ‘SPACs.’”69 That commenter noted that a “logical distinction could be drawn based on exchange listing, rather than on whether the offering is by a blank check company and therefor subject to Rule 419.”70 The same commenter recommended that, if we adopt a new definition, we clarify that a company “ceases to be a SPAC for purposes of the rules after consummation of a de-SPAC transaction.”71 In response to requests for comment,72 one commenter said that “it is clear what entities are SPACs, without the need for additional boxes to check.”73 6. Final Definition: “Special Purpose Acquisition Company (SPAC)” After considering the comments received, we are adopting the definition of special purpose acquisition company (or SPAC) as proposed, with certain modifications discussed 67 Letter from ABA. 68 Letter from ABA. 69 Letter from Vinson & Elkins. 70 Id. 71 Id. 72 Proposing Release, supra note 7, at 29466 (request for comment number 6) (“For example, should we amend Form S-1, Form F-1, Form S-4, and/or Form F-4 to add to the registration statement cover page of these forms a check box for issuers to indicate whether they are special purpose acquisition companies?”). 73 Letter from Vinson & Elkins. 28 below.74 Under the final rules, the term special purpose acquisition company (SPAC) 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 § 230.419 (Rule 419 under the 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. One commenter did not see a need for a new defined term “SPAC,”75 because, in the commenter’s view, enhanced disclosures should apply to all shell companies (other than business combination shell companies) and not only to those companies defined as SPACs.76 Several of the rules being adopted in this release will enhance disclosures for investors in non-SPAC shell companies.77 However, the proposed individual disclosure items in the Item 1600 series of Regulation S-K were largely tailored to SPAC transactions. For the reasons we discuss in this release below in connection with the specific rules we are adopting, we believe it is appropriate at this time to apply enhanced disclosure in connection with companies meeting the definition of SPAC. However, we will continue to consider whether enhanced disclosure in other shell 74 Item 1601(b) of Regulation S-K. 75 Letter from Vinson & Elkins. See supra note 63 and accompanying text. 76 Letter from Vinson & Elkins. 77 See Rule 145a and definitions of “blank check company” in Securities Act Rule 405 and Exchange Act Rule 12b-2. 29 company transactions, such as reverse mergers with public shell companies, would be appropriate or necessary in the future.78 This commenter further observed there was circularity in the proposed definitions of “SPAC” and “de-SPAC transaction.”79 We agree the final rules should eliminate this circularity. Although the commenter made the suggestion to revise the definition of “de-SPAC transaction” rather than addressing the issue by revising the definition of “SPAC,” we believe it would be clearer to avoid circularity by revising the definition of “SPAC.” We have replaced the term “de-SPAC transaction” in the definition of “SPAC” with “business combination, such as a merger, consolidation, exchange of securities, acquisition of assets, reorganization, or similar transaction, with one or more target companies.” Several comments focused on the aspect of the proposed SPAC definition regarding the return of proceeds and suggested that special purpose acquisition companies may not return “all remaining proceeds.”80 We agree with commenters that the proposed term “return all remaining proceeds” could inappropriately exclude companies that take some portion of cash out of trust for anticipated expenses and therefore do not return “all” proceeds at the time of redemption.81 To avoid excluding such companies, we have revised the definition to use the term “return proceeds” instead of “return all remaining proceeds.” We have also added a parenthetical 78 According to data provided by The Deal during the years when it tracked this data, the number of reverse mergers not involving SPACs was as follows by year: (a) 48 in 2017, (b) 48 in 2018, (c) 28 in 2019, and (d) 17 in 2020. The Deal staff indicated to the Commission staff they stopped tracking the data after 2020 because of the small number of reverse mergers. 79 Letter from Vinson & Elkins. See supra note 63 and accompanying text. 80 Letters from ABA, Vinson & Elkins. See supra notes 64, 65, and 66 and accompanying text. 81 See, e.g., letters from ABA (“In addition, SPACs are permitted to withdraw interest to pay income and franchise taxes, and, upon liquidation, pay certain liquidation costs….”); Goodwin Procter LLP (June 14, 2022) (“Goodwin”) (“SPACs are permitted to withdraw interest to pay income and franchise taxes and, upon liquidation, pay certain liquidation costs….”); White & Case LLP (June 17, 2022) (“White & Case”) (“In addition, SPACs are permitted to withdraw interest to pay income and franchise taxes, and, upon liquidation, pay certain liquidation costs, which would reduce overall returns.”). 30 reference “(if such offering or concurrent offering intends to raise proceeds)” that qualifies the term “offering and any concurrent offering” to account for the fact there may be some SPAC offerings that do not raise proceeds. We do not believe it is necessary to revise the definition to refer only to the plan to return proceeds from the primary offering, rather than the primary offering and any concurrent offering. We understand SPACs typically place proceeds of concurrent offerings in trust and return these proceeds if the SPAC does not complete a de-SPAC transaction within the specified time frame.82 We are not adopting the recommendation that we should replace the terms related to the return of proceeds with alternative terms related to the redemption of equity securities. We continue to believe, as the Commission indicated in the Proposing Release, that the definition should not include certain criteria, including the issuance of redeemable securities, that could result in an overly narrow definition by including transactional terms that have not applied to every SPAC offering in the past or that could change as the SPAC market continues to evolve.83 One commenter recommended we narrow the definition of SPAC to only “a blank check company as defined in § 230.419(a)(2).”84 The Rule 419 definition of “blank check company” includes a requirement that the company is issuing penny stock.85 The proposed definition of SPAC reflects the fact that special purpose acquisition company structures often are designed to 82 See NYSE Listed Company Manual Section 102.06 and Nasdaq Listing Rule IM-5101-2 (providing for the placement of concurrent offering proceeds in trust). 83 Proposing Release, supra note 7, at 29466. 84 Letter from ABA. 85 See supra notes 1 and 61 (discussion of Securities Act Rule 419). As discussed in section III.E infra, in the final rules, we are not amending the definition of “blank check company” in Rule 419 as proposed but are adopting a definition of “blank check company” in Securities Act Rule 405 that is exclusively for purposes of the safe harbor created by the PSLRA for forward-looking statements. 31 avoid issuing penny stock but continue to pose disclosure and other investor protection concerns.86 Special purpose acquisition companies frequently do not issue penny stock and, therefore, would not meet the definition in § 230.419(a)(2). Thus, the inclusion of the suggested criterion would inappropriately exclude many or all special purpose acquisition companies from the SPAC definition. Another commenter indicated the SPAC definition should draw a distinction based on exchange listing, which would exclude shell companies traded in over-the-counter markets. In the commenter’s view, shell companies traded in over-the-counter markets are not generally considered to be SPACs.87 While companies commonly considered to be SPACs often list on a national securities exchange, we do not believe the SPAC definition should be limited to such listed entities. While carving out companies traded over-the-counter might leave out only a few (or zero) companies today, prevailing structures may further evolve over time just as they have evolved over time in the past,88 and we believe investors in those over-the-counter companies engaged in the same kinds of business as exchange-traded companies should have the same investor protections provided by the rules we are adopting.89 Furthermore, we are adding a new clause to the definition that provides that the term special purpose acquisition company also includes a company that has represented it pursues or 86 Proposing Release, supra note 7, at 29465. 87 Letter from Vinson & Elkins. 88 See, e.g., Table 2 in section VIII (Economic Analysis) (statistics on over-the-counter SPACs for over a threedecade period). 89 Prior to exchange rule changes permitting listing, shells commonly referred to as SPACs were not exchangelisted. See Securities Exchange Act Release Nos. 58228 (July 25, 2008) [73 FR 44794 (July 31, 2008)] (Order Granting Approval to Proposed Rule Change, as modified by Amendment No. 1, to Adopt Additional Initial Listing Standards to list Securities of Special Purpose Acquisition Companies) (NASDAQ-2008-013); 57785 (May 6, 2008) [73 FR 27597 (May 13, 2008)] (Order Approving Proposed Rule Change to Adopt New Initial and Continued Listing Standards to List Securities of Special Purpose Acquisition Companies) (SR-NYSE2008-17). According to data from SPACInsider, in the years 2020 through 2022, there were zero SPAC IPOs in the over-the-counter market (i.e., that were not listed on an exchange in connection with the IPO). 32 will pursue a special purpose acquisition company strategy.90 In the Proposing Release, the Commission asked if the proposed definition provides a workable approach to determining which issuers would be subject to the requirements of proposed subpart 1600.91 In addition, the Commission asked whether there were any potential opportunities for regulatory arbitrage in shell company or SPAC transactions that the Commission should consider addressing. 92 After further consideration of these regulatory arbitrage concerns, we have revised the final rule to include new paragraph (b)(2) to Item 1601 concerning pursuit of a special purpose acquisition company strategy. Variations on common SPAC structures could cause some companies to fall technically outside one of the three prongs of paragraph (1) of the final SPAC definition. When companies make representations they pursue or will pursue a special purpose acquisition company strategy, they may be indistinguishable to investors from companies that meet the other components of the definition. As a result, we believe investors in such companies should benefit from the enhanced disclosures applicable to SPACs. Therefore, even where a company technically does not meet one of the three prongs in paragraph (1) of the final definition of SPAC, if it represents, directly or indirectly, that it pursues or will pursue a SPAC strategy, then pursuant to paragraph (2) of the final definition of SPAC, the company would meet the definition of a SPAC. 90 As a result of this change, the three prongs contained in the proposed definition (that had paragraph numbers (1), (2), and (3)) will be renumbered as paragraphs (1)(i), (ii), and (iii) and the clause regarding pursuit of a SPAC strategy will be numbered as paragraph (2). We have also added a parenthetical reference to the acronym “(SPAC)” in the body of the definition in the final rule as well as in the name of the defined term “special purpose acquisition company (SPAC)” to add incremental clarity that the acronym also refers to the defined term. 91 Proposing Release, supra note 7, at 29466 (request for comment number 1). 92 Proposing Release, supra note 7, at 29490 (request for comment number 102). 33 Similarly, to avoid the risk that certain varieties of SPACs may fall outside the definition because of minor technical distinctions from the prongs of the definition, we have changed the proposed term “register a primary offering” to “conduct a primary offering” to account for evolving SPAC structures that may not conduct a registered offering. We do not believe it would be appropriate for companies in de-SPAC transactions to avoid the disclosure (or any other) requirements of these final rules only because the initial SPAC transaction was not registered. As noted in the Proposing Release,93 we intend this definition to be sufficiently broad to take into account potential variations in the SPAC structure and the possibility that SPACs may continue to evolve. This adjustment to the definition will ensure that appropriate disclosures are provided at the de-SPAC stage regardless of the structure of the initial SPAC transaction. In the final definition, we have also made a corresponding revision to change the proposed term “registered offering” to “offering.” One commenter recommended we clarify that a company ceases to be a SPAC upon consummation of a de-SPAC transaction.94 For the avoidance of doubt, we are providing guidance that, if a company that meets the SPAC definition has completed a de-SPAC transaction or, in the case of one or more target companies, contemporaneous de-SPAC transactions, then the company no longer meets the definition of a SPAC and that such companies are not required to comply with the enhanced disclosures under Regulation S-K applicable to SPACs in registration statements they file in later periods after the completion of such de-SPAC transactions. 93 Proposing Release, supra note 7, at 29465. 94 Letter from Vinson & Elkins. 34 We are not requiring a check box on form cover pages indicating SPAC status as the enhanced disclosure provided by registrants pursuant to the Item 1600 series of Regulation S-K will make clear the registrant is a SPAC.95 7. Proposed Definition: “SPAC Sponsor” The Commission proposed to define the term “SPAC sponsor” as the entity and/or person(s) primarily responsible for organizing, directing or managing the business and affairs of a SPAC, other than in their capacities as directors or officers of the SPAC as applicable.96 8. Comments: Definition of “SPAC Sponsor” One commenter said the proposal “should be revised to eliminate the need for a defined term ‘SPAC sponsor’” and, “[i]nstead, the rules should require disclosure regarding the SPAC’s directors, officers and affiliates.”97 This commenter also said “the definition’s exclusion of directors and officers in their capacities as such would result in there being no ‘sponsor’ for many SPACs.” This commenter also said the proposal “blur[red] the lines between the roles and responsibilities of the SPAC sponsor and that of the SPAC board and officers.” Another commenter recommended an alternative definition of “SPAC sponsor”: “the entity and/or person(s) that (1) own all or a portion of the privately placed common equity securities of the special purpose acquisition company and (2) are primarily responsible for directing and managing the business and affairs of a special purpose acquisition company other than in their capacities as (i) directors or officers of the special purpose acquisition company or (ii) third-party service providers to the special purpose acquisition company, as applicable.”98 95 See also section III.C (discussing co-registration on Forms S-4 and F-4 and the requirement to identify the target company as a registrant on the registration statement cover page). 96 Proposed Item 1601(c). 97 Letter from Vinson & Elkins. 98 Letter from ABA. 35 The commenter said that “the ‘SPAC sponsor’ should be the entity or persons who have both ownership of [s]ponsor shares and responsibility for directing and managing the SPAC.” The commenter said that their suggested definition will “identify the entity or persons that are currently identified as [s]ponsors in registration statements for the SPAC.”99 9. Final Definition: “SPAC Sponsor” After considering the comments received, we are adopting the definition of SPAC sponsor as proposed with certain modifications discussed below.100 Under the final rules, the term 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. The definition is designed to be sufficiently broad that appropriate entities or persons will be subject to the enhanced disclosure requirements applicable to SPAC sponsors.101 Although a sponsor of a SPAC may perform a variety of functions within the SPAC’s structure, we intend for the SPAC sponsor definition to encompass activities that, based on the staff’s experience reviewing SPAC filings and public commentary, are commonly understood to be sponsors of SPACs or with persons referred to as sponsors in current registration statements. We do not believe it would provide investors with adequate information to tie the SPAC sponsor definition to persons with particular titles, because the definition and corresponding disclosure requirements are intended to capture all parties who perform certain activities that result in such parties having key substantive influence over the SPAC. The suggestion to replace 99 Letter from ABA. 100 Item 1601(c) of Regulation S-K. 101 See, e.g., Item 1603 (regarding SPAC sponsors). 36 “SPAC sponsor” with “directors, officers, and affiliates of the SPAC” would require disclosure from directors and officers not commonly considered to be sponsors today and, as indicated by the Commission in the Proposing Release, would overlap unnecessarily with current required disclosure concerning directors and officers.102 Also, “directors, officers, and affiliates of the SPAC” may not include external management companies and their principals that should be included in the definition on the basis of their activities. While State law may provide that directors manage the business and affairs of a corporation and may not provide that any one director has any more authority than any other director,103 the phrase “primarily responsible” in the definition of SPAC sponsor is not limited to solely directors or solely directors and officers. Other persons, such as third-party management companies and their affiliates, frequently are primarily responsible for the organization, direction, or management of the business and affairs of SPACs today and would be SPAC sponsors under the definition we are adopting. One commenter recommended an alternative definition of SPAC sponsor that featured, among other things, carve-outs from that alternative definition for directors and officers of the SPAC and for third-party service providers.104 This commenter also suggested that the proposed definition’s exclusion of directors and officers in their capacities as such would result in a null set of SPAC sponsors.105 Having considered this comment, we have made changes to the final definition. We are not adopting the proposed term “other than in their capacities as directors or 102 See Proposing Release, supra note 7, at 29466, n.58 (“In regard to natural persons, we are proposing to exclude from the scope of the definition of ‘SPAC sponsor’ the activities performed by natural persons in their capacities as directors and/or officers of the SPAC to avoid overlap with existing disclosure requirements relating to directors and officers.”). 103 See, e.g., DGCL Section 141(a) (“The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.”). 104 Letter from ABA. See supra note 98 and accompanying text. 105 Id. 37 officers,” because it could be unclear under the proposed definition whether any action taken on behalf of the SPAC by a director or officer of a SPAC is “other than in that person’s capacity as an officer or director.” As the commenter noted, this could result in no such persons being considered SPAC sponsors. To address such potential ambiguities, in the final rule, we have changed the term “other than in their capacities as directors or officers of the special purpose acquisition company as applicable” to “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.” Based on the staff’s experience, we understand that a SPAC sponsor entity is typically involved in the SPAC. However, if the SPAC sponsor is not an entity, then we want to make sure the appropriate persons are captured within the SPAC sponsor definition. An officer or director of the SPAC that is an affiliate of an entity that is a SPAC sponsor would also be a SPAC sponsor under the final definition. For example, in the case of a hypothetical SPAC where a third-party management company is a SPAC sponsor and a person is a director of both the SPAC and this third-party management company, then this person would also be a SPAC sponsor. We are not adopting the suggestion to exclude “third-party service providers” from the definition of SPAC sponsor.106 As discussed above, some third-party service providers will be “SPAC sponsors” under the definition where they are “primarily responsible for organizing, directing, or managing the business and affairs” of the SPAC. Other third-party service providers, however, will not fall within the definition of SPAC sponsor where they are not “primarily responsible” for organizing, directing, or managing the business and affairs of a SPAC. For example, external legal counsel that only assists in the formation of a SPAC by 106 Letter from ABA. See supra note 98 and accompanying text. 38 drafting its certificate of incorporation and bylaws on behalf of a client would not be “primarily responsible” for “organizing…the business and affairs of a SPAC.”107 Other third-party service providers may perform similar administrative or ministerial activities for a SPAC or provide outside legal or accounting advice neither of which would cause them to be “primarily responsible” for organizing, directing, or managing the business and affairs of the SPAC and thus they would not be SPAC sponsors. 10. Proposed Definition: “Target Company” The Commission proposed to define the term “target company” as an operating company, business, or assets.108 11. Comments: Definition of “Target Company” One commenter asserted that “the concept of ‘assets’ being a ‘target company’ yields anomalous results under certain proposed rules (such as requiring assets to sign a registration statement) and the concept of a ‘business’ may be vague (as a business may be a product line, rather than an entity that could sign a registration statement).”109 Another commenter suggested “deleting the term ‘assets’ from the definition or clarifying that a target company includes assets where the acquisition of such assets is intended to constitute the SPAC’s initial business combination.”110 107 Item 1601(c). 108 Proposed Item 1601(d). 109 Letter from Vinson & Elkins. 110 Letter from Freshfields (“We believe there are circumstances where a SPAC may acquire some assets (such as cash) but would not yet have completed its acquisition of a target company.”). 39 12. Final Definition: “Target Company” After considering the comments received, we are adopting the definition of target company as proposed.111 Under the final rules, the term target company means an operating company, business or assets. To address commenters’ concerns about the use of the terms “assets” and “business” in the definition of target company,112 we have revised certain registration statement form instructions, as discussed in more detail below.113 We believe these changes address the commenters’ concerns. Therefore, we do not believe it is necessary to make changes to the proposed definition of “target company.” In addition, although an asset purchase transaction may be a different form of transaction for the purposes of other legal requirements, including State law, we do not believe a SPAC combination with a target company taking the form of an asset purchase should be excluded from the definition of de-SPAC transaction merely for this reason. B. Sponsors 1. Proposed Rules The Commission proposed Item 1603(a) to require additional disclosure about the SPAC sponsor, its affiliates, and promoters114 in registration statements and schedules filed in 111 Item 1601(d) of Regulation S-K. 112 Letters from Freshfields, Vinson & Elkins. See supra notes 65 and 66 and accompanying text. 113 See infra section III.C. 114 The term “promoter” is defined in Securities Act Rule 405 and Exchange Act Rule 12b-2. 40 connection with SPAC registered offerings and de-SPAC transactions,115 including disclosure of the following: • The experience, material roles, and responsibilities of these parties, as well as any agreement, arrangement, or understanding (1) 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 (2) 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, as well as an organizational chart that shows the relationship between the SPAC, the SPAC sponsor, and the SPAC sponsor’s affiliates; • Tabular disclosure of the material terms of any lock-up agreements with the SPAC sponsor and its affiliates; and • 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.116 115 See (a) proposed General Instruction VIII to Form S-1, (b) proposed General Instruction I.1 to Form S-4, (c) proposed General Instruction VII to Form F-1, (d) proposed General Instruction I.1 to Form F-4. (e) proposed Item 14(f)(1) of Schedule 14A, and (f) proposed General Instruction K to Schedule TO. 116 In the Proposing Release, the Commission stated that this would include, for example, fees and reimbursements in connection with lease, consulting, support services, and management agreements with entities affiliated with the sponsor, as well as reimbursements for out-of-pocket expenses incurred in performing due diligence or in identifying potential business combination candidates. Proposing Release, supra note 7, at 29467, n.64. 41 2. Comments Broadly categorized, commenters on proposed Item 1603(a) or generally on the types of SPAC sponsor issues covered by proposed Item 1603(a) focused on six areas: (1) general comments that expressed support for the proposals, (2) promoter requirements, (3) compensation, (4) transfers of SPAC ownership, (5) interests in the SPAC sponsor and the organizational chart requirement, and (6) agreements. i. General Comments A number of commenters generally supported the proposed enhanced disclosure requirements regarding SPAC sponsors.117 Commenters cited a number of benefits to investors as the reasons for their support, including the following five benefits: (a) placing investors in a better position to evaluate the merits of SPAC and de-SPAC transactions,118 (b) illuminating financial incentives of SPAC sponsors that may affect de-SPAC transaction outcomes,119 (c) providing compensation information that may promote more informed investment decisions,120 (d) providing SPAC sponsor ownership interest information that may affect investor ability to 117 Letters from ABA; Stephen W. Hall, Legal Director and Securities Specialist, and Scott Farnin, Legal Counsel, Better Markets (June 13, 2022) (“Better Markets); Michael Ryan, Chief Executive Officer, Bullet Point Network, LP (June 13, 2022) (“Bullet Point Network”); Charles Pieper (May 13, 2022) (“Charles Pieper”); John L. Thornton, Co-Chair, Hal S. Scott, President, and R. Glenn Hubbard, Committee on Capital Markets Regulation (June 13, 2022) (“Committee on Capital Markets Regulation”); Paul Andrews, Managing Director, Research, Advocacy and Standards, CFA Institute (May 31, 2022) (“CFA Institute”); Glenn Davis, Deputy Director, Council of Institutional Investors (June 9, 2022) (“CII”); Dylan Bruce, Financial Services Counsel, Consumer Federation of America (June 13, 2022) (“Consumer Federation”); Elizabeth Warren, United States Senator (July 8, 2022) (“Senator Elizabeth Warren”); Kerrie Waring, Chief Executive Officer, International Corporate Governance Network (June 13, 2022) (“ICGN”); Melanie Senter Lubin, President, North American Securities Administrators Association, Inc. (June 13, 2022) (“NASAA”); Paul A. Swegle, Kinsel Law Offices (Apr. 9, 2022) (“Paul Swegle”). 118 Letter from Committee on Capital Markets Regulation. 119 Letter from CII. 120 Letter from Consumer Federation. 42 vote on de-SPAC transactions,121 and (e) providing information about SPAC sponsor experience that may help investors assess the SPAC sponsor’s ability to find a target company.122 Also, several commenters suggested that proposed Item 1603(a) would codify, to an extent, existing disclosure practices.123 ii. Promoters Some commenters said Item 1603 should not apply to “promoters.”124 One commenter asserted that application to the SPAC sponsor and its affiliates would include all significant participants in the SPAC and thus the “promoter” provision would not significantly benefit investors.125 Another commenter said that “disclosure regarding a promoter of the SPAC’s initial public offering that will have no involvement with the de-SPAC transaction would be immaterial to investors.”126 iii. Compensation A number of commenters suggested that the proposed disclosure requirements regarding sponsor compensation would provide useful information to investors.127 A few commenters expressed the view that sponsor compensation is already sufficiently disclosed.128 121 Letter from ICGN. 122 Letters from ICGN, NASAA. 123 Letters from ABA, NASAA, Vinson & Elkins. 124 Letters from Freshfields, Vinson & Elkins. 125 Letter from Freshfields (stating that “the proposed rules also already require disclosure of all persons who have direct and indirect material interests in the SPAC sponsor and the amount and nature of their interests” and that “this should encompass the most relevant entities and persons”). 126 Letter from Vinson & Elkins. 127 Letters from Better Markets, Charles Pieper, Committee on Capital Markets Regulation, CFA Institute, Consumer Federation, Senator Elizabeth Warren, ICGN, NASAA. 128 Letters from Samir Kapadia, Director, and Bobby Cunningham, Director, SPAC Association (June 13, 2022) (“SPAC Association”); Vinson & Elkins (expressing the view that sponsor compensation and reimbursement is already disclosed under existing disclosure requirements and the material terms of lock-up agreements are already sufficiently disclosed as a matter of industry practice). 43 One commenter said the SPAC sponsor “20 percent promote is fully and fairly disclosed and has been for decades.”129 Another commenter said they “believe the sponsor’s compensation and reimbursement are already sufficiently disclosed in response to existing disclosure requirements and that incremental disclosure requirements are thus not merited.”130 One commenter that did not support the additional proposed disclosure requirements stated that, if the Commission were nonetheless to impose new requirements, “the reference to ‘compensation’ should be revised to refer instead to all equity and rights to cash held by the SPAC directors and officers and their affiliates, as certain equity interests may be purchased for value (i.e., not be ‘compensation’) and reimbursement of advances or repayment of loans would not be compensation.”131 Another commenter said “sponsor compensation comes almost entirely in the form of capital gains associated with securities issued in the ‘promote’ resulting from stock price increases after the de-SPAC transaction, and quantifying such compensation may involve speculation or be subject to criticism as incomplete.”132 Another commenter said that, “in addressing non-equity compensation and reimbursements, proposed Item 1603(a)(6) should explain its requirement to identify other compensation and reimbursements that are material, individually or in the aggregate and that the required disclosure may be qualitative and not quantitative, except where amounts are above a specified de minimis threshold, similar to the approach taken in certain respects under the 129 Letter from SPAC Association. We understand that the term SPAC sponsor “promote” typically refers to the acquisition by the SPAC sponsor of a significant percentage of the shares of the SPAC, typically 20%. We observe the term used to connote a meaning of “special compensation,” but it does not involve a preferred return, such as in real estate private equity investment structures that also use this terminology. 130 Letter from Vinson & Elkins. 131 Letter from Vinson & Elkins. 132 Letter from Loeb & Loeb LLP (June 13, 2022) (“Loeb & Loeb”). 44 existing compensation disclosure framework in Item 402 of Regulation S-K [17 CFR 229.402].”133 iv. Transfer of SPAC Ownership Several commenters recommended we adopt requirements to disclose transfers of SPAC securities by the SPAC sponsor and others. One commenter recommended, in response to request for comment,134 adding a sentence at the end of Item 1603(a)(6) that states: “Disclose any arrangements under which the SPAC sponsor, its affiliates and any promoters have transferred ownership of any securities in the SPAC to other parties in exchange for compensation or other benefit to the sponsor, its affiliates, any promoters, or to the SPAC.”135 The commenter said that “SPAC sponsors at times sell off a portion of their promote or other securities to a ‘risk-capital syndicate’ as a way of cashing out early on a portion of the compensation they receive for their work on the SPAC” and that “the amount of interest that a sponsor retains in securities of the SPAC is material for investors seeking to evaluate the incentive of the sponsor in pursuing a SPAC merger.”136 Another commenter suggested expanding current Forms 3 and 4 director and officer reporting requirements to cover SPAC sponsors and their transactions in SPAC securities after the de-SPAC transaction.137 Similarly, 133 Letter from ABA. 134 Proposing Release, supra note 7, at 29467 (request for comment number 9) (“Should we require more or less information about the sponsor’s compensation and reimbursements?”). 135 Letter from Michael Klausner, Stanford Law School, and Michael Ohlrogge, NYU School of Law (June 13, 2022) (“Michael Klausner and Michael Ohlrogge”), included as an attachment to a letter from Michael Ohlrogge, NYU School of Law (June 13, 2022). 136 Id. 137 Letter from Paul Swegle. 45 another commenter recommended disclosure of post-de-SPAC transaction transfers, noting “this reporting could be time limited, for example to two years” following the de-SPAC transaction.138 v. Interest in SPAC Sponsor and Organizational Chart One commenter said that the proposed approach departs from the traditional approach to beneficial ownership reporting and recommended that this item should clarify that “an indirect economic interest in less than 10% of a SPAC’s founder shares or warrants through ownership of equity interests in a [SPAC] [s]ponsor should not, in and of itself and absent other factors, be considered a direct or indirect material interest in the [SPAC] [s]ponsor.”139 Another commenter said the identity of natural persons controlling the sponsor is already disclosed in response to existing 17 CFR 229.403 (“Item 403” of Regulation S-K).140 vi. Agreements One commenter recommended that the Commission should revise proposed Item 1603(a)(8) to “specify that if a SPAC, the SPAC sponsor, or any affiliated party enters into an agreement regarding the redemption of outstanding securities of the SPAC after the date of the merger registration statement or proxy, that the SPAC be required to issue a proxy amendment or similar filing prior to the redemption deadline to inform SPAC shareholders of the new agreement.”141 Another commenter said the material terms of lock-up agreements are already disclosed as a matter of industry practice and that requiring additional disclosure would “go beyond the disclosure requirements applicable to lock-up agreements that are entered into in connection with 138 Letter from NASAA. 139 Letter from ABA. 140 Letter from Vinson & Elkins. 141 Letter from Michael Klausner and Michael Ohlrogge. 46 a traditional IPO.”142 Regarding proposed requirements to disclose any exceptions to relevant lock-up agreements, one commenter recommended excluding exceptions that are not material or are customary.143 This commenter noted that frequently these exceptions provide that the transferee agree to the lock-up agreement as a condition of the transfer.144 3. Final Rules After considering the comments received, we are adopting Item 1603(a) as proposed with certain modifications we discuss below. Additionally, for clarity and consistency throughout Item 1603, we have replaced the term “executive officers” with the term “officers.” i. General Discussion Item 1603(a)’s disclosure requirements will provide a SPAC’s prospective investors and existing shareholders with detailed information relating to the SPAC sponsor that could be important in understanding and analyzing a SPAC, including how the rights and interests of the SPAC sponsor, its affiliates, and any promoters may differ from, or may conflict with, those of public shareholders.145 Given that a SPAC does not conduct an operating business, information about the background and experience of the SPAC sponsor is important in assessing a SPAC’s prospects for success and may be a relevant factor in the market value of a SPAC’s securities.146 142 Letter from Vinson & Elkins. 143 Letter from Freshfields (“Exceptions to lockups that are customary and not significant or material [include]: transfers to affiliates, transfers to family members, gifts and other charitable donations, transfers by will or inheritance, transfers upon dissolution of a marriage, and in-kind distributions to an entity's members and partners”). 144 Letter from Freshfields. 145 Item 1603(a) will operate in addition to existing disclosure requirements that may be applicable to a SPAC’s arrangements with SPAC sponsors such as 17 CFR 229.701 (“Item 701” of Regulation S-K), which requires disclosure about, among other things, the terms of any private securities transactions between a SPAC and SPAC sponsors within the past three years, and 17 CFR 229.404 (“Item 404” of Regulation S-K), which requires disclosure about certain related party transactions. 146 See, e.g., Chen Lin, Fangzhou Lu, Roni Michaely & Shihua Qin, SPAC IPOs and Sponsor Network Centrality (SSRN Working Paper, 2021); Andrea Pawliczek, A. Nicole Skinner, and Sarah L.C. Zechman, Signing Blank 47 Corresponding disclosure with respect to SPAC sponsor affiliates and promoters will also provide investors with important information, because the SPAC sponsor’s affiliates and any promoters of the SPAC may also carry out activities similar to those of a SPAC sponsor. Furthermore, the enhanced disclosure regarding the SPAC sponsor’s compensation and the SPAC sponsor’s agreements, arrangements, or understandings may be helpful to a SPAC’s prospective investors and existing shareholders in considering whether to acquire or redeem the SPAC’s securities and in evaluating the potential risks and merits of a proposed de-SPAC transaction, because it could highlight additional motivations for completing a de-SPAC transaction. Several commenters suggested that proposed Item 1603(a) would codify, to an extent, existing disclosure practices.147 We agree that the requirements in Item 1603 to provide detailed disclosure about the SPAC [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3A4469d48d980bea52. Public record. Not legal advice.