Special Purpose Acquisition Companies, Shell Companies, and Projections

Federal RegisterMay 13, 2022

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 232, 239, 240, 249, and 270

[Release Nos. 33-11048; 34-94546; IC-34549; File No. S7-13-22]

RIN 3235-AM90

Special Purpose Acquisition Companies, Shell Companies, and Projections

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rules.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is proposing rules intended to enhance investor protections in initial public offerings by special purpose acquisition companies (“SPACs”) and in subsequent business combination transactions between SPACs and private operating companies. Specifically, we are proposing specialized disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the fairness of these business combination transactions. The proposed new rules and amendments to certain rules and forms under the Securities Act of 1933 and the Securities Exchange Act of 1934 would address the application of disclosure, underwriter liability, and other provisions in the context of, and specifically address concerns associated with, business combination transactions involving SPACs as well as the scope of the Private Securities Litigation Reform Act of 1995. Further, we are proposing a rule that would deem any business combination transaction involving a reporting shell company, including a SPAC, to involve a sale of securities to the reporting shell company's shareholders and are proposing to amend a number of financial statement requirements applicable to transactions involving shell companies. In addition, we are proposing to update our guidance regarding the use of projections in Commission filings as well as to require additional disclosure regarding projections when used in connection with business combination transactions involving SPACs. Finally, we are proposing a new safe harbor under the Investment Company Act of 1940 that would provide that a SPAC that satisfies the conditions of the proposed rule would not be an investment company and therefore would not be subject to regulation under that Act.

DATES:

Comments should be received on or before June 13, 2022.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

https://www.sec.gov/rules/submitcomments.htm

); or

• Send an email to

rule-comments@sec.gov.

Please include File Number S7-13-22 on the subject line; or.

Paper Comments

• Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-13-22. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website (

http://www.sec.gov/rules/proposed.shtml

). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission's Public Reference Room. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Charles Kwon, Office of Rulemaking, Division of Corporation Finance, at (202) 551-3430; or with respect to proposed Rules 140a and 145a under the Securities Act, Adam Turk, Office of Chief Counsel, Division of Corporation Finance, at (202) 551-3500; with respect to proposed Rule 15-01 of Regulation S-X, Ryan Milne, Office of Chief Accountant, Division of Corporation Finance, at (202) 551-3400; with respect to the proposed amendments relating to projections disclosure and tender offer rules, Daniel Duchovny, Office of Mergers & Acquisitions, Division of Corporation Finance, at (202) 551-3440; and with respect to proposed Rule 3a-10 under the Investment Company Act, Rochelle Kauffman Plesset, Seth Davis, or Taylor Evenson, Senior Counsels; Lisa Reid Ragen, Branch Chief; or Thoreau Bartmann, Assistant Director, 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.

SUPPLEMENTARY INFORMATION:

The Commission is proposing for public comment new 17 CFR 210.15-01 (Rule 15-01 of Regulation S-X), new 17 CFR 229.1601 through 229.1610 (subpart 1600 of Regulation S-K), new 17 CFR 230.140a (Securities Act Rule 140a), new 17 CFR 230.145a (Securities Act Rule 145a), and new 17 CFR 270.3a-10 (Investment Company Act Rule 3a-10). We are also proposing for public comment

amendments to:

15 U.S.C. 77a

et seq.

Commission reference

CFR citation

(17 CFR)

Securities Act of 1933 (“Securities Act”):

Rule 137

230.137

Rule 138

230.138

Rule 139

230.139

Rule 163A

230.163A

Rule 164

230.164

Rule 174

230.174

Rule 405

230.405

Rule 419

230.419

Rule 430B

230.430B

Rule 437a

230.437a

Form S-1

239.11

Form F-1

239.31

Form S-4

239.25

Form F-4

239.34

Securities Exchange Act of 1934 (“Exchange Act”):

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

Regulation S-K (17 CFR 229.10 through 229.1406):

Item 10

229.10

Item 601

229.601

Regulation S-T (17 CFR 232.10 through 232.903):

Rule 405

232.405

Regulation S-X (17 CFR 210.1-01 through 210.13-02):

Rule 1-02

210.1-02

Rule 3-01

210.3-01

Rule 3-02

210.3-02

Rule 3-05

210.3-05

Rule 3-14

210.3-14

Rule 8-02

210.8-02

Rule 10-01

210.10-01

Rule 11-01

210.11-01

Table of Contents

15 U.S.C. 78a

et seq.

I. Introduction

II. Proposed New Subpart 1600 of Regulation S-K

A. Definitions

B. Sponsors

C. Conflicts of Interest

D. Dilution

E. Prospectus Cover Page and Prospectus Summary Disclosure

1. Prospectus Cover Page

2. Prospectus Summary

F. Disclosure and Procedural Requirements in De-SPAC Transactions

1. Background of and Reasons for the De-SPAC Transaction; Terms and Effects

2. Fairness of the De-SPAC Transaction

3. Reports, Opinions, and Appraisals

4. Proposed Item 1608 of Regulation S-K

G. Structured Data Requirement

III. Aligning De-SPAC Transactions With Initial Public Offerings

A. Aligning Non-Financial Disclosures in De-SPAC Disclosure Documents

B. Minimum Dissemination Period

C. Private Operating Company as Co-Registrant to Form S-4 and Form F-4

D. Re-Determination of Smaller Reporting Company Status

E. PSLRA Safe Harbor

F. Underwriter Status and Liability in Securities Transactions

1. Participants in a Distribution as “Underwriters”

2. The De-SPAC Transaction as a “Distribution” of the Combined Company's Securities

3. Proposed Rule: SPAC IPO Underwriters are Underwriters in Registered De-SPAC Transactions

IV. Business Combinations Involving Shell Companies

A. Shell Company Business Combinations and the Securities Act of 1933

1. Shell Company Business Combinations

2. Proposed Rule 145a

3. Excluded Transactions

B. Financial Statement Requirements in Business Combination Transactions Involving Shell Companies

1. Number of Years of Financial Statements

2. Audit Requirements of Predecessor

3. Age of Financial Statements of the Predecessor

4. Acquisitions of Businesses by a Shell Company Registrant or Its Predecessor That Are Not or Will Not Be the Predecessor

5. Financial Statements of a Shell Company Registrant After the Combination With Predecessor

6. Other Amendments

V. Enhanced Projections Disclosure

A. Background

B. Rule Proposals

1. Item 10(b) of Regulation S-K

2. Item 1609 of Regulation S-K

VI. Proposed Safe Harbor Under the Investment Company Act

A. Background

1. Potential Status as an Investment Company

2. Rationale for the Safe Harbor

3. Boundaries of the Safe Harbor

B. Conditions

1. Nature and Management of SPAC Assets

2. SPAC Activities

3. Duration Limitations

VII. Additional Requests for Comment

VIII. General Request for Comments

IX. Economic Analysis

A. Broad Economic Considerations

B. Baseline and Affected Parties

1. SPAC Initial Public Offerings

2. De-SPAC Transactions

3. Blank Check Companies

4. Shell-Company Business Combinations

5. Projections Under Item 10(b) of Regulation S-K

6. Investment Company Act Safe Harbor

C. Benefits and Costs of the Proposed Rules

1. Disclosure-Related Proposals

2. Liability-Related Proposals

3. Shell-Company Related Proposals

4. Enhanced Projections Disclosure (Amendments to Item 10(b) of Regulation S-K)

5. Investment Company Act Safe Harbor

D. Effects on Efficiency, Competition, and Capital Formation

1. Efficiency

2. Competition

3. Capital Formation

E. Reasonable Alternatives

1. Disclosure-Related Proposals

2. Liability-Related Proposals

3. Expanding Disclosure in Reporting Shell Company Business Combinations

4. Enhanced Projections Disclosures

5. Investment Company Act Safe Harbor

F. Requests for Comment

X. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Estimates of the Effects of the Proposed New Rules and Amendments on the Collections of Information

C. Incremental and Aggregate Burden and Cost Estimates

D. Request for Comment

XI. Small Business Regulatory Enforcement Fairness Act

XII. Initial Regulatory Flexibility Analysis and Certification

A. Reasons for, and Objectives of, the Proposed Action

B. Legal Basis

C. Regulatory Flexibility Act Certification

D. Small Entities Subject to the Proposed Rules and Amendments

E. Reporting, Recordkeeping, and Other Compliance Requirements

F. Duplicative, Overlapping or Conflicting Federal Rules

G. Significant Alternatives

Statutory Authority and Text of Proposed Rule and Form Amendments

I. Introduction

Special purpose acquisition companies first began to emerge in the 1990s as an alternative to blank check companies regulated pursuant to Rule 419 under the Securities Act.

In response to widespread fraud and abuse in blank check offerings, Congress passed the Securities Enforcement Remedies and Penny Stock Reform Act of 1990,

which required the Commission to adopt rules governing registration statements filed by blank check companies offering penny stock.

In response, the Commission adopted comprehensive disclosure and other requirements for blank check offerings in Rule 419.

Following the adoption of Rule 419, securities offerings by SPACs, which are not subject to the rule's requirements but have many similar features, began to appear, with the number of these offerings fluctuating over the years.

In the past two years, however, the U.S. securities markets have experienced an unprecedented surge in the number of initial public offerings by SPACs, with SPACs raising more than $83 billion in such offerings in 2020 and more than $160 billion in such offerings in 2021.

In 2020 and 2021, more than half of all initial public offerings were conducted by SPACs.

The term “blank check company” is defined in 17 CFR 230.419(a)(2) 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 (Exchange Act Rule 3a51-1).

Public Law 101-429, 104 Stat. 931 (Oct. 15, 1990).

Id.

at sec. 508; Section 7(b) of the Securities Act.

Blank Check Offerings,

Release No. 33-6932 (Apr. 13, 1992) [57 FR 18037 (Apr. 28, 1992)]. Rule 419 requires a blank check company to meet certain disclosure and investor protection requirements in registered offerings of securities.

Between 2011 and 2021, the average number of initial public offerings by SPACs registered under the Securities Act per year was 98, with the highest number of such offerings (613) in 2021 and the lowest number of such offerings (9) in 2012. In 2008, both the New York Stock Exchange and Nasdaq adopted rules to permit the listing of SPACs on these exchanges for the first time.

See, e.g.,

Release No. 34-57785 (May 6, 2008) [73 FR 27597 (May 13, 2008)] and Release No. 34-58228 (July 25, 2008) [73 FR 44794 (July 31, 2008)].

By comparison, SPACs raised a total of $13.6 billion in initial public offerings in 2019 and a total of $10.8 billion in initial public offerings in 2018. As used in this release, “initial public offering” refers 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 Exchange Act immediately prior to the registration.

A SPAC is typically a shell company

that is organized for the purpose of merging with or acquiring one or more unidentified private operating companies (a “de-SPAC transaction”) within a certain time frame (often two years) and that conducts a firm commitment underwritten initial public offering of $5 million or more in units consisting of redeemable shares and warrants.

A SPAC is organized and managed by its sponsor, which is usually compensated through an amount equal to a percentage (often 25 percent) of the SPAC's initial public offering proceeds (in the form of discounted shares and warrants) to be received upon the completion of a de-SPAC transaction.

Although SPACs are not subject to the requirements of Rule 419,

they are typically structured to operate under similar, though usually less stringent, conditions in order to attract investors and to comply with exchange listing requirements.

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.

The descriptions included in this release of common features currently seen in SPACs and SPAC transaction structures are based, in part, on reviews by the Commission staff of SPAC filings with the Commission. The terms “private operating company” and “target company” are used interchangeably in this release, unless otherwise indicated. We are proposing to define the term “target company” for purposes of the requirements applicable to SPACs.

See infra

Section II.A.

This sponsor compensation is often referred to as the sponsor's “promote” or “founder shares,” which usually amounts to around 20% of the total shares of a SPAC after its initial public offering. The underwriting fees in a SPAC's initial public offering are typically between 5% and 5.5% of the offering proceeds, of which 3.5% is also usually conditioned on the completion of the de-SPAC transaction.

Issuers that raise more than $5 million in a firm commitment underwritten initial public offering are excluded from the definition of “blank check company” in Rule 419, and thus are not subject to the requirements of the rule, because they are not selling “penny stock,” as defined in Exchange Act Rule 3a51-1. The definition of “penny stock” in Exchange Act Section 3(a)(51) and Rule 3a51-1 encompasses any equity security except those excluded under the rule, such as an NMS stock, as defined in 17 CFR 242.600(b)(55), that meets certain criteria; securities issued by a registered investment company; and securities of an issuer that has net tangible assets in excess of $2 million, or $5 million if the issuer has been in continuous operation for less than three years, or average revenue of at least $6 million for the last three years. In 1993, the Commission issued guidance stating that issuers may aggregate the proceeds of a firm commitment underwritten initial public offering in order to exceed the $5 million net tangible assets test in Rule 3a51-1(g)(1).

See Penny Stock Definition for Purposes of Blank Check Rule,

Release No. 33-7024 (Oct. 25, 1993) [58 FR 58099 (Oct. 29, 1993)]. SPACs often have provisions in their governing instruments that prohibit them from being “penny stock” issuers. As used in this release, the term “SPAC” excludes those issuers that are subject to Rule 419. In Dec. 2020, the Commission received a rulemaking petition (“Rulemaking Petition”) requesting that the Commission adopt rule amendments to permit SPACs to conduct initial public offerings on a best-efforts basis without being subject to Rule 419.

See

Rulemaking Petition from Loeb & Loeb LLP, File No. 4-768 (Dec. 21, 2020),

available at: https://www.sec.gov/rules/petitions/2020/petn4-768.pdf.

As of the date of this release, we have not received any comment letters in response to the Rulemaking Petition.

These conditions are generally market driven, and are typically set forth in their governing instruments and/or contractual arrangements, or are pursuant to the laws of the state or country of organization or the listing standards of national securities exchanges.

See, e.g.,

NYSE Listed Company Manual Section 102.06 and Nasdaq Listing Rule IM-5101-2. For example, Section 102.06 of the NYSE Listed Company Manual requires, among other things, that at least 90% of the initial public offering proceeds, together with the proceeds of any other concurrent sales of equity securities, be held in a trust account controlled by an independent custodian until the consummation of a business combination with a fair market value equal to at least 80% of the net assets held in the trust, with the time period to consummate the de-SPAC transaction not to exceed three years. In contrast, under Rule 419, a blank check company must, among other things, complete a merger or acquisition within 18 months after the effective date of its registration statement and must place the offering proceeds and the securities sold in the offering in an escrow or trust account until the completion of the merger or acquisition, which precludes trading in the blank check company's securities until after the merger or acquisition is completed.

Following its initial public offering, a SPAC generally places all or substantially all of the offering proceeds into a trust or escrow account,

and the SPAC's shares and warrants are typically registered under Section 12(b) of the Exchange Act and then begin trading on a national securities exchange.

If a SPAC does not complete a de-SPAC transaction within the time frame specified in its governing instruments, the SPAC may seek an extension of the time frame from its shareholders or may dissolve and liquidate, with the sponsor not earning the “promote” and the assets held in the trust or escrow account returned on a pro rata basis to its shareholders.

The assets in the trust or escrow account are typically invested in U.S. government securities and money market funds that invest in U.S. government securities.

See infra

Section VI.

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 one year after the SPAC's initial public offering or upon the completion of a de-SPAC transaction.

Exchange rules require a listed SPAC to complete a de-SPAC transaction within a specified

timeframe not to exceed 36 months after its initial public offering.

See, e.g.,

NYSE Listed Company Manual Section 102.06.and Nasdaq Listing Rule IM-5101-2.

If, on the other hand, a SPAC identifies a candidate for a business combination transaction, the shareholders of the SPAC have the opportunity to either: (1) Redeem their shares prior to the business combination and receive a pro rata amount of the initial public offering proceeds held in the trust or escrow account, or (2) remain a shareholder of the company after the business combination.

To offset shareholder redemptions and 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.

De-SPAC transactions often result in the former SPAC's shareholders owning a minority interest in the post-business combination company, with the former private operating company's shareholders and PIPE investors owning a majority interest in the post-business combination company following these transactions.

According to a study of SPAC initial public offerings between 2010 and 2018, an average of 54.4% and a median of 57.1% of shares issued in an initial public offering by a SPAC during this period were redeemed prior to the completion of a de-SPAC transaction. Usha R. Rodrigues and Michael Stegemoller,

SPACs: Insider IPOs

(SSRN Working Paper, 2021). Another analysis found that, between July 1, 2021 and Dec. 1, 2021, mean and median SPAC redemption rates were 55% and 66%, respectively. Michael Klausner, Michael Ohlrogge, and Emily Ruan,

A Sober Look at SPACs,

39 Yale J. on Regul. 228 (2022).

See infra

Section IX.C.1.a.4. for a discussion of shareholder redemptions based on analysis by the Division of Economic and Risk Analysis (DERA) of available data.

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.

According to one study, of the 47 SPAC mergers that occurred between Jan. 2019 and June 2020, SPAC shareholders, including the sponsor, held a median of 35% of the merged company after a de-SPAC transaction (of which the sponsor held a median of 12% of the merged company), with the remaining 65% of the merged company held by other parties including the target company's shareholders and PIPE investors. Klausner, Ohlrogge, and Ruan,

supra

note 17.

Shareholder approval is often required in de-SPAC transactions, and, in such cases, a SPAC provides its shareholders with a proxy statement on Schedule 14A, or an information statement on Schedule 14C if it is not soliciting proxies from its shareholders.

If a SPAC or the target company is registering an offering of its securities (or the securities of a new holding company) to be issued in the de-SPAC transaction, then a registration statement on Form S-4 or F-4 would be filed for the securities offering. If no registration statement or proxy or information statement is required, then the SPAC disseminates a tender offer statement (Schedule TO) for the redemption offer to its security holders with information about the target company.

Regardless of how the de-SPAC transaction is structured, the operations of the private company are conducted by the post-business combination company following the consummation of a de-SPAC transaction, with the shareholders of the private company now owning shares in a publicly listed company.

17 CFR 240.14a-2 (Exchange Act Rule 14a-2) and 17 CFR 240.14c-2 (Exchange Act Rule 14c-2).

The Commission has promulgated rules under the Exchange Act setting forth filing, disclosure, and dissemination requirements in connection with tender offers.

See, e.g.,

Regulations 14D and 14E and Exchange Act Rule 13e-4. When an issuer conducts a tender offer, the issuer may be required to file and disseminate a Schedule TO pursuant to Rule 13e-4. The redemption rights in a SPAC context generally have indicia of being a tender offer, such as a limited period of time for the SPAC security holders to request redemption of their securities. The Commission staff, however, has not insisted that SPACs comply with the tender offer rules when a SPAC files a 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 Regulation 14A or 14C, 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 when a SPAC does not file a Schedule 14A or 14C in connection with the de-SPAC transaction or an extension. SPACs that do not file a Schedule 14A or 14C, such as SPACs that are foreign private issuers, have generally filed and disseminated Schedules TO for the redemptions of their securities and complied with the procedural requirements of the tender offer rules. In these circumstances, 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.F.4 for a discussion of proposed Item 1608 of Regulation S-K and Section IV.A. for a discussion of proposed Rule 145a under the Securities Act, which would affect when a SPAC may be required to file a Form S-4 or F-4 in connection with a de-SPAC transaction.

De-SPAC transactions can be viewed as a way for private operating companies to become public reporting companies under the Exchange Act and obtain a listing on a national securities exchange while avoiding certain of the safeguards for investors and conventions of the typical initial public offering process.

From the perspective of the shareholders and management of a private operating company, some of the purported advantages of combining with a SPAC compared to conducting an underwritten initial public offering could include: Greater pricing certainty in merger negotiations; a relatively shorter time frame in becoming a public company; and the perceived freedom to use projections in connection with de-SPAC transactions, with reduced liability exposure.

De-SPAC transactions also offer private operating companies an infusion of capital from the SPAC,

as well as potentially greater share liquidity for the post-business combination company based on the existing trading market for the SPAC's securities.

See infra

note 119.

See, e.g.,

Klausner, Ohlrogge, and Ruan,

supra

note 17; Rodrigues and Stegemoller,

supra

note 17; Minmo Gahng, Jay R. Ritter, and Donghang Zhang,

SPACs

(SSRN Working Paper, 2021).

Typically, much of this cash comes from PIPE investors around the time of the de-SPAC transaction and not from investors in the SPAC's initial public offering.

See, e.g.,

Klausner, Ohlrogge, and Ruan,

supra

note 17.

However, one study found evidence of illiquidity in SPAC shares, with relatively thin trading volume particularly during the period before the announcement of a proposed de-SPAC transaction. Rodrigues and Stegemoller,

supra

note 17.

Although the basic structure of SPACs has existed since the 1990s, the recent surge in SPAC offerings and the increasing use of de-SPAC transactions as a mechanism for private operating companies to access the U.S. public securities markets have caused some market observers to express concerns about various aspects of the SPAC structure.

For example, some commentators have raised concerns regarding the amount of sponsor compensation and other costs and their dilutive effects on a SPAC's shareholders.

A number of commentators have also pointed to the nature of the sponsor compensation (

i.e.,

dependent on the completion of a de-SPAC transaction) as a potential conflict of interest in the SPAC structure

that could lead sponsors to enter into de-SPAC transactions that are unfavorable to unaffiliated shareholders of the SPACs without performing robust due diligence in connection with these transactions, when the alternative is to liquidate the SPACs and return the initial public offering proceeds to the shareholders.

Other commentators have criticized stock exchange listing rules under which SPAC shareholders have voted in favor of proposed de-SPAC transactions while still redeeming their shares prior to the closing of the transactions.

A number of studies have found that returns are relatively poor for investors in companies following a de-SPAC transaction.

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 de-SPAC transactions. A webcast of the hearing is available at:

https://financialservices.house.gov/events/eventsingle.aspx?EventID=407753.

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,

The Wall Street Journal, Apr. 25, 2021.

See, e.g.,

Klausner, Ohlrogge, and Ruan,

supra

note 17; Rodrigues and Stegemoller,

supra

note 17; Gahng, Ritter, and Zhang,

supra

note 23; 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-parka-20210524.pdf.

See

Mira Ganor,

The Case for Non-Binary, Contingent, Shareholder Action,

23 U. Pa. J. Bus. L. 390 (2021); Rodrigues and Stegemoller,

supra

note 17. We note that exchange listing rules only explicitly require that, when 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”).

See, e.g.,

Lora Dimitrova,

Perverse Incentives of Special Purpose Acquisition Companies, the “Poor Man's Private Equity Funds,”

Journal of Accounting and Economics (2017); Johannes Kolb and Tereza Tykvová,

Going Public via Special Purpose Acquisition Companies: Frogs Do Not Turn Into Princes, Journal of Corporate Finance

(2016); Klausner, Ohlrogge, and Ruan,

supra

note 17; Gahng, Ritter, and Zhang,

supra

note 23; Chen Lin, Fangzhou Lu, Roni Michaely, and Shihua Qin,

SPAC IPOs and Sponsor Network Centrality

(SSRN Working Paper, 2021).

See also

Testimony of Scott Kupor, Andreessen Horowitz, before the Investor Protection, Entrepreneurship, and Capital Markets Subcommittee of the U.S. House Committee on Financial Services, May 24, 2021,

https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-wstate-kupors-20210524.pdf;

Alexander Osipovich and Dave Michaels,

Investors Flock to SPACs, Where Risks Lurk and Track Records Are Poor,

The Wall Street Journal, Nov. 13, 2020.

In addition, some commentators have expressed concerns regarding the adequacy of the disclosures provided to investors in these transactions in terms of explaining the potential benefits, risks and effects for investors, as well as the potential benefits for the sponsor and other affiliates of the SPAC.

One of these commentators also expressed the view that the disclosure about the private operating company provided through the de-SPAC transaction process may be less complete and less reliable than that provided by an issuer in a traditional initial public offering.

Other 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,

as well as the lack of a named underwriter in these transactions that would typically perform traditional gatekeeping functions, such as due diligence, and would be subject to liability under Section 11 of the Securities Act for untrue statements of material facts or omissions of material facts.

In response to a number of these and other issues, the Commission staff has provided guidance relating to SPACs on five occasions since December 2020.

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 SEC actions have highlighted disclosures about the private operating company that are allegedly incomplete, inaccurate, and materially misleading.

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);

In the Matter of Nikola Corp.,

Release No. 33-11018, 34-93838 (Dec. 21, 2021);

SEC

Akazoo S.A.,

Case No. 1:20-cv-08101 (S.D.N.Y. filed Sept. 30, 2020);

SEC

Hurgin, et al.,

Case No. 1:19-cv-05705 (S.D.N.Y. filed June 18, 2019).

See

AFR Letter.

See, e.g.,

Michael Dambra, Omri Even-Tov, and Kimberlyn George,

Should SPAC Forecasts be Sacked?

(SSRN Working Paper, 2022); AFR Letter; Park Testimony; Rodrigues and Stegemoller,

supra

note 17.

See also

Heather Somerville and Eliot Brown,

SPAC Startups Made Lofty Promises. They Aren't Working Out.,

The Wall Street Journal, Feb. 25, 2022.

See

AFR Letter; Deane Testimony; Rodrigues Testimony.

See also

John C. Coffee Jr.,

Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms,

84 B. U. L. Rev. 301 (2004) and John C. Coffee, Jr.,

Gatekeepers: The Professions and Corporate Governance

(2006).

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); and

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). This guidance and other staff statements (including those cited herein) 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 content of these documents and, like all staff 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.

In September 2021, the Commission's Investor Advisory Committee

issued preliminary recommendations regarding SPACs and expressed concerns about whether sponsors and target companies have engaged in regulatory arbitrage by using de-SPAC transactions as a path to the public markets. In addition, the Investor Advisory Committee expressed concerns about potential conflicts of interest between sponsors and retail investors, and the effectiveness of the disclosures provided in these transactions.

Among other things, the Investor Advisory Committee recommended that the Commission “regulate SPACs more intensely” through an enhanced focus on and stricter enforcement of existing disclosure rules in areas such the sponsor's role in a SPAC, the process and risks in identifying and assessing target companies, PIPE financing terms, and de-SPAC transaction due diligence, as well as application of the Plain English disclosure rules.

The Investor Advisory Committee also recommended that the Commission prepare and publish a report analyzing the parties involved in SPAC transactions at

various stages and the compensation and incentives of these parties.

The Investor Advisory Committee was established by Section 911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), Public Law 111-203, 124 Stat. 1376 (2010), to advise and consult with the Commission on regulatory priorities, issues, and initiatives.

See

Recommendations of the Investor Advisory Committee Regarding Special Purpose Acquisition Companies (Sept. 9, 2021) (“IAC Recommendations”),

available at: https://www.sec.gov/spotlight/investor-advisory-committee-2012/20210909-spac-recommendation.pdf.

The Dodd-Frank Act authorizes the Investor Advisory Committee to submit findings and recommendations for review and consideration by the Commission. The Commission then issues a public statement assessing the finding or recommendation and disclosing the Commission's intended action, if any, in regard to the finding or recommendation.

See

Section 911(g) of the Dodd-Frank Act.

17 CFR 230.421(d) (Securities Act Rule 421(d)) requires registrants to write the prospectus cover page, prospectus summary, and risk factors sections of prospectuses using plain English principles, including the use of short sentences; definite, concrete, everyday language; active voice; tabular presentation of complex information whenever possible; no legal or business jargon; and no multiple negatives.

Plain English Disclosure,

Release No. 33-7497 (Jan. 28, 1998) [63 FR 6370 (Feb. 6, 1998)].

Also in September 2021, the Commission's Small Business Capital Formation Advisory Committee

held a panel discussion on initial public offerings, direct listings, and SPACs.

The panelists expressed their views on a range of topics related to SPACs, including the factors behind the significant growth of the SPAC market over the past two years, the potential benefits of SPACs to the public markets, the potential benefits of enhanced disclosure requirements applicable to SPACs, and perceived issues surrounding the use of projections in de-SPAC transactions. The panel discussion also addressed the costs embedded in the SPAC structure and the dilutive effects of these costs on non-redeeming shareholders, as well as the poor market-adjusted returns of companies, on average, following de-SPAC transactions.

The Small Business Capital Formation Advisory Committee was established by Section 2 of the SEC Small Business Advocate Act of 2016, Public Law 114-284, 130 Stat. 1447 (2016), to provide advice to the Commission on the Commission's rules, regulations, and policies relating to (1) capital raising by emerging, privately held small businesses and public companies with less than $250 million in public market capitalization; (2) trading in their securities; and (3) public reporting and corporate governance requirements applicable to these companies.

The panelists were Isabelle Freidheim, Michael Klausner, David Ni, and Phyllis Newhouse.

See

Transcript of SEC Small Business Capital Formation Advisory Committee (Sept. 27, 2021),

available at: https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-092721.pdf.

Having considered these and other perspectives on the SPAC market, we are of the view that greater transparency and more robust investor protections could assist investors in evaluating and making investment, voting, and redemption decisions with respect to these transactions. Accordingly, we are proposing new rules and rule amendments to enhance existing disclosure requirements and investor protections in initial public offerings by SPACs and in de-SPAC transactions. A number of the rules and amendments we are proposing are intended to improve the usefulness and clarity of the information provided to investors so that they can make better informed decisions as to whether to purchase securities in SPAC initial public offerings, to purchase or sell SPAC securities in secondary trading markets, and in voting, investment and redemption decisions in connection with de-SPAC transactions.

The proposed rules and amendments, if adopted, could help the SPAC market function more efficiently by improving the relevance, completeness, clarity, and comparability of the disclosures provided by SPACs at the initial public offering and de-SPAC transaction stages, and by providing important investor protections to strengthen investor confidence in this market. In developing these proposals, we have considered the recommendations and views discussed above, as well as the Commission staff's experience in reviewing disclosures in SPAC initial public offerings and de-SPAC transactions.

Specifically, we are proposing to add new Subpart 1600 of Regulation S-K that would set forth specialized disclosure requirements in connection with initial public offerings by SPACs and in connection with de-SPAC transactions. In new Subpart 1600, we are proposing to, among other things:

• Require additional disclosures about the sponsor of the SPAC, potential conflicts of interest, and dilution;

• Require additional disclosures on de-SPAC transactions, including a requirement that the SPAC state (1) whether it reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to investors, and (2) whether it has received any outside report, opinion, or appraisal relating to the fairness of the transaction; and

• Require certain disclosures on the prospectus cover page and in the prospectus summary of registration statements filed in connection with SPAC initial public offerings and de-SPAC transactions.

In addition, in view of the increasing number of private companies using de-SPAC transactions to become publicly-traded reporting companies, we are proposing amendments to provide procedural protections and to align the disclosures provided, as well as the legal obligations of companies, in de-SPAC transactions more closely with those in traditional initial public offerings. Specifically, we are proposing to:

• Amend the registration statement forms and schedules filed in connection with de-SPAC transactions to require additional disclosures about the private operating company;

• Require that disclosure documents in de-SPAC transactions be disseminated to investors at least 20 calendar days in advance of a shareholder meeting or the earliest date of action by consent, or the maximum period for disseminating such disclosure documents permitted under the laws of the jurisdiction of incorporation or organization if such period is less than 20 calendar days;

• Deem a private operating company in a de-SPAC transaction to be a co-registrant of a registration statement on Form S-4 or Form F-4 when a SPAC files such a registration statement for a de-SPAC transaction, such that the private operating company and its signing persons would be subject to liability under Section 11 of the Securities Act as signatories to the registration statement;

• Amend the definition of smaller reporting company to require a re-determination of smaller reporting company status following the consummation of a de-SPAC transaction; and

• Define “blank check company” to encompass SPACs and certain other blank check companies for purposes of the Private Securities Litigation Reform Act of 1995 (PSLRA)

such that the safe harbor for forward-looking statements under the PSLRA would not be available to SPACs, including with respect to projections of target companies seeking to access the public markets through a de-SPAC transaction.

Public Law 104-67, 109 Stat. 737 (1995).

Underwriters play a critical role in the securities offering process as gatekeepers to the public markets. In light of this important role, we are proposing a new rule, Securities Act Rule 140a, that would deem anyone who has acted as an underwriter of the securities of a SPAC and takes steps to facilitate a de-SPAC transaction, or any related financing transaction or otherwise participates (directly or indirectly) in the de-SPAC transaction to be engaged in a distribution and to be an underwriter in the de-SPAC transaction. By affirming the underwriter status of SPAC IPO underwriters in connection with de-SPAC transactions, the proposed rule should better motivate SPAC underwriters to exercise the care necessary to ensure the accuracy of the disclosure in these transactions by affirming that they are subject to Section 11 liability for that information.

In addition, private companies have historically used shell companies with Exchange Act reporting obligations in various forms of transactions, including SPACs, to become a public company without undergoing a traditional initial public offering. In many cases, such shell company shareholders may not receive a Securities Act registration statement containing disclosures about the private company that is entering the public market for the first time. Due to the significant increase in the use of reporting shell company business combination transactions as a means to

enter the U.S. capital markets, and in an effort to provide reporting shell company shareholders with more consistent Securities Act protections regardless of transaction structure, we are proposing to add new Rule 145a that would deem any business combination of a reporting shell company, involving another entity that is not a shell company, to involve a sale of securities to the reporting shell company's shareholders.

Throughout this release, 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 as a shell company that is: “(1) Formed by an entity that is not a shell company solely for the purpose of changing the corporate domicile of that entity solely within the United States; or (2) Formed by an entity that is not a shell company solely for the purpose of completing a business combination transaction (as defined in 17 CFR 230.165(f)) among one or more entities other than the shell company, none of which is a shell company.” For purposes of proposed Rule 145a (

see infra

Section IV.A.), the term “reporting shell company” is defined as a company, other than an asset-backed issuer as defined in Item 1101(b) of Regulation AB, that has: (1) No or nominal operations; (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; and (3) an obligation to file reports under Section 13 or Section 15(d) of the Exchange Act. 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.

Further, we are proposing new Article 15 of Regulation S-X, as well as related amendments, to more closely align the financial statement reporting requirements in business combinations involving a shell company and a private operating company with those in traditional initial public offerings. This is consistent with our view that the manner in which a company goes public should not generally result in substantially different financial statement disclosures being provided to investors.

We are also proposing amendments intended to enhance the reliability of projections disclosure in Commission filings, as well as additional requirements when projections are disclosed in connection with de-SPAC transactions. The proposed amendments to Item 10(b) of Regulation S-K would address broader concerns regarding the use of projections generally, while proposed Item 1609 of Regulation S-K would address concerns specific to de-SPAC transactions.

Finally, as the SPAC market has grown dramatically in recent years, some SPACs have sought to operate in novel ways that suggest a need for SPACs and their sponsors to increase their focus on evaluating when a SPAC could be an investment company and thus subject to the requirements under the Investment Company Act of 1940 (“Investment Company Act”).

We are concerned that SPACs may fail to recognize when their activities raise the investor protection concerns addressed by the Investment Company Act. To assist SPACs in focusing on, and appreciating, when they may be subject to investment company regulation, we are proposing a new safe harbor under the Investment Company Act. The proposed rule would provide a safe harbor from the definition of “investment company” under Section 3(a)(1)(A) of the Investment Company Act for SPACs that satisfy certain conditions that limit a SPAC's duration, asset composition, business purpose and activities.

15 U.S.C. 80a-1

et seq.

See infra

Section VI for a discussion of proposed Rule 3a-10.

We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposed new rules and amendments. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation.

II. Proposed New Subpart 1600 of Regulation S-K

We are proposing to add new Subpart 1600 to Regulation S-K to set forth specialized disclosure requirements applicable to SPACs regarding the sponsor, potential conflicts of interest, and dilution, and to require certain disclosures on the prospectus cover page and in the prospectus summary.

Proposed Subpart 1600 would also require enhanced disclosure for de-SPAC transactions, including a fairness determination requirement. We are proposing to amend a number of forms and schedules used by SPACs for initial public offerings and de-SPAC transactions to require the information set forth in proposed Subpart 1600.

To the extent that the disclosure requirements in proposed Subpart 1600 address the same subject matter as the existing disclosure requirements of the forms or schedules, the requirements of proposed Subpart 1600 would be controlling.

The following table summarizes the proposed items in Subpart 1600, as described more fully below:

The proposed requirements in new Subpart 1600 would, to an extent, codify and standardize some of the disclosures already commonly provided by SPACs.

See

the proposed amendments to Forms S-1, F-1, S-4, and F-4, and Schedules 14A and TO. While we are not proposing amendments to Schedule 14C, the disclosure contemplated by proposed Subpart 1600 would 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, but would be authorized to be registered on Form S-4 or F-4, the proposed requirements of Form S-4 or F-4, as applicable, in regard to de-SPAC transactions would apply in that context.

Proposed General Instruction L.1. to Form S-4; Proposed General Instruction I.1. to Form F-4; Proposed Item 14(f)(1) to Schedule 14A; Proposed General Instruction K to Schedule TO. We are also proposing to re-designate existing General Instruction K to Schedule TO as General Instruction L to the schedule.

The information in this table is not comprehensive and is intended only to summarize the proposed items of Subpart 1600. This table should be read together with the complete text of this release.

Item

Summary description

Principal objective(s)

Applicable forms and schedules

Item 1601,

Definitions

Definitions for the terms “special purpose acquisition company,” “de-SPAC transaction,” “target company,” and “SPAC sponsor”

Establish the scope of the issuers and transactions subject to the requirements of Subpart 1600

Forms S-1, F-1, S-4, and F-4; Schedules 14A, 14C, and TO.

Item 1602,

Registered offerings by special purpose acquisition companies

Require certain information on the prospectus cover page and in the prospectus summary of registration statements for offerings by SPACs other than de-SPAC transactions. Require enhanced dilution disclosure in these registration statements

Enhance the clarity and readability of prospectuses in SPAC initial public offerings and the disclosures relating to dilution in these prospectuses

Forms S-1 and F-1.

Item 1603,

SPAC sponsor; conflicts of interest

Require certain disclosure regarding the sponsor and its affiliates and any promoters of SPACs and disclosure regarding conflicts of interest between the sponsor or its affiliates or promoters and unaffiliated security holders

Provide investors with a more complete understanding of the role of sponsors and their conflicts of interest

Forms S-1, F-1, S-4, and F-4; Schedules 14A, 14C and TO.

Item 1604,

De-SPAC transactions

Require certain information on the prospectus cover page and in the prospectus summary of registration statements for de-SPAC transactions. Require enhanced dilution disclosure in these registration statements

Enhance the clarity and readability of prospectuses in de-SPAC transactions and disclosures relating to dilution in these prospectuses

Forms S-4 and F-4; Schedules 14A, 14C, and TO.

Item 1605,

Background of and reasons for the de-SPAC transaction; terms of the de-SPAC transaction; effects

Require disclosure on the background, material terms and effects of a proposed de-SPAC transaction

Provide investors with a more complete understanding of the background of and motivations behind a proposed de-SPAC transaction

Forms S-4 and F-4; Schedules 14A, 14C, and TO.

Item 1606,

Fairness of the de-SPAC transaction and any related financing transaction

Require disclosure on whether a SPAC reasonably believes that a de-SPAC transaction and any related financing transactions are fair or unfair to investors, as well as a discussion of the bases for this reasonable belief

Provide investors with additional information regarding a proposed de-SPAC transaction and address concerns regarding potential conflicts of interest and misaligned incentives

Forms S-4 and F-4; Schedules 14A, 14C, and TO.

Item 1607,

Reports, opinions, appraisals and negotiations

Require disclosure on whether a SPAC or its sponsor has received a report, opinion or appraisal from an outside party regarding the fairness of a de-SPAC transaction or any related financing transaction

Provide investors with additional information underlying a fairness determination by a SPAC

Forms S-4 and F-4; Schedules 14A, 14C, and TO.

Item 1608,

Tender offer filing obligations in de-SPAC transactions

Require additional disclosures in a Schedule TO filed in connection with a de-SPAC transaction

Align the information provided in such a Schedule TO with the information provided in other filings in connection with a de-SPAC transaction

Schedule TO.

Item 1609,

Financial projections in de-SPAC transactions

Require additional disclosures regarding financial projections disclosed in a disclosure document for a de-SPAC transaction

Provide investors with additional information regarding the use of projections in connection with a de-SPAC transaction

Forms S-4 and F-4; Schedules 14A, 14C, and TO.

Item 1610,

Structured data requirement

***

Require information disclosed pursuant to Subpart 1600 to be tagged in a structured, machine-readable data language

Provide investors and other market participants with information that is more readily available and more easily accessible for aggregation, comparison, filtering, and other analysis

Forms S-1, F-1, S-4, and F-4; Schedules 14A, 14C, and TO.

Notes:

* Proposed Item 1608 is discussed in Section II.F.4.

** Proposed Item 1609 is discussed in Section V.B.2.

*** Proposed Item 1610 is discussed in Section II.G.

A. Definitions

For purposes of proposed new Subpart 1600, we are proposing Item 1601 to define the term “special purpose acquisition company” 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;

(2) complete a de-SPAC transaction within a specified time frame; and (3) return all remaining proceeds from 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.

While the proposed definition does not include certain features common to SPACs, such as the listing of the SPAC's securities on a national securities exchange

or the issuance of redeemable securities, the proposed definition incorporates the key defining features of the issuers that in our view should be subject to the disclosure and procedural requirements of Subpart 1600, while remaining sufficiently broad to take into account potential variations in the SPAC structure and the possibility that SPACs may continue to evolve. In particular, the proposed definition would encompass issuers that would otherwise be subject to Rule 419's investor protection requirements but for the fact that the issuer is not issuing “penny

stock.”

At the same time, the proposed definition does not include criteria such as listing on a national securities exchange, certain requirements that are applicable to exchange-traded SPACs,

or the issuance of redeemable securities, as these criteria would 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.

Blank check companies subject to Rule 419 must comply with a comprehensive set of disclosure and investor protection requirements under the rule and would not be subject to the requirements applicable to SPACs under the proposed rules.

See supra

notes 6 and 13.

Proposed Item 1601(b).

In this regard, we note that the securities of SPACs were not listed on national securities exchanges until the 2000s.

See supra

note 12.

See infra

note 57.

The term “de-SPAC transaction” would be defined 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).

The term “target company” would be defined as an operating company, business, or assets.

As proposed, these definitions are intentionally broad and, taken together, would encompass more typical transactions such as the acquisition of one or more private operating companies by a SPAC, as well as less common transactions that may or may not be permitted under exchange listing rules but for which the proposed enhanced disclosure and procedural requirements described below may be appropriate because they raise the same investor protection concerns.

Proposed Item 1601(a).

Proposed Item 1601(d).

The proposed definitions would apply to both exchange-traded SPACs and SPACs traded in the over-the-counter market. Some transactions encompassed by the proposed definitions may not be permitted under exchange listing rules for SPACs, and nothing in this release is intended to indicate that such transactions are or should be permitted under the exchanges' SPACs listing rules or that exchange listing requirements should not, at a minimum, apply to SPACs seeking an exchange listing. The Commission has consistently recognized the importance of national securities exchange listing standards. Among other things, such listing standards help ensure that exchange-listed companies will have sufficient public float, investor base, and trading interest to provide the depth and liquidity necessary to promote fair and orderly markets. Furthermore, Section 6(b)(5) of the Exchange Act requires exchange listing rules be designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, and protect investors and the public interest. The Commission has also stated that listing standards are of significant importance to investors that may rely on the status an exchange listing ascribes to a security.

See, e.g.,

Release No. 34-57785 (May 6, 2008) [73 FR 27597, 27599 (May 13, 2008)] (SR-NYSE-2008-17) (order approving initial and continued listing standards for NYSE exchange-listed SPACs).

The term “SPAC sponsor” would be defined 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.

Although a sponsor of a SPAC may perform a variety of functions within the SPAC's structure, the proposed definition encompasses activities that, based on the staff's experience reviewing SPAC filings and public commentary, are commonly associated with sponsors of SPACs. We are proposing to define this term broadly so that the appropriate entities or persons are subject to the proposed enhanced disclosure requirements applicable to the sponsors of a SPAC.

Proposed Item 1601(c). 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.

See infra

Section II.B. for a discussion of the activities of a sponsor.

Proposed Item 1603.

Request for Comment

1. Should we define the term “special purpose acquisition company” as proposed? Does the proposed definition provide a workable approach to determining which issuers would be subject to the requirements of proposed Subpart 1600? Should we define this term differently? If so, how? For example, are there certain other common characteristics of SPACs that should be included in the definition, such as redemption rights, exchange listing, the placing of initial public offering proceeds in a trust or escrow account, and/or that the de-SPAC transaction must meet a minimum fair market value (

e.g.,

at least 80%) of the value of the proceeds in the trust or escrow account? Should we include a reference to “shell company” in the definition?

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?

See supra

notes 13 and 16.

3. Should we define the term “SPAC sponsor” as proposed? Does the proposed definition reflect those activities commonly associated with a SPAC's sponsor? Would the proposed definition encompass persons or entities that are not commonly considered to be sponsors of a SPAC? If so, how should we revise the definition to avoid scoping in such persons or entities? In regard to natural persons, should we exclude from the scope of the definition the activities performed by natural persons in their capacities as directors and/or officers of the SPAC, as proposed?

4. Should we define the term “target company” as proposed? Is this definition sufficiently clear? Would this definition, in combination with the other proposed definitions, be overly broad and encompass transactions that should not be treated as de-SPAC transactions?

5. Are there other terms that we should define in proposed Subpart 1600? If so, which terms and how should we define them?

6. With respect to the proposed definition of “special purpose acquisition company,” is it clear what “has indicated that its business plan” is intended to convey? Should we require registrants to affirmatively state in filings whether they are a special purpose acquisition company? 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? Should we also amend Schedule 14A, Schedule 14C and Schedule TO to include this check box on the cover pages of these schedules?

B. Sponsors

The sponsor's role is critical to the success of a SPAC. At the earliest stage, the sponsor typically organizes and manages the SPAC, including appointing the initial directors and officers of the SPAC, and provides the initial capital for the SPAC's operations prior to its initial public offering.

In subsequent stages, among other things, the sponsor may work with one or more investment banks in preparing for the SPAC's initial public offering and may place the proceeds from the offering into a trust or escrow account. Following the initial public offering, the sponsor typically identifies potential candidates for a business combination transaction, negotiates the transaction to acquire the target private operating company and promotes the transaction to the SPAC's shareholders. As discussed above, the value of the sponsor's compensation is

usually contingent on the completion of a de-SPAC transaction.

See

proposed Item 1601(c) for the proposed definition for “SPAC sponsor.” There is often an identity of interest between the sponsor and the SPAC's officers and directors, in that the same persons may work for both the sponsor and the SPAC in different capacities. In many instances, SPACs will not hold a public election for directors until the de-SPAC transaction or thereafter. Some SPACs provide that only the founder shares may vote in director elections until the de-SPAC transaction.

See

text accompanying

supra

notes 14-16.

In view of the central role of the sponsor in a SPAC's activities, we are proposing Item 1603(a) to require additional disclosure about the sponsor, its affiliates and any promoters

of the SPAC in registration statements and schedules filed in connection with SPAC registered offerings and de-SPAC transactions, including disclosure on the following:

The term “promoter” is defined in Securities Act Rule 405 and Exchange Act Rule 12b-2.

• The experience, material roles, and responsibilities of these parties, as well as any agreement, arrangement or understanding (1) between the sponsor and the SPAC, its executive officers, directors or affiliates, in determining whether to proceed with a de-SPAC transaction and (2) regarding the redemption of outstanding securities;

• The controlling persons of the sponsor and any persons who have direct and indirect material interests in the sponsor, as well as an organizational chart that shows the relationship between the SPAC, the sponsor, and the sponsor's affiliates;

• Tabular disclosure of the material terms of any lock-up agreements with the 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 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 sponsor, its affiliates and any promoters upon the completion of a de-SPAC transaction.

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.

Proposed Item 1603(a)'s disclosure requirements are intended to provide a SPAC's prospective investors and existing shareholders with detailed information relating to the sponsor that could be important in understanding and analyzing a SPAC, including how the rights and interests of the sponsor, its affiliates, and any promoters may differ from, and may conflict with, those of public shareholders.

Given that a SPAC does not conduct an operating business, information about the background and experience of the sponsor is often important in assessing a SPAC's prospects for success and may be a relevant factor in the market value of a SPAC's securities.

To the extent that a sponsor's activities and arrangements with a SPAC are carried out through, or in conjunction with, the sponsor's affiliates and any promoters of the SPAC, we are proposing to require corresponding disclosure with respect to these affiliates and promoters. In addition, enhanced disclosure on the sponsor's compensation and the 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.

Proposed Item 1603(a) would operate in addition to existing disclosure requirements that may be applicable to a SPAC's arrangements with its sponsor such as Item 701 of Regulation S-K, which requires disclosure about, among other things, the terms of any private securities transactions between a SPAC and its sponsor within the past three years, and Item 404 of Regulation S-K, which requires disclosure about certain related party transactions.

See, e.g.,

Lin, Lu, Michaely, and Qin,

supra

note 30; Andrea Pawliczek, A. Nicole Skinner, and Sarah L.C. Zechman,

Signing Blank Checks: The Roles of Reputation and Disclosure in the Face of Limited Information

(SSRN Working Paper, 2021).

While proposed Item 1603 calls for detailed disclosure about the sponsor, its experience and its rights and interests, we note that some of this information is already being provided, to an extent, by SPACs. Codifying and amplifying these existing disclosure practices would help ensure that issuers provide consistent and comprehensive information across transactions, so that investors can make more informed investment, voting and redemption decisions.

Request for Comment

7. Should we require additional information regarding sponsors of SPACs pursuant to Item 1603(a), as proposed? If so, should we also require disclosure regarding the sponsor's affiliates and any promoters of the SPAC, as proposed?

8. Should we require disclosure about the experience and material roles and responsibilities of the sponsor, its affiliates and any promoters of the SPAC in directing and managing the SPAC's activities, as proposed? How would investors use this information?

9. Should we require more or less information about the sponsor's compensation and reimbursements? Should we require this disclosure only when the amounts exceed a

de minimis

threshold? If so, what should the

de minimis

threshold be?

10. Should we require additional disclosure about the sponsor's agreements, arrangements, or understandings in determining whether to proceed with a de-SPAC transaction and regarding the redemption of outstanding securities of the SPAC, as proposed?

11. Should we require disclosure about the controlling persons of the sponsor and any persons who have direct and indirect material interests in the sponsor, as proposed? Should we take a different approach than requiring disclosure on persons with “material interests” in the sponsor? Should we consider requiring additional disclosure on the controlling persons of entities that own or control the sponsor? Should we require an organizational chart that shows the relationship among the SPAC, the sponsor, and the sponsor's affiliates, as proposed? Would both narrative disclosure and an organizational chart be helpful to investors?

12. Should we require disclosure of the material terms of any lock-up agreements with the sponsor and its affiliates as proposed? Would the proposed requirement to provide this disclosure in a tabular format be helpful to investors? Should we instead require this disclosure in a non-tabular format?

13. Is there additional information regarding sponsors that should be disclosed? Should we require more or less information about the sponsor depending on the size or other characteristics of a SPAC?

14. Should additional disclosure be required regarding affiliated entities involved in the SPAC's operations?

C. Conflicts of Interest

Within a SPAC's structure, there may be a number of potential or actual conflicts of interest between the sponsor and public investors that could influence the actions of the SPAC. A notable example is the potential conflict of interest stemming from the contingent nature of the sponsor's compensation, whereby the sponsor and its affiliates have significant financial incentives to pursue a business combination transaction even though the transaction could result in lower returns for public shareholders than liquidation of the SPAC or an alternative transaction.

Other conflicts of interest may arise when a sponsor is a sponsor of multiple SPACs and

manages several different SPACs at the same time; when a sponsor and/or its affiliates hold financial interests in, or have contractual obligations to, other entities; or when a SPAC enters into a business combination with a private operating company affiliated with the sponsor, the SPAC, or the SPAC's founders, officers, or directors. Further, a SPAC's officers often do not work full-time at the SPAC, may work for both the sponsor and the SPAC, and/or may have responsibilities at other companies, which may impact such officers' ability to devote adequate time and attention to the activities of the SPAC and may influence their decision to proceed with a particular de-SPAC transaction. These potential conflicts of interest could be particularly relevant for investors to the extent that they arise when a SPAC and its sponsor are evaluating and deciding whether to recommend a business combination transaction to shareholders, especially as the SPAC nears the end of the period to complete such a transaction under,

e.g.,

its governing instruments or the proposed safe harbor under the Investment Company Act,

if adopted, and the sponsor may be under pressure to find a target and complete the de-SPAC transaction on less favorable terms or face losing the value of its securities in the SPAC.

See, e.g.,

Usha Rodrigues and Mike Stegemoller,

Exit, Voice, and Reputation: The Evolution of SPACs,

37 Del. J. Corp. L. 849 (2013).

See infra

Section VI.

We are proposing Item 1603(b) to require disclosure of any actual or potential material conflict of interest between (1) the sponsor or its affiliates or the SPAC's officers, directors, or promoters, and (2) unaffiliated security holders. This would include any conflict of interest in determining whether to proceed with a de-SPAC transaction and any conflict of interest arising from the manner in which a SPAC compensates the sponsor or the SPAC's executive officers and directors, or the manner in which the sponsor compensates its own executive officers and directors. In addition, we are proposing Item 1603(c) to require disclosure regarding the fiduciary duties each officer and director of a SPAC owes to other companies. Such disclosure could allow investors to assess whether and to what extent officers or directors may have to navigate a conflict of interest consistent with their obligations under the laws of the jurisdiction of incorporation or organization, may be compelled to act in the interest of another company or companies that compete with the SPAC for business combination opportunities, or may have their attention divided such that it may affect their decision-making with respect to the SPAC.

The proposed disclosure requirements would provide a SPAC's shareholders and prospective investors with a more complete understanding of any actual or potential material conflicts of interest associated with the SPAC and the benefits that may be realized by the sponsor and its affiliates and any promoters arising from these conflicts of interest. Such disclosure could allow investors to more accurately assess the potential risk associated with the conflicts of interest in a SPAC. Further, disclosure about the fiduciary duties a SPAC's officers and directors owe to other companies could allow the SPAC's shareholders and prospective investors to better assess the actions of these officers and directors in managing the SPAC's activities and in determining to proceed with a proposed de-SPAC transaction.

Request for Comment

15. Should we require disclosure with respect to material conflicts of interest that may arise in connection with de-SPAC transactions, as proposed? Should we include a materiality threshold, as proposed? Is it clear what would constitute an actual or potential material conflict of interest, or is further guidance or specification needed? For example, are there other specific conflicts of interest that we should identify in the rule?

16. Would the proposed disclosure requirements adequately inform investors as to potential material conflicts of interest? Are there approaches that could minimize potential boilerplate or duplicative disclosure? Should we require that this disclosure be presented in a tabular format?

17. Is there any additional information that we should require regarding conflicts of interest? For example, should we also require a description of any policies and procedures used or to be used to minimize potential or actual conflicts of interest? Should we require disclosure of how the board of directors assesses and manages such conflicts, in particular where directors themselves have conflicts of interest?

18. Should SPACs be required to provide additional disclosure regarding material conflicts of interest in Exchange Act reports following their initial public offerings? For example, should periodic reports require that any changes in previously disclosed conflicts of interest be reported? Should we require disclosure about material conflicts of interest relating to both the SPAC and the identified target company in the Form 8-K that is required to be filed in connection with the announcement of a de-SPAC transaction?

19. Should we require disclosure about any fiduciary duties each officer and director of a SPAC owes to other companies, as proposed? How would investors use this information? Should we require additional or different disclosure regarding these fiduciary duties? Would this requirement potentially result in the disclosure of information that is not relevant to SPAC investors? Should this disclosure requirement be focused instead on material conflicts of interests arising from these fiduciary duties to other companies? Should we require that this disclosure be provided in a tabular format? Should we consider other approaches to this disclosure?

D. Dilution

We are proposing Items 1602(a)(4), 1602(c) and 1604(c) to require additional disclosure about the potential for dilution in (1) registration statements filed by SPACs, including those for initial public offerings, and (2) de-SPAC transactions. Proposed Item 1602(c) would be applicable to all registered offerings by a SPAC other than a de-SPAC transaction, while proposed Item 1604(c) would be applicable to all de-SPAC transactions. We are also proposing Item 1602(a)(4) to require simplified tabular dilution disclosure on the prospectus cover page in registered offerings by a SPAC on Form S-1 or F-1 other than for de-SPAC transactions.

There are a number of potential sources of dilution in a SPAC's structure, including dilution resulting from shareholder redemptions, sponsor compensation, underwriting fees, outstanding warrants and convertible securities, and PIPE financings. This dilution may be particularly pronounced for the shareholders of a SPAC who do not redeem their shares prior to the consummation of the de-SPAC transaction and who may not realize or appreciate that these costs are disproportionately borne by the non-redeeming shareholders.

According to one study, the median dilutive impact of sponsor compensation, underwriting fees, warrants, and rights equaled 50.4% of the cash raised in a SPAC initial public offering.

Further, several

commentators have asserted that the complexity of the disclosures in these transactions makes it difficult for investors to understand the dilutive impact of sponsor compensation on the SPAC's non-redeeming shareholders.

For example, the dilutive impact of underwriting fees deferred until the completion of a de-SPAC transaction and the number of shares received by the sponsor is not required to be disclosed in a manner that takes into account the additional dilution caused by redemptions.

Klausner, Ohlrogge, and Ruan,

supra

note 17.

See, e.g.,

AFR Letter; Klausner, Ohlrogge, and Ruan,

supra

note 17; Michael Klausner, Michael Ohlrogge, and Harald Halbhuber,

SPAC Disclosure of Net Cash Per Share

(SSRN Working Paper, 2022).

In light of the potential for significant dilution embedded within the typical SPAC structure, enhanced disclosure regarding dilution could enable investors in a SPAC initial public offering and subsequent purchasers of SPAC shares to better understand the potential impact upon them of the various dilutive events that may occur over the lifespan of the SPAC.

We are therefore proposing to require dilution disclosure in registration statements filed by SPACs other than for de-SPAC transactions that would require a description of material potential sources of future dilution following a SPAC's initial public offering, as well as tabular disclosure of the amount of potential future dilution from the public offering price that will be absorbed by non-redeeming SPAC shareholders, to the extent quantifiable.

This proposed disclosure would be in addition to the disclosure already required under Item 506 of Regulation S-K.

In this regard, we note that the initial purchasers in SPAC initial public offerings often resell or redeem their shares prior to the completion of the de-SPAC transaction.

See, e.g.,

Benjamin Mullin and Amrith Ramkumar,

BuzzFeed Suffers Wave of SPAC Investor Withdrawals Before Going Public,

The Wall Street Journal, Dec. 2, 2021.

See also

Item 3 of Form S-4 and Item 3 of Form F-4 (specifying that certain information be included in the prospectus summary).

In regard to registered offerings other than de-SPAC transactions, we are proposing Item 1602(b) to require that SPACs include the following information in the prospectus summary in plain English:

• The process by which a potential business combination candidate will be identified and evaluated;

• Whether shareholder approval is required for the de-SPAC transaction;

• The material terms of the trust or escrow account, including the amount of gross offering proceeds that will be placed in the trust;

• The material terms of the securities being offered, including redemption rights;

• Whether the securities being offered are the same class as those held by the sponsor and its affiliates;

• The length of the time period during which the SPAC intends to

consummate a de-SPAC transaction, and its plans if it does not do so, including, whether and how the time period may be extended, the consequences to the sponsor of not completing an extension of this time period, and whether shareholders will have voting or redemption rights with respect to an extension of time to consummate a de-SPAC transaction;

• Any plans to seek additional financing and how such additional financing might impact shareholders;

• Tabular disclosure of sponsor compensation and the extent to which material dilution may result from such compensation; and

• Material conflicts of interest.

Based on the Commission staff's experience in reviewing registration statements filed by SPACs, we believe these topics are among those that investors are likely to find most important when considering an investment in the SPAC prior to the identification of a potential business combination candidate.

In regard to registered de-SPAC transactions, we are proposing Item 1604(b) to require that registrants include the following information in the prospectus summary in plain English:

• The background and material terms of the de-SPAC transaction;

• The fairness of the de-SPAC transaction;

• Material conflicts of interest;

• Tabular disclosure on sponsor compensation and dilution;

• Financing transactions in connection with de-SPAC transactions; and

• Redemption rights.

Based on the Commission staff's experience in reviewing registration statements for de-SPAC transactions, we believe investors would find this information, in particular those topics that illuminate potential conflicts of interest and the overall fairness of the proposed transaction, important when making an investment decision at the de-SPAC transaction stage.

Request for Comment

26. Would requiring certain information in regard to SPAC offerings on the prospectus cover page and in the prospectus summary make it easier for investors to review and understand the disclosures in these registration statements? Are there other ways we could make these registration statements easier for investors to understand?

27. Should we require the proposed cover page disclosures for SPAC initial public offerings and de-SPAC transactions? Is there other information that we should require to be included on the cover page, either in addition to, or in lieu of, the information proposed to be required? Conversely, are there any proposed additional cover page disclosures that we should not adopt?

28. Should we require the inclusion of the proposed specified information in the prospectus summary? Is there other information that we should require to be included in the prospectus summary?

29. Is the subset of the disclosure under proposed Item 1605 that we are proposing to require to be more prominently presented on the prospectus cover page and in the prospectus summary via proposed Items 1604(a) and (b) the most informative or otherwise important information for purposes of the prospectus cover page and the prospectus summary? Should any additional disclosure provided pursuant to proposed Item 1605 be added to or replace an existing element of the information proposed to be required on the prospectus cover page or in the prospectus summary?

30. Are there other changes we should consider in regard to the prospectus cover page and prospectus summary? For example, should we impose any additional formatting requirements, such as the use of tables or bullet points, for certain information in the prospectus summary? Would such formatting requirements improve the clarity of this disclosure?

F. Disclosure and Procedural Requirements in De-SPAC Transactions

We are proposing specialized disclosure and procedural requirements in de-SPAC transactions so that investors can better understand and evaluate the merits of a prospective de-SPAC transaction.

The proposed rules would require: (1) Additional disclosures on the background of and reasons for the transaction; (2) a statement from the SPAC as to whether it reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to unaffiliated security holders; (3) disclosure on any outside report, opinion, or appraisal relating to the fairness of the transaction; and (4) additional information in a Schedule TO filed in connection with a de-SPAC transaction, as well as clarify the need to comply with the procedural requirements of the tender offer rules when filing such a Schedule TO.

As discussed above, a SPAC is required to provide its shareholders with a proxy statement on Schedule 14A if shareholder approval is required in a de-SPAC transaction. If a SPAC is registering an offering of its shares to be issued in the de-SPAC transaction, the SPAC generally files a registration statement on Form S-4 or F-4. Alternatively, if shareholder approval is required but the SPAC is not soliciting proxies from its shareholders, the SPAC is required to provide an information statement on Schedule 14C. Otherwise, if no registration statement, proxy statement or information statement is required, the SPAC must disseminate a Schedule TO (tender offer statement) to its shareholders.

See

Section IV.A. for a discussion of proposed Rule 145a, which would affect when a SPAC may be required to file a Form S-4 or F-4 in connection with a de-SPAC transaction.

In addition, we are proposing new rules applicable to business combinations involving shell companies more generally, which would include de-SPAC transactions.

See infra

Section IV.

1. Background of and Reasons for the De-SPAC Transaction; Terms and Effects

In order to provide investors with a more complete understanding of the de-SPAC transaction, we are proposing Item 1605 of Regulation S-K which would require disclosure of the background, material terms, and effects of the de-SPAC transaction, including:

• A summary of the background of the de-SPAC transaction, including, but not limited to, a description of any contacts, negotiations, or transactions that have occurred concerning the de-SPAC transaction;

For example, this disclosure could encompass whether any portion of the underwriting fees in connection with a SPAC's initial public offering is contingent upon the SPAC's completion of a de-SPAC transaction and whether the underwriter in the SPAC's initial public offering has provided additional services to the SPAC following the initial public offering, such as locating potential target companies, providing financial advisory services, acting as a placement agent for PIPE transactions, and/or arranging debt financing. For a discussion of the role of the underwriter in connection with a de-SPAC transaction,

see infra

Section III.F.

• A brief description of any related financing transaction, including any payments from the sponsor to investors in connection with the financing transaction;

• The reasons for engaging in the particular de-SPAC transaction and for the structure and timing of the de-SPAC transaction and any related financing transaction;

• An explanation of any material differences in the rights of security holders of the post-business combination company as a result of the de-SPAC transaction;

and

This proposed disclosure requirement is intended to address situations where the shares of a SPAC are being exchanged for shares of a new holding company or the target company in a de-SPAC transaction.

• Disclosure regarding the accounting treatment and the federal income tax consequences of the de-SPAC transaction, if material.

Proposed Items 1605(a) and (b). This disclosure would be required in any Form S-4 or F-4 or Schedule 14A, 14C, or TO filed in connection with a de-SPAC transaction. We note that registrants are

already subject to similar disclosure requirements in Schedules 14A and 14C and in Forms S-4 and F-4. These proposed disclosure requirements are intended to complement these existing requirements by setting forth specialized disclosure requirements that are specific to de-SPAC transactions.

These disclosure requirements are modeled, in part, on Item 1004(a)(2) and Item 1013(b) of Regulation M-A

and are intended to provide investors with, among other things, an enhanced basis upon which to evaluate a SPAC's reasons for proposing a de-SPAC transaction and for choosing a particular structure and financing for the transaction, through a specialized disclosure rule tailored to SPACs that would address disclosure issues more specific to de-SPAC transactions. These proposed requirements would also help promote consistent disclosure, which would allow for greater comparability of these disclosures across de-SPAC transactions. As proposed, Item 1605(b) would require a reasonably detailed discussion of the reasons for, and the structure and timing of, a proposed de-SPAC transaction, which could include a discussion of the key events and activities in identifying the target private operating company and in negotiating the terms of the merger or acquisition, as well as the material factors considered by a SPAC's board of directors in approving the terms of the proposed de-SPAC transaction and in recommending shareholder approval of the transaction.

17 CFR 229.1000 through 229.1016. Regulation M-A is a subpart (the 1000 series) of Regulation S-K. Item 1004(a)(2) sets forth disclosure requirements regarding the material terms of mergers or similar transactions, and Item 1013(b) requires disclosure of alternative means considered by the subject company or affiliate in the context of a going-private transaction. In our view, these rules are appropriate models for the proposed specialized disclosure requirements for de-SPAC transactions, in that Item 1004(a)(2) sets forth disclosure requirements for mergers generally and the same potential for self-interested transactions exists in de-SPAC transactions as in going-private transactions.

In addition, we are proposing Item 1605(c) to require disclosure of the effects of the de-SPAC transaction and any related financing transaction on the SPAC and its affiliates, the sponsor and its affiliates, the private operating company and its affiliates, and unaffiliated security holders of the SPAC. Such disclosure could allow investors to better assess whether the transactions have been structured in a manner that would benefit one of these parties in particular or that would be to the detriment of other parties. As proposed, the disclosure must provide a reasonably detailed discussion of both the benefits and detriments to non-redeeming shareholders of the de-SPAC transaction and any related financing transaction, with such benefits and detriments quantified to the extent practicable.

For example, if the sponsor's interests and returns may differ from those of public investors in regard to a prospective de-SPAC transaction, the disclosure should describe and quantify, to the extent practicable, dollar amounts or prospective returns the sponsor and its affiliates stand to gain or lose that are dependent on the completion of the transaction.

Proposed Item 1605(c).

We are also proposing Item 1605(d) to require disclosure of the SPAC's sponsors', officers' and directors' material interests in the de-SPAC transaction or any related financing transaction, including any fiduciary or contractual obligations to other entities and any interest in, or affiliation with, the private operating company that is the target of the de-SPAC transaction. This proposed disclosure requirement is intended to address, among other things, the concern that a sponsor may be proposing a de-SPAC transaction that will produce benefits or detriments that are not fully disclosed to investors.

See, e.g.,

IAC Recommendations,

supra

note 37 (stating that “there may be financial arrangements that constitute conflicts of interest that are not fully disclosed or understood by investors”); Rodrigues and Stegemoller,

supra

note 17; Klausner, Ohlrogge, and Ruan,

supra

note 17; Deane Testimony.

Under Item 403 of Regulation S-K, SPACs currently provide tabular disclosure regarding the beneficial ownership of its equity or voting securities, as applicable, by management and beneficial owners of more than 5% of a class of voting securities.

The proposed disclosure requirement in Item 1605(d) would be broader than Item 403, and would require disclosure of any material interests that the sponsor and the SPAC's officers and directors have in a de-SPAC transaction or any related financing transaction, including fiduciary or contractual obligations to other entities as well as any interest in, or affiliation with, the target company. The proposed disclosure requirement would also encompass material interests that are non-pecuniary in nature that may nevertheless affect the decision to proceed with a prospective de-SPAC transaction or related financing transaction. In the context of a de-SPAC transaction, this disclosure could help investors, when making an investment, voting or redemption decision with respect to the de-SPAC transaction, to assess whether, on balance, the benefits of the de-SPAC transaction justify the detriments, and particularly whether the sponsor is motivated to complete a de-SPAC transaction by interests not held by all investors.

Under Item 403, beneficial ownership is determined in accordance with 17 CFR 240.13d-3(d)(1) (Exchange Act Rule 13d-3(d)(1)), pursuant to which a person is generally deemed to be the beneficial owner of securities that the person has the right to acquire within 60 days.

Proposed Item 1605(e) would require disclosure of whether or not security holders are entitled to any redemption or appraisal rights, and if so, a summary of the redemption or appraisal rights.

Under the proposed rules, SPACs would be required to disclose, among other things, whether shareholders may redeem their shares regardless of whether they vote in favor of or against a proposed de-SPAC transaction, or abstain from voting, and whether shareholders have the right to redeem their securities at the time of any extension of the time period to complete a de-SPAC transaction. If there are no redemption or appraisal rights available for security holders who object to the de-SPAC transaction, the proposed rules would require disclosure of any other rights that may be available to security holders under the law of the jurisdiction of organization. These disclosures would help investors better assess the impact of any redemption or appraisal rights on a proposed de-SPAC transaction, including whether the existence of such rights might lead some investors to redeem their securities after voting in favor of a de-SPAC transaction.

This proposed disclosure requirement would build upon, and be in addition to, the existing disclosure requirement in Item 202 of Regulation S-K (Description of registrant's securities). Under Item 202, SPACs are currently required to disclose the redemption provisions of their capital stock being registered, such as whether redemptions would be required under certain circumstances at the SPAC's option,

e.g.,

whether a SPAC may require the redemption of warrants held by public shareholders for nominal consideration if the underlying shares trade above a certain threshold price.

One commentator has observed that SPAC shareholders may vote in favor of a proposed de-SPAC transaction while redeeming their shares prior to the closing of the transaction, such that the vote is decoupled from any economic interest in the post-business combination company. Rodrigues and Stegemoller,

supra

note 17.

See also

Michael Klausner and Michael Ohlrogge,

SPAC Governance: In Need of Judicial Review

(SSRN Working Paper, 2021).

In this regard, we are proposing an instruction to Item 1606 that a “statement that the special purpose acquisition company has no reasonable belief as to the fairness or unfairness of the de-SPAC transaction or any related financing transaction to unaffiliated security holders will not be considered sufficient disclosure in response to [Item 1606(a)].” As proposed, a SPAC would not be required to disclose that a de-SPAC transaction and any related financing transaction are fair but rather would be required to state its reasonable belief as to the fairness or unfairness of the transaction as well as the bases for this statement.

We have modeled certain of the proposed requirements in Item 1606 and Item 1607 (

see infra

Section II.F.3.), on the disclosures required in going-private transactions subject to 17 CFR 240.13e-3 (Exchange Act Rule 13e-3).

See

Items 1014 and 1015 of Regulation M-A. In our view, the disclosure requirements in Rule 13e-3 provide an appropriate model for the proposed requirements with respect to de-SPAC transactions, in that the conflicts of interests and misaligned incentives inherent in going-private transactions are similar to those often present in de-SPAC transactions.

Under proposed Item 1606(b), a SPAC would be required to discuss in reasonable detail the material factors upon which a reasonable belief regarding the fairness of a de-SPAC transaction and any related financing transaction is based and, to the extent practicable, the weight assigned to each factor. These factors would include but not be limited to: The valuation of the private operating company; the consideration of any financial projections; any report, opinion, or appraisal obtained from a third party; and the dilutive effects of the de-SPAC transaction and any related financing transaction on non-redeeming shareholders. Together, these proposed disclosures are intended to help investors assess the reasonableness of the SPAC's stated belief about the fairness of the transaction.

To provide additional context for understanding the process by which a SPAC determined to proceed with a de-SPAC transaction, we are proposing Items 1606(c), (d), and (e), which would require disclosure on whether:

• The de-SPAC transaction or any related financing transaction is structured so that approval of at least a majority of unaffiliated security holders is required;

• A majority of directors who are not employees of the SPAC has retained an unaffiliated representative to act solely on behalf of unaffiliated security holders for purposes of negotiating the terms of the de-SPAC transaction or any related financing transaction and/or preparing a report concerning the fairness of the de-SPAC transaction or any related financing transaction; and

• The de-SPAC transaction or any related financing transaction was approved by a majority of the directors of the SPAC who are not employees of the SPAC.

Request for Comment

36. Should we adopt Item 1606 as proposed?

37. Should we require a statement from the SPAC as to whether it reasonably believes that the de-SPAC transaction and any related financing transaction are fair or unfair to unaffiliated security holders, as proposed? Should the scope of the fairness determination include both the de-SPAC transaction and any related financing transaction, as proposed? Should the fairness determination be as to the SPAC's security holders as a whole, rather than to the SPAC's unaffiliated security holders? The factors enumerated in proposed Item 1606(b) in determining fairness include, but are not limited to, the valuation of the target company, the consideration of any financial projections, any report, opinion, or appraisal described in Item 1607 of Regulation S-K, and the dilutive effects described in Item 1604(c) of Regulation S-K. Is there any additional or alternative information that should be disclosed in connection with the SPAC's fairness determination?

38. Should we include an instruction to Item 1606 that a statement that the SPAC has no reasonable belief as to the fairness or unfairness of the de-SPAC transaction or any related financing transaction to unaffiliated security holders will not be considered sufficient disclosure in response to Item 1606(a), as proposed?

39. What are the potential benefits and costs of the statement that would be required by proposed Item 1606(a)? Would the costs of complying with this disclosure requirement discourage SPAC initial public offerings or discourage private operating companies from pursuing business combinations with SPACs?

40. Should we require registrants to disclose whether any director voted against, or abstained from voting on, the approval of a de-SPAC transaction or any related financing transaction, as well as the reasons for such vote or abstention, as proposed? Are there additional or alternative disclosures that we should require in this regard?

41. Should we require registrants to discuss in reasonable detail the material factors and, to the extent practicable, the weight assigned to each factor

underlying the fairness determination, as proposed? Are there additional or alternative factors that should be specified in the proposed rule to enhance an investor's understanding of the fairness determination?

42. How would investors use disclosure about whether the approval of at least a majority of unaffiliated security holders is required and whether the de-SPAC transaction or any related financing transaction was approved by a majority of non-employee directors of the SPAC? How would investors use disclosure about whether a representative has been retained to represent the investors in the negotiations of the de-SPAC transaction?

3. Reports, Opinions, and Appraisals

In addition, we are proposing Item 1607 to require disclosure about certain reports, opinions, or appraisals from outside parties.

Proposed Item 1607(a) would require disclosure about whether or not the SPAC or its sponsor has received any report, opinion, or appraisal obtained from an outside party relating to the consideration or the fairness of the consideration to be offered to security holders or the fairness of the de-SPAC transaction or any related financing transaction to the SPAC, the sponsor or security holders who are not affiliates.

This requirement would provide additional transparency about whether a SPAC's board of directors and/or its sponsor have access to information underlying a fairness determination that shareholders could find useful in making voting, investment, and redemption decisions in connection with the de-SPAC transaction.

As noted above, we have modeled the proposed requirements in Item 1607 on the disclosures required in going-private transactions subject to Exchange Act Rule 13e-3. See Item 1015 of Regulation M-A.

Though currently not a routine practice in de-SPAC transactions, SPACs often obtain fairness opinions in connection with de-SPAC transactions involving an affiliated private operating company.

For example, the proposed rule would require a SPAC to disclose whether or not the SPAC or its sponsor has received a fairness opinion or valuation report from a financial advisor.

To assist investors in considering the usefulness and reliability of any outside party report, opinion or appraisal described in response to proposed Item 1607(a), as well as any negotiation or report by an unaffiliated representative acting solely on behalf of unaffiliated security holders described in response to proposed Item 1606(d), proposed Item 1607(b) would require disclosure of:

• The identity, qualifications, and method of selection of the outside party and/or unaffiliated representative;

• Any material relationship between (1) the outside party, its affiliates, and/or unaffiliated representative, and (2) the SPAC, its sponsor and/or their affiliates, that existed during the past two years or is mutually understood to be contemplated and any compensation received or to be received as a result of the relationship;

100

For example, this disclosure could include whether the compensation for a financial advisor's fairness opinion is conditioned on the completion of the de-SPAC transaction or whether the amount of compensation due the financial advisor may include a bonus or may be increased depending on the ultimate financial terms of the de-SPAC transaction.

• Whether the SPAC or the sponsor determined the amount of consideration to be paid to the private operating company or its security holders, or the valuation of the private operating company, or whether the outside party recommended the amount of consideration to be paid or the valuation of the private operating company; and

• A summary concerning the negotiation, report, opinion or appraisal, which would be required to include a description of the procedures followed; the findings and recommendations; the bases for and methods of arriving at such findings and recommendations; instructions received from the SPAC or its sponsor; and any limitation imposed by the SPAC or its sponsor on the scope of the investigation.

Finally, proposed Item 1607(c) would require all such reports, opinions or appraisals to be filed as exhibits to the Form S-4, Form F-4, and Schedule TO for the de-SPAC transaction or included in the Schedule 14A or 14C for the transaction, as applicable.

Request for Comment

43. Should we require disclosure regarding reports, opinions, or appraisals from an outside party, as proposed? Is there any additional or alternative information that we should require with respect to these reports, opinions, or appraisals? Is there any proposed information that should not be required?

44. Should we require that the reports, opinions or appraisals be filed as exhibits to the Form S-4, Form F-4, or Schedule TO for the de-SPAC transaction or included in the Schedule 14A or Schedule 14C for the transaction, as proposed? Should we require instead that such reports, opinions, or appraisals be made available for inspection and copying upon written request? Should we require the filing of board books and other written materials presented to the board in connection with the reports, opinions, or appraisals, as is the case with going-private transactions? Are there other means by which investors should be able to access such report, opinion, or appraisal, such as posting on a website?

45. As proposed, filers would be required to include a summary of the report, opinion, or appraisal and file such report, opinion, or appraisal as an exhibit to the filing. Would investors benefit from having both the summary and the actual report, opinion, or appraisal disclosed, or would one or the other item of disclosure be sufficient?

4. Proposed Item 1608 of Regulation S-K

We are proposing Item 1608 of Regulation S-K to codify a staff position that a Schedule TO filed in connection with a de-SPAC transaction should contain substantially the same information about a target private operating company that is required under the proxy rules and that a SPAC must comply with the procedural requirements of the tender offer rules when conducting the transaction for which the Schedule TO is filed, such as a redemption of the SPAC securities. Redemption rights offered by a SPAC to its security holders in connection with the de-SPAC transaction or an extension of the timeframe to complete a de-SPAC transaction generally have indicia of being a tender offer, but the Commission staff has not objected if a SPAC does not comply with the tender offer rules when the SPAC files a Schedule 14A or 14C in connection with a de-SPAC transaction or an extension and complies with Regulation 14A or 14C, because the federal proxy rules would generally mandate substantially similar disclosures and applicable procedural protections as required by the tender offer rules.

101

Proposed Item 1608, if adopted, would not affect the availability of this staff position for those SPACs that file Schedule 14A or 14C for their de-SPAC transactions or extensions. SPACs that are unable to avail themselves of this position and file a Schedule TO (such as foreign private issuers

102

), however, would be subject

to the requirements of proposed Item 1608 of Regulation S-K, which would codify the staff's view regarding the information required to be included in a Schedule TO filed for a SPAC redemption and clarify the need to comply with the procedural requirements of the tender offer rules.

103

101

See supra

note 21.

102

“Foreign private issuer” is defined in Securities Act Rule 405 and Exchange Act Rule 3b-4(c). A foreign private issuer is any foreign issuer other than a foreign government, except for an issuer that (1) has more than 50% of its outstanding voting securities held of record by U.S. residents and (2) any of the following: (i) A majority of its officers and directors are citizens or residents of the United States, (ii) more than 50 percent of its assets are located in the United States, or (iii) its business is principally administered in the United States.

103

The staff has historically expressed the view that the same information about the target company that would be required in a Schedule 14A should be included in such a Schedule TO, in view of the requirements of Item 11 of Schedule TO and Item 1011(c) of Regulation M-A and the importance of this information in making a redemption decision. Item 11 of Schedule TO states “Furnish the information required by Item 1011(a) and (c) of Regulation M-A.” Item 1011(c) of Regulation M-A states “Furnish such additional material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not materially misleading.”

Proposed Item 1608 would require a SPAC that files a Schedule TO pursuant to Exchange Act Rule 13e-4(c)(2) for any redemption of securities offered in connection with a de-SPAC transaction to include disclosures required by specified provisions of Forms S-4 and F-4, and Schedule 14A, as applicable. Proposed Item 1608 would specify and standardize the information required in a Schedule TO that is filed in connection with a de-SPAC transaction so that it is consistent with the information required by the proposed amendments to Forms S-4 and F-4 and Schedule 14A. As a result, SPAC shareholders who are not solicited for their votes to approve a de-SPAC transaction (in a solicitation subject to Regulation 14A) would nevertheless receive the same information about the target private operating company that could be material to their redemption decisions.

104

Proposed Item 1608 would clarify that SPACs that file a Schedule TO for a redemption also must comply with the procedural requirements of Rule 13e-4 and Regulation 14E (such as the requirement to keep the redemption period open for at least 20 business days). This proposed codification would eliminate any potential ambiguity as to the SPAC's obligation to provide the tender offer rules' procedural protections to the SPAC security holders who are considering whether to redeem their securities.

104

Proposed Item 1608 would also be consistent with exchange listing rules regarding the use of Schedule TO in de-SPAC transactions.

See, e.g.,

Nasdaq Listing Rule IM-5101-2(e) and NYSE Listed Company Manual Section 102.06(c).

Request for Comment

46. Should we adopt Item 1608 as proposed?

47. Is there any additional or alternative information that we should require in proposed Item 1608 when a Schedule TO is filed in connection with a de-SPAC transaction?

48. Are there any requirements of Rule 13e-4 and Regulation 14E that should not apply to SPACs that file a Schedule TO for the redemption of the SPAC securities?

49. Are there any other provisions of Rule 13e-4 or Regulation 14E that should be amended to ensure that SPAC security holders are provided with the information material to their decision on whether to redeem their SPAC securities or to address other issues arising from the SPAC redemption process? For example, should we amend Exchange Act Rule 14e-5, which generally prohibits a bidder or its affiliates from making purchases outside of a tender offer, to permit a sponsor's purchases of SPAC securities outside of the redemption offer as long as certain conditions are satisfied (such as requiring disclosures of the sponsor's purchases and limiting the purchase price to no more than the price offered through the redemption offer),

e.g.,

in a manner consistent with the Division of Corporation Finance's Tender Offers and Schedules Compliance and Disclosure Interpretation 166.01 (Mar. 22, 2022)?

105

This staff interpretation is available at:

https://www.sec.gov/divisions/corpfin/guidance/cdi-tender-offers-and-schedules.htm

50. As noted above, the staff has taken the position that a SPAC filing a Schedule 14A or 14C in connection with a de-SPAC transaction or an extension of the time frame to complete a de-SPAC transaction would not need to file a Schedule TO or otherwise comply with the tender offer rules, including the procedural requirements of the tender offer rules, such as the all-holders requirement. Should we codify this position? Should we reconsider this position?

G. Structured Data Requirement

We are proposing to require SPACs to tag all information disclosed pursuant to Subpart 1600 of Regulation S-K in a structured, machine-readable data language. Specifically, we are proposing to require SPACs to tag the disclosures required under Subpart 1600 in Inline XBRL in accordance with Rule 405 of Regulation S-T and the EDGAR Filer Manual.

106

The proposed requirements would include detail tagging of the quantitative disclosures and block text tagging of the narrative disclosures that would be required under Subpart 1600.

106

This tagging requirement would be implemented by including a cross-reference to Rule 405 of Regulation S-T in Subpart 1600 of Regulation S-K, and by revising 17 CFR 232.405(b) of Regulation S-T to include the proposed SPAC-related disclosures. A corresponding Note and Instruction would also be added to Schedules 14A and TO, respectively. Pursuant to Rule 301 of Regulation S-T, the EDGAR Filer Manual is incorporated by reference into the Commission's rules. In conjunction with the EDGAR Filer Manual, Regulation S-T governs the electronic submission of documents filed with the Commission. Rule 405 of Regulation S-T specifically governs the scope and manner of disclosure tagging requirements for operating companies and investment companies, including the requirement in 17 CFR 232.405(a)(3) to use Inline XBRL as the specific structured data language to use for tagging the disclosures.

In 2009, the Commission adopted rules requiring operating companies to submit the information from the financial statements (including footnotes and schedules thereto) included in certain registration statements and periodic and current reports in a structured, machine-readable data language using eXtensible Business Reporting Language (“XBRL”).

107

In 2018, the Commission adopted modifications to these requirements by requiring issuers to use Inline XBRL, which is both machine-readable and human-readable, to reduce the time and effort associated with preparing XBRL filings and improve the quality and usability of XBRL data for investors.

108

107

Interactive Data to Improve Financial Reporting,

Release No. 33-9002 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)] (“2009 Financial Statement Information Adopting Release”) (requiring submission of an Interactive Data File to the Commission in exhibits to such reports).

See also Interactive Data to Improve Financial Reporting,

Release No. 33-9002A (Apr. 1, 2009) [74 FR 15666 (Apr. 7, 2009)].

108

Inline XBRL Filing of Tagged Data,

Release No. 33-10514 (June 28, 2018) [83 FR 40846, 40847 (Aug. 16, 2018)]. Inline XBRL allows filers to embed XBRL data directly into an HTML document, eliminating the need to tag a copy of the information in a separate XBRL exhibit.

Id.

at 40851.

Requiring Inline XBRL tagging of the Subpart 1600 disclosures would benefit investors by making SPAC disclosures more readily available and easily accessible to investors and other market participants for aggregation, comparison, filtering, and other analysis, as compared to requiring a non-machine readable data language such as ASCII or HTML. This would enable automated extraction and analysis of granular SPAC disclosures, allowing investors and other market participants to more efficiently perform large-scale analysis and comparison of SPAC disclosures across SPAC transactions and time periods, including information on sponsor compensation and material conflicts of interest. At the same time, we do not expect the incremental compliance burden associated with tagging the additional information to be unduly burdensome, because SPACs subject to the proposed

tagging requirements would be subject to similar Inline XBRL requirements in other Commission filings.

109

However, because issuers (including SPACs) are not required to tag any filings until after they have filed a periodic report on Form 10-Q, 20-F, or 40-F, the proposed tagging requirement for disclosures in SPAC IPO registration statements would accelerate the tagging obligations (and related compliance burdens) of SPACs compared to those of other filers.

110

Enhancing the usability of the SPAC initial public offering disclosures through a tagging requirement is of particular importance given the unique nature of SPAC offerings and the potential risks they present to investors.

109

Id.

110

See

17 CFR 229.601(b)(101)(i)(A).

Request for Comment

51. Should we require SPACs to tag the disclosures required by Subpart 1600 of Regulation S-K, as proposed? Are there any changes we should make to ensure accurate and consistent tagging? If so, what changes should we make?

52. Should we modify the scope of the Subpart 1600 disclosures required to be tagged? For example, should we require tagging of quantitative disclosures only? Should we limit the tagging requirement to only those disclosures required in de-SPAC transactions?

53. Where an item in Subpart 1600 requests that a registrant provide a tabular presentation without specifying a particular format for the table, or data points to include in the table, such as the proposed disclosure related to SPAC sponsor compensation, dilution of unaffiliated shareholders, and the related sensitivity analysis, should we instead require specific elements in the tabular presentation? If we do not propose a specific tabular presentation or required elements, would detail tagging provide useful data for investors and other market participants?

54. Should we require SPACs to use a different structured data language to tag the Subpart 1600 disclosures? If so, what structured data language should we require, and why?

55. We have not proposed exemptions or different requirements from the proposed structured data requirement for foreign private issuers, smaller reporting companies,

111

or emerging growth companies.

112

Should we exempt or provide different requirements from some or all of the proposed structured data requirements for these or other classes of registrants?

111

See infra

Section III.D.

112

Section 101(a) of the JOBS Act amended Section 2(a) of the Securities Act [15 U.S.C. 77b(a)] and Section 3(a) of the Exchange Act [15 U.S.C. 78c(a)] to define an “emerging growth company” as an issuer with less than $1 billion in total annual gross revenues during its most recently completed fiscal year, as such amount is indexed for inflation every five years by the Commission. If an issuer qualifies as an EGC on the first day of its fiscal year, it maintains that status until the earliest of (1) the last day of the fiscal year of the issuer during which it has total annual gross revenues of $1.07 billion or more; (2) the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities pursuant to an effective registration statement; (3) the date on which the issuer has, during the previous three-year period, issued more than $1 billion in nonconvertible debt; or (4) the date on which the issuer is deemed to be a “large accelerated filer” (as defined in Exchange Act Rule 12b-2).

See

Section 2(a)(19) of the Securities Act [15 U.S.C. 77b(a)(19)]; Section 3(a)(80) of the Exchange Act [15 U.S.C. 78c(a)(80)]; and

Inflation Adjustments and Other Technical Amendments under Titles I and II of the JOBS Act,

Release No. 33-10332 (Mar. 31, 2017) [82 FR 17545 (Apr. 12, 2017)].

III. Aligning De-SPAC Transactions With Initial Public Offerings

As discussed above, private operating companies have increasingly turned to de-SPAC transactions as a means of accessing public securities markets and becoming public reporting companies. As the SPACs that were part of the unprecedented growth in the SPAC market in 2020 and 2021 continue to identify target private operating companies and consummate de-SPAC transactions, it is likely that a significant proportion of companies in the coming years that enter the U.S. public securities markets will do so through de-SPAC transactions.

A private operating company's path to the public markets through a de-SPAC transaction usually commences when a SPAC begins considering it as a potential business combination candidate. After agreeing to the terms of the business combination, the SPAC typically files a Form 8-K announcing the transaction that includes limited information on the material terms of the business combination agreement.

113

This announcement is usually followed by a disclosure document (a Securities Act registration statement, proxy statement, or information statement) filed by the SPAC that includes more extensive information about the private operating company.

114

SPACs 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,

115

(2) which entity will have a continuing Exchange Act reporting obligation following the transaction,

116

and (3) the disclosures provided in connection with the transaction.

117

113

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.

114

The disclosure document may be a Form S-4 or F-4, Schedule 14A or Schedule TO, depending on, among other things, whether shareholder approval is required and whether the SPAC is registering an offering of shares to be issued in the transaction.

115

SPACs may use cash, securities, or a combination of both to acquire a target company in a de-SPAC transaction, and the form of consideration is a factor in determining whether a registration statement, proxy or information statement, or tender offer statement is required to be filed in connection with a de-SPAC transaction. Additionally, the SPAC, the target company or a new holding company may issue securities in a de-SPAC transaction, which may necessitate the filing of a registration statement on Form S-4 or F-4 for the transaction.

116

For example, when a holding company is formed to acquire both the private operating company and the SPAC, and the holding company files a registration statement for the de-SPAC transaction, generally the holding company would continue as the registrant with the Exchange Act reporting obligation following the transaction. In these situations, the private operating company would be the holding company's predecessor, as the term is used in Regulation S-X, with respect to the financial statements and possibly the accounting acquirer under generally accepted accounting principles as used in the United States (“U.S. GAAP”), with the equity ownership percentage in the combined company held by the former owners of the private operating company and the degree to which former management of the private operating company continues with the combined company among the factors that could impact the accounting acquirer determination under U.S. GAAP. Under the proposed amendments to Regulation S-X, the SPAC would be an acquired business.

See infra

Section IV.B.

117

The disclosures required in connection with a de-SPAC transaction are determined by the applicable disclosure form (Form S-4 or F-4, Schedule 14A or 14C, or Schedule TO) and which entity is filing the form. Under the proposed amendments, companies would not be subject to the same disclosure requirements in every de-SPAC transaction structure. For example, if the SPAC is a domestic registrant and a new holding company is a foreign issuer, and the private operating company meets the criteria to be a foreign private issuer, the holding company (the company filing the de-SPAC transaction filing) would also qualify as a foreign private issuer. Foreign private issuer status would permit the foreign holding company to file a Form F-4 for the de-SPAC transaction and apply the foreign private issuer disclosure regime. In contrast, if a de-SPAC transaction is structured so that (1) a domestic SPAC is the company issuing securities as the acquiring entity of the foreign private operating company, (2) there is no foreign holding company, and (3) the SPAC makes the de-SPAC transaction filing, the registrant would continue to be a domestic issuer and follow domestic reporting rules until the next determination date for foreign private issuer status.

After the completion of the de-SPAC transaction, the post-business combination company is required to file a Form 8-K within four business days that includes even more information about the private operating company that is equivalent to the information that a new reporting company would be required to provide when filing a Form

10 under the Exchange Act.

118

The result is that investors may receive disclosures about the future public company that differ from, or are not provided in the same manner as, the information disclosed in a Form S-1 or F-1 filed in connection with a traditional initial public offering. Additionally, some of the investor protections afforded in a traditional initial public offering are not available or are more attenuated when a private operating company becomes a public company through a de-SPAC transaction.

119

118

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. By the time the Form 8-K with Form 10 information is filed, the securities of the post-business combination company have often already begun trading on a national securities exchange with a new ticker symbol, in that the securities of the SPAC generally trade on an exchange until the consummation of the de-SPAC transaction, after which the securities of the post-business combination company generally commence trading on the following business day.

119

For example, a private company engaged in a traditional initial public offering is generally more limited in its ability to make communications about its offering prior to the filing of a Securities Act registrations statement on Form S-1 than companies engaged in a business combination transaction that will be registered on Form S-4 or F-4. De-SPAC transactions also often lack named underwriters that perform due diligence and other traditional gatekeeping functions, and it may be more difficult for investors to trace their purchases to the registered de-SPAC transaction for purposes of establishing a Section 11 claim for material misstatements or omissions in de-SPAC disclosure documents.

In light of the increasingly common reliance on de-SPAC transactions as a vehicle for private operating companies to access the U.S. public securities markets, we are proposing a number of new rules and amendments to existing rules to align more closely the treatment of private operating companies entering the public markets through de-SPAC transactions with that of companies conducting traditional initial public offerings. In our view, a private operating company's method of becoming a public company should not negatively impact investor protection. Accordingly, the proposed new rules and amendments are intended to provide investors with disclosures and liability protections comparable to those that would be present if the private operating company were to conduct a traditional firm commitment initial public offering.

These proposed new rules and amendments would (1) more closely align the non-financial statement disclosure requirements with respect to the private operating company in disclosure documents for a de-SPAC transaction with the disclosure required in a Form S-1 or F-1 for an initial public offering;

120

(2) require a minimum dissemination period for disclosure documents in de-SPAC transactions; (3) treat the private operating company as a co-registrant of the Form S-4 or Form F-4 for a de-SPAC transaction when a SPAC is filing the registration statement; (4) require a re-determination of smaller reporting company status following the consummation of a de-SPAC transaction; (5) amend the definition of “blank check company” for PSLRA purposes such that the safe harbor for forward-looking information would not apply to projections in filings by SPACs and certain other blank check companies that are not penny stock issuers; and (6) provide, in a Commission rule, that underwriters in a SPAC initial public offering are deemed to be underwriters in a subsequent de-SPAC transaction under certain circumstances.

120

We are also proposing to more closely align the financial statement disclosure requirements with respect to the private operating company in any business combination involving a shell company with the disclosure required in a Form S-1 for an initial public offering, which would encompass de-SPAC transactions.

See infra

Section IV.B.

A. Aligning Non-Financial Disclosures in De-SPAC Disclosure Documents

In regard to non-financial statement disclosures, we are proposing that, if the target company in a de-SPAC transaction is not subject to the reporting requirements of Section 13(a) or 15(d) of the Exchange Act, disclosure with respect to such company pursuant to the following items in Regulation S-K would be required in the registration statement or schedule filed in connection with the de-SPAC transaction: (1) Item 101 (description of business); (2) Item 102 (description of property); (3) Item 103 (legal proceedings); (4) Item 304 (changes in and disagreements with accountants on accounting and financial disclosure); (5) Item 403 (security ownership of certain beneficial owners and management, assuming the completion of the de-SPAC transaction and any related financing transaction);

121

and (6) Item 701 (recent sales of unregistered securities).

122

If the private operating company is a foreign private issuer,

123

the proposed rules would include the option of providing disclosure relating to the private operating company in accordance with Items 3.C, 4, 6.E, 7.A, 8.A.7, and 9.E of Form 20-F, consistent with disclosure that could be provided by these entities in an initial public offering.

124

121

We note that Item 18(a)(5) of Form S-4 currently requires disclosure pursuant to Item 403 regarding the target company and a SPAC's principal shareholders, through Item 6 of Schedule 14A, in a Form S-4 that includes a proxy seeking shareholder approval of the de-SPAC transaction.

122

Proposed General Instruction L.2. to Form S-4; Proposed General Instruction I.2. to Form F-4; Proposed Item 14(f) of Schedule 14A; Proposed General Instruction K to Schedule TO. We note that disclosure pursuant to Item 303 (management's discussion and analysis of financial condition and results of operations) of Regulation S-K is already required with respect to a non-reporting target company in Forms S-4 and F-4 and in Schedules 14A and 14C for a de-SPAC transaction. As proposed, disclosure pursuant to Item 701 of Regulation S-K would be required in Part I (information required in the prospectus) of Form S-4 and Form F-4, whereas in Form S-1, the Item 701 disclosure requirement appears under Part II (information not required in prospectus) of the form.

123

See supra

note 102.

124

Disclosure requirements for foreign private issuers differ from domestic registrants, including the absence of quarterly reporting requirements, the use of different forms with different disclosure provisions, and an ability to present financial statements in accordance with IFRS instead of U.S. GAAP. In addition, foreign private issuers are not required to file current reports on Form 8-K using the Form 8-K disclosure criteria; rather, they can furnish current reports on Form 6-K applying the disclosure requirements of that Form.

See Foreign Issuer Reporting Enhancements,

Release 33-8959 (Sep. 23, 2008) [73 FR 58300 (Oct. 6, 2008)].

The proposed additional information is already required to be included in a Form 8-K due within four business days of the completion of the de-SPAC transaction, such that registrants currently should already be preparing this information in anticipation of this Form 8-K filing in connection with a de-SPAC transaction.

125

Aligning the disclosure requirements in de-SPAC transactions in this manner with those in initial public offerings would mandate that this additional information about the private operating company be provided to shareholders before they make voting, investment, or redemption decisions in connection with the proposed transactions.

126

As proposed, this information would also be available to investors prior to the inception of trading of the post-business

combination company's securities on a national securities exchange, rather than being required in a Form 8-K due within four business days of the completion of the de-SPAC transaction. Further, if this disclosure is included in a Form S-4 or Form F-4, any material misstatements or omissions contained therein would subject the issuers and other parties to liability under Sections 11 and 12 of the Securities Act, which would align with the protections afforded to investors under the Securities Act for disclosures provided in a Form S-1 or F-1 for an initial public offering.

125

This Form 8-K is required to include the same information that would be required for a newly reporting company when filing a Form 10 under the Exchange Act.

See

Items 2.01(f), 5.01(a)(8), and 9.01(c) of Form 8-K. In this regard, we note that these items of Form 8-K each provide that if any disclosure required by these items has been previously reported, the registrant may identify the filing in which that disclosure is included instead of including that disclosure in the Form 8-K.

126

In this regard, we note that many, but not all, Forms S-4 and F-4 and Schedules 14A and 14C that are filed in connection with de-SPAC transactions contain information about the target company as proposed. The proposed amendments, if adopted, would require that this information be provided in all de-SPAC transactions subject to the specialized disclosure requirements in Subpart 1600.

Request for Comment

56. Should we require additional information regarding the private operating company in disclosure documents filed in connection with a de-SPAC transaction, as proposed? Would these additional disclosures provide investors with a better understanding of the private operating company's operations and related risks? Should we require more or less disclosure regarding the private operating company in the registration statements or schedules filed in connection with de-SPAC transactions?

57. What are the benefits of providing this information earlier to investors when they are making voting, investment, and redemption decisions in connection with a de-SPAC transaction or at or before the commencement of trading in the post-business combination company's securities on a securities exchange? Would it be unduly burdensome to provide this additional information regarding the private operating company at this earlier point in time?

58. Should a private operating company that would qualify as a foreign private issuer have the option of providing disclosure in accordance with certain items of Form 20-F, as proposed?

59. Should we require additional or less information in proposed Item 1608 and Schedule TO when a SPAC files a Schedule TO in connection with a de-SPAC transaction? For example, should we require disclosure regarding m

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