SEC Finalizes Long-Awaited Special-Purpose Acquisition Company Rules

On January 24th the U.S. Securities and Exchange Commission (SEC) voted to adopt a new set of rules for special-purpose acquisition companies (SPACs), also known as blank-check companies. The SEC’s new rules bring the disclosure requirements for the merger of a SPAC vehicle and an operating company, or de-SPAC transaction, much closer to those for traditional initial public offerings (IPOs), eliminating what many viewed as a key benefit of de-SPACs for companies looking to access the public markets for the first time. Market commentators believe the new rules, slated to go in effect in about four months, could be the final death nail for SPACs, which had become a popular alternative to traditional IPOs in recent years.

With the volume of SPACs drastically slowing, companies are expected to revert to traditional IPOs or reverse mergers with public operating companies. In either case, companies need to start preparing for the extensive disclosures required in a go-public transaction and the ongoing burdens of reporting as a public company.

What are SPACs, and How Do They Work?

SPACs are shell companies that do not have the day-to-day operations of a typical organization. Instead, they are created solely to raise capital through an IPO, which they subsequently use to acquire or merge with an operating business or businesses. SPACs are traditionally formed by sophisticated investors — hedge funds, private equity firms, and serial entrepreneurs that larger institutional investors initially back. The sponsors have expertise and experience in specific industries that generally inform the types of targets they pursue.

When a SPAC is formed and completes its IPO, the capital raised is placed in a trust account that earns interest. The funds can only be used for an acquisition, but the SPAC may be able to use the interest for any working capital needs. If a SPAC fails to find a merger partner in a defined period, typically 18 to 24 months, it will dissolve and return funds to investors.

The SPAC Boom…. And Then Bust

Though SPACs have been around for decades, interest and awareness surged between 2019 and 2022, both on the investor side and in companies that wanted to go public but did not necessarily want to follow the traditional IPO route. In 2020 and 2021 alone, there were almost 900 SPAC IPOs raising in excess of $200 billion. Between 2020 and 2022, more than 350 operating entities became public companies through de-SPAC transactions.

But the SPAC boom brought its own issues and concerns. The SEC and the market more broadly became increasingly concerned about conflicts of interest inherent in SPAC structures that could put the interests of SPAC sponsors ahead of other investors. Concerns related to accounting by SPACs, particularly related to warrants, led to a rash of restatements in 2021.

The most important issue was the performance of companies that went public via a de-SPAC. Many companies that accelerated their go-public timeline to take advantage of the SPAC boom were not ready to be public in terms of the stage of development or operational preparedness for the burdens of public company reporting. The Bloomberg de-SPAC index, which measures the performance of companies taken public through a SPAC merger, was down more than 80 percent from December 2020 through March of 2023, significantly underperforming companies that went public via traditional IPOs and the equity markets more broadly. Reflecting concerns about post-de-SPAC performance and market conditions for go-public transactions more broadly, the number of SPAC mergers dropped below 30 in 2023.

New SEC Rules Make a SPAC Rebound Unlikely

The new rules adopted by the SEC on January 24th finalizes the previous rules proposal that was issued in March of 2022. The final rules, among other things:

  • Require additional disclosures about SPAC sponsor compensation, conflicts of interest, dilution, the target company, and other information that is important to investors in SPAC IPOs and de-SPAC transactions;
  • More closely aligning the required disclosures and the legal liabilities that may be incurred in de-SPAC transactions with those in traditional IPOs, including deeming the target company an issuer that must sign a Securities Act registration statement and aligning financial statement requirements applicable to de-SPAC transactions with those in traditional IPOs;
  • Better align the regulatory treatment of projections in de-SPAC transactions with that in traditional IPOs under the Private Securities Litigation Reform Act of 1995 (PSLRA);
  • Require a 20-calendar-day minimum dissemination period for prospectuses and proxy and information statements filed for de-SPAC transactions; and
  • Require a re-determination of smaller reporting company status following the consummation of a de-SPAC transaction and require such re-determination to be reflected in filings beginning 45 days after the de-SPAC transaction’s consummation.

Taken as a whole, these new requirements make disclosures and processes for both SPAC IPOs and de-SPAC transactions more burdensome, thereby eliminating much of the administrative and timing benefits of a de-SPAC compared to a traditional IPO to take a company public. Combined with more closely aligned legal liabilities, it becomes doubtful that SPACs will remerge as a preferred alternative to the traditional IPO.

Companies Will Still Go Public… And It’s Never Too Soon to Start Getting Ready

While the SPAC market is unlikely to bounce back, the need and desire for companies to access the public markets has not diminished. Companies will always need to access capital to fund growth and innovation. As we look towards the future, traditional IPOs are expected to make a comeback as a way for companies to access public markets, as will reverse mergers, a particularly strong opportunity for those in biopharma.

For companies considering accessing the public equity markets, it’s never too early to start getting ready. Filing a registration statement to take a company public and the ongoing burden of reporting as a public company is heavy lifting, requiring extensive planning and preparation to ensure success. Comprehensive planning and preparation are needed to improve financial reporting, gather information and data needed for a registration statement, build internal controls and implement the necessary infrastructure to report as a public company.

WilliamsMarston’s advisory, tax and valuation experts are here to help companies through every step of the IPO process and provide support to handle the challenges of ongoing reporting as a public company. From assessing IPO readiness to providing hands-on assistance with preparing historical, pro forma and selected financial data, WilliamsMarston professionals will ensure you move forward in full compliance with SEC requirements to successfully take your company public.