Significant Changes to Rules Affecting SPACs Proposed by the SEC

The free run enjoyed by Special Purpose Acquisition Companies (SPACs) may finally be over, at least in the US. SPACs saw an unprecedented boom in 2020 and 2021 – raising $83 billion in 2020 and $160 billion in 2021. They constituted more than half of all IPOs raised in the US in those same two years.

This sudden spurt of SPACs can be attributed to the fact that they are companies with no real operations formed to raise capital in an IPO to be used to acquire an operating company. In the interim, the offering proceeds are placed into a trust or escrow account. Essentially, SPACs act as vehicles for the acquired operating companies to go public through the de-SPAC acquisition transactions.

New Rules Affecting SPACs by the SEC

This makes SPACs an alluring target for SEC rulemaking, owing to its high popularity but lack of regulations and investor protection. This has raised concerns about risk and asymmetric knowledge between those inside and outside of the SPAC. 

The SEC had proposed new disclosure rules to enhance transparency and accountability and ultimately enhance investor protection for these ‘blank cheque’ vehicles.

The proposal on ‘Special Purpose Acquisition Companies, Shell Companies, and Projections’ would introduce specialized disclosure requirements in areas including:

Compensation Paid To Sponsors 

This proposed rule would require additional disclosure about the sponsor, its affiliates, and any promoters of the SPAC in SPAC registered offerings and de-SPAC transactions. 

It also requires information on 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. 

Conflicts Of Interest

This proposed rule would require that a SPAC disclose 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.

Sources Of Dilution 

Here, the rule would require additional disclosure about the potential for dilution in 

(1) registration statements filed by SPACs, including those for IPOs, and 

(2) de-SPAC transactions. 

Sources of dilution may include sponsor compensation, underwriting fees, shareholder dilution, outstanding warrants, convertible securities, and PIPE financings.

Additional Disclosures On Business Combination Transactions between SPACs and Private operating companies and information on their fairness.

These rules also mandate that all information should be disclosed in Inline XBRL, a move that is aimed at making the final report structured and machine-readable. 

This would entail (i) detailed tagging of quantitative disclosures and 

(ii) block text tagging of narrative disclosures. 

Not only would structured data help with analysis and comparisons between SPACs, but since the SEC collects several more information in the same format, Inline XBRL would also facilitate comparison with traditional offerings.

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