Special purpose acquisition companies (SPACs), also known as “blank check companies” provide an alternative route for private companies to go public from the traditional initial public offering (IPO) process. There are pros and cons to going public via a SPAC with one of the main advantages being faster execution. A SPAC merger can typically occur within 4-6 months on average whereas a traditional IPO typically takes longer, often up to 12-18 months.

We covered how a typical SPAC transaction works in a previous blog, SPAC: Is it a hack?, but to summarize:

• A SPAC entity is formed, goes through the IPO process, and typically sells units which are comprised of a share and a warrant (these components are eventually separated into common stock and tradable warrants).
• Remember, the SPAC is a shell company with the sole purpose of raising funds to combine with a yet-to-be identified private company to take it public. As such, there is a period of time for the SPAC to search for a target company.
• Once a target company is identified, an agreement reached, regulatory requirements satisfied, and shareholder approval obtained, the shell company merges with the private company resulting in the private company becoming a public company. This is referred to as the “de-SPAC” transaction.
• If a target company is not identified within the required timeframe, it must return the funds raised in the initial SPAC IPO to shareholders (less a management fee).

The popularity of going public via the SPAC route continues to grow. The chart below shows the growth in capital raised in SPAC IPOs has exploded in the past couple of years.

In 2020, 248 SPAC deals were completed for a total value of $83.4 billion. The capital raised was an increase of over six times of that raised in 2019. Growth continued in 2021, with 613 SPAC deals completed for a total value of $162.5 billion. (source: spacresearch.com)

SPAC structures are complex and with the increase in popularity and use of these structures, concerns were raised with regards to shareholder protections. These concerns fall under the purview of the Securities and Exchange Commission (SEC) as their three-part mission is to protect investors, maintain fair, orderly, and efficient markets, and to facilitate capital formation.

SEC proposes new regulations on SPAC transactions

On March 30, 2022, the SEC proposed new 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.

Chair Gary Gensler, in his statement on the proposed rule, indicated the proposal addresses:

• Full and fair disclosures including, among other things, SPAC sponsors, conflicts of interests, SPAC target IPOs, and dilution
• Standards around SPAC marketing practices
• Gatekeeper and issuer obligations
• When SPACs become subject to the investor protection framework of the Investment Company Act

The proposed rules were released in a 372-page document, divided into five different categories as follows:

1. Proposed new subpart 1600 of Regulation S-K
2. Aligning de-SPAC transactions with initial public offerings
3. Business combinations involving shell companies
4. Enhanced projections disclosure
5. Safe harbor under the Investment Company Act

You can access the full document here: Proposed Rule: Special Purpose Acquisition Companies, Shell Companies, and Projections.

Comments should be received by May 31, 2022, or within 30 days after publication in the Federal Register, whichever is later.

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